Page 1

Routledge Revivals

The Distorted World of Soviet-Type

Economies

The Soviet Union and Eastern Europe provide unique examples of

large-scale relatively highly developed centrally planned economies. In

the 1980s economists in both the East and West began to focus with

increasingly critical attention on the economies of the Soviet Bloc, in

an attempt to explain why they were performing so poorly in compar-

ison with the economies of the Western powers and the capitalist

countries of South-East Asia.

First published in 1988 this substantial and innovative contribution to

the critical literature on the economies of the former Soviet bloc is

unusual in that its author is equally familiar with both Western and

Eastern sources. It highlights, in particular, a discrepancy between the

behaviour of individuals in Soviet-style economies and that expected of

agents in a market system. It proceeds to outline how the consequent

discordance between microeconomic practice and macroeconomic

planning generates fundamental economic distortions.

The Distorted World of

Soviet-Type Economies

Jan Winiecki

First published in 1988

by Routledge

This edition first published in 2011 by Routledge

2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN

Simultaneously published in the USA and Canada

by Routledge

270 Madison Avenue, New York, NY 10016

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 1988 Jan Winiecki

All rights reserved. No part of this book may be reprinted or reproduced or

utilised in any form or by any electronic, mechanical, or other means, now

known or hereafter invented, including photocopying and recording, or in any

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ISBN 13: 978-0-415-67605-2 (hbk)

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ISBN 13: 978-0-203-80837-5 (ebk)

THE DISTORTED WORLD

OF SOVIET-lYPE

ECONOMIES

The Soviet Union and Eastern Europe provide unique examples of

large-scale and relatively highly developed centrally planned economies.

In recent years, however, economists in both the East and West have

focused with increasingly critical attention on the economies of the

Soviet Bloc, in an attempt to explain why they have performed so

poorly in comparison with the economies of the Western powers and

the capitalist countries of South-East Asia. This book, unusual in that

its author is equally familiar with both Western and Eastern sources,

makes a substantial and innovative contribution to this critical literature.

It highlights, in particular, a discrepancy between the behaviour of

individuals in Soviet-style economies and that expected of agents in a

market system. It proceeds to outline how the consequent discordance

between microeconomic practice and macroeconomic planning

generates fundamental economic distortions, which will not be resolved

by the sort of piecemeal economic reforms currently being promulgated

in these countries.

Jan Winiecki is Associate Professor in the Institute of Labour Research,

Warsaw and Associate Professor, DoE, Katholic University of Lublin.

The Distorted World

of Soviet-Type

Economies

JAN WINIECKI

First published in 1988 by

Routledge

a division of Routledge, Chapman and Hall

11 New Fetter Lane, London EC4P 4EE

Reprinted 1991

© 1988 Jan Winiecki

Printed and bound in Great Britain

by Anthony Rowe Ltd, Wiltshire

All rights reserved. No part of this book may be

reprinted or reproduced or utilized in any form or

by any electronic, mechanical, or other means, now

known or hereafter invented, including photocopying

and recording, or in any information storage or

retrieval system, without permission in writing from

the publishers.

British Library Cataloguing in Publication Data

Winiecki, Jan

The distorted world of Soviet-type economies

1. Europe, Eastern - Economic policy

2. Soviet Union - Economic policy - 1981 -

I. Title

330.947'0854

HC244

ISBN 0-415-00390-3

Abbreviations

Introduction

Contents

Part One: The Distorted Macroeconomics of Central Planning

1. Quantities

3

2. Prices

38

Part Two: The DIstorted Structure of Soviet-type Economies

3. The Overgrown Industrial Sector

73

4. Peculiarities of Intra-industry Change

99

Part Three: Soviet-type Economies and the World Market

S. Import Pressure and Distorted Export Structure

13S

6. The Failure of Catching-up Through Technology

Imports

170

Conclusion

Bibliography

Index

20S

212

224

v

CMEA

COMECON

CPE

CPI

CPSS

ECE

FYP

GDP

GNP

ISIC

LDC

MDC

ME

NMP

PIG

RandD

SD

STE

SYP

YP

vi

Abbreviations

Alternative abbreviation for COMECON

Council for Mutual Economic Assistance

Centrally planned economy

Consumer price index

Communist Party of the Soviet Union

Economic Commission for Europe (UN)

Five-year plan

Gross domestic product

Gross national product

International Standard Industrial Classification

Less developed country

'Middle' developed country

Market economy

Net material product

Physical-indicators (global) methodology

Research and development

Standard deviation

Soviet-type economy

Seven-year plan

Yearly plan

Introduction

The need for a book on system-specific economic distortions and

their impact on economic performance of the Soviet-type economies

was, not for the first time, strongly felt by me in the spring of 1983

in a Warsaw ice-cream parlor, while I discussed the latest develop-

ments in the area with an American friend, an expert on Eastern

Europe. The friend, looking at the quite crowded place, remarked

casually: 'I can imagine how crowded it will be after office hours.'

'Wrong', I said: 'After office hours, it will become half empty,

since most people will go home or, more probably, go queueing

somewhere.' Since there was so much to discuss, my friend saw for

himself the place getting emptier and emptier as 4 p.m. approached.

I then realised once again that it was something more than a case

of the misunderstanding of labour supply reactions in the Soviet-type

economy. I It also furnished anecdotal evidence of the fact - and

the umpteenth case of it - that even Western experts tend to take

for granted the normality and, consequently, the universality of

behavioural patterns grounded in the rationality of the Western

system. Behind each piece of such anecdotal evidence of the

misunderstanding by Western experts of one or another facet of the

Soviet system was usually the underlying belief in a common

rationality for both the market-type and the Soviet-type economies

- a largely mistaken view.

Consequently, deviations from what may be regarded as

behavioural normality in Western eyes seemed desirable as a focus

of analysis for Soviet-type economies. Moreover, since behavioural

deviations tend to translate themselves into economic distortions, in

the sense of lasting adverse effects upon economic performance, it

has been important to point out the links between deviations from

Western rationality at the behavioural level and resultant economic

losses - or gains forgone - at the aggregate level. Thus, the

behaviour of economic agents in the Soviet system is rational at the

micro level, but this rationality is clearly different from that of

agents in the market system; and, what is more, there is no concord-

ance between micro and macro rationality in the former, as there is

in the latter. On the contrary, it is precisely the contradictions

between the two that generate fundamental economic distortions.

