Economy of Czechoslovakia

The Czechoslovakia, in the Years 1980, was one of the most industrialized economy S and most prosperous of the Eastern bloc. Although the level of the Consommation is quite lower than that of Western Europe, the inhabitants of Czechoslovakia profit from a enviable Standard of living by the nationals of the other countries of the Comecon.

Very dependant on the International business, Czechoslovakia is not less the Comecon country with the the Foreign debt least important near the international authorities and Western countries. This will represent an undeniable advantage at the time of the transition towards an market economy.

The economy is however not stripped of problems: the Investment S in industry realized in the years 1970 and 1980 did not give the anticipated results; the radiant Intensity is too high and the raw material consumption is too important with the eyes of the political officials who realize that their economy is too slow to be modernized.

The economic statistical in general and those of the Foreign trade in particular are difficult to analyze because of the differences in currencies of exchange employed to calculate them and especially because the concepts used by the communist countries differ basically from those to which we refer usually, like the rough National product.

Operation

In the middle of the years 1980, the Industrialization of the country is very thorough, a fact that the official statistics of 1985 concerning the clear material production reflect (the official measurement of the total Production).

Clear material production by Economic sectors:

Industry: 59,7%;
Construction: 11,2%;
Agriculture and Sylviculture: 7,5%;
services: 21,6% (including/understanding, inter alia, the Transport S, the restoration and the Retail business.

In 1980, the Public sector (administrations, government enterprises and co-operatives) employs 99,8% of the active population and generates 97,4% of the national product.

The Czechoslovakian economy differs from the market economy or the mixed economy in this which it follows a economic Planification. All the investment — like the amount of the production of each factory, the selling prices and the wages — is decided or approved centrally while following a Five-year plan which through law.

In Czechoslovakia, as in the majority of the countries of the Eastern bloc, the political structures and economic are centralized and pledged with those of the Communist party. In the facts, it is the Czechoslovakian Communist party which imposes the direct “line” of the plan. Contrary to the the USSR, relatively agrarian, having vast a domestic “market” not very dependant on the foreign trade and Natural resources wide, Czechoslovakia is a small country, industrialized and dependant on its foreign trade which is quickly seen imposing the terms of trade by this guardian power after 1948.

Planning

Different the Ministère S prepares the general directives on the development of the economic sectors of which they have the load. They then transmit them to the Committee of central planning, equivalent of the General police station of French the Plan which, in its turn, incorporates them and prepares the economic objectives in the long run. They are these total development plans on fifteen or twenty years which, saucissonnés in as many five-year plan, are finally divided into annual Budget S which specifies, for each production unit (factory, agricultural cooperative, mine, etc) a production quota to be reached which become, on this level, a requirement and loses its character of directive.

With the federalisation of Czechoslovakia in 1969, the economic planning of the socialist republics Slovak and Czech is made at the national level by the Committees of Slovak or Czech central planning and is incorporated by the Committee of the central planning, which remains nevertheless and preserves the upper hand on the process.

It is the Committee of the central planning which converts the directives into physical units of production, drawing right in currency for the imports of the key sectors of the economy, to transmit them to the various ministries in load of their application. The ministries, for their part, distribute these annual objectives of production between the various industrial society or agricultural cooperatives.

In their turn, the industrial society and agricultural cooperatives transform these objectives into a budget which they subject to their Official Authority detailing their operational expenditure and the Investissement S necessary to achieve these production targets, the Subvention S necessary (called “negative tax”) if the fixed price by the Plan does not make it possible to cover the expenses of production, the plan of launching of the new products or new technologies of production, etc This information are joined together and go up towards the Committee of central planning in the form of supposed operational plans to achieve the central goals. Once validated, these operational plans take the force of law for the various ministries and the companies which depend on it.

The system is, one suspects it, excessively bureaucratic and not very flexible. Production with the Retail business, a vertical Intégration very thorough is set up. Also, to take an example among others, does not find one a Toilet paper in the Droguerie S, reserved for the chemicals, but in the Papeterie S which depend on the die paper…

A very thorough standardization, often Kafka ïenne, is established: cut standard hand towels, standard weight of beefsteak been useful in the restaurants, salary scale according to the Socioprofessional categories (where the worker manual gains more than the White collar). Done everything the object of a Standard.

