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Czechoslovakia ECONOMIC POLICY AND PERFORMANCE
http://www.photius.com/countries/czechoslovakia/economy/czechoslovakia_economy_economic_policy_and_~777.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    The Czechoslovak economy emerged from World War II relatively undamaged. Industry, which was the largest sector of the economy, included large firms in light and heavy industry. During the war, the German occupation authorities had taken over all major industrial plants. After the war, the reconstituted Czechoslovak government took control of these plants. Foreign trade was still in private hands, however, and remained important in the economy. Exports of machinery and consumer goods paid for imports of materials for processing. The quality of Czechoslovak export products was comparable to that of products produced in other industrialized countries. Agriculture also remained in private hands, and farming was still largely a family affair. The labor force as a whole was skilled and productive, and management was competent. This mixed system, containing elements of socialism and private enterprise, operated efficiently in 1947 and 1948 under a two-year plan in which goals were general and indicative rather than mandatory. The country received considerable assistance from the West through the United Nations, and most of its trade was with the West. Until prohibited by Stalin in 1947, Czechoslovakia intended to participate in the United States Marshall Plan to rebuild Europe. By 1948 Czechoslovak production approximated prewar levels, agricultural output being somewhat lower and industrial output somewhat higher than earlier levels. When the KSC assumed complete political and economic control in February 1948, it began immediately to transform the Czechoslovak economy into a miniature version of that of the Soviet Union (see Stalinization , ch. 1). By 1952 the government had nationalized nearly all sectors; many experienced managers had been replaced by politically reliable individuals, some of them with few technical qualifications. Central planning provided a mandatory guide for institutions and managers to follow in nearly all economic activity.

    The targets of the First Five-Year Plan (1949-53) reflected the government's commitment to expansion of the producer goods sector of the economy. The goals were dramatically revised upwards after 1949, partly in response to the Korean War, to build up metallurgy and heavy industry. The country became an important supplier of machinery and arms to other communist countries. Foreign trade with noncommunist countries dropped sharply (in part because of trade controls imposed in those countries); trade with communist countries increased from 40 percent of the country's total in 1948 to 70 percent a decade later. The economy failed to reach the ambitious goals of the first plan, although investment and growth were high. By the end of the plan period, serious inflationary pressures and other imbalances had developed, requiring a currency conversion in 1953 that wiped out many people's savings and provoked outbreaks of civil disorder.

    The years 1954 and 1955 were covered by yearly plans only; the scheduling change was part of an effort by the members of the Council for Mutual Economic Assistance (Comecon) to correlate and integrate their planning by using common planning periods (see Appendix B). The Second Five-Year Plan then encompassed the years 1956-60. During that period, investment continued at a high rate, although real wages and the supply of consumer goods also increased substantially, and national income grew by 6.9 percent. In the late 1950s, however, economic leaders noted that investment efforts were yielding diminishing returns. Large investments were required to sustain economic growth. In 1958 and 1959, in response to this troubling situation, the government made several relatively minor adjustments in the functioning of organizations and prices--the first of the country's economic reforms. The reforms involved some limited decentralization of authority, most notably giving enterprises more autonomy in handling investment funds. The intention was not to alter the Soviet economic model to any great extent but rather to enhance its overall operation. The reforms did not result in noticeable improvements in economic performance, however. Eventually, in 1962, planners quietly scrapped the entire reform program, reimposing most of the central controls.

    During the early 1960s, industrial production stagnated. The agricultural sector also registered a relatively poor performance. Agriculture had been a weak part of the economy throughout the 1950s, consistently failing to reach planned output targets, and the minimal reforms of 1958-59 had done little to alter the situation. Targets set for the national economy in the Third Five-Year Plan (1961-65) quickly proved to be overly ambitious, particularly with regard to foreign trade. The plan was dropped after a recession in 1962, and annual plans covered the remainder of the period. National income actually declined in 1963. By 1965 it was only 1.9 percent higher than in 1960, in comparison with a 6.9 percent growth rate in the 1956-60 period. Many factors contributed to the economy's poor performance, including adverse weather for agriculture, cancellation of orders by China resulting from the Sino-Soviet dispute, and unrealistic plan goals. By this time, however, reform-minded economists had reached the conclusion that much of the blame lay in deficiencies of the Soviet model. They began to prepare additional reform measures to improve the economy's efficiency.

