JPRS ID: 9751 EAST EUROPE REPORT ECONOMIC AND INDUSTRIAL AFFAIRS

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JPRS L/9751
22 May 1981
East Euro e Re ort
~ p
ECONOMIC AND INDUSTRIAL AFFAIRS
CFOUO 5/81)
FBIS FOREIGN BROADCAST INFORMATION SERVICE
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JPRS L/9751
2 2 May 19 81
EAST EU ROPE REPO RT
~ ECONOMIC AND INDUSTRIAL AFFAIRS
(~ouo 5/si)
CONTENTS
C7ECHOSLOVAKIA
Influence of Banks on Capital Aeset Replacement Diacussed
(Pavol Gallo; EKONOMICKY CASOPIS~ No 2, 1981) 1
POLAND
Polish Economic Ills Analyzed
(Bronislaw Minc Interview; IL SOLE-24 ORE, 31 Mar 81) 12
_ a - [III - EE - 64 FOUO]
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CZECHOSLOVAKIA
INFLUENCE OF BANKS ON CAPITAL ASSET REPLACEMENT DTSCUSSED
Bratislava EKONOMICKY CASOPIS in Slovak No 2, 1981 pp 118-127
[Article by Pavol Gallo: "The Influence of Banks on the Reproduction of
the Enterprises' Capital Assets"]
_ (Text] The banks as credit organs are able to influence the reproductio~n ob-
of the enterprises' capital assets only through credit, by using it as
jective economic cateqory--as the form of solving the contradiction betweet;
the production time and turnover time of goods, or between the need and
temporary shortage of resources, in accordance with the sources of the in-
dividual types of credit, with the duration for which these sources are
made mporarily available, and with interest as an essential element of
credit.
_ Such influence by the banks has certain specific conditions. The banks' ac-
tivity is strictly defined, and t:~~~y may not depart from it. Their activity .
can neither be narrowed nor broadened arbitrarily. Thei~ place or task with-
- in the economy is accurately defined, similarly as the task of the produc-
tion enterprises to produce goods, and the task of the trade enterprises to
arrange for the exchange of the produced goods. All economic units must
fulfill their task, consistently employ cost accounting and, in their rela-
tions with the banks, see to it that credit is used i.n accordance with its
intended purpose. At the same time the agencies that supervise the enter-
prises, and the central organs must create the conditions necessary for the
smooth operation of the enterprises.
This is the aspect from which we must approach also the solution of such
problems in the area of capital asset reproduction as, for example, inade-
quate utilization of existing capital assets, assertion of the requirements
to modernize, reconstruct and renew capital assets, the use of credit to
~ finance the replacement of capital assets, etc.
The solution of these problems requires that ~~e analyze the basic questions
of the enterprises' cost accounting as a prerequisite for effective influ-
ence by the banks, the creation of conditions for the smooth operation of
the production process as an essential element of the normal application of
cost accounting, the utilization of credit, and finally the questions of
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the forms ~.n which the law-conforming in�luence of credit manifests itself,
with special attention to the influence o~ credit on the reproduction of
capital assets.
1. Basic Questions of the Enterprises' Operatio~ Under Cost Accounting as
a Prerequisite for Effective rnfluence by the Banks
Socialist enterprises are obliged not only to preserve, but also to syste-
matically expand the economic assets entrusted to them by society. This ob-
ligation stems from the objective economic law of expanded socialist repro-
ducti~n.
Admittedly, the productive forces do not develop evenly in every branch.
This applies also to the reproduction of a highly efficient structure of the
- national economy. In a given year, therefore, the level of the productive
forces cannot be the same in all branches, sectors and enterprises of even .
a specialized national economy.with a highly effici~.nt structure. The ne-
cessity of reproducing the productive forces at the world level in all
branches, however, leads to their systematic equalization. Which means that
' here, over a period of several years, the rate of return can and must be the
same.
The requirement of the same rate of r~turn over a period of several years
is determined also by the fact that all economic units must utiliae their
productive forces~equally,~and thereby contribute equally to expanded social
reproduction. After all, it would not bP right if society did not require
identical results from all. economic units operating under identical condi-
tions. Finally, an identical rate of return is also an objective criterion ,
for evaluating the work of the enterprises.
It is not easy to create for all the socialist enterprises such conditions
of operation that enable us to demand identical results of them, nor is this .
a problem that can be solved once and for all. However, this should be one
of the basic features of the overall concept of building a socialist econ-
omy, an economy of a higher socioeconomic system. _
If we were to allow persistent mism.anagement of the socialist enterprises and
the elimination of such mismanagement by liquidating them, this would also
mean the absence of accountabi.lity for enterprise ~mployees, the toleration
of a situatior in which some enterprises survive at the expense of others.
This would disrupt the economic mechanism and lead to socioeconomic problems.
The means for preventing such problems is the economic-financial system for
the sociaZist enterprises' operation, i.e., cost accounting as an objective
economic category of the socialist economy. At present, however, measures
are necessary to enforce cost accounting and ensure its consistent applica-
tion, so that it may become a system that excludes any absence of account-
- ability and creates conditions for comprehensive incentives to stimulate
maximum output and economic efficiency.