Performance evaluation

The evaluation of the performance of the companies is made in various ways. The planning authorities set up a Internal audit to evaluate the rate of complétude plan. In-house additional controls and into external exist: it is duty of each member of the Czechoslovakian Communist party and of each trade-union person in charge to make sure that the company in which it works achieved his goals. The ministry for finances also has rapporteurs of the Court of Auditors to check the progress report of it. Moreover, the Czechoslovakian national Bank can exert the monitoring of the companies by the means of their bank accounts. However, as in an market economy, it is by a monthly Reporting, established by the companies themselves, that information is established initially.

Advantages and disadvantages

The defenders of a planned economy affirm that it offers advantages. The authorities in load of centralized planning can decide Allowance of the resources on a rational mode and lay down the long-term strategic objectives by balancing, via the fixed prices, the Demande and the Offre, the Consommation and the Production. The planners of Czechoslovakia of post-war period, for example, could develop the heavy industry, which forms the base of the economy. The Research and development, it also centralized, can be concentrated on the vital sectors. Economies of scale carried out, the avoidance of the loss inherent in the disordered efforts of the individual capitalist actors. It allows also the full employment.

These criticisms underline however that this system interferes with the economic Efficience. One of the problems is posed by the Quota S of production: the planner bases his future objectives on last data. The managers, for their part, knowing that the planners base themselves on the results passed, tend to underestimate or make up the total productive potential of their company. They do not have or little interest to exceed the laid down objectives, being satisfied to fill, without more and when it is possible, their quota; knowing that, the planner imposes more ambitious objectives or unrealistic persons which have as a consequence of the not very glorious performances. The bureaucratic heaviness of the process draws aside the introduction of new technologies which would be perturbing both for the manager the planner. The creative Destruction of the capitalism about which Joseph Schumpeter speaks, presupposing taken of risk and radical change, is paradoxical with centralized planning. It results from it, for the ultimate consumer, a limited set (a little provided range allows economies of scale) of goods of bad quality (it is the total quantity of the production which is measured by the planner, not its quality).

Evolution

Democratic interlude: 1945-1948

The Czechoslovakian economy leaves the Second world war relatively saved, the bombardments having been not very frequent and little destructors. The Czechoslovakia during the Second world war is under the regulated cut of the Nazis who confiscated the goods of the nationals Jewish and taken the direction of the principal factories (in particular important arms factories of Škoda to Prague and Plzeň). After the armistice, within the framework of the Decrees Beneš, the government nationalizes the factories belonging to the German minority (which has approximately 70% of the industrial potential of the country) and the grounds of the religious orders as of the Austro-Hungarian nobility are also nationalized.

The foreign trade remains free and constitutes a big part of the economy: Czechoslovakia is an important producer of machine tools and Europe is in full effort of rebuilding. The quality of the Czechoslovakian products is recognized. The Agriculture remains in private hands. The active population, as a whole, is educated and productive, and management is qualified. This mixed economy, mixing public and deprived, functions without major tear in 1947 and in 1948 with a bi-annual plan or the objectives are more indicative than obligatory. The country receives a considerable help of the West via the United Nations, whereas all its foreign trade is done with its Western neighbors. Until Joseph Stalin puts at it the hola in 1947, Czechoslovakia intends to take part in the Marshall plan for the rebuilding of the Europe. In 1948, the national product gross reached the levels of pre-war period, agriculture being a little with the drag and industry having exceeded its former levels a little.

Communist seizure: 1948-1960

When the Czechoslovakian Communist party seizes the power at the time of the Coup of Prague, in February 1948, it starts immediately by transforming the economy of the country into a miniature version of that of the Soviet Union. Between 1948 and 1952, the government has nationalized almost all the sectors of the economy and replaced the direction of the factories by “reliable” people politically, of which some of them are qualified little for the task. The planned economy is the rule for all the companies of all the branches of industry.

