SPECI AL REPORT ECONOMIC REFORM IN EASTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A004800030003-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 19, 2016
• Document Release Date: May 22, 2006
• Sequence Number: 3
• Publication Date: February 26, 1965
• Content Type: REPORT

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ECONOMIC REFORM IN EASTERN EUROPE
CENTRAL INTELLIGENCE AGENCY
OFFICE OF RESEARCH AND REPORTS
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26 February 1965
Economic pressures and the loosening of Soviet
control are undermining the Stalinist economic sys-
tem in Eastern Europe. The regimes are giving in-
creased weight to economic criteria in planning and
are trying to make producers more responsive to the
changing needs of customers. They have been unable
to obtain much guidance or help from the Soviet
Union, and are borrowing techniques and ideas from
Yugoslavia and the capitalist West.
Economic reforms are being designed primarily
to attack national problems, and so vary consider-
ably from one country to another. The Czechoslovak
regime, faced with the greatest economic difficul-
ties and with deep divisions within the party, is
contemplating reforms which give considerable scope
to the market mechanism. Rumania, with the fastest
economic growth in the area and a party unified
closely behind the nationalist policies of Gheorghiu-
Dej, seems generally satisfied with the existing eco-
nomic system. The other countries fall in between
but clearly are aiming at improving operation of the
"command economy" rather than replacing it.
Early Reform
In the late 1950s the East-
ern European countries made
fairly extensive, but generally
unsuccessful, changes in eco-
nomic planning, management, and
incentives. Poland in 1956-58
and Czechoslovakia in 1958-60
experimented with an increase
in the authority of enterprises.
East Germany and Bulgaria dis-
solved the industrial ministries
in order to eliminate conserva-
tive opposition to ambitious
growth schemes and to strengthen
party control over the economy.
Throughout Eastern Europe, new
and more complex formulas were
introduced as a basis for incen-
tive payments to enterprise man-
agers--in place of the old cri-
teria, based on gross value of
production, which tended to en-
courage the output of poor-qual-
ity goods and to delay techno-
logical progress.
These reforms caused con-
fusion, however, and had few
favorable effects because they
barely touched the basic causes
of inefficiency--the failure to
consider economic criteria in
planning, and the disparities
between national and individual
interests.
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Worsening of the Economic
Situation, 19bl-64
The intensive efforts to
increase the rate of economic
growth which accompanied the
reforms of the late 1950s were
successful only for a short
time and at a heavy cost. The
more industrialized satellites
soon exhausted their reserves
of labor and productive capac-
ity, and production plans were
set too high to permit the in-
creased attention to quality
and efficiency that the early
reforms were expected to stim-
ulate. Rapid technological
change abroad and improving
living conditions at home made
customers more exacting, and
consequently inventories piled
Beginning in 1961, signs
of strain began to appear; in-
dustrial growth slowed down,
except in Rumania, and then
stopped altogether in Czecho-
slovakia. Agricultural pro-
duction, which had reached new
postwar highs in the late 1950s,
stopped rising or declined in
the early 1960s. Investment
programs lagged and living con-
ditions stagnated. Pressure
built up throughout Eastern
Europe, except in Rumania, to
undertake more fundamental re-
forms.
Faced with rapidly disap-
pearing "reserves" and more
particular customers, the
Eastern European regimes could
no longer condone the long-
standing inefficiencies of the
"Stalinist" system--maintenance
of high-cost industries; long
delays in the completion of in-
vestment projects; sluggishness
in the introduction of new tech-
niques; and the inability of pro-
ducers to adjust quickly to
changing demand. In their search
for increased economic efficiency,
the regimes have looked increas-
ingly to the capitalist West,
where they have borrowed both
ideas and techniques. The prin-
cipal changes being considered in
Eastern Europe are the following:
(a) To make planning more
consistent with rational calcula-
tions of economic advantage.
This means reducing political in-
terference, and improving the
tools of economic planning,
especially by use of mathemati-
cal planning techniques.
(b) To clarify the line of
command in economic administra-
tion. This means mainly undoing
the reorganizations of the late
7L 950s and re-establishing a clear
hierarchy from the center to the
enterprise.
(c) To develop business-
like (as opposed to bureaucratic)
methods of economic management.
A careful study of the manage-
ment techniques of Western cor-
porations, a willingness to
delegate authority, and limi-
tation of party interference
with day-to-day management are
stressed.
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(d) To develop incentives
which align personal advantage
with national interest. Even
the best-laid plans cannot pre-
scribe every action, and yet a
basis must be found to make un-
planned decisions consistent
with the national interest.
