Economy of Communist Czechoslovakia

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.

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

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.

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.

• 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 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.

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.