Economic Reforms in Eastern Europe and Prospects for the 1980s. Colloquium, 16–18 April 1980

307 Pages·1980·17.724 MB·English

by  North Atlantic Treaty Organization (Auth.)

Economies Directorate
Information Directorate
(eds.)
NATO
Economic Reforms in Eastern Europe
and Prospects for the 1980s
Colloquium
16-18 April 1980
Brussels
OTAN
Réformes Economiques en
Europe de l'Est et Perspectives pour
les années 80
Colloque
16-18 avril 1980
Bruxelles
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First edition 1980
British Library Cataloguing in Publication Data
Economic Reforms in Eastern Europe and Prospects for
the 1980s.
1. Europe, Eastern—Economic policy
1. North Atlantic Treaty Organisation
338.947 HC244 80-41411
ISBN 0-08-026801-3 Hardcover
ISBN 0-08-026800-5 Flexicover
Note: This is the latest volume in a series bringing
together articles presented at the NATO
Colloquia organized by the NATO Economics
and Information Directorates on economic issues
in the Communist world. For further information
please write to the Director, Information
Directorate, NATO HQ, Boulevard Leopold III,
1110 Brussels, Belgium.
Printed in Great Britain by A. Wheaton & Co. Ltd., Exeter
Page v ERRATA
Correction to caption and footnote.
The colloquium in session. From left to right, Mr Armin Halle, NATO’s Director of
Information; Mr Alan Smith, University of London; Dr. Paul Wiedemann, City of
London Polytechnic; Mr. Jean-Not1 Gibault, Director of the NA TO Economics
Directorate; Mr. Philip Joseph, Assistant Director, NA TO Economics Directorate;
Professor Hans-JUrgen Wagener, Ruksuniversiteit, Groningen, The Netherlands.
Article reprinted by permission of the NATO Review.
NATO: Economic Reforms in Eastern Europe and Prospects for the 1980s
ISBN 0-08-026801-3 Hardcover
Preface
Eastern Europe:
Current Reforming Trends
Determine Future Economic
Prospects*
James Ellis
NATO Economics Directorate
Noted academics, government officials, and businessmen gathered at NATO
Headquarters in Brussels between 16-18 April for an annual Colloquium
sponsored by the Economics and Information Directorates to discuss an
aspect of Communist economies. This year's topic was "Economic Reforms
in Eastern Europe and Prospects for the 1980s".
The opening session of the colloquium. From left to right, Mr. Armin Halle, NATO's Director of
Information; Mr. Alan Smith, University of London; Dr. Paul Wiedemann, City of London
Polytechnic; Mr. Rinaldo Petrignani, NATO's Deputy Secretary General; Mr. Jean-Noël
Gibault, Director of the NATO Economics Directorate; Professor Hans-Jürgen Wagener,
Rijksuniversiteit, Groningen, The Netherlands; Mr. Philip Joseph, Assistant Director, NATO
Economics Directorate.
* We are indebted to the editors of the NA TO Review for permission to print this paper.
v
vi James Ellis
In view of recent reform measures taken in each of the East European
countries—Hungary, Poland, Romania, the German Democratic Republic,
Czechoslovakia, and Bulgaria—the participants at the Colloquium concluded
that during the 1980s, attention in the region would be directed mainly to
raising labour productivity, cutting down on raw materials and energy
consumption, redressing adverse foreign trade balances, and trying to satisfy
ever more exigent consumer demand.
Participants at the Colloquium noted certain recurring features in Eastern
Europe's current reforming efforts; a decline in the number of plan
performance indicators and an extension of plan time-spans; industrial
reorganization favouring larger enterprise groupings and shortened chains of
command; more incentives to promote worker and management productivity
and initiative; increased orientation of domestic prices to world levels; and
measures to boost export competitiveness.