The objectives of the first Five-year plan (1949-53) reflect the desire of the government to develop the production of current consumer goods. These objectives are radically changed as of 1950, partially in answer to the Guerre of Korea, and are reorientated towards heavy industry and the metallurgy. The country becomes an important supplier of Arme lies and machine tools for the other communist countries. The foreign trade with the West is reduced then strongly (also because of the barriers imposed by these countries): the share of the Eastern European countries passes from 40% in 1948 to 70% ten years later. The ambitious objectives of the plan are not achieved, even if the investments and the growth are then high. At the end of the period, inflationary pressures appeared, requiring a monetary reform in 1953 which devaluates the Czechoslovakian Couronne and destroys the saving of the individuals and caused series of demonstrations of anger. The years 1954 and 1955 are covered by annual plans, change which is explained by a structural reform of the members of the Comecon to integrate their economies, to align their methods of planning and to harmonize the phases of their five-year plans.

The second five-year plan covers the years 1956 - 60. Over this period, the investments are continued and the national product believes of 6,9% per annum. At the end of the Fifties, the Committee of planning realizes however that the Return on investment tends to decrease. In 1958 and 1959, the government engages a series of minor structural adjustments in the operation of the companies (Décentralisation partial of the decision-making process) and of the fixing of the prices - the first of the committed economic reforms. The goal is not then to change the Soviet model, but to optimize with the margin operation of it. This “réformette” not bringing the discounted fruits, and rather than to continue the “liberal” aspects of them, the communist authorities remove it completely and return, in 1962, with centralized planning.

Stagnation: the Sixties

During the Sixties, the industrial production stagnates and the agricultural sector systematically shows a notorious delay after having been in lower part of the objectives of the plan during the previous time. The objectives laid down within the framework of the third five-year plan (1961 - 65) are shown quickly unrealistic or too ambitious, in particular with regard to the objectives laid down at the foreign trade. The five-year plan is abandoned after the recession of 1962 and is replaced by annual plans which cover the remainder of the period. In 1965, the rough national product is only of 1,9% superior on his level of 1960, this figure being to compare with the annual growth rate of 6,9% between 1956 and 1960. The explanatory factors of this weak economic performance are multiple: bad weather for agriculture, cancellation of orders by the China following the argument sino-Soviet. However, some reformists start to blame gravities inherent in the Soviet system of centralized planning… They advance that the dogmatic application of the Soviet model is unsuited to the Czechoslovakian economic conditions for the following reasons:

the country is already industrialized, it has few resources and a limited interior market, which makes in more than one way it depend on the foreign trade;
the Soviet model is based on an extensive development, like building new factories, and not on an intensive development in which the production processs are modernized, of the made innovations and the marginally improved productivity;
the pressures to develop the investments related to industries of armament in the Fifties with the detriment of the consumption, which believed less than the national product, caused inflationary tensions whose resultant is forced savings of the population;
the factories and companies of Construction industry are forced to constitute important stocks (which have a cost) to compensate for the risks of delivery due to heavinesses of the system;
some of the investment plans absorb for too a long period of the too important sums and financial means made unproductive;
the inadequate investments in agriculture are responsible for its low productivity;
the Vérité of the prices poses also problem; established according to often political criteria resulting from internal conflicts, they reflect neither the Rareté nor the production costs, do not have a relation between them and are uncoupled from the world prices;
the innovation is not encouraged and no alternate Benchmarking exists to evaluate the effectiveness of an investment plan.

Attempt at economic reform

At the beginning of the Years 1960, certain Czechoslovakian economists analyzed these problems and offered solutions. In October 1964, the party publishes the principles for a major economic reform and, at the beginning of 1965, it starts to implement some of measurements recommended. In June 1966, the thirteenth congress of the Communist party gives its green light to the new program called “new economic model” (which somewhat points out Leninist NEP of 1921).

