Czechoslovakia-ECONOMIC STRUCTURE AND ITS CONTROL MECHANISMS

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, differs markedly from market or mixed economies. The most notable feature common to nearly all communist economies, including Czechoslovakia, is the deliberate and almost complete severance between market forces and the allocation and use of resources. 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. The leaders and planners make most economic decisions: setting quotas for production units that are almost completely state owned; directing the flow of materials through the economy; establishing prices for nearly everything, including labor and capital; and controlling investment and consumption. Most communist economies are organized vertically in a command structure radiating from the central authorities down to the individual production units. This is the case in Czechoslovakia, where the centralized economic structure parallels that of the government and the Communist Party of Czechoslovakia (Komunisticka strana Ceskoslovenska--KSC). This structure gives 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.

Government ministries prepare general directives concerning the desired development of the economy (see Government Structure , ch. 4). They pass these along to the economic advisory body, the Central Planning Commission, which in turn prepares the long-term targets of the economy. These are 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 remains the most important. Most significant on a daily operational basis, however, are 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 converts the directives of the ministries into physical units, devises assignments for key sectors of the economy, and then delivers this information to the appropriate ministries, which oversee various functional branches of the economy. The production plans are made more specific and concrete through implementation of the system of "material balances," an accounting system that allocates available materials and equipment in an effort to make plan fulfillment possible for all sectors in the economy.

Upon receiving their assignments, the various ministries further subdivide the plan into tasks for the industrial enterprises and trusts or groups of enterprises under their supervision. (A parallel process takes place for agriculture, in which the federal Ministry of Agriculture and Food supervises the planning procedures for the collectives and state farms.) The ministries provide 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 draw up a draft plan with the assistance of their parent trust or ministry. As noted by economist John Stevens, during this phase of planning an important reverse flow of information occurs, from the actual producers at the bottom of the hierarchy to the authorities at the top. Bargaining may take place among the various levels. After receiving feedback concerning the plan, the ministries consult again with the Central Planning Commission and, assembling all the draft plans, formulate an operational plan that can achieve the central directives. The appropriate parts of the assignments are then dispatched once again to the trusts and enterprises. This time, their acceptance by the enterprises and trusts is mandatory.

The norms included in the instructions to the enterprises usually specify 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 are also set forth in the instructions.

Evaluation of enterprise performance occurs on several levels. The planning authorities assess plan fulfillment, but there are additional control devices internal and external to the enterprise. Among the duties of KSC members and trade union leaders within the enterprise is monitoring plan fulfillment. The federal Ministry of Finance also sends representatives into the enterprise to investigate accounts. In addition, the State Bank of Czechoslovakia can exert influence on enterprise activities by monitoring enterprise bank accounts (see Banking and Finance , this ch.). Nevertheless, the main source of information for the planners is the enterprises themselves.

Under the Czechoslovak system, foreign trade is a state monopoly, supervised by the central Ministry of Foreign Trade. The ministry oversees the operation of about thirty foreign trade enterprises. As intermediaries between the domestic export producers or import purchasers and the external market, the enterprises are responsible for arranging contracts as well as for financing and generally supervising Czechoslovak foreign trade, usually setting prices that have little connection with domestic production factors.

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.

The Czechoslovak leadership, aware of these criticisms and also of the deteriorating performance of the national economy in the late 1970s and early 1980s, undertook a series of modest reforms, the "Set of Measures to Improve the System of Planned National Economic Management after 1980" for industry in 1981 and a similar program for agriculture in 1982 (see Economic Policy and Performance , this ch.). These measures focused on monetary reform, decentralizing somewhat the management of investment funds by giving more authority to enterprises or, more often, the trusts that supervised groups of enterprises. The reforms left the centralized system fundamentally unchanged, however.

Data as of August 1987