But despite these efforts, the prospect for the East European economies in
the 1980s is for reduced economic growth. This is due to a number of factors,
including declining manpower availability, increasingly scarce and expensive
energy and raw materials, lack of technological innovation, and inflexibilities
in management. Consequently, consumers throughout the area may grow
restive as they see their real standard of living eroded.
Prospects can best be evaluated, however, by analysing current reforms on
a country-by-country basis.
Recent reforming trends in Bulgaria have emphasized the need to improve
management techniques by various reorganizations in industry and
agriculture. Most often leading to the creation of larger units, these
reorganizations have had the effect of increasing the powers of middle
management.
At the same time, worker brigades have been given greater powers,
through self-financing and more direct participation in the planning process,
which itself has been simplified through the use of fewer plan performance
indicators.
Changes have also been made in Bulgaria's foreign investment law to
encourage more foreign firms to do business with Bulgarian concerns. By
such amendments, Bulgaria hopes to deal more effectively with its severe
hard-currency debt and its worsening terms of trade.
Unless the economic situation in Bulgaria deteriorates more markedly,
however, the decade ahead is unlikely to see more extensive reforms, such as
instituting greater price flexibility or allowing market relationships to
supplement planning in determining production levels. Limited changes
might be made in the agricultural sector, however, to promote Bulgaria's
agricultural exports.
Since the beginning of 1979, Romania has effected a number of new
Preface vii
measures designed to give greater latitude to the large groupings of
enterprises to organize and direct their own activities. Among the devices
introduced are profit sharing and a system of worker participation.
Under the new system, enterprises and industrial groups, guided by
workers' committees, have increased powers to draw up their own plans in
consultation with the central authorities. Intended primarily to reduce
production costs and eliminate waste, the reform rewards workers and
enterprises alike for over-fulfilling their self-established plans.
To achieve economies of scale, industry has been concentrated increasingly
into large production units, and management has been brought closer to
production operations, while the functions of the ministries have
correspondingly diminished. Future reforms in Romania could continue to
deal with the problem of improving the quality of industrial management.
The prospects for the success of Romania's recent reforms appear to
depend primarily on the strength of the party apparatus within enterprises
and the degree to which President Ceausescu will be willing to relax central
controls. They will also partially depend on the country's continuing efforts to
improve labour skills.
New Economic Mechanism
Recent Hungarian reforms are related to the broad range of measures
instituted in 1968 and known collectively as the "New Economic
Mechanism", or NEM. These tend to decentralize economic decision
making, prices and profits being relied on to motivate enterprise managers to
make appropriate production choices.
NEM suffered a setback during the seventies, as a result of sharp price
movements on world markets, which threatened to cause severe dislocations
in the price-sensitive Hungarian economy. Consequently, the government
increasingly provided subventions to maintain existing consumption and
investment levels, at a cost of accumulating considerable external debt and
reducing motivation toward economic efficiency.
Now Hungary is moving once again to establish domestic prices more
nearly aligned with those prevailing on world markets, in the hope of forcing
manufacturers of exportable goods to produce more competitive items, under
the discipline of world market prices. The government is also seeking to
reduce domestic consumer price subsidies, and has modified labour laws to
allow management more flexibility, including by the use of labour lay-offs, in
the interest of economic efficiency. While the measures should improve the
functioning of the economy as a whole, they may also give rise to considerable
consumer discontent in the decade ahead.
Notwithstanding these efforts, Hungary can at best look forward to
viii James Ellis
reduced economic growth, because of inevitable manpower shortages and
increasing energy and raw materials costs. Moreover, because of its already
high external debt, the country will no longer be so readily able to cover
adverse foreign trade imbalances, as it did in the past, simply by borrowing.
In short, the 1980s are likely to be a time of severe testing for the Hungarian
economic reforms.
In Czechoslovakia, since the abortive approaches of 1968, one finds
emphasis on improving planning and pricing as primary instruments of
reform. For enterprises participating in a three-year experiment ending this
year, net profit has become the key indicator of plan fulfillment. Longer-term
planning has also become the rule; in the 1981-85 period, the Five-Year Plan
is to take precedence over annual plans. Finally, prices are again to be
realigned in 1981-82, after numerous adjustments in the 1970s.