A few comments about the book itself are in order. To begin with

the readership, this is a researcher's book, and as such, it was

vii

INTRODUcnON

written with other researchers in mind. I hope that at least some of

them find enough new and provocative material herein to stimulate

further discussion on the distortionary world of Soviet-type

economies. However, given its non-mathematical presentational

style, this is also a book for other readers as well - for scholars who

are non-specialists in comparative economic studies and/or East

European area studies, but are nonetheless interested in the subject;

for officials dealing with East-West issues; and - last but not least

- for business men involved in or envisaging trade or other deals

with Eastern European institutions or enterprises. Readers from

each group may find in this study answers to some vexing questions

which are unanswerable on the basis of the rationality governing the

behaviour of the economic agents in the system with which they are

familiar. 2

As to the style, the material in this book is presented in a largely

non-mathematical fashion. This has not been done merely to attract

the wider readership that I had in mind: for much of the theory -

if not most of it - of the Soviet-type economy ought to take into

account the distinctively different institutional and behavioural

features of the system, such that its formal modelling in the tradition

of modern Western economic theory would become a very

precarious exercise. 3

Readers will themselves be able to judge to what extent the

presentational style has indeed become lighter as a result of the

scattering throughout the pages of the book of the 'system-specific'

jokes heard in Eastern Europe. However, the occasional joke was

not only intended to give the reader a 'laughing space', but also to

offer a joke as a shortcut to understanding. In addition, anecdotal

evidence is sometimes presented along similar lines, since - in the

words of a 1981 Polish cabaret song - life in the Soviet system

surpassed anything cabaret writers could invent. An example would

be the story of an enterprising Pole who took advantage of irrational

relative prices and bought bottles of sorrel soup, poured the soup

into the nearby streams, cleaned the bottles there, and sold empty

bottles to salvage storehouses, with a profit rate of 150 per cent (less

the cost of cleaning and transportation). 4 Or another story, this

time from the long list of Potemkin village-type cases: a new Soviet

factory was reported to be completed and a document putting it into

commission was signed - although it existed only on paper!

(Pravda, quoted in Dyker, 1982).

As regards the terminology, this author concurs with the view

that Soviet-type economies (or STEs) represent a distinctive type of

viii

INTRODUCTION

economic system and the term used reflects their most important

feature (Clarke, 1983). Another term, 'centrally planned economies'

(or CPEs) was more widely used in the past, but some countries

(e.g. Hungary) claimed that they had shed the institutional character-

istics of CPEs. Regardless of the validity of that claim, Hungary

continues to be an STE since it retains the linkages between the

political and economic system, both formal and informal, character-

istic for the Soviet system as a whole.

On the other hand, the term 'Eastern Europe' (or East for short)

has a distinctive usage in this book. The term covers both the Soviet

Union and six smaller STEs: Bulgaria, Czechoslovakia, East

Germany (GDR), Hungary, Poland, and Romania. The exclusion of

the Soviet Union from 'Eastern Europe' found in many studies is not

justified, because it is precisely the fact that they are within the

Soviet sphere that makes the six smaller STEs Eastern European

countries. After all, in earlier (and happier) times, the same area was

called Central Europe . . . S Finally, the terms, STEs and East

European countries are used with respect to countries, while the

terms the Soviet-type economy, the Soviet system and central plan-

ning are used interchangeably with reference to the economic system

dominant in Eastern Europe.

The content of this book and its order of presentation reflect the

author's ideas concerning the fundamental distortions generated by

STEs, as well as the linkages among them. Thus, the book is divided

into three parts. The first part deals with the dynamics of the system,

i.e. distortions affecting economic growth and price changes; the

second with the structure of national economies as influenced by the

dynamics of the system and the policies pursued (with special regard

to the distortionary role of Soviet-type industrialisation); and the

third with the impact of the dynamics and structure upon foreign

trade performance and technology imports.

Some of the issues taken up in this book have already been studied

extensively, as is the case with the so-called macroeconomics of central

planning, i.e. aggregate quantity and price changes. What I have

added to the picture is a behaviourally grounded clarification of the

investment cycle concept, as well as the empirical evidence of the

distortionary and inherently wasteful nature of the said phenomenon.

Uncertainty has also been put into sharper focus. Another novel

feature is a disaggregation of hidden inflation on the basis of

establishing who is hiding it from whom, i.e. inflation hidden by the

centre, by the public (meaning the enterprises) and half-hidden by

both at the same time. Another classification of hidden inflation,

ix

INTRODucnON

according to whether hidden price change appears in the guise of

quantity change or is hidden price change pure and simple,

contributes in my view to the clarification of the somewhat muddled

perception of the STE distortions existing in the price-quantity area.

If the first part of the book is mainly reinterpreting, reclassifying

and empirically verifying concepts already in use in the literature on

the subject, the second is different due to the presentation and later

empirical verification of my own concepts. This change has been

necessitated by the dearth of studies examining structural change and

the inexorable structural distortions under central planning. Here I

was venturing upon almost untouched ground. I used in particular

the concept of twofold underspecialisation - at the level of a

national economy and at that of an enterprise - to explain the

empirically established distortions in the structure of production and

employment of STEs that increasingly set them apart from the rest

of the world in this respect. The concept may be seen as an

intermediate explanation, since underspecialisation is itself caused

by the dynamics of the Soviet system and that of its inward-oriented

policy formation. The distortionary role of industry - or, more

specifically, of the socialist industrialisation process - is a central

theme of this second part of the study.

The third part of the book concentrates upon the foreign trade

performance of the Soviet-type economies. Many thorough

empirical studies in the literature on the subject freed me from the

necessity of repeating my approach in the second part, where the

evidence had to be built from scratch. Rather, I tried to link the

characteristics of the dynamics and structure of STEs to their (poor)

performance on the world market. Both the evolving theory of the

STE and the received Western theory were useful in this exercise.

In addition, my own theoretical considerations suggested why STEs

failed in their attempt to reduce the developmental gap with the West

through the import of technology and capital (contrary to what one

would expect from the latter theory grounded in Western economic

rationality) .

In my conclusions, I restate the fundamental problems, i.e. the

distortions generated in the areas of dynamics, structure and foreign

trade, as well as stress the linkages between them and their mutually

reinforcing character. Since distortions are increasingly costly, I

also highlight the stagnation and decline facing the distorted world

of the STEs.

Many of the chapters are based on or adapted from previously

published articles. Thus Chapter 1 appeared in condensed form in

x

INTRODUcnON

Banca Nazionale del Lavoro Quarterly Review, no. 157, 1986.

Chapter 2 is an adapted version of an article in Rivista Internazionale

di Scienze Economiche e Commerciali, nos. 10-11, 1986. Chapter

4 appeared in extended form in Studies in Comparative and Inter-

national Development, vol. 23, 1988. Chapter 5 is an extended and

rewritten article that appeared in Economic Notes of the Monte dei

Paschi di Siena, no. 2, 1985. Chapter 6 is an adapted version of an

article in Technovation vol. 6, 1987. The several publishers allowed

me to integrate and elaborate upon these materials in this book, for

which I express my appreciation. Also, I would like to thank MAW

Publishers, Warsaw, for allowing the editors to use a cartoon

published by them on the cover of this book.