Established in 1967, it partly catalyzes the political change of the Printemps of Prague in 1968. This reform comprises multiple facets of which some (for lack of time) will never be installation, its basic principle being reducing the role and the power of the Committee of central planning and to give a greater room for maneuver to the persons in charge of the companies:

the role of the Committee of central planning is advisory and is limited to the definition of the long-term objectives and the strategic directions;
the companies are free to define their short-term objectives;
the companies have a duty of profitability and must carry out Profit S on their production;
the State must gradually cease the subsidies, the lame ducks are condemned in the long term;
to carry out profits, rather than to fill the quantitative and qualitative objectives of the Plan, becomes the criterion of evaluation of the companies;
the apparatus of production will be gradually put in competition with the international Concurrence so that it increases its productivity and lowers its prices;
in order to acquire currencies, exports towards the West are encouraged;
an attachment unit of the more realistic price must replace centralized fixing; the prices must reflect the real production costs, Offre and request as well local as world;
the investments must be financed by the companies themselves via the recourse to the bearing loan Intérêt and must justify of a Return on investment so that cease the underhand dealings of the financial resources;
finally, the wages must be re-examined so that cease the egalitarianism and a Intéressement based on the individual performance or of the company must be introduced.

Moreover, the government amalgamates certain companies according to a sectoral principle resembling extremely the trust S or the Cartel S, directed by “directories of branch”. These great production units form an intermediate bond between the companies and the ministries and constitutes to some extent an economic countervailing power. With the spring 68, the government authorizes the companies to incite the workers to take part in the management of their company via work's councils.

It is the economic slope of the Socialisme to human face, it does not aim the market economy nor the inversion of the Socialisme, but constitutes a socialist Réformisme. A part only of this program of reform is implemented when in August 1968, the armies of the Warsaw Pact invade the country and that the hard line of the party takes again the tiller of the capacity, putting a term at this attempt reformist. It is what is called the “Normalization” or the return to the normal .

The borders towards the West are briefly opened at the end of the summer 1968. One estimates that approximately a hundred and thousand citizens then leave the country, which loses thus part of sound Intelligentsia, among young people and most educated. This massive emigration will not be without consequence on the future development of the country.

At the end of the Years 1960 and at the beginning of the Years 1970, Czechoslovakia grows at sizeable intervals of 6,9% per annum, well beyond the objectives of the Plan located between 4,1 and 4,4%.

Standardization: years 1970

The “Standardization” ( Normalizace ) described the resumption in hand of the party and the political bodies by the hard line of the Czechoslovakian Communist party after the Spring of Prague and its Socialism with human face. At the economic level, this same resumption in hand has place in a typical movement of beam between attempt at reform and hardening: after a relative easing of the rules (for the fixing of the prices, the decisions of investment, etc), centralized planning is reinforced, improved marginally by the introduction of indicators of quality, productivity, efficiency and innovation in the plans presented by the production units instead of concentrating on the only quantitative aspect. The fifth five-year plan (1971 - 75) bears some fruits with a sustained high growth of the GNP (5,7% per annum), higher than the initial objectives (5,1% per annum). The wages, the incomes and private consumption increase then and it is not interdict to think that the communist authorities “buy” social peace after the reaction against the Spring of Prague and concentrate finally on waitings of the population in terms of capital equipment (television, electric household appliances, car, etc). Agriculture remains the weak point of the economy even if self-sufficiency is almost reached for the production of meat and seems realizable for the production of cereals. The mechanization of the campaigns is continued and the wages of the revalued farmers.

In contrast, the sixth five-year plan (1976 - 80) is a disappointment: the deceleration of the growth definitely perceptible and is reached 3,7% per annum against of the objectives of 4,9%. The Dryness of 1976, the severe winter of 1979 and the floods of the same year compromise harvests while in parallel, the shortage of spare parts for agricultural machinery and the bad quality of manures blocks the development of the agricultural sector. Corn imports are made necessary. The growth of the household consumption tiny, hardly reaching 0,5% in 1979, is undoubtedly slowed down by the correction of the prices to the detail, whose inflation is of 11% over the five-year period. The reading of the letters to the Editor in the newspapers informs us about the complaints of the consumers who complain about the Pénurie basic commodities like the meat, milk and vegetables. In spite of the investments which remain constant and which reinforce the growth, particularly in the mining extraction and the equipment of nuclear plants, the state of the apparatus of industrial production does not cease being degraded and poses a real problem with the economic planners.

The balance of the foreign trade also does not cease being degraded over the period. The First oil crisis of 1973 pushes the Soviet Union to increase the price of the gross and the price of the Raw materials, whose depends the Czechoslovakian processing industry, increases more quickly than those of the intermediate goods (primarily of the machines) which it exports, resulting in a degradation from the terms of trade. The persons in charge of the party and the government, eager to limit the foreign debt, then try to give the priority to the goods intended for exports on those intended for the domestic consumption in the total objectives of production in order to cover the energy bill. That leads them to strongly reduce the importation of goods coming from the noncommunist countries.

