Central Eurasia:
Socialist Economic Reforms

I.       Yugoslavia: Worker-Managed Market Socialism

A.     Idealized Yugoslav system:

1.     Social ownership; democratic workers' management.

2.     Market coordination in short run; indicative planning in   long run.

3.     Workers paid a share of enterprise profits.

4.     Government uses market-oriented fiscal & monetary policies.

B.    Backwardness and Central Planning

1.     Ottoman and Serbian domination.

2.     Before World War II - feudalism and land reform.

3.     After the war - unity under Tito and central planning.

C.    The 1950s: Worker's Self-Management and the Visible Hand

1.     Tito-Stalin confrontation.

2.     In 1950, Basic Law on self-management adopted.

3.     In 1951, detailed central planning replaced with the Visible Hand.

4.     In 1952-53, agriculture liberalized and decollectivized.

D.    The 1960s: Worker-Managed Market Socialism

1.     In 1961, division of National and commercial banks.

2.     In 1965, Yugoslav "shock therapy":

a.       Many price controls lifted.

b.       Investment funds transferred to banks.

c.       Exposure to foreign competition.

d.       Greater enterprise autonomy.

e.       Still less  detail in central planning.

3.     In 1967, banks reorganized into independent basic banks, associated banks, and internal banks.

E.     The 1970s: Radical Decentralization - Constitution of 1974 established:

1.       collective and rotating presidency.

2.       Basic Organizations of Associated Labor (BOALs)

F.      The 1980s: After Tito

1.     Rotating presidency and economic instability.

2.     1991 constitutional crisis, declarations of independence, and civil war.

G.    Evaluation of the Yugoslav System

1.     General considerations

a.     benefits - economic democracy and strong work incentives.  J.S. Mill - “common interest of all the workers in the work."

b.     criticisms - inconsistency (economic democracy under one-party state), not genuine (little true participation),  cumbersome (especially with BOALs), wrong decisions (low allocative efficiency and stability).

2.     Supply Response and Productivity - Ward model (below) says reaction to price destabilize markets - mixed empirical evidence.

3.     Market Entry - little opportunity or incentive for entrepreneurs.

4.     Saving and Investment - no portable ownership rights.

5.     Inflation 

a.     Absence of hard budget constraint.

b.     Workers could vote for pay raises.

c.     Circulation of trade credits and promissory notes among enterprises.

6.       Unemployment - above 11 percent between 1984 and 1988, plus 3-6 percent working outside the country.

a.     Rapid growth of industrial labor force.

b.     Linguistic and cultural barriers.

c.     Reluctance of worker-managed enterprises to hire and share income.

7.     Economic Growth - higher than OECD average or most socialist countries. Explained by growth of capital stock.

8.     Income Inequality and Poverty - never developed a remarkably even distribution of income. Relatively high poverty rate.

a.     Regional inequalities.

b.     Enterprise income differentials under self-management.

9.     Consumer Sovereignty - market gave Yugoslav consumers advantage over those in centrally planned economies.

10.   Natural Environment - self-management allowed Yugoslavs to choose between income and clean environment.

H.      Appendix: The Theory of the Labor-Managed Firm

1.     Benjamin Ward's Model

a.     Assumptions - Firm maximizes income per worker rather than total pro­fits. Otherwise, assumptions are identical to standard textbook theo­ry of competitive firm: price taker sells a single product, produced according to standard production function with variable labor and fixed capital inputs.

b.     Conclusion - An increase in market price causes a reduction in employ­ment and production--the supply curve is negatively sloped. Market potentially unstable.

2.     Exceptions - The supply curve may be positively sloped under alter­nate assumptions; for example, if labor is not the only variable in­put, if there is more than one final product, or if a rise in price today causes us to expect the price to fall in the future.

II.      Hungary: Administrative Market Socialism

A.    Background

Relatively small, most trade-dependent country in region.

1950-1954 - First Five-Year Plan, Stalinist model

1956 Anti-Communist demonstration drew a brutal Soviet response.

1965-1967 - Successful agricultural reforms.

B.    The New Economic Mechanism

Provisions:

1.     Detailed central planning replaced with regulated market and indicative planning.

2.     Profit motive replaced of bonuses for plan fulfillment.

3.     Aside from raw materials and consumer staples, price controls were lifted from a wide range of products, and many other prices were allowed to fluctuate within limits.

4.     State monopoly of foreign trade was weakened.

5.     No challenge to Communist power structure. Support for the NEM declined during the early 1970s; central controls reintroduced in 1973.

C.      The 1980s: The New Improved Mechanism

1.     Prices - Under competitive price system, most industrial prices approximate world market levels.

2.     Industrial Organization and Competition 

a.     Dissolution of large enterprises and trusts.

b.     New small, competitive organizations in the public and private sectors. Cooperatives, enterprise contract work associations (ECWAs), independent contract work associations (ICWAs).

3.       Enterprise Autonomy and Democracy

a.     Three industrial ministries merged in 1980 into Ministry of Industry.

b.     Decentralization of foreign trade continued.

c.     In 1984, Law on Enterprise Democracy assigned state companies to three categories of control: centralized, enterprise council, and Yugoslav-style labor management.

4.     Finance and Monetary Policy

a.     Bond market established in 1983; secondary trading in 1984.

b.     In 1987 the National Bank of Hungary became Western-style central bank, but not independent.

5.     Bankruptcy - code implemented in 1986, but few state enterprises were threatened by the law.

6.     Taxation - profit tax revised in 1989, with reduced rate, with revenue replaced by VAT and revised personal income tax.