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The objective economic law o~ distribution in accordance with the work per-
formed, which aims to satisfy legitimate needs, applies to individuals as
well as to groups of workers and enterprises. Furthermore, the enterprises ~
can obtain through exchange only the equivalent of what they produced.
If the enterprises are to survive and develop further, which is sirnultane-
ously a condition of expanded socialist reproduction and of society's de- -
vel~pment, they cannot report arbitrary outputs. The enterprises themselves
cannot set the criteria of their own activity. These criteria are deter-
mined by the requirements of society as a whole, incorporated in a system _
of criteria for deciding the alloca~ion of material and financial resources,
for evaluating and stimulating the enterprises. Credit conditions also be-
long in this system of criteria.
In order to preserve the economic assets that society entrusts to the en-
terprises for reproduction and further growth, the losses occurring at the
enterprises must necessarily be reimbursed as they arise--immediately and
, with approrpriate accountability of the individual employees or groups of
employees who caused the losses. This presupposes certain conditions,
namely: strict definition of the activity of every employee, skills com-
mensurate with the assigned work, continuous control of the work performed,
appropriate resources for stemming the "loss process," and existence of
- contingency funds or insurance funds for employees and groups of employees.
In agreement with the priciples of cost accounting, the enterprises must
form the objectively necessary funds of monetary reso~irces, ~~tilize the
temporarily idle monetary resources of these funds, an6 finance through _
credit the enterprises' temporary need of financial resources. _
The funds of monetary resources in question are as follo~is: (a) for re-
placing the worn-out economic assets, and partially foy manpower reproduc-
tion; (b) for the expansion of economic assets, and partially for the ex-
- panded reproduction of manpower, for increasing the size of the work force _
and upgrading its skills; (c) for financing joint needs and the needs of
society as a whole; (d) for financing losses and unforeseen needs losses
resulting from natural disasters, and other losses not attributable to the
enterprise employees.
The enterprises must use the monetary resources of their formed funds in
the Same way as their`other economic assets, to attain the same rate of re-
turn. The form of their use(motion) is objectively given. This form is
credit. Through the banking system (by means of deposits on bank accounts),
the enterprises lend their temporarily idle monetary resources to other en-
terprises that are able to use these temporarily idle resources at the given
time. For at every enterprise, due to the unevenness of the economic pro-
cesses, there occurs a contradiction between the pro3uction time and turn-
over time of goods, respectively between the need and temporary shortage of
monetary resources.
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In ~rinciple, the enter_prises could always finance their expanded reproduc-
tion fxom their internal resources (depreciation, profit, and the proceeds
from the sale of caQital assets) and �rom credit. Tt is merely necessary
to form the conditions for this. zn aqre~ment with cost accounting, the
enterprises should be allowed to retain the~entire amount of depreciation.
Even if occasionally the output of certain goods is curtailed, it is not
absolutely essential to reduce the economic assets of the enterprises,
provided the enterprise collectives take over other production programs.
From their internal resources and by using credit, the enterprises could
finance also large investment proje~ts. They only have to be enabled to
gradually accumulate resources, primarily fro~. depreciation and profit. A
no small sourres of financing could also be the proceeds from the sale of
capital assets that the enterprises do nct need for the fulfillment o~
their production tasks, of capital assets that are obsolete or worn out,
and of unused and unneeded capital assets held in reserve. Of course, the
allocation and use of enterprise profit would have to be modified, in ac-
cordance with this solution for financing the long-term development of the
enterprises,
In the case of large investment projects--e.g., construction of a new
plant--it would be possible to use also credit on a large scale. It wo~ld
be repaid not only from the relatively high profit of the newly built
plant and its depreciation, but also from the profit and depreciation of
the entire enterprise.
A further comment should be added to the question of using the temporarily
idle monetary resources of the enterprises. In a departure from gresent
practice, the enterprises should be able to use these temporarily idle mon-
etary resources for any planned need, regardless for what purpose the mone-
tary resources are intended. At present, for example, credit for the ex-
panded reproduction of working capital is being repaid with the monetary
resources disengaged from the turnover of working capital, and with that
proportion of profit which is allocated for the increase of working capi-
tal. In addition to these sources, an enterprise should be allowed to use
any of its temporarily idle monetary resources to repay the credit. This
means also the monetary resources intended for the reproduction of capital
assets.
Failure to use all temporarily idle monetary resources is in conflict with
_ the necessity of fully utilizing internal resources, with the possibility
of reducing production costs, and with the efforts of the enterprises to at-
- tain the highest possible (deserved) profit. Namely ~he entex'p_ises lose
the difference between the interest that they pay on credit, and the inter-
est that they receive on their temporarily idle monetary resources deposit-
ed with a bank.
Any regulation of the enterprises' financial management that separates the
monetary resources intended for the reproduct ion of capital assets, from
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the monetary resources eax~marked for the xeproduction of working capital,
results ~n that an enterprise must apply for credit even when it has suf-
ficient monetary resources on its account with the bank.