Other measures to stimulate the economy, however, have fallen far short of
their intended effects. Extremely high capital investment, amounting to some
30-40% of GNP, has produced only around three percent annual growth in
national income, largely because funds have been inefficiently used, employed
in unprofitable or military projects, or diverted to black market activities.
Moreover, increasingly sophisticated computer planning seems to have had
little effect on improving the functioning of the economy.
For the future, whatever reforms are undertaken will have to reckon with
entrenched economic problems. One of these problems is a persisting
shortage of labour. Pensioners are being encouraged to return to the labour
force, but practically all sources of additional labour have been exhausted;
most women are already fully employed.
Another problem is Czechoslovakia's continuing dependence on imported
raw materials and energy, which account for 45% of all imports, and 40% of
all energy consumed. Nuclear power-station construction, already much
behind schedule, will begin to provide perceptible relief only by 1990, when it
is to provide 9-10 thousand megawatts of generating capacity, or 55-60% of
total 1978 capacity.
A third problem is transport shortcomings. Railways handle the bulk of
Czechoslovak goods, one-third of which is solid fuels, since domestic coal is
increasingly being used because of rising prices of imported oil. But
Czechoslovak railroads are hampered by a lack of skilled workers, outdated
equipment, and limited capacity.
Finally, Czechoslovakia must face the prospect of continuing foreign trade
difficulties. Its terms of trade steadily deteriorated throughout the 1970s, as
the costs of imported raw materials and energy rose more quickly than the
prices received for its exports, principally machinery, which is becoming
steadily less competitive on world markets. Imported energy costs will climb
even more rapidly after 1984, when a special agreement with the USSR for
Preface ix
low-cost oil is due to terminate. Partially to offset its foreign trade difficulties,
and to promote its export efficiency, Czechoslovakia may allow Western
market prices to have more influence on firms exporting to the West.
Prolonged Trade Imbalance
In the German Democratic Republic, a prolonged trade imbalance
stemming from rapid rises in the prices of imported energy and raw
materials, on which the country is heavily dependent, has shaped the course
of present reform efforts and will doubtless continue to do so throughout the
present decade.
To promote export competitiveness by simplifying management and
hastening the introduction of new technology into industry, most of the
former middle-level industrial management organizations have been replaced
by generally larger groups of enterprises called "combines". The new
combines incorporate many formerly separate research facilities and have
apparently been given broad decision-making powers concerning the
organization of production, as well as some foreign trade rights. In addition
to industrial reorganization, new planning indices have been introduced and
prices systematically raised on raw materials in an effort to reduce
consumption.
Consumer prices, on the other hand, after having remained constant for
most of the decade, were finally raised in 1979 on higher quality consumer
goods, partially to offset growing state subsidies. Although there is little
latitude for raising consumer prices much further without setting off
widespread discontent, the 1980s may well see additional limited price
increases if the government can offer convincing improvements in the range
and quality of consumer goods.
Certainly, however, the 1980s will be a time of continuing economic strain
for the GDR. Because of the mounting burden of foreign trade imbalances,
there will be increasing pressures to improve export competitiveness. On the
other hand, to remedy the GDR's continued uneconomic use of manpower
and other resources, ways will have to be found to improve management, and
arrest probably declining economic growth. In any case, domestic supply
problems are likely to become more severe because of the increased need to
export.
In short, the GDR will have to devote the bulk of its efforts in the decade
ahead to improving the standard of living, promoting economic growth and
efficiency, and at the same time balancing the State budget and international
trade accounts.
Poland followed a policy throughout the seventies of massive capital
investments, including much imported technology and equipment, to promote
EREEP80 - A»
x James Ellis
rapid economic growth. The period immediately ahead is expected to see a
consolidation of these investments, a building-up of the skilled labour force,
import restraints, and slowing growth.