Intensification: 1980-1985

At the beginning of the Years 1980, economic development is blocked, recognized fact by the economists, the political officials and the civil society as a whole. The factories of the country are, for the majority, obsolete, the raw material resources are done rare and the Energy independence country does nothing but worsen.

The economists in load of planning draw up modest growth targets for the seventh five-year plan (1981 - 85), going until revising them with the fall at the time of the second year. The “intensification” of the economy becomes the watchword - it is advisable to optimize the consumption of inputs and to intensify the saving energy. In spite of that, the results are not with the height of the objectives: 1,7% of fall of energy consumption against a goal of 2% during the five-year period and this, in a climate of relative economic Stagnation.

Several tendencies, indeed, go against the development of the economy: the Western economies enter in recession following the Second oil crisis, the USSR limit its oil exportations towards the countries brothers and announce an objective of fall of 10% in 1981 and the prices intended for the countries of the Comecon increase some (related to a quinquennial formula, the price of the Soviet barrel increases in the years 1980 with a delay taken on the world rise of the prices in 1979), which affects 16,4 million the 16,6 million tons of crude oil imported by Czechoslovakia. Following the disorders in Poland, the Western banks limit the credit to the socialist countries in 1982, which influences even more negatively the Czechoslovakian foreign trade.

Second attempt at economic reform

The bad performance of the economy to the beginning of the year 1980 persuades the leaders of the party which a change is necessary. Also, within the framework of the seventh five-year plan, in 1981, a batch of reforms limited is introduced, entitled “Measurements to improve the system of the national economic management planned after 1980”. Under a preserving preparing and introduced without drum nor trumpet, they correspond to those of the years 1960 whole while preserving centralized planning. One year later, in 1982, a reform of agriculture removes the comminatory effect of the production targets and allows more initiatives for the direction of the agricultural cooperatives.

The Western observers noted the little of effect of these reforms: they are not sufficient to engage the modernization of the production and to bring the productivity gains sought by the apparatus of the Czechoslovakian party.

Structural turning: 1986-1989

The eighth five-year plan concentrates on a “intensification” of the economy where it is necessary to improve quality and the technological level of the production, to lower the costs of the energy inputs and the raw materials, to raise the productivity, to accelerate the technological innovation, to reinforce the discipline and to continue the change “structural” of a greedy processing industry into energy towards an industry of the knowledge and technologies advanced. The objective is a growth of the GNP of 3,5% per annum, that is to say 19% over the five-year period; 3% per annum for industry and 15,8% over the period; the household consumption is once more sacrificed with a growth target of 11,9% only. Also modest they were, these objectives are higher than the results of 6,9% of growth at the time of the previous five-year period. The objectives fix a growth of the investment at 10,4% against the 2,5% previously reached between 1981 and 1985. They concentrate in industries considered to be priority:

machine tool;
electronic;
Chemistry and Metallurgy;
construction of Nuclear plants;
extension of the distribution network of the Natural gas.

The intensification of the foreign trade must, always according to the objectives, to allow degearing near the West (Czechoslovakia has a relatively modest debt of 2 billion dollars). Economy develops still not enough quickly with eyes of Communist leaders and, rather than to start one énième reform mining their credibility and that, finishing, of system of Production centralized, they test, in 1987, while allowing freedom quasi-total 120 industrial companies which receives Committee of central planning only some key indicators, which can innovate and seek new methods of production, to manage their own finances — in short, which can behave like very undertaken capitalist whose shareholder limits a little the freedom of management. That is very daring compared to the “series of measures” of 1981 and relatively shy person compared to the reforms launched by Mikhaïl Gorbatchev, to the USSR.