There is no wholly satisfactory
solution to this problem in a
command economy, but increased
consistency between national and
private interests is being sought
by basing bonuses on profits
while making profits a more mean-
ingful criterion of performance.
For the latter purpose, various
regimes are bringing prices more
into line with relative costs;
charging interest for the use of
fixed capital; financing more of
investments with repayable in-
terest-bearing loans; giving en-
terprises more authority to ne-
gotiate their own contracts, in-
cluding export contracts; and
strengthening the legal position
of buyers relative to that of
sellers.
There have been few reforms
recently in agriculture, except
in Hungary, although there is a
tendency to pay more attention
to farmers' incentives and al-
low collective farms to manage
more of their own affairs.
Sources of Conflict
Despite strong resistance
to change from vested interests,
there is agreement in principle
on the need for extensive re-
forms. This agreement, however,
often obscures differences in
emphasis which, at least poten-
tially,involve a fundamental
conflict.
The predominant approach of
the regimes is to try to make the
existing command economy work
better. This approach emphasizes
reforms of planning and state ad-
ministration and treats reforms
of incentives as a means of pro-
moting the implementation of
state plans. It advocates self-
restraint by state and party of-
ficials, but no basic reduction
in their power. Liberal econo-
mists and many enterprise man-
agers, however, favor a quite
different approach--creation in
at least part of the economy of
a self-regulating mechanism which
would reduce the need for state
or party intervention. In its
more extreme form, this approach
leads to a rejection of the com-
mand economy and substitution of
some form of market socialism.
Economic reforms are not
yet far enough along for these
two approaches to have raised
important practical issues. Even
as reforms progress, it may be
possible to combine elements of
a market economy in various ways
with elements of a command econ-
omy. Considerable differences
can be expected in the way dif-
ferent economic branches will be
managed--for example, management
of railroads is certain to be
more centralized than that of
shoe factories. Sooner or later,
however, each country will have
to decide whether to rely mainly
on a system of commands or
mainly on a self-regulating mar-
ket.
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Diversity In Economic Reform
The Soviet regime has been
unable to offer much guidance
for reforms of the economic sys
tem, partly because it does not
know how to deal with its own
problems. Khrushchev's attacks
on dogmatism and his Liberties
in interpreting "Leninism" helped
to break down ideological bar-
riers throughout the bloc and
encouraged change, but did not
give this change a clear direc
tion.
So the Eastern European
countries did not wait for the
Soviet Union. They Looked in-
stead to the West and also to
Yugoslavia, which has had con-
siderable success with a mixed
socialist system combining re-
Liance on the market mechanism
for current production with
state planning and control for
key investments and foreign
trade. They studied the earlier
experience of Poland and Czecho-
sLovakia. And they went ahead
with reforms to suit their in-
dividual economic and political
conditions.
Economic necessity and
political instability in Czecho-
slovakia have spawned the most
radical program in the bloc.
Economic stagnation since 1962
has convinced the regime that
thoroughgoing reforms are neces-
sary. Political divisions have
sharpened economic issues and
given considerable influence to
elements favoring extensive use
of the market.
The reform program grew
from a long and bitter conflict
between the Novotny leadership
and liberal elements within
and outside the party. After
suppressing the agitation for
reform which accompanied the
"thaw" of 1956, Novotny adopted
part of his opponents' program
in the decentralization of 1958-
60. Beginning in 1962 he was
subjected to a new wave of crit-
icism, which grew stronger as
economic difficulties multiplied
and became associated with an
intense political and cultural
ferment. Novotny was intran-
sigent at first, but then had
to give way, his position greatly
weakened. The party gave the
Liberals an opportunity to de-
velop and publicize their views,
and by the beginning of 1964
many economists were advocating
a form of market socialism.
The debate then raged with-
in the party, until the outlines
of a new system of management
were approved by the presidium
in September 1964 and by the
central committee in January
1965. Parts of the new system
have been introduced experimen-
tally in about one fifth of in-
dustry. By the end of next
year almost alL industries will
be using it. Considerable au-
thority will pass from bureau-
crats to producers, and greater
use will be made of the market
mechanism. As desired by the
liberals, enterprises are to
determine their own short-term
production plans, deal freely
with suppliers and customers,
and retain a substantial part
of their earnings for bonuses
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and investments prices are to
be set more rationally and some
of them are to be flexible; the
state is to concentrate on long-
term planning and to use mainly
indirect financial controls.