With a probable decline in real living standards, the Polish population may
become restive. To alleviate the situation, enterprises may continue to grant
irregular wage increases, which at the same time could further boost the
rapidly rising cost of living.
Poland's room for manœuvre in foreign trade will continue to be limited,
hampering the country's possibilities for economic growth or restructuring
the economy. Ironically, Poland may find itself in the position of not being
able to afford the imports of raw materials needed to expand industrial
production and exports for convertible currency.
In view of these imminent difficulties, the Polish leadership may well be
inclined to undertake extensive reform measures beginning around 1983.
These could include planning and organizational changes, revision of the
management and incentive systems, and the extension of the role played by
financial and pricing mechanisms. Already, the government has undertaken
limited reforms in the area of foreign trade by giving exporting enterprises
more liberal access to imports of machinery and raw materials.
In the longer term, Poland's possibilities for expanded economic growth
may increase about the middle of this decade, when some of its current
external debt should diminish, and when the productive effects of the
investments of the seventies should begin to make themselves felt. Hence
improved economic performance could obviate pressures toward further
reform.
Common Approaches
For Eastern Europe as a whole, certain common approaches appear in
current reform efforts. They include a tendency toward decentralization of
decision making, a general increase in the financial autonomy of individual
enterprises or associations of enterprises, and a restructuring of price systems
to reflect more realistically prevailing conditions of scarcity and demand.
A further similarity is that growth in personal consumption has typically
been lower than the rate of growth of national income, reflecting the fact that
the consumer has often taken second place in policies designed to bolster
national economic expansion. Nonetheless, despite continuing generally poor
quality in available consumer goods, there has been a marked improvement in
real consumption in Eastern Europe since 1965. At the same time, pressures
have accumulated for even greater consumption, stemming from the fact that
real wages have risen faster than the supply of consumer goods.
A common goal of reform efforts is to compensate for increasingly costly
Preface xi
energy supplies. Heavily dependent on coal for the generation of electrical
power, Eastern Europe will nonetheless continue to require minimal
quantities of oil for transportation and essential industrial processes; total
needs may amount to 145 million tonnes by 1985. Since Soviet oil exports to
the area will by then probably come to no more than 90 million tonnes at best,
Eastern Europe will have to find about one-third of its supplies elsewhere, at
rapidly rising prices. In short, Eastern Europe's need for oil from non-Soviet
sources may trigger complicated deals and new types of trade and payments
arrangements.
In any case, Eastern Europe will probably enter into a period of
diminishing trade growth with the West in the 1980s, when total trade could
grow by 4% at best. Even then growth will be restricted primarily to exports;
imports will probably consist of goods designed to save energy or raw
materials, or to boost exports.
A number of additional factors are expected to influence the course of East
European economic reforms in the 1980s. They include each country's
transport situation, world financial developments, and the economic and
political climate in the West.
In the field of transport, road traffic is steadily gaining in importance in all
the East European countries, especially for short-haul traffic. At the same
time railroad rates are being perceptibly raised, although transport costs are
still given relatively little importance in the evaluation of optimum enterprise
production.
With the increasing burden of foreign debt and energy constraints, the
East European countries may be forced again in the 1980s to attempt the
market-oriented foreign trade reforms that they tried in the 1970s. Eastern
Europe has already probably reached about the limit of its hard-currency
borrowing abilities; nonetheless, it should still have access to Western money
markets to promote its exports and to ease its liquidity problems because of
its established banking relationships and the relative political instability
existing elsewhere in the world.
In the final analysis, favourable economic relations with the West are
needed to allow the East European countries to consolidate their reform
policies. East European investment must increasingly contend with Western
prices for its rational structuring because of the costs of imported Western
materials and the prices of necessary exports. Hence, many export-linked
East European economic reforms must increasingly take account of Western
market conditions.