NOTES

1. Quite a common occurrence for some economists: see the critique of

Portes et al. in Winiecki (1985b).

2. For example, business men may find herein reasons for the failure of,

or disagreement over, many licence-related deals (called 'industrial co-

operation' in the official bureaucratic parlance).

3. For a critique by this author of disequilibrium modelling as applied

to Soviet-type economies, see Kemme and Winiecki (1984) and Winiecki

(1985b). See also Nove (1985).

4. At approximately the same time, a second entrepreneur bought bottles

straight from the glass factory and sold them to salvage store-houses for a

fat profit, given the large price differential in favour of price established for

used bottles (in theory, to encourage recycling). The former found his

profits taken away by ad hoc confiscatory taxes, and the later finished up

in prison.

5. Or more rarely, East Central Europe.

xi

Part One

The Distorted Macroeconomics of

Central Planning

1

Quantities

1.1. PERMANENCE OF EXCESS DEMAND: A STATIC VIEW

The pitfalls awaiting analysts of Soviet-type economies (STEs) using

a coherent framework have often been underestimated. These pitfalls

are generally of two kinds: firstly, difficulties in explaining macro-

economic relationships in terms of the received theory (whether

neoclassical or Keynesian); and secondly, difficulties in using the

distorted official data. Both sets of problems stem from the same

sources. It is system-specific features which make the characteristic

macro effects under central planning - excess demand, shortage,

uncertainty - mean something somewhat different from those terms

as they are understood by many Western economists (which is, by the

way, an important source of misunderstanding). Moreover, the same

features generate quantity and price distortions that again make STE

statistics different from those in market economies (or MEs).

The author has tried to avoid both types of pitfalls. System-

specific terminology and theoretical concepts that make otherwise

valuable Eastern European contributions incomprehensible for the

Western reader have either been eliminated or explained in under-

standable terms. On the other hand, the author has also rejected as

no less unsatisfactory, simplistic applications of Western disequi-

librium theory to a different institutional setting.

In my view, the starting point for the analysis of the distorted

dynamics of STEs is the perennial excess demand and shortage

plaguing these economies. Both problems appeared in STEs almost

from the start, and have become a permanent feature ever since.

Over the years writings accumulated in both the East and in the West

that tried to explain their sources and concomitants. To an extent we

may even talk about a kind of consensus explanation, especially with

3

QUANTITIES

respect to the incentive structure that generates excess demand. 1 In

a condensed form it runs as follows. There exist certain system-

specific features that result in what Kornai (1971, 1972, 1979, 1980)

has called 'rush growth' and a group of Polish economists centred

at one time around Wakar, less well known than Kornai in the

West, dubbed 'expansive formulas of management'. According to

these authors, enterprises in STEs have from the start felt the impact

of the structure of incentives that motivated them to expand produc-

tion almost at any cost. In other words, incentives to execute and

exceed plan targets were positively correlated with volume or value

of production, but were not at the same time negatively correlated

with production costs. This structure of incentives did not change

substantially and has been dominant under both traditional

(command-type) and modified (mixed command/parametric-type)

policy instruments.

Central planners, in their fundamentally autarkic approach,

usually react to perceived needs in only one way - i.e. by trying

to increase production of goods in short supply. Thus, plans are

drawn up, which with respect to aggregate economic growth and the

production structure (especially the latter!) cannot be executed due

to the shortage of resources. There may be many simultaneously

existing causes for this shortage. The first may be that the resources

are not there because the quantities reported earlier by enterprises

were - to some degree - fictitious. It is a perennial problem in

STEs where everybody at the enterprise level, from manager to

worker, is interested in showing doctored performance figures. 3

This 'imaginative reporting' may take the form of pure fiction, i.e.

reporting higher output volume than the actual one. Possibilities of

such imaginative reporting are enormous. According to A. Shitov,

first deputy chairman of the USSR Committee for National Control,

'to a greater or smaller extent additions [to the actual output figures]

and other distortions were discovered in every third enterprise'

(Planovoye Khozyaistvo, no. 11, 1981).

Doctored reports may concern everything from sophisticated

machinery (again, see Shitov, ibid.) to homogeneous commodities,

like coal or cotton, as was the case some years ago with respect to

the former in Poland and Romania, and in Uzbekistan (USSR) with

respect to the latter. Other methods of doctoring are probably much

more numerous, i.e. reports of higher output volume when in fact

only output value increased.4 Thus, plan targets are executed or

even exceeded, but a part of output - that constitutes input for other

enterprises - exists only on paper.

4

QUANTITIES

The second reason for resource shortage may be that the

resources are not of the right quality. To stay with the simple

example of coal, enterprises, in their attempts at executing or

exceeding plan targets, lower the quality of output (that is, coal's

calorific content) by adding more non-coal ingredients. This not

only plays havoc with the central planners' balancing activity, but

also has further negative repercussions for domestics coal users;

and if downward quality shifts exist with respect to homogeneous

goods like coal, they are all the greater with respect to differentiated

ones.

The third reason may be that the resources are not of the right

type. The suppliers are usually interested in producing as few types,

grades, sizes, etc., as possible. Since enterprises in STEs cannot

turn to another supplier, they either have an option of producing

from, say, thicker steel plates and using more labour and capital

inputs, more energy and - by definition - more costly material

(steel), or that of not producing at al1.6 The inability of an enter-

prise in a STE to obtain the right type of inputs does not stem from

the fact that it is tied to a specific supplier (because under the modi-

fied system of central planning it is not so tied), but because it knows

that other domestic suppliers behave in the same way (this explains,

inter alia, the permanent preference for imports, and, more specific-

ally, for imports from the West.7

The fourth reason for resource shortage may be that the resources

are not there at the right time. Even the most centralised planning

cannot dream of allocating everything in detail, and such details are

left to enterprises. And for an enterprise that was given a command

to produce something, it makes a difference whether an input-

producing enterprise ships a given input at the beginning, in the

middle or at the end of a planning period (a month, quarter or a

year). A command to supply inputs does not specify such details and

it should not be forgotten that a supplier is itself coping with short-

ages of its own. Thus, delayed shipments may interrupt production

schedules.

The fifth reason may be that the resources are not given at the

right place. In the aggregate, there may be enough of a given input

of the right quality and type to allocate among enterprises but there

are general priorities (producer, i.e. intermediate and investment,

goods), specific priorities (investment projects on a priority list) and

ad hoc priorities (created by political interventions - see next

section) which together result in the misallocation of inputs.