Other elements of the pro-
gram, however, especially the
formation of some 100 branch
monopolies to manage industry,
suggest that the regime intends
to retain the means for direct
control. Disagreements over the
application of these principles
are inevitable because of prac-
tical difficulties and differ-
ences in long-term objectives.
The outcome is uncertain, but
the severity of the economic
and political problems makes
the chances for a basic change
in the economic system greater
in Czechoslovakia than else-
where in Eastern Europe.
East Germany
East Germany is overhaul-
ing its economic system along
somewhat similar lines, but be-
cause the political leadership
is unchallenged, a substantial
reduction in the state's author-
ity over the economy is much
less likely.
The Ulbricht regime has
followed moderate economic pol-
icies since being forced in 1961
to abandon the unrealistic Seven-
Year Plan (1959-65) and was the
first in Eastern Europe to begin
introducing a "new economic sys-
tem," which is to be entirely
operative by 1966. The keynote
of the "new system" is "scien-
tific" (that is, rational) plan-
ning and management, and U1-
bricht, once a foremost practi-
tioner of "political" planning
and management by exhortation,
now can present himself as the
principal author of the "scien-
1:ific" approach. In sharp con-
trast to the situation in Czech-
oslovakia, there has been no
public criticism of the leader-
ship's policies; public discus-
sion has only elaborated on them.
The new system clarifies
the line of command. After Ul-
bricht had disbanded the indus-
trial ministries in 1958, the
responsibilities of the State
Planning Commission increased,
but effective control over in-
dustry was shared with the dis-
trict party authorities, who
already controlled agriculture.
The result was confusion. Now
there is a clear subordination
of enterprises to Branch Asso-
ciations (VVBs) and of the VVBs
to the State Economic Council,
the State Planning Commission
having been limited mainly to
long-range planning.
The key units of industrial
management are the VVBs (about
8D in number), which control
all enterprises engaged in pro-
duction of related goods, such
as machine tools, cotton goods,
and pharmaceuticals. Like enter-
prises, the VVBs are expected
to show profits. Each is to be
responsible for making its own
detailed plans, purchasing and
marketing, specialized research
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and development, and determina-
tion of appropriate methods of
production management. "'Eco-
nomic methods" of management,
such as profit incentives, are
preferred, but directives are
to be used where necessary.
The regime expects that the re-
vision of wholesale prices which
is nearing completion will per-
mit a great expansion in the
use of profit incentives.
The reorganization of East
German industry is administra-
tively sensible, but its effec-
tiveness depends entirely on the
continued support and self -re
straaint of the leadership.
There has been practically no
change in the total size of
administrative staffs either at
intermediate (VVB) Levels or at
high levels, or in the party's
professional apparatus, which
numbers some 30,000 people. The
Ulbricht regime appears to be
convinced that party organs
must change their mode of opera-
tion, but there are bound to
be frequent conflicts between
party officials and VVB managers.
In Poland a. cautious, cen-
trist regime has continued to
rely on the state bureaucracy
to make all important economic
decisions. Once the most eco-
nomically unorthodox country in
the bloc and still the only Com-
munist country where agricul-
ture is mainly in private hands,
Poland has played only a small
part in the recent drive for
economic reform.
Immediately following the
October 1956 revolution, state
controls over the economy were
reduced, and there was strong
agitation for a radical change
toward market socialism. As
Gomulka consolidated his politi-
cal position, however, he
squelched the liberals, halted
the economic reforms, and even
reversed some of them. Economic
difficulties during the past
two years have renewed interest
in reform, but the regime seems
interested only in making the
existing command system more
efficient.
The new approach to eco-
nomic planning and management
is probably partly responsible
for the improvement in economic
performance in the past year or
two but continued improvement
will tempt the regime to set
more difficult production plans.
As long as Ulbricht remains in
power and the apparatus of con-
trol remains intact, therefore,
the extent to which planning and
management will be rationalized
is uncertain.
Most of the current reforms
are weak. counterparts of those
in East Germany. Poland's
Branch Associations recently
have been strengthened, but less
so than the East German VVBs.
The emphasis is on rational
planning and on the adaptation
of management methods and incen-
tives to the particular condi-
tions of each branch. Poland
has introduced a unique system
for encouraging exports--in
many enterprises, bonuses for
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export production are related
to export earnings in foreign
currency. Profit incentives
are widely used in combination
with other incentives. The
chances are that the Polish
economy can get by for several
more years without drastic re-
forms, and the present leader-
ship is unlikely to give up any
more controls than it considers
absolutely necessary.
seems to be no immediate inten-
tion to move away from a bureau-
c:ra.tic, command economy. How-
ever, Hungary is experiencing a
growing shortage of labor and
increasing buyer resistance
abroad, and the regime has an-
nounced that it will consider
more fundamental changes in the
next two or three years.