D.      Evaluation of the Hungarian System

1.     Successes

a.     Quickest growth of industrial labor productivity in Eastern Europe during early 1980s; even more success in agriculture.

b.     During 1980s, export sales grew more rapidly than other countries in its income category and remained solvent through the debt crisis.

c.     Ended 1980s, more even distribution of income than any country in Central Eurasia except Czechoslovakia.
 

2.     Problems

a.     slow income growth during the 1980s.

b.     Relatively high inflation.

c.     Largest foreign debt, per capita, in Central Eurasia.

d.     Relatively few are "totally satisfied" with their lives.

III.    The Soviet Union: Treadmill of Conservative Reforms

A.      Khrushchev: Regional Decentralization

1.     Network of 100 regional economic councils (sovnarkhozy), created in 1957, replacing and demoting many ministries.

2.     Slow growth rates caused program to be  judged a failure. Khrushchev ousted in 1964, ministries and state committees rebuilt.

B.      Liberman/Kosygin Reforms

1.     Sales volume replaced gross output to set bonuses.

2.     Bonuses and benefits paid from funds, based on profits.

3.     Enterprises to economize on their use of capital, they would be required to pay a 6 percent annual charge to the state for their fixed and circulating assets.

4.     Fewer performance targets industrial prices would be set according to a new set of formulas, permitting enterprises to accumulate incentive funds and to pay capital charges.

5.     Improvements illusory - inflexible prices, ineffective profits, failed implementation.

C.    Counterplanning

1.     Introduced in 1971 to encourage ambitious plans. Larger bonus for proposing and fulfilling larger target.

2.     Unsuccessful because obligatory plan targets had to be fulfilled before any bonuses were paid, enterprises continued in their attempts to obtain unchallenging assignments. Few enterprises proposed counterplans.

D.    Net normative value added (NNVA) -
introduced in 1979 to replace  GVO. Designed to discourage inflation of output with expensive raw materials and assemblies.  Never fully implemented.

E.    Andropov Experiments

1.     Enforcement of stricter codes of order and discipline.

2.     Commissioned long-run economic studies, including Novosibirsk Report, which found that earlier reforms were defeated by resistance from ministries in Moscow. Power of these agencies must be broken.

3.     Experiment, Jan. 1994. Incentives linked to product sales, product quality, and profits, according to stable formulas. Measures taken to limit ministry interference, with partial success.

F.      The Gorbachev Era:

1.     Stages of Perestroika

1985-1986 - extension of the Andropov era. Gorbachev believed that a perestroika (restructuring) of Soviet society based on hard work, discipline, and moderate programs of economic reform would be sufficient to accelerate economic growth and technological achievement.

1987-1989 - "radical" or "revolutionary" perestroika. Gorbachev supported stronger enterprise independence, including  development of private enterprise, and he supported a truly revolutionary democratization of the political system.

1990-1991 - Gorbachev supported principles of regulated market socialism, but never introduced a market economy in the Soviet Union.

2.     Political Environment.

a.     glasnost ("openness") - encouraged news media to criticize bureaucratic practices.

b.     1987Abalkin conference - fundamental economic reform requires political democratization. Led to one-party multicandidate elections for a new parliament; forum for debate of national issues.

c.     1990, Gorbachev supported development of multiparty system, and Article 6 abolished. Attempted to transfer power from the party to the presidency and to these other state structures.

d.     Coup attempt in August 1991 led to dissolution of USSR.

3.     Discipline.

a.     Antialcoholism campaign.

b.     Enterprises organized into brigades (10 to 30 workers) and links (5 to 10 workers) with collective contracts.

c.     New military-style product quality inspection was introduced in 1987. Teams of inspectors posted in enterprises. System was quickly abandoned, though, because tough quality standards were unrealistic in the Soviet system and were inconsistent with ambitious goals for economic growth.

d.     Glasnost publicly reprimanded officials who worked "in the old way."

4.     Enterprise Autonomy and Central Planning.

a.     In 1985, created seven superministries by merger.

b.     In 1987, obligatory plan assignments, encompassing all production, replaced with state orders for strategic products. Workers in each enterprise would elect managers.

5.     New Forms of Enterprise.

a.     individual enterprise - could employ family members, but could not employ other hired labor.

b.     producer cooperatives - Could be owned by a single person, who could be its manager, and it could hire workers. Opened door to large, quasi-capitalist sector.

c.     leased enterprises - Created in 1989, using state property in private enterprises.

6.     Incentives - the "human factor." Wage scales raised for skilled workers. Law on State Enterprise (1987) allowed enterprises to control wages and salaries. Result: more uneven income distribution.

7.     Prices - Gorbachev called for a radical price reform in 1987, but proved controversial. Retail prices raised 60% in April 1991; foodstuffs 240 %.

8.     Foreign Trade and Joint Ventures - Reforms in 1987:

a.     21 ministries and 70 manf. enterprises allowed to handle foreign-trade transactions indepenently.

b.     New export incentives, including export foreign echange retention.

c.     Legalization of joint ventures between Soviet enterprises and foreign firms on Soviet soil.

d.     Initial steps toward ruble convertibility.

9.     Performance

a.     Poor in economic terms. Income growth slowed, price inflation accelerated, international current account descended into deep deficits.

b.     Accomplishments were civil and legal - history rediscovered, political prisoners released, elections held, travel restrictions abolished.

IV.    Evaluation of Socialist Reforms

A.    Reforms attempted to establish "golden mean" between Stalinism and unfettered capitalism.

B.    None were successful over extended time. Fettered by:

1.     Environmental problems - internal divisions and international economy.

2.     Internal contradictions - "Worst of both worlds," rather than best. subsidies and inter-enterprise credits.

3.     Unwillingness of socialist leaders to grant independence to enterprises and enforce responsibility. Interference to serve  national priorities, to prevent bankruptcy and unemployment, and/or to undermine the reforms.