Sectoral analysis

Industry

See: Industry in Czechoslovakia ()

Agriculture

See: Agriculture of Czechoslovakia ()

Foreign trade

See: Foreign trade of Czechoslovakia ()

Public finances and banking environment

Currency

The Czechoslovakian Couronne ( ceskoslovenská koruna , shortened in Kcs) is the national currency. In 1986, the currency becomes convertible under certain conditions and with official foreign exchange rate. The violation of the rules of exchange is a severely punished crime. The crown must be used in the country and can be neither exported nor exchanged freely. In 1987, official foreign exchange rate is of 5,4 Kcs for a dollar; the semi-official foreign exchange rate offered to the tourists is of 10,5 Kcs for a dollar. The legal definition of the currency, based on the Gold Standard, is of 123 milligrams gold, which allows a certain continuity in the data analysis economic.

Banking environment

Of the head of the banking environment of the country takes care the bank of State of Czechoslovakia (divided today between the Czech national Banque and the Slovak national Bank), Central bank of the country, financial agent of the government, Banque of trade of the country, Banque of investment and room of Compensation of the transfers. Under central bank, it also supervises the other banks of the country:

ČSOB, banks of Czechoslovakian trade, is mainly a bank of the transactions in currencies with the foreigner;
three deposit banks which supplement the banking landscape.

The banking environment is the financial arm of the plan; it grants appropriations of Investissement where the plan decides that they have priority and limit elsewhere. These credit lines are approved by the central authorities of planning and the central bank is in load of its application. The essence of these appropriations, however, is absorbed to finance the Besoin in working capital for the companies. Obviously, the central bank does not have any independence.

The central bank fixes the directing Interest rate, used in the operations of credit, but it does not reflect of anything the cost capital and does not influence the credit. In the years 1970, various directing rates are set up: low for the companies which modernize their production equipment, usurers for the companies which deviate of the objectives of the plan. The credit lines are granted in priority to industry, followed agriculture, construction and retail business.

The pledged position of the central bank makes it possible the authorities of planning to set up correct economic measures. Thus, in 1953, vis-a-vis the pressures Inflation nists, the saving of the population is decimated by the monetary reform. After this experimentation, the official Czechoslovakian ones set up a strict control of the investment and make so that the wages grow in real terms. Nevertheless, as of the years 1970, the deterioration of the trade balance, the problems structural of the economy and the intense needs for industrial financings slow down the growth of consumption.

Inflation and price

The installation of the Soviet model of centralized planning introduced a systematic inflationary skew into the economy. The Inflation does not appear in terms of prices (which are controlled, except for the fruit and vegetables resulting from the private production), but in terms of saving forced on behalf of the population unable to buy the consumer goods to the fixed price and which are found in shortage. The authorities, first of all reticent, make gradual adjustments (with the rise) of the prices, especially as from the years 1970. At this point in time in 1982, the food prices undergo a brutal rise.

Budget and taxes

The budget also plays a big role to achieve the goals of the economic policy of the Communist government. We have little information on this subject, the government not publishing or little the figures of the budget. The Western observers believe however that the recourse to the Budget deficit is less frequent than the surpluses.

The public revenues come primarily from the tax on the turnover of the companies, the Income tax of the natural persons marginal remainder just as the agricultural Customs duties and some taxes. Part of these taxes is redistributed with the companies in the form of subsidies.

The tax on the turnover, coming from the USSR and established in 1953, is a simple method to collect funds without requiring countable techniques or of invoicing complicated (like the VAT). It loses of its importance in the years 1960 when other sources of imposition are created. It is, in the facts, a mixture of Corporation tax (in theory taxes on the selling price, it takes into account elements of benefit: it is calculated on the difference between the selling price, centrally decided, and the production costs, also controlled by the State) and of Excise duty (higher for the Tabac, the alcohol, the Habillement or the Sucre that for the products of first need).

Autonomous in theory, the government enterprises see the selling price of their production fixed centrally, the quantity to be produced decided by their ministry in charge, the wages of their workmen out of their range of negotiation and the costs of purchase of their goods fixed and also non-negotiable… to say as much that the communist managers have to manage little! In the Fifties, the government (which controls the banks) made control on all the financial surpluses of the companies. In 1958, a reform authorizes the companies to manage the surplus of exploitation, but the seizure of the government remains omnipresent; one second attempt in the years 1980 to encourage the modernization of the apparatus of production will not produce, one saw it, not more effects in terms of motivation of the economic elites.

Random links: