Economy of communist Czechoslovakia

In the mid-1980s, Communist Czechoslovakia was prosperous by the standards of the Eastern Bloc, and did well in comparison to many richer western countries. Consumption of some goods like meat, eggs and bread products was even higher than the average countries in Western Europe, and the population enjoyed high macroeconomic stability and low social friction. 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 the Eastern Bloc's smallest international debts to non-socialist countries.

The command economy of Czechoslovakia possessed serious structural problems. Like the rest of the Eastern Bloc economies, producer goods were favored over consumer goods, causing consumer goods to be lacking in quantity and quality in the shortage economy that resulted. Economic growth rates lagged well behind Czechoslovakia's western European counterparts. Investments made in industry did not yield 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 socialist and non-socialist economists make an 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 non-socialist 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

The Czechoslovak economy, like most economies in socialist 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 decided by a national plan that has the force of law.

In Czechoslovakia, like in most socialist countries, the centralized economic structure paralleled that of the government and the Communist Party of Czechoslovakia (Komunistická strana Československa—KSČ). 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.

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 workforce, almost 99.8 percent was employed in the socialist sector.

thumb|[[Tatra T3 by ČKD Tatra became one of the most widely produced trams in the world, exported to the Soviet Union, Germany, Yugoslavia, and Romania. Depicted here is a tram in Riga.]]

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, devised 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 supervised the planning procedures for the collectives and state farms. Agricultural farms had been collectivized according to a process pioneered by Joseph Stalin in the late 1920s by which Marxist-Leninist regimes in the Eastern Bloc and elsewhere attempted to establish an ordered socialist system in rural agriculture. Because of the need to conceal the assumption of control and the realities of an initial lack of control, no Soviet dekulakization-style liquidation of rich peasants occurred in countries such as Czechoslovakia. Because Czechoslovakia was more industrialized than the Soviet Union, it was in a position to furnish most of the equipment and fertilizer inputs needed to ease the transition to collectivized agriculture.

The ministries provided more detailed instructions concerning fulfillment of the assignments and passed 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 could 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.

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-term 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 non-completion 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 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 a 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 the fulfillment of the plan, managers may also hesitate to adopt new technology, since the 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.

Producer goods were favored over consumer goods, causing consumer goods to be lacking in quantity and quality in the shortage economies that resulted. Because periodic shortages of birth control pills and intrauterine devices made these systems unreliable in Czechoslovakia, abortion became the most common form of contraception . Many premium goods could be bought only in special stores using foreign currency generally inaccessible to most citizens, such as Tuzex stores in Czechoslovakia. As a result, black markets were created that were often supplied by goods stolen from the public sector. A saying in Czechoslovakia was "if you do not steal form the state, you are robbing your own family."

In addition, because of large social purges, so many workers were dismissed from established professions in such purges that they often had to be replaced by hastily trained younger workers free of questionable class origins. A Czechoslovak noted: It possessed poorly defined property rights, a lack of market clearing prices and overblown or distorted productive capacities in relation to analogous market economies.

Growth rates

Growth rates in Czechoslovakia, as throughout the Eastern Bloc, experienced relative decline. Meanwhile, Germany, Austria, France and other Western European nations experienced increased economic growth in the Wirtschaftswunder ("economic miracle"), Trente Glorieuses ("thirty glorious years") and the post-war boom. Overall, the inefficiency of systems without competition or market-clearing prices became costly and unsustainable, especially with the increasing complexity of world economics. While most western European economies essentially began to approach the per capita Gross Domestic Product levels of the United States, Eastern Bloc countries such as Czechoslovakia did not.

{| class="wikitable" style="text-align: left"

|- bgcolor="#cccccc"

!style="text-align: left;background:#B0C4DE"|Per Capita GDP (1990 $)

!style="background:#B0C4DE"|1938

!style="background:#B0C4DE"|1990

|- style="text-align:center;"

| align="left"|||$1,800 ||$19,200

|- style="text-align:center;"

| align="left"|||$1,800||$3,100

|- style="text-align:center;"

| align="left"|||$1,800 ||$26,100

|- style="text-align:center;"

| align="left"|||$1,300 ||$16,800

|- style="text-align:center;"

Similar results occur for GDP on a PPP basis:

{| class="wikitable" style="text-align: left"

|- bgcolor="#cccccc"

!style="text-align: left;background:#B0C4DE"|Per Capita GDP (1990 $)

!style="background:#B0C4DE"|1950

!style="background:#B0C4DE"|1973

!style="background:#B0C4DE"|1990

|- style="text-align:left;"

|align=left||| $3,706 || $11,235|| $16,881

|align=left||| $3,502 || $10,643|| $16,320

|align=left||| $3,501 || $7,041|| $8,895 (Czech Republic)/ $7,762 (Slovakia)

|align=left||| $2,834 || $6,058|| $6,871

|align=left||| $2,480 || $5,596|| $6,471

|align=left||| $2,397 || $8,739|| $12,210

History

Before socialism

thumb|The First Republic

In 1929, compared to 1913, the gross domestic product increased by 52% and industrial production by 41%. In 1938, Czechoslovakia was in 10th place worldwide in terms of industrial production.

After World War II the Czechoslovak economy emerged 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. Immediately after the war, the Soviet Union began to transfer large amounts of industrial and other assets from Eastern Bloc countries, including Czechoslovakia. In addition, the Soviets reorganized enterprises as joint-stock companies in which the Soviets possessed the controlling interest. Using that control vehicle, several enterprises were required to sell products at below Western market prices to the Soviets, such as uranium mined in Czechoslovakia.

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.

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%. 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.

On the results of the Second Five-Year Plan, the Great Soviet Encyclopedia claims:

"During the second five-year plan the industrial output increased by 66 percent, rising to four times the pre-war level (1937). The national income increased by a factor of 2.5 between 1948 and 1960. The socialist sector now owned 87.4 percent of the farmland, and the organization of farmers into cooperatives was virtually completed. Nevertheless, in terms of the growth of production, agriculture lagged behind industry. The successes of socialist construction quickly raised the living standard of the people. A national conference of the Communist Party, held on July 5–7, 1960, confirmed the victory of socialist production relations in the country. Several days later, on July 11, the National Assembly adopted a new constitution under which the country was renamed the Czechoslovak Socialist Republic (CSSR). The constitution proclaimed the CSSR a socialist state based on a firm alliance, headed by the working class, of the peasantry, the working class, and the intelligentsia."