    Serious defects in the Soviet model for economic development had long been recognized by some Czechoslovak economists, and calls for decentralization had occurred as early as 1954. Economists and others had argued that it was inappropriate to apply the Soviet model to Czechoslovakia in a dogmatic manner. The country was already industrialized, had few natural resources and a small internal market, and remained dependent on foreign trade in significant ways. The model emphasized extensive development, such as building new factories, rather than intensive investment in which production processes were modernized and efficiency improved. The pressure for greater investment and defense production during the 1950s had caused private consumption to grow more slowly than net material product. The result had been a chronic inflationary bias, reflected in shortages of consumer goods and forced savings by the population. Plants and construction firms held large inventories of materials to compensate for irregular deliveries from suppliers. Completion of most investment projects required an inordinate amount of time, freezing funds in unproductive uses. Inadequate investment in agriculture had contributed to the latter's chronically poor performance. Prices were also a problem, based as they were on often conflicting policies; prices reflected neither scarcity nor cost, bore little rational relationship to one another in the domestic market, and had become increasingly divorced from world prices. The system appeared to stifle innovation and to offer no basis for selecting between investment and production alternatives or for judging efficiency.

    By the early 1960s, several Czechoslovak economists had analyzed these problems and had remedies to offer. One spokesman for the reformers was the economist Ota Sik, a member of the KSC Central Committee and its Economic Commission (see National Organization , ch. 4). Party and government officials listened because after the 1962 recession and the earlier failure of the 1958 reforms they recognized that something had to be done. In October 1964, the party published a set of principles for major economic reform and, beginning in 1965, started implementing specific measures. In June 1966, the Thirteenth Party Congress gave its official approval to the new program, which came to be called the New Economic Model (NEM). Some influential party leaders remained opposed to the reforms, apparently concerned about possible domestic political repercussions. These party leaders engaged in what they termed "correction of deficiencies," but in the process they diluted the content of the reform measures. Only after the party leadership changed in January 1968 did support for the reforms increase and the pace of reform quicken (see The Reform Movement , ch. 1).

    The reform program was multifaceted, and portions of it were never implemented. Its principal object was to limit significantly the role of the central planning authorities while expanding the autonomy and responsibility of the enterprises. The central planning authorities were to concern themselves only with overall long-term planning of economic development and to provide general guidance through the formulation of a limited number of economic goals. Enterprises and their associations would be free to determine short-term production targets within the framework of the overall goals. Individual enterprises were to become financially viable, realizing a profit from their sales after covering all costs and various state levies. State subsidies would gradually end; enterprises that could not operate at a profit would have to close. Profit, rather than fulfillment of planned quantitative output targets, was to become the main criterion for evaluating the economic performance of enterprises. This change in emphasis, it was hoped, would make enterprises more competitive and more responsive to the demands of customers. At the same time, producers were to be increasingly exposed to foreign competition, so that they would seek to increase their own productivity and lower prices. As a means of earning much- needed hard currencies, exports to Western countries were to be stimulated through incentives encouraging enterprises to make their products competitive on world markets; the incentives would include the right to retain a portion of the foreign currency profit.

    In the reform program, a more realistic system of prices was to replace the centrally determined system. Prices were to reflect actual costs, the supply and demand situation, and relevant world prices. Enterprises were to finance investments with their own resources and interest-bearing bank loans and would have to justify their investments in terms of need, effectiveness, and cost so that widespread waste of investment resources would cease. The state would provide investment funds only for key economic development projects. Finally, a revised wage and salary system was to eliminate egalitarianism in the wage structure and substitute a system based on individual work performance and on results obtained by the employing enterprise.

    To ensure greater concentration and specialization of industrial production, the government consolidated enterprises into large production units resembling trusts or cartels managed by "branch directorates." These large production units formed an intermediate link between the enterprises and the ministries. The branch directorates had overall responsibility for the performance of enterprises under their jurisdiction, but the division of authority between the larger unit or trust and its subordinate members was not clearly defined.

    In the spring of 1968, the government permitted enterprises to experiment with worker participation in management through the establishment of enterprise councils. Direct involvement of workers in the management of enterprises was expected to bring about an improvement in morale and performance by calling into play the workers' self-interest. The form of the councils was left vague because it was thought that the varying sizes of enterprises would necessitate different forms.

