Economy of Communist Czechoslovakia

This article is part of the main article: Czechoslovakia

Table of contents
1 Introduction
2 Functioning of the economy
3 History
4 Industry
5 Agriculture
6 Foreign trade
7 Financial System and Banking

Introduction

In the mid-1980s, Czechoslovakia was one of Eastern Europe's most industrialized and prosperous countries. Although levels of consumption were well below those common in Western Europe, inhabitants of Czechoslovakia enjoyed a standard of living generally higher than that found in most other East European countries. Heavily dependent on foreign trade, the country nevertheless had one of Eastern Europe's smallest international debts to noncommunist countries.

The Czechoslovak economy had serious problems, however. Investments made in industry during the late 1970s and early 1980s had not yielded the results expected. Consumption of energy and raw materials was excessive. Czechoslovak leaders themselves decried the economy's failure to modernize with sufficient speed.

The differing statistical concepts and procedures used by communist and noncommunist economists make assessment of the status of the Czechoslovak economy complicated. Foreign trade statistics are particularly difficult to assess because a variety of currency conversion methods were employed to calculate trade turnover value. Data calculated on the basis of noncommunist concepts will be identified here by the use of such Western terms as gross national product; Czechoslovak statistics will be called official data or identified by such terms as net material product or national income.

Functioning of the economy

In the mid-1980s, Czechoslovakia had a highly industrialized economy, a fact reflected in the 1985 official statistics concerning production of the net material product of the country (the official measure of aggregate production). The industrial sector accounted for 59.7 percent of the value of the net material product; construction, 11.2 percent; agriculture and forestry, 7.5 percent; and various other productive services (including transport, catering, and retailing, among other activities), 21.6 percent. As of 1980 the socialist sector (state enterprises or cooperatives) generated 97.4 percent of the national income. Of the total work force, almost 99.8 percent was employed in the socialist sector.

The Czechoslovak economy, like most economies in communist countries, differed markedly from market or mixed economies. The main difference is that while in market economies, decisions by individual consumers and producers tend automatically to regulate supply and demand, consumption and investment, and other economic variables, in most communist economies, these variables are determined by a small governing group and are incorporated in a national plan that has the force of law.

In Czechoslovakia, like in most Communist countires, the centralized economic structure paralleled that of the government and the Communist Party of Czechoslovakia (Komunisticka strana Ceskoslovenska--KSC). This structure gave the party firm control over the government and the economy. It is generally referred to as the Soviet model and was first applied in the Soviet Union, which was initially an agrarian nation with extensive natural resources, a large internal market, and relatively little dependence on foreign trade; the goal was to quickly develop heavy industry and defense production. Czechoslovakia, by contrast, was a small country that had already reached a high level of industrialization and was rather heavily dependent on foreign trade when the Soviet system was first imposed after World War II

Plans and their implementation

Government ministries prepared general directives concerning the desired development of the economy . They passed these along to the economic advisory body, the Central Planning Commission, which in turn prepared the long-term targets of the economy. These were expressed in extensive economic plans--in general plans covering periods fifteen to twenty years into the future and in the well-known five-year plans. Since 1969, economic plans for the Czech Socialist Republic and the Slovak Socialist Republic have been produced by their own planning commissions, although the central plan remained the most important. Most significant on a daily operational basis, however, were the short-term annual production objectives. In their final form, these more detailed annual plans have the force of law, no longer being merely guides or recommendations.

In formulating the various plans, the Central Planning Commission converted the directives of the ministries into physical units, devises assignments for key sectors of the economy, and then delivered this information to the appropriate ministries, which oversee various functional branches of the economy. Upon receiving their assignments, the various ministries further subdivided the plan into tasks for the industrial enterprises and trusts or groups of enterprises under their supervision. (A parallel process took place for agriculture, in which the federal Ministry of Agriculture and Food supervises the planning procedures for the collectives and state farms.) The ministries provided more detailed instructions concerning fulfillment of the assignments and pass them along to the trusts and enterprises. Upon receipt of their proposed tasks, individual enterprises drew up a draft plan with the assistance of their parent trust or ministry. After receiving feedback concerning the plan, the ministries consulted again with the Central Planning Commission and, assembling all the draft plans, formulated an operational plan that can achieve the central directives. The appropriate parts of the assignments were then dispatched once again to the trusts and enterprises. This time, their acceptance by the enterprises and trusts was mandatory.

The norms included in the instructions to the enterprises usually specified the volume and kinds of production required, inputs available, a production schedule, job categories and wage rates, and a description of the centrally funded investment planned. National and republic budget levies and subsidies, profit targets and limitations, and plans for the introduction of new products and technology were also set forth in the instructions.

Performance evaluation

Evaluation of enterprise performance occured on several levels. The planning authorities assessed plan fulfillment, but there were additional control devices internal and external to the enterprise. Among the duties of KSC members and trade union leaders within the enterprise was monitoring plan fulfillment. The federal Ministry of Finance also sent representatives into the enterprise to investigate accounts. In addition, the State Bank of Czechoslovakia could exert influence on enterprise activities by monitoring enterprise bank accounts. Nevertheless, the main source of information for the planners were the enterprises themselves.

Advantages and Disadvantages

Advocates of this centralized system of managing the economy contend that it has a number of advantages. In a centrally planned system, authorities can distribute resources and production targets as they choose, balancing the needs of consumption and investment on the basis of long-range goals. Planners in postwar Czechoslovakia, for example, were thus able to expand the country's heavy industrial base as they wished. In turn, research efforts, being centrally directed, can focus on areas deemed vital to the economy's goals. In general, central planning can make it possible for producers to take advantage of economies of scale, eliminating superfluous and wasteful activities. If planning is really effective, the system should result in virtually full employment of resources.

As critics have pointed out, however, certain aspects of the system interfere with its effective functioning. One problem is the assignment of production quotas. Planners generally must base these assignments on the past performance of enterprises. Enterprise managers, knowing that planners tend to assess enterprise performance according to completion or noncompletion of assigned tasks, may be tempted to understate and misrepresent the production potential of their organizations in order to obtain an assignment they can easily handle. Also, they may have little incentive to overfulfill aspects of the current plan; such achievements might lead planners to assign a substantially more difficult or even unachievable task during the next planning period, resulting in a poor performance evaluation for the enterprise. Such a disparity might call into question the validity of the information previously furnished to the planners by the enterprise managers. To ensure plan fulfillment, managers tend to exaggerate their material and labor requirements and then to hoard these inputs, especially if there is reason to worry about punctual delivery of supplies. Furthermore, since planning under the Soviet model aims at full utilization of resources, plans are typically "taut," and an ambitious manager who seeks to obtain resources beyond those needed to achieve the plan norms may find the process difficult and discouraging, if not impossible. Given the emphasis on fulfillment of the plan, managers may also hesitate to adopt new technology, since introduction of a new procedure might impede operations and even jeopardize plan fulfillment. Critics have also noted that central planning of production can result in an inappropriate assortment of goods from the consumers' point of view or in low-quality production.

History

see: Economic History of Communist Czechoslovakia

Industry

see: Industry of Communist Czechoslovakia

Agriculture

see: Agriculture of Communist Czechoslovakia

Foreign trade

see: Foreign trade of Communist Czechoslovakia

Financial System and Banking

Currency

The koruna (Kcs), or crown, was the national currency and consisted of 100 halers. In 1986 the currency continued to be convertible only under restricted conditions and at official rates. Violation of exchange regulations constituted a serious offense. The koruna could be used only within the country and was not used in foreign trade. In 1987 the official, or commercial, exchange rate was Kcs5.4 per US$l; the tourist, or noncommercial, rate was Kcs10.5 per US$l. The koruna was legally defined in terms of 123 milligrams of gold, which provided a historical basis for the commercial rate.

Banking System

  • At the head of the country's banking system was the State Bank of Czechoslovakia. The State Bank was the central bank, the government's financial agent, the country's commercial bank, an investment bank, and the clearing agent for collection notices. It also supervised the other banking in the country and, in conjunction with specific ministries, formulated the financial plan for Czechoslovakia. The other banks, also state owned, were subordinate to the State Bank and relegated to special functions.
  • The Commercial Bank of Czechoslovakia was primarily the bank for foreign currency transactions.
  • Three additional banks--two of which were savings banks, one for each of the republics, providing credit to individuals--completed the banking system in 1980.

The main function of the banking system was to act as the government's agent in implementing the financial plan, an important part of which consisted of expanding and contracting credit to meet the economy's needs. The central authorities controlled most investments directly, and the national plan regulated production. The State Bank acted as a supervisory agent in extending credit to the enterprises, ensuring that the investments met plan goals. The bulk of bank credit was for working capital, largely utilized to finance the purchase of materials and the sale of finished products. The powers of the State Bank appeared to be somewhat limited, however, since credit was extended according to guidelines for planned production.

The central authorities set interest rates, which neither reflected the cost of capital nor appreciably affected the flow of credit. Instead, beginning in the 1970s, interest rates were differentiated to accomplish objectives of the plan. Interest rates were low for enterprises modernizing a production process. Punitive rates were used if firms deviated from plan goals. In the mid-1980s, the greatest portion of investment credits went to the industrial sector, followed by agriculture, construction, and retail trade.

The banking system operated within the framework of the financial plan. Major elements of the financial plan included allocation to consumption and investment, foreign and domestic financing of investment, and wage and price changes. Planning authorities were in a position to use the centralized banking system to carry out major corrective measures, as occurred in 1953 when inflationary pressures became serious and the population's accumulated savings were largely wiped out by a conversion of the currency. After this experience, officials placed stricter controls on investments, permitting real wages and the standard of living to rise gradually. But in the late 1970s, and particularly in the early 1980s, the worsening terms of trade, bottlenecks in the economy, and the need for large investments in energy and industry combined to limit the allocations for consumption.

Inflation and Prices

Imposition of the Soviet model introduced a chronic inflationary bias into the Czechoslovak economy, although the inflation was not necessarily reflected in prices. Control of prices (only private food produce, especially fruit and vegetables, were priced freely) repeatedly produced inflationary manifestations in other areas, such as shortages in the market and increased savings by the population. Although officials generally limited the rise in prices (causing price indexes to advance slowly), by the mid-1970s prices had to be adjusted upward more frequently. This trend continued into the 1980s, and major food price increases occured in 1982.

Budget and Taxes

In addition to the banking system, another major financial tool for implementing economic policies and the annual plan was the central and republic government budgets. The Czechoslovak government published little budget information. Western observers believed that small surpluses of revenues were more common than deficits, however. Budget revenues were derived primarily from state economic organizations and the turnover tax. Income taxes provided a small part of revenues. Other minor revenue sources included agricultural taxes and customs duties. The planning authorities redistributed these budget funds according to the plan guidelines, using the budget to encourage certain sectors through subsidies or investment funds.

Central authorities set prices on over 1.5 million kinds of goods. State enterprises were theoretically autonomous financial entities that covered costs and profits from sales. Because the government set production quotas, wage rates, and prices for the products manufactured and the inputs used in the process, however, managers had little freedom to manage. In the 1950s, the government had collected nearly all enterprise funds above costs for redirection according to its priorities. After the 1958 reforms, enterprises obtained a little more control over surplus funds, although the government continued to control the amount of the surplus. In the 1980s, the government was encouraging enterprises to undertake modernization and other limited investment from their own funds and bank credit and to rely less on budget funds.

The turnover tax, another major source of budget revenue, was originally employed in the Soviet Union as a simple and effective method of collecting most of the funds needed by the government without requiring extensive bookkeeping and estimating. It was introduced in Czechoslovakia in 1953 and lost its importance as the chief source of revenue only in the late 1960s, when other levies extracted funds from state enterprises. The tax was collected on goods destined for retail, the rate varying according to the difference between the producer's costs plus approved margin and the selling price as specified by pricing officials. Retail prices of manufactured consumer goods, such as clothing and particularly tobacco products, alcoholic beverages, and sugar, were substantially higher than those of such basic necessities as potatoes, milk, and eggs. The turnover tax appeared to be both a source of revenue and a tool used to influence consumption patterns.


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