At this point it is worth noting that the first three causes outlined

5

QUANTITIES

above stress the existence of shortages due to the system-specific

structure of incentives, while the last two highlight the other institu-

tional and policy characteristics of a STE. They also imply the

impossibility of proper plan-execution in the (theoretical) case of a

plan that is feasible, i.e. in which the aggregate amount of inputs is

exactly that needed for plan execution (on this point, see Ericson,

1983).

The above shortages interact, creating the overall climate of

shortage. Shortage is further aggravated by the behaviour of enter-

prises which, being aware of shortages and trying to minimise the

risk of non-execution of the plan stemming from shortages, demand

excessive labour, spare parts for the equipment, and material inputs.

As every enterprise behaves in this way - and everybody else

knows that others behave thus - additional excess demand is

generated (on hoarding and inventories, see, inter alia, Goldmann

and Kouba, 1969; Komai, 1980; Winiecki, 1982; and Porket,

1984). It should be noted that in a STE, shortage is a relative rather

than an absolute phenomenon. The amount of inputs expended per

unit of output is inordinately high in STEs. Table 1.1. illustrates this

with respect to energy and steel.

It will be shown elsewhere that the excessive use of inputs is

partly related to the overgrown industrial sector in STEs (see

Chapter 3). However, the fact that the industrial sector, so large

relative to that of MEs, is unable to eliminate persistent shortage is

yet another indictment against central planning, not a justification of

inordinately high input use. The same may be said with respect to

the aggravating factor considered here, i.e. much higher inventories

per unit of output in STEs than in market economies (in Hungary,

for example, they are twice as high: Komai, 1982).

It should not be surprising, then, that actual figures for inven-

tories deviate from plan targets by more than those for other

indicators: for example, in Poland during the three consecutive five-

year plans (or FYPs) , actual figures for inventories exceeded

planned ones by between 23.5 and 48.8 per cent (Maciejewski and

Zajchowski, 1982). Even if shortages are more relative than real,

however, excess demand is very real, for indeed, there are no

adequate resources of the right quality and type at the right time and

place. 8

The results are well known. An important one is increased costs

of production in the rush when enterprises are striving to execute or

exceed planned quality targets or they are trying to make up for the

time lost due to late deliveries of material inputs. Another result is

6

QUANTITIES

Table 1.1: Resource intensity of East European SrEs and

industrialised West European MEs: the cases of energy and

steel, 1979-80

Countries

East European STEs·

Bulgaria

Czechoslovakia

Hungary

GDR

Poland

Soviet Union

Average, unweighted (6)

West European MEs

Austria

Belgium

Denmark

Finland

France

FRG

Italy

Norway

Sweden

Switzerland

United Kingdom

Energy intensity in

1979

(in kg of coal equiv.

consumption per

1000 US dollarsb

of GOP

1464

1290

1058

1356

1515

1490

1362

603

618

502

767

502

565

655

1114

713

371

820

Average, unweighted (11)

660

Notes: a. Except Romania

b. US$ of 1979

Steel intensity in 1980

(in kg of steel

consumption per

1000 US dollarsb

of GOP

87

132

88

88

135

135

111

39

36

30

40

42

52

79

38

44

26

38

42

Sources: World development report (1981); Yearbook of international

statistics (1981); own calculations.

the decline in quality, when enterprises decide not to wait for inputs

of the right quality and use inputs of a sub-standard quality. In fact,

lower quality is also a concomitant of 'rushed production'. Not only

specific supply problems, but also the general climate of buyers'

pressure for more output, imbues suppliers with a careless attitude

towards cost and quality; and this, in tum, demoralises, to a varying

extent, the labour force which in tum takes an equally careless

attitude towards materials and equipment. (After all, both enter-

prises as goods suppliers and workers as labour suppliers perform

on the seller's market!)

The results are cost overruns that are compensated at higher

levels of the bureaucratic hierarchy by subsidies, lower taxes, price

7

QUANTITIES

increases, and so on, with the tacit understanding that it is quantity

- always in short supply - that counts most. In this way, 'hard'

direct commands to produce are accompanied under central plan-

ning by 'soft' budget constraints (to use Komai's (1979, 1980)

term) with respect to input costs. Quantity performance becomes

almost completely divorced from financial performance. This

situation may continue almost indefinitely. Even in Hungary, with

its modified system, the list of (pre-1968) largest loss-makers did

not differ much from a similar list drawn a dozen years later before

the next phase of systemic modifications in the early 1980s (Csaba,

1983b).

Enterprise demand is thus almost infinite under central planning.

In order to put this unusual situation in terms of classical economics

and illustrate it diagrammatically in the price-quantity space,

demand of enterprises should be marked by a vertical, i.e. price-

independent, demand line. At the same time, supply should also be

marked by a vertical line, since production plans are fixed in

advance and are also price- (and demand-) independent. In Figure

1.1, the Q.Q2 section of the abscissa determines the size of excess

demand that is independent of the price level. Komai (1979, 1980)

is right in stating that excess demand may persist under stable, fall-

ing or rising prices. Incidentally, the situation presented on the

diagram implies that with respect to producer goods, the official

price index is irrelevant as a measure of excess demand (even if

prices are allowed to fluctuate). They are not much more relevant

with respect to consumer goods either, as will be shown in the next

chapter.

Later, in the second and third parts of this book, it will be shown

that years and decades of economic growth under central planning

has built into the system lasting distortions that aggravate shortages

even further and make excess demand much worse and more

difficult to eliminate. Their inclusion at this point would not change

the picture, however, because they are also system-specific. What

has been shown so far is system-specific institutions and policies

whose interactions reproduce excess demand independently of

'taut', 'mobilising' or simply over-optimistic plans decreed by

central planners and their political masters. (On the endogeneity of

shortages and excess demand, and their independence from this,

much over-emphasised, feature of STEs, see Tamas Bauer, 1978;

Komai, 1979, 1980 and Winiecki, 1982).

We have so far been considering the producer goods market

alone. This is a legitimate approach, for it is in the world of central

8

QUANTITIES

Figure 1.1: Vertical, i.e. price-independent, demand line,

depicting unlimited demand of enterprises in STEs under

conditions of soft budget constraint. The supply line is also

vertical due to the rigidity of the plan and resultant demand-

independence of supply. Excess demand, i.e. 0,°2, will be the

same under the existing price level (Pol, as well as under higher

(P21 or lower (P31 price levels.

p

s

D

~

--------- ------

~ --------- ------

~

--------- ------

o

0,

o

planners (here lumped together with the intermediate levels of

bureaucratic hierarchy) and enterprises that most fundamental

distortions arise. Nonetheless, their consequences spill over to the

consumer goods market. We deal with some of them, i.e. various

atypical inflationary phenomena in STEs, in the next chapter. Here,

only some fundamentals are outlined in order to round off the picture

of permanent excess demand.