    In sponsoring their program, Czechoslovak reformers did not intend to introduce free enterprise or to permit free play of market forces. They were committed socialists trying to improve economic management under continuing party control, but with fewer rigid controls than had formerly existed. They had implemented only a portion of their program by August 1968, when Soviet and other Warsaw Pact troops invaded the country and the reform experiment came to an end. The reforms and other elements of the Prague Spring had become too threatening to party control, at least in the Soviet view, to be allowed to continue (see Intervention , ch. 1).

    The next two years saw the gradual dismantling of most of the program. By the early 1970s, almost all traces of the reform measures had vanished. Economic "normalization" resulted in a reversion to mandatory central planning, price controls, and the system of material balances. Only a few modifications of the central planning system remained, including devolution of some aspects of planning to the consolidated production units and modification of some plan indicators to emphasize efficiency, productivity, quality, and innovation rather than simply gross output targets.

    In spite of the apparently disruptive changes and political turmoil of the late 1960s and early 1970s, the Czechoslovak economy continued to grow at a respectable rate throughout the period. From 1966 to 1970, the period of the Fourth Five-Year Plan, net material product grew at an average annual rate of 6.9 percent, well exceeding the planned yearly increase of 4.1 to 4.4 percent. Performance was also gratifying during the Fifth Five- Year Plan (1971-75). During this period, net material product grew somewhat more slowly, averaging 5.7 percent yearly, but still exceeded the planned rate of 5.1 percent yearly. The fastest growing sectors in industry during both planning periods were chemicals and engineering (growing at an annual rate of 8 to 10 percent); the slowest growing sectors were fuels (3 to 5 percent) and consumer goods (4 to 6 percent). Wages, incomes, and personal consumption levels rose at respectable rates despite an overall increase in investment. Agriculture continued to be a weak area but had improved markedly. By 1975 the agricultural sector was almost self-sufficient in animal production, and self- sufficiency in crop production appeared to be an attainable goal. Rural wages rose, and mechanization progressed rapidly.

    During the Sixth Five-Year Plan (1976-80), by contrast, economic performance was far less satisfactory; in the closing years of the period, the slowdown in economic growth became especially noticeable. Net material product grew by only 3.7 percent yearly on average, instead of the 4.9 percent called for by the plan. Both agriculture and industry failed to meet planned growth targets; 5.7 to 6.0 and 2.7 to 2.8 percent yearly growth rates were planned, respectively, whereas the rates actually achieved were 4.5 and 1.8 percent. The plan called for an annual average increase in labor productivity of 4.5 percent, an important goal, given constraints on expansion of the labor force; 3.3 percent was actually achieved. Other difficulties included insufficient technological improvement, failure to meet the conservation goals for energy and materials, and less than full use of fixed assets. In addition, the performance of agriculture was disappointing, particularly after the optimal climatic conditions and bumper crops of the early 1970s. Problems in agriculture were in part a result of drought (1976) and severe winter and spring flooding (1979). Other factors, such as shortages of agricultural machinery and spare parts and poor quality of fertilizer, also had an impact on the agricultural sector. Large imports of grain necessarily continued. During the plan period, growth rates in personal consumption declined, reaching a low point of 0.5 percent in 1979. At the same time, in contrast to the previous plan period, retail prices rose by about 11 percent over the 5-year period. During the last few years of the plan, there were widespread consumer complaints about the unavailability of basic commodities such as meat, milk, and vegetables.

    The economy's performance was lackluster despite the continuing infusion of substantial investment funds. Since 1948, investment had been the most dynamic element of economic growth, with a growth rate substantially exceeding that of national income. Gross investment had reached a peak of about 31 percent of national income expenditures in the 1950s during Czechoslovakia's most extensive development phase. Gross investment limits of about 30 percent of national expenditures had been typical during the 1960s. The same ceiling was set for the Fifth Five-Year Plan, but the investment rate was edging up. The limit was raised to a maximum of 31 to 33 percent for the Sixth Five-Year Plan, but actual expenditures exceeded this rate, being closer to 34 percent. In part, the rise in the investment rate in the 1970s reflected large capital expenditures for increased mining of coal and other fuels and for the development of engineering branches to produce equipment for nuclear power plants. Nevertheless, given the considerable funding poured into the economy, the mediocre condition of the Czechoslovak industrial plant in general at the end of the 1970s must have been discouraging to economic planners.