Bulgaria.
Hungary
The Hungarian regime has
followed a. careful and pragmatic
approach, ready to introduce
unorthodox reforms but avoiding
sweeping changes. Reorganiza-
tion of industrial administra-
tion ha.s been limited to some
mergers of enterprises and re-
duction in the number of inter-
mediate administrative units.
On the other hand, Hungary in
1959 brought its prices more
closely into line with those on
the world market than any other
bloc country, and it was the
first (in January 1964) to charge
interest on the use of fixed and
working capital. A pragmatic
approach also is apparent in
the encouragement given to a
broad variety of incentive
schemes in collective farms.
Many collectives couple share-
cropping on an assigned plot
with a. version of the old Soviet
work-unit system.
This piecemeal approach has
worked reasonably, well and there
In Bulgaria, a. reaction to
the excesses of the Chinese-like
"].ea.p forward" of 1959-60 led
to sober economic policies, and
recently even to liberal experi-
ments. In 1963 much emphasis
was given in official statements
to "scientific" planning, and
a long-term program was announced
for merging industrial enter-
prises to facilitate specializa-
tion and technical progress. In
1964, the emphasis shifted to
market-oriented reforms. Fifty-
two plants, mainly in light in-
dustry, have been permitted to
base their production primarily
on contracts negotiated directly
with trade organs, and central
controls over these plants have
been greatly reduced.
These experiments are simi-
lar to those introduced later
in Soviet light industry. Bul-
garians plan to extend them to
all of industry, but it is not
clear how they will be applied
in producer goods industries,
where demand as well as supply
is planned in detail.
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Prospects for future re-
forms are highly uncertain be-
cause of the political weakness
of the Bulgarian leadership and
the absence of a pressing eco-
nomic need for basic reforms.
Because Bulgaria is still at a
relatively early stage of in-
dustrialization, it has consider-
able reserves of labor to cover
up the inefficiency of its eco-
nomic system.
Rumania in recent years
has been the most successful
economically and the most con-
servative institutionally of the
countries of Eastern Europe.
In essence, Rumania retains the
same centralized system of ad-
ministration it had in the early
and mid-1950s--a clearly defined
hierarchy headed by economic
ministries.
Economic success especially
an average annual rate of indus-
trial growth of about 14 percent
a year since 1958--is one of
the main reasons for the lack
of interest in changing economic
institutions. Although the cen-
tralized economic system is not
in itself mainly responsible for
this good performance, at the
present stage of Rumanian eco-
nomic development it has the ad-
vantage of facilitating the con-
centration of resources on proj-
ects of high priority. More-
over, the Rumanians have by-
passed some of the inefficiency
of their system by importing
equipment and know-how on a large
scale from the West, and have
bolstered popular morale by fol-
lowing nationalistic economic
policies.
The outlook is for contin-
ued experimentation and change,
and neither theory nor experience
is a reliable guide for judging
the outcome. Marxist theory is
of no help at all, and is being
increasingly ignored in Eastern
Europe's search for a more effi-
cient economic system. Western
theory has little to say about
"mixed" systems. Experience
seems to show that partial,
poorly integrated steps like the
early Polish and Czechoslovak
reforms do more harm than good
to the economy, but no one knows
how far reforms have to go to
be really effective. Electronic
computers may conceivably turn
out to be the salvation of com-
mand economies, or it may be
necessary to rely as much on the
market as Yugoslavia has done.
There is serious doubt that
a middle way can work well or
that a command system, with or
without computers, can cope ef-
fectively with the complexities
of modern economies. One thing
is clear--greater efficiency
requires not just a release of
producers' initiative, but also
good guidance and discipline.
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A market is self-regulating,
with competition as the police-
man. But without a. market the
problem of guiding and control-
ling the innumerable decisions
that planners cannot make re-
mains unsolved.
Past experience also sug-
gests that economic reforms in
Communist countries tend to be
ineffective unless accompanied
by major institutional changes.
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As long as the apparatus of state
aind party control remains strong,
there is a. tendency to revert
to old ways whenever things go
wrong. In any case, the funda-
mental questions are political
-?-how important is it to a, re-
gime to increase economic effi-
ciency; and how much deviation
from its policies and priori-
ties will a, regime tolerate?
Each country will have to hunt
its own way.
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