Thus, higher production costs under the conditions of shortage

described above spill over to the consumer goods market through

labour hoarding and overtime, which together result in the

exceeding of plan targets for wage-fund growth. In Poland over the

period 1960-75, for example, the wage fund and the average

9

QUANTITIES

monthly wage were amongst those indicators whose actual yearly

figures deviated from planned yearly figures (YPs) by the largest

percentage (Maciejewski and Zajchowski, 1982). Since increased

incomes did not meet commensurate increases in consumer goods,

excess has been created on the demand side.

Kornai (1979, 1980) strengthens the case by highlighting the fact

that enterprises in both sectors (i.e. those producing producer and

consumer goods) often compete for the same material inputs,

because many of them may alternatively be used for the production

of either producer or consumer goods. In a general climate of short-

age and with the deeply rooted preferences of central planners for

the former, policy interventions during YPs reallocate some of the

inputs from the production of consumer goods to that of producer

goods. Methodologically, the division of industrial production into

two sectors allows such undetected input shifts to take place.

Substantially, an inflationary gap is also created on the supply side,

because not only is demand greater, but supply is also often smaller

than planned. Thus, excess demands on both markets are inseparable

in spite of attempted separation of producer and consumer goods-

producing sectors under central planning.9

1.2. CENTRAL PLANNING AND UNCERTAINTY: TIlE TWIN

BROTHERS

Long ago, a perceptive analyst of a Soviet-type economy stressed the

Sisyphus task of Soviet central planners who try to maintain the

semblance of balance in the national economy in the absence of the

scarcity prices. Most of their time and effort are expended on

substituting - very imperfectly - central planning for the most

elementary accomplishments of the market system (Grossman,

1963). This view, shared by many, may be put in sharp focus in the

light of our earlier considerations.

It is true that thousands of the so-called material balances drawn

by planners at all levels of the bureaucratic hierarchy still leave a lot

of room for uncertainty in the face of millions of products, final and

intermediate, manufactured in STEs (for example, some 20 million

in the Soviet Union).10 This is what everyone points out when

stressing the balancing problems of central planning. However,

these size-equals-complexity views rest on two underlying assump-

tions. The first assumption is that the data upon which material

balances are based reflect reality, while the second equates the

10

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macroeconomic balance between supply and demand with the non-

existence of shortages.

The preceding subsection enables us to understand why neither of

these assumptions is true for STEs. The structure of incentives there

is such that the reports on plan implementation include various

overstatements as to quantity and/or quality that leave balancing

activities on very shaky ground. What looks at the planning stage as

a balance may quite often hide an excess demand that appears during

the implementation stage, because either the quantity turns out to be

lower than the one taken into account while drawing the balance, or

lower quality generates demand for higher than planned quantity.

Interestingly, central planners' behaviour tends in some respects

to confirm the existence of uncertainty about plan implementation

figures. Since they are not sure as to what extent reported figures

are realistic, they allocate supplies for the early part of the year at

a level lower than that of the previous year (some 65-95 per cent

of last year's actual supplies). Obviously, once they become con-

vinced that supplies really increased - even if they are still

uncertain by how much - they subsequently allocate higher

quantities of supplies (for the USSR, see Planovoye Khozyaistvo,

no. 3, 1977). Their perception of the situation continues, however,

to be deficient in any case.

Next, even if planned quantity and quality of supplies happen to

balance demand in the aggregate, it does not mean that inputs of the

required quantity, quality and type will be delivered at the right time

in the right place. Microeconomic shortages may appear even under

the conditions of excess supply (if high inventories in STEs are taken

into account),!! but - as we have already noted in passing - there

are no forces in a STE that, in the absence of a proper price system

and a hard budget constraint for enterprises, would shift the exces-

sive supplies to where they are needed.

Thus, it is system-specific features, on top of the problems aris-

ing from the size of the economy, that make uncertainty a twin

brother of central planning at both the planning and implementation

stages. For the same reasons outlined earlier, this uncertainty is not

only great, but also unevenly distributed, increasing with the level

of bureaucratic hierarchy. The latter feature may also be explained

in the light of our earlier considerations.

The direct (or in modified STEs, indirect) subordination of enter-

prises to higher levels of the hierarchy does not prevent them from

holding more trump cards at any stage. At the stage of plan prepara-

tion, enterprises are usually able to beat central planners in the game

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where the centre wants to increase the level of planned output by a

maximum percentage and the allocated inputs by a minimum

percentage, while enterprises try to achieve the opposite outcome. 12

It oUght to be added that, in spite of the pressure from above,

middle levels of the hierarchy usually support the resource claims

of 'their' enterprises. (Therefrom stem recurrent fulminations of

communist leaders against ministers that strive to take most and give

least. Names are named from time to time, Gorbachev's speeches

being the latest example,13 but ministers come and go, while the

practice remains, since slack plans with ample resources are easier

to implement and figures look better when reported.)

However, even if the game is played with higher figures due to

pressure from above, it is uncertainty everywhere in the system that

increases, while enterprises usually find some valid excuses in case

plans are not fully implemented (or at least reported as such). For

they may be reasonably sure that there will be many shortages

during the plan execution period that allow them to put the blame

on somebody else, obtain reduction of plan targets and gain most of

the plan-implementation-related rewards. In the Soviet Union, for

example, 57 per cent of enterprises in 1980 obtained reductions in

the output plan targets during the implementation period, some 33

per cent as late as in December (Pkmovoye Khozyaistvo, no. 11,

1981).

The knowledge of the game described above is not new in the

literature. It dates back to the early works of Berliner (1952, 1956,

1957) on Soviet enterprises. Important here, however, is its impact

upon the distribution of uncertainty. In the system in which everyone

up to the highest but one level of the hierarchy is interested in

producing performance figures which are better than they actually

are,14 the only undistorted figures may be those at the enterprise

level or, to be more exact, those remaining within the enterprise

(because figures reported upwards are quite often doctored to its

advantage). Herein lies the relative strength of the enterprise. As far

as its information needs are concerned, it is simply on a less shaky

ground.

That relative strength continues throughout the whole stage of

plan execution. The enterprise continues to rely on less distorted

data than those available to its superiors in evaluating its prospects

of plan implementation. Its managers know the true level of employ-

ment (not always truly reported upwards15 for fear of being ordered

to 'compress' itI6). they know more or less the productive capacity

(affected, however, by machinery breakdowns and variable input

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Table 1.2: The structure of inventories in industry· in selected

Soviet-type and market economies

Share in total stocks in industry (%)

Raw

Unfinished

materials, production,

Spare

Finished

purchased

produced

parts for products,

Country

Year intermediate intermediate equipment goods

products,

products

for resale

fuels, etc.

2

3

4

5

6

Czechoslovakia 1981

64.5

21.3

b

10.4

Hungary

1976

11.9

Poland

1970

63.0

21.9

b

15.1

1980

63.5

24.5

b

12.0

1983

62.9

23.2

b

13.9

Soviet Union

1970

59.3

22.3

3.9

14.6

1980

57.7

23.5

4.4

14.3

GDR

1963

15.4

Austria

1976

32.1

Canada

1970

31.3

Japan

1975

53.2

Sweden

1977

38.2

Notes: a. Excluding intertemporal accounts.

b. Included in column 3.

Sources: For Czechoslovakia, Poland and Soviet Union - national

statistical yearbooks and own calculations; for the rest, see Kornai

(1982).

quality), and the inventories (but not the variable quality of stocked

inputs). Uncertainty is greatest with respect to the inflow of inputs

from other enterprises. On the other hand, there is almost no uncer-

tainty with respect to outputs. They are sure to find demand on the

seller's market for almost anything they care to produce.17 Goods

are shipped to purchasers almost as fast as they are produced. The

comparative data for STEs and MEs on respective shares of inputs

and outputs in inventories of manufacturing enterprises bear witness

to this. In STEs, the share of the latter is 2-3 times lower (see Table

1.2).

The situation is different at higher levels of the hierarchy. The

further one moves up the hierarchy, the more aggregated the figures

are and the more distortions they contain. The figures look better,

because some enterprises exceeded their monthly or quarterly plan

targets while others fell short of theirs. These figures are misleading,

however, because they contain an unknown share of non-existent or

lower quality products and these will affect production elsewhere (see

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above). Thus, aggregate economic growth figures may not deviate

very much from planned ones due to the above-mentioned netting

out procedure and a contribution of upwardly distorted reporting.

However, other aggregated plan indicators, not affected by all these

distortions, as well as more disaggregated indicators, will deviate

markedly from the plan. Recent remarkably candid publication on

the scale of these deviations in Poland, covering 182 disaggregated

indicators for the period of 1960-76, prove the point. According to

Maciejewski and Zajchowski (1982), only in 19.3% of cases were

there no deviations at all from the plan, or deviations were less than

1 %. In 39.1 % of cases deviations were larger than 5 % and in 19%

of cases they were even greater than 10%. Thus, the number of

cases of the exact plan implementation was equal to the number of

those where it exceeded or fell short by more than 10% (with both

over- and underproduction having disequilibrating effects in the

basically closed economy. The details are shown in Table 1.3.

Significantly, the same publication stresses a high degree of

uncertainty with respect to actual outcomes continuing almost until

the last moment. Even September predictions of end-year production

figures - made, therefore, only three full months before the end of

the YP - missed the mark by more than 1 % in almost two-thirds

of cases, and in 20.9% of cases deviations were higher than 5%

(details given in Table 1.3.). There are no data of comparable

breadth and length of coverage for any other STE, but the doubters

thinking that Poland may be a special case should be reminded that

until the mid-1970s, and especially under Gomulka in the 1960s

(two-thirds of the period under analysis), Poland was a fairly typical

STE.

A Soviet survey made by the Central Statistical Office on the plan

implementation in engineering industries in the 1976-78 period with

respect to quantities of the 149 most important product groups found

that only in 89, 94 and 86 product groups were plans fully imple-

mented or exceeded (59.7%,63.1 % and 57.7% respectively). With

respect to the remaining product groups implementation fell short of

the plan targets (Planovoye Khozyaistvo, no. 8, 1979). The survey

is fragmentary in comparison with the Maciejewski-Zajchowski

study but its results display similar features. If we assume that the

amount of upward deviations is similar to that of downward

deviations (40.3%,36.9% and 42.3%), we arrive at the 18-22% of

cases of the exact plan implementation of output targets. That

percentage does not differ from the 19.3 percentage figure obtained

by the said Polish authors.

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Table 1.3: The pattern of deviations of actual from planned and

predicted· production figures in Poland for 198 indicators,

1961-76

The range of deviations in

percentages

0-1

1-2

2-3

3-4

4-5

5-6

6-7

7-8

8-9

9-10

10 and more

The deviations

The deviations

from the plan

from the

predictions

The percentage of cases within a given

range

2

3

19.3

36.6

14.2

19.7

11.5

11.3

8.4

6.9

7.5

4.6

5.7

3.6

4.9

3.4

3.5

1.7

3.0

2.4

3.0

1.7

19.0

8.1

Note: a. Predictions conducted every year in September.

Source: Maciejewski and Zajchowski (1982).

Thus, uncertainty, pervasive under central planning, is, like

shortage and excess demand, endogenous to the system. Those who

maintain that the growth maximisation strategy, a policy-specific

rather than a system-specific feature, is at the root of each of these

phenomena would see all these phenomena as persisting under

'slack', 'modest' or 'reasonable' plans, as well as under more

familiar 'taut', 'ambitious' and 'optimistic' ones. The centre (central

planners and their political masters) may leave its imprint on

economic performance as a result of whims and wishes but that

would be over and above problems generated endogenously by the

system itself - for example, shortage, excess demand and uncer-

tainty persisted in Poland both under the cautious Gomulka and the

reckless Gierek.

We oUght to remember, however, that it is not only the centre

which may leave its imprint upon the performance of an STE.

Uniquely in communist countries there exists a strange type of

linkage between political and economic hierarchies, and in conse-

quence, multiple pressures on management persistently appear at

various levels of the latter. Party organisations not only use their

clout to assure a larger share of the investment pie for 'their' enter-

prises (located on their territory or otherwise under their control),

but also intervene with respect to changes in plan targets, additional

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QUANTITIES

supplies, etc. Each time, political interventions set in motion the

whole procedure of commands and reports throughout the

bureaucratic hierarchy, clogging information channels and increas-

ing uncertainty even further. The resultant ad hoc priorities

superimposed upon earlier ones aggravate the supply situation.

Thus, not only the Politbureau (a commanding segment of the

centre), but also other Party bodies and individual apparatchiks

adversely affect the performance of the economy under central

planning, without bearing any responsibility for the results. 18

1.3. INVESTMENT CYCLES: A DYNAMIC VIEW ON EXCESS

DEMAND

So far we have outlined a picture of STEs as economies where short-

age and excess demand continually persist for system-specific

reasons. These phenomena are accompanied by yet another one, i.e.

a high degree of uncertainty, as the system, with great effort but

without commensurate effect, tries to substitute for the elementary

allocational capability of the market. However, this picture,

although true enough, is a static one. It is a well known fact that

STEs are characterised by rapid accelerations and decelerations first

of all of the investment component of their GNP equivalent (net

material product - NMP).19 It will be argued below that these

fluctuations have had a powerful and, over time, an increasing

impact upon the pattern of shortage and excess demand under central

planning.

However, many different interpretations were advanced to

explain cyclical fluctuations of investments in STEs (see, inter alia,

overviews in Bajt (1971), Tamas Bauer (1978), Dahlstedt (1980),

Winiecki (1982». Thus I will begin with the refutation of certain

most commonly held views, restate20 my own view on investment

fluctuations in general and within the FYP horizon in particular, and

only then move on to describe the ideal type, i.e. 'model' investment

cycle, and deviations from that model.

Analysts of the investment fluctuations usually agree that excess

demand for investments stems from perceived shortage and resultant

necessity to increase production. It is this demand, augmented by all

formal and infonnal incentives inducing enterprises (and their

superiors in the bureaucratic hierarchy) to strive for more

investments, that is at the root of recurrent over-expansions

followed, in due course, by cut-backs in expenditures. However,

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regardless of whether these authors evaluate excess demand

positively in normative terms as a 'right to grow' (e.g. Pajestka,

1975) or negatively as a 'growth psychosis' (e.g. Romuald Bauer et

al., 1972), they all miss the most important point. If output growth

is so highly regarded within each multi-level bureaucratic hierarchy

in an STE, why should output grow only through putting on stream

new capacities at the same level of technological sophistication?

There exists an obvious (and less costly) alternative of output growth

through innovation: technological change and/or reorganisation of

production factors already at hand. 21 Obviously, it is not output

growth per se but such growth through investments in new capacities

that is sought by enterprises.

Yet another explanation of excess demand for investments is that

it is a costless method from the enterprise viewpoint, since most

investments were financed from the state budget (e.g. Khachaturov,

1975). However, cost (i.e. financial) considerations cannot be taken

too seriously in an economy in which enterprises enjoy soft budget

constraint. In any case various modifications of central planning in

the 1960s and 1970s changed the financial structure of investments,

increasing the role of self-financing and banking credit, while

investments have continued to be the preferred method of expansion.

Sources of excess demand for investments must then lie elsewhere.

It is, again, as in the case of general excess demand, the structure

of incentives to which we turn as the main source of this particular

excess demand.

The present author stressed earlier (Winiecki, 1982)22 the risk-

averting behaviour under central planning in this respect. Enterprise

managers evaluate their growth possibilities within the framework of

the present and future plan targets first of all from the viewpoint of

minimising the risk of non-implementation of output plan targets in

the short term, be they formulated in volume or value terms. The

lesser the risk, the lower the possibility of losing premiums and

bonuses tied to the execution of the plan (as well as losing the high

regard of their superiors). From where they stand the risk of expan-

sion through investments, preferably new investments, is by far the

lowest.

Firstly, every innovation, technical or managerial,23 is

introduced into the already existing productive facilities; and person-

nel operating these facilities are interested in implementing plan

targets, first and foremost for the present planning period. The

incentive system influences them strongly in this direction. Even if

innovation would result in increased output, the risk associated with

17

QUANTITIES

introducing it - a risk of too long a period of technology absorbtion

or resource reorganisation and resultant disturbances to production

schedules - would cause managers generally to avoid such methods

of expansion. In addition, as it has often happened in practice,

increased productivity, if successful, would result in having the plan

targets raised in the next planning period (the well-known 'ratchet'

principle), so an extra effort could even be counterproductive, for

it would be more difficult to implement the next year's plan and to

get related premiums and bonuses.

In contrast, expansion of production capacity through new

investments is achieved at no great effort, and what is more impor-

tant, at no risk at all. A new plant or an expansion of the existing

one is being implemented outside the already-existing capacity and

without affecting production schedules there. There is no risk stem-

ming from new investment with respect to plan execution. Even if

production from new capacity is included in the plan and fails to

materialise due to delays in completing a given project, the respons-

ibility rests with a construction enterprise and material rewards for

implementing or exceeding plan targets from existing capacity are

still obtained.

Secondly, analysis of excess investment demand in terms of risk-

averting behaviour also enables us to understand the commonly

displayed preference for new investments rather than less costly

modernising projects. The explanation is sometimes offered in

psychological terms, viewing this preference as a carry-over from

the early industrialisation era when new plants were status symbols

of a rapidly industrialising country. Psychology, of course, may

play a role, but preferences for new investments have a perfect

economic explanation. Modernising investments, just like non-

investment-based innovations, affect the existing productive

capacity and bring with them a similar type of risk to which we have

been pointing above. Seen from that angle, they are certainly less

attractive for enterprises relative to new investments.

This explanation, incidentally, explains very well why various

reforms in the 1960s and 1970s that tried to limit absolute attrac-

tiveness of investments were doomed to fail (and they did so): for

it is the reduction of relative attractiveness of investments vis-ii-vis

innovations, coupled with other far-reaching changes in the system,

that may decrease demand for investments of risk-averting managers

of enterprises. This, however, would require reforms to change the

fundamental features of central planning. It should be noted in

passing that even the farthest reaching reforms of the period, i.e. the

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Hungarian reforms of 1968, did not significantly reduce (if at all)

excess demand for invesbnents (see for example, Drecin, 1971;

Drecin and Tar, 1978). In fact even modifications in Hungary and

elsewhere, introduced in the 1980s, did not change the pattern of

excess demand for invesbnents. Although invesbnent growth rates

fell significantly in STEs, and in some of them invesbnents declined

in absolute terms, actual figures almost uniformly exceeded plan

targets (see both sets of figures in Economic Survey of Europe,

1982/3-1985/6).

After explaining excess demand for invesbnents in STEs, we tum

to the issue of how this demand affects the aggregate behaviour of

the national economy, i.e. how invesbnents expand and contract in

a cyclical manner. To this end we put the risk-averting behaviour of

enterprises within the framework of planning with its typical FYP

time horizon. We begin with the procedure of the preparation of the

invesbnent part of a FYP. Enterprises presenting their invesbnent

demands to the higher levels of the hierarchy are trying to present

the proposals in the best possible light in order to obtain the desired

funds. With that aim in view, they often underestimate the costs of

proposed invesbnent projects and/or overestimate the results. It is

the time-honoured method of 'hooking into the plan' stemming from

the conviction that cost overruns will be validated through increased

funding under pressure of the argument that giving up the comple-

tion of unfinished invesbnent projects will entail losses for the

national economy. 24 This is, by the way, just another manifestation

of Kornai's soft budget constraint principle.

Invesbnent proposals of enterprises become aggregated as they

move up the institutional hierarchy. Even if there are some

preliminary limits drawn by central planners for ministries and by

the latter for unions of enterprises, they are by and large

disregarded, as each institution, given the incentive system, is vying

to expand production. Thus, after aggregating the demand for

invesbnents at the central level, it usually turns out that the demand

by far exceeds the funds (and capacities) earmarked for invesbnent

for the next planning period. In consequence, cuts are ordered down

the line.

However, there is no possibility at the central planners' level for

evaluating proposals on a project-by-project basis (it exists with

respect to a few major projects and even here in general terms only).

Cuts are usually of financial character, ministries are ordered to cut

planned invesbnent expenditures by a specified amount or percent-

age, and the procedure is repeated at each level. As a result, a few

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QUANTITIES

projects are dropped, while each remaining project is allocated

somewhat less than requested. Cuts from above are thus increasing

the extent of distortions built in from below, for real costs of planned

investments have often already been underestimated.

Thorough assessments as to the size of the underestimates are

rarely made, but in Hungary a 20-50 per cent range of cost overruns

per project is being mentioned (Brody, 1983), while in

Czechoslovakia a more precise figure of 25.4 per cent of cost over-

runs on industrial investment projects in the late 1970s was put

forward (Srejn and Novotny, 1980). The same figure for the late

19608 for the Soviet Union was 37 per cent (Plyshevsky, 1972).

Projects not only cost more but also last longer. Gestation periods

are often 50-100 per cent or more longer than planned (e.g. Brody

(1983) for Hungary, and Khachaturov (1975) for the Soviet Union).

Thus, the cost increase per project is spread over more years, while

yearly expenditure overruns as compared with plans include not only

cost overruns per project but also costs of the inclusion of new,

originally unplanned, projects.

In consequence, the FYP typically starts with significant built-in

distortions in its investment component. These distortions exercise,

over time, an increased pressure on aggregate equilibrium (or,

rather, lower-scale disequilibrium).2S Shortages multiply and

excess demand begins to grow. The producer goods sector of

manufacturing and the construction sector are trying to meet invest-

ment demand but it is here that underestimated costs and/or over-

estimated results exert their strongest influence. On the one hand,

new factories whose output had already been included in the planned

output figures do not reach the expected capacity or do not even

begin producing, while on the other, expenditures have already been

made and wages, premiums and bonuses paid out. 26

Aggregate disequilibrium usually reaches its peak in the middle

of the medium-term plan, i.e., beginning with the early 19608 in the

middle of the FYP. Those who would stress the lack of theoretical

foundations upon which this assertion is based (e.g. gestation

periods of investment projects may be shorter or longer than five

years), should realise that a five-year horizon constitutes a corset put

upon the real economic processes and exerts a strong influence upon

the behaviour of economic agents. That influence is also strong in

the case of those who put that corset upon the economy in the first

place, i.e. upon central planners.

With their sights affected by the planning horizons, they see the

investment cost increases and wage fund increases exceeding targets

20

QUANTITIES

by substantial margins, while on the other hand, new capacities are

not coming on stream to relieve shortages of both producer and

consumer goods. Additionally, input shifts (see first section)

aggravate the situation on the consumer goods market. Thus, with

half of the planning period already over and increases in new

capacities increasingly falling behind, they decide to intervene. At

mid-point they resign themselves to the fact that all planned invest-

ment projects will not be completed by the end of the FYP. Thus,

they decide to concentrate on those deemed to be most important and

(optionally) on decreasing the disequilibrium on the consumer goods

market. The second goal (if pursued) would also affect the selection

of projects to be given priority at this point. All this makes the third

year of a FYP a likely candidate for a policy change, usually with

a year's lag effects of that change being felt throughout the rest of

the Fyp.27

Investment and production plans are then extensively revised and

it is worth stressing that only now, when the scale of cost overruns

and delays begins to be recognised, that cuts in investment plans are

more project- than funds-oriented. Many projects are 'mothballed',

with further construction postponed until the next FYP, and some

others discontinued altogether. It is at this point that the economy

begins to bear the burden of the so-called 'costs without results', for

mothballed or discontinued projects appear only on the one side of

the ledger.

The remainder of the FYP is usually a period when no substantial

investment projects are started, while those started earlier are being

completed. If the cuts are large and the share of the projects in the

consumer goods' sector completed in that period is sufficiently

large, excess demand for producer goods is decreased while the

inflationary overhang on the consumer goods market follows suit. It

sometimes happens, however, that the inflationary overhang is so

large that it becomes impossible to close it through increased supply

alone. A decrease in excess demand on the consumer goods market

becomes necessary at the same time even to a lower scale of

disequilibrium. It is then that price increases are declared.28 Thus,

at the end of that period, equilibrium, or low-scale disequilibrium,

is restored and an STE enters the next cycle.

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1.4. INVESTMENT CYCLES: EVIDENCE, CHARACTER AND

IMPUCATIONS

The outline presented in the preceding section represents a standard,

'model' explanation of the investment cycle under central planning

as an endogenously generated phenomenon. In fact, particular

cycles may deviate from the model with respect to their timing. For

the most part, however, they are in concordance with the pattern

described above. Table 1.4. shows that average yearly investment

growth rates for the FYP second and third years combined were

higher than those for the fourth and fifth years of the same FYPs in

over 60 per cent of cases (i.e. FYPs) in the 1961-80 period for all

STEs considered here.

In reality, the concordance ratio is even higher (and much higher

at that) if we exclude those cases in which factors exogenous to the

cycle influenced investment growth rates. To begin with, we should

exclude from the sample the 1961-5 FYP for the Soviet Union. In

that country, a Seven-Year Plan (SYP) was inaugurated in 1959, but

it was later abandoned. There were then a few more changes, with

the 1964-5 period forming a separate plan.29 Only ex post the

1956-60 and 1961-5 periods are presented in Soviet statistics as

FYPs. In consequence, investments increased rather quickly over

the 1959-61 period, while plan changes brought about a slowdown

in the rate of growth (and also investments reaccelerated again

during the 1964-5 plan).

Besides these changes in the planning horizon and related earlier

starts of the acceleration phase, also excluded should be those cases

in which important modifications of central planning institutions and

instruments took place, especially those that were not introduced

with the beginning of a new FYP. As it happened, all systemic

modifications in smaller STEs were introduced in the middle of the

respective medium-term plans.

Partial decentralisations that gave enterprises an increased room

for manoeuvre (without imposing the accompanying hard budget

constraint) invariably brought about an acceleration of the invest-

ment growth rate. The introduction in the GDR of the 'New

Economic System of Planning and Management' from 1963

onwards more than doubled the growth rate of investments in the

next two years. The same happened in Hungary with its more exten-

sive 1968 modifications. The investment growth rate also doubled

in the next two years, but this jump took place from the already high

rate (an increase, on the average, from 10.5 to 25 per cent in each

22

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