    The energy and trade problems Czechoslovakia faced in the late 1970s were also major factors in the slowdown in industrial growth. The terms on which Czechoslovakia conducted foreign trade had begun to deteriorate sharply by the mid-1970s. After 1974 the rapid rise of world oil prices was partially reflected in the price of oil from the Soviet Union, Czechoslovakia's principal source of fuel and raw materials. Prices of other materials on which the country's economy depended also increased faster than the prices of its exports, which consisted primarily of manufactured goods (especially machinery). Party and government leaders were cautious about increasing foreign indebtedness and attempted to maintain a high level of exports. Increasingly in the 1970s, a substantial portion of the country's production of consumer goods and machinery was diverted to export markets to meet the rising import bill. Restraints on imports from noncommunist countries reduced inputs for domestic industries.

    At the beginning of the 1980s, the economy had substantial limitations, which were recognized by economists, political leaders, and even the public at large. The country had perhaps the oldest stock of plant and equipment in Eastern Europe, a stagnant resource base, and growing dependence on energy and material imports. To reduce requirements for energy and raw materials and to increase the competitiveness of Czechoslovak exports, domestic production needed to become more efficient. Furthermore, consumption standards continued to be well below those found in Western Europe.

    Economic planners set relatively modest growth targets for the Seventh Five-Year Plan, revising their goals downward two years into the plan. "Intensification" of the economy--focusing on efficient use of resources rather than simply quantitative growth--was the keynote of government policy. The revised goals called for a growth rate in net material product of 10.5 to 13.5 percent. Gross industrial output was to increase by 14 to 18 percent, and gross agricultural output by 7 to 10 percent. Personal consumption was to rise by less than 3 percent.

    The early years of the Seventh Five-Year Plan saw a serious slump in the economy. During 1981 and 1982, personal consumption actually declined. The cost of living rose more rapidly than wages. During the final three years, however, an economic recovery made up for the earlier poor performances; according to official calculations, the country succeeded in either meeting or surpassing domestic goals during the plan period as a whole. Official reports listed the growth rate of net material product at 11 percent, growth of gross industrial output at 14.5 percent, growth of gross agricultural output at 9.8 percent, and increase in personal consumption at 5.5 percent. Results of the "intensification" effort were disappointing, however, as leaders acknowledged. During the plan, consumption of energy decreased by only 1.7 percent per annum, less than the 2 percent goal of the plan (see table 8, Appendix A).

    The relatively favorable outcome of the Seventh Five-Year Plan was noteworthy, particularly because several international trends had had negative effects on the Czechoslovak economy during the period. A recession in developed Western countries dampened their markets for Czechoslovak exports; and in 1981 the Soviet Union announced its intention to scale back oil exports to Eastern Europe, including Czechoslovakia, by 10 percent. Although in 1983 and 1984 worldwide prices for oil began to drop, the Comecon (or Soviet) price, tied to a 5-year formula, caused the price of Soviet oil (16.4 million of the 16.6 million tons imported by Czechoslovakia in 1984) to continue to climb. In 1982 the decision of Western banks to restrict credit to Eastern Europe as a result of Poland's serious payment problems and the sizable debts of other East European countries impeded Czechoslovakia's foreign trade with the West.

    The poor performance of the economy in the early 1980s persuaded party leaders that some changes were needed. Therefore, in conjunction with the Seventh Five-Year Plan, in 1981 the government introduced a series of limited reforms called the "Set of Measures to Improve the System of Planned National Economic Management after 1980." Relatively conservative in design and initiated without fanfare, these reforms permitted somewhat greater freedom of action for managers of enterprises in selected operational areas, giving them more authority over their own investment activities and over providing financial incentives to workers. The intention was to make industry as a whole more aware of prices and costs. The reforms did not call for any appreciable loosening of central planning and control. In 1982 parallel reform measures were introduced for agriculture; the measures permitted farm officials to exercise greater management initiative and limited the number of binding targets imposed on farm production. Many Western observers believed that these reforms did have a helpful effect during the final years of the plan. It was felt, however, that these partial reforms were not sufficiently comprehensive to bring about the modernization and improvements in efficiency sought by Czechoslovakia's leaders. Czechoslovakia -- ECONOMIC SECTORS

    Data as of August 1987


    NOTE: The information regarding Czechoslovakia on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Czechoslovakia ECONOMIC POLICY AND PERFORMANCE information contained here. All suggestions for corrections of any errors about Czechoslovakia ECONOMIC POLICY AND PERFORMANCE should be addressed to the Library of Congress and the CIA.

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