Separation of the monetary resources for the reproduction of capital as-
sets, from the monetary resources for the reproduction of work~ng capital,
stems from an effort to thoroughly ensure the planned proportion~ of both
types of economic assets of the enterprises, and thereby also the planned
proportions of the entire process of social reproduction. This same objec-
tive, however, could be ensured al~o without the mentioned administrative
regulation.
The monetary resources that are disengaged from the turnover of capital as-
sets and are intended for their reproduction could be used also for the re-
production of working capital, because such monetary resources will be tem-
porarily idle at some enterprises only if the planned proportions are ob-
served. Similarly the monetary resources that are disengaged from the
turnover of worki.ng capital and are intended for its reproduction could be
used also t~o acquire capital assets in their physical form. In this way .
the unnecessary operations could be eliminat~d that complicate the work of
both the enterprises and the banks.l
1The application of cost accounting in enterprise management contributes in
large extent toward ensuring the continuity of the reproduction process, but
. at the same time it presupposes that the enterprises' supervising agencies
and the central state organs form in a planned manner the conditions for the �
proportional develo~ment of the national economy. The quality of the nation- ,
al economy's planning and management must be i.mproved, the questions concern-
ing the competence and managing activity of the enterprises' supervising
agencies must be resolved, the shortcomings must be eliminated in cooper-
ation among investors, planning and design institutes, and contractors, etc.
The solution of these and similar problems, the creation of conditions for
the continuous supply of the enterprises and for ensuring their needs in
general, for the smooth course of the entire process of social reproduction
and of the aggregate social product's realization, are a prerequisite for
the normal application of cost accounting and the influence of bank credit.
These problems were discussed in detail at the sixth session of the CPCZ Cen-
tral Committee, in 1977. See: "Report of the CPCZ Central Committe Presid-
ium on the Construction Industry. J. Kempny: The Great Mission and Responsi-
bility of the Construction Inudstry for the Further Development of the Ecori-
omy and of 5ociety" (PRAVDA, 18 March 1977).
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~ 2. Basic Questions o~ Using Credit, Primarily for the Repzoduction of
Capital Assets
Credi~ is the form of resolving the contradiction between the production
time and turnover time of goods. Tt serves to bridge the temporary finan-
cial needs of the economic units.
- ":hrough credit, a creditor economic unit temporarily lends certain re-
sources to a debtor economic unit. Tf the borrower were to retain the re-
sources longer, the creditor economie uni~ would be short of resources.
It would have to curtail operations and cut back its activity, and even the
supply of the needs of individuals would be limited.
If the debtor economic unit were to permanently retain the resources, the
creditor economic unit's activity and the satisfaction of its needs would
- be permanently reduced by the amount loaned. The credit relationship would
change into some kind of financial relationship, a s~rt of subsidy. The
difference would be merely that the creditor economic unit would receive in-
terest on the loan.
One might object that not all resources provided as credit must be repaid
within a certain time. The own resources of banks are cited as an example.
Such cases, however, are not intrinaic to credit, especially not under so-
cialism.
Nor are such cases unavoidable, provideb the banks have their own resources ~
intended only for lending. The state alone can allot the enterprises credit
to finance their permanent need of resources. The banks--similarly as the !
production, trade and other enterprises--must merely have reserve funds to ;
cover possible l~sses.
The reserve funds, which should be formed only to the amount of the possible
losses and should be used to cover these losses, are temporarily idle re-
sources by their very natur~. Therefore the reserve funds, too, should be
used to provide credit, but not credit to finance the permanent needs of
the economic units.
The mentioned facts justify the conclusion that it is economically unwar-
ranted to substitute credit for the internal resources of the enterprises,
or to finance partially'or entirely with credit their permanent needs. This
applies to all enterprises, and hence also to construction and installation
enterprises that undertake capital construction.
It is likewise improper not to nse cr~edit to~resolve the cont"radi~tion be-
tween the production time and turnover ~ime of goods. ~'ailure to do so
would mean d~.sregarding two economic and finwr~cial categories: the economic
units' internal resources intended to finance cheir permanent needs, and
credit intended to finance their temporary needs.
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The volume and structure of credit are determined by the volume of the
sources of credit and by their structure that expreGses the strucutre of
material values whose flow credit is intended to mediate. Which means
that the banks cannot provide any arbitrary volume of credit in any arbi-
trary str,acture. They can provide only the volume of credit and in the
structure that correspond to the sources of credit and the sources of thE
~ individual types of credit: the sources of credit for the reproduction of
capital assets, working capital, durable consumer goods, and nondurable
consumer goods.
The banks cannot provide credit for any arbitrary length of time, only for
the term determined by the factors of the individual types of credit.
Repayment of the credit within the agreed term can be secured primarily
with monetary resources disengaged from the turnover of the credit-financed
plant, by insuring the credit-financed plant, by providirig credit only di-
rectly ~:o the credit applicant, by assuming a guaranty fo�r the debtor, and
by employing the principle of a single crediting organ.
Credit is bein g used at present not only to resolve the contradiction be-
tween the production and turnover time of goods, but also to finance a part
of the enterprises' permanent need of working capital. The main argument
offered to justify ~his practice is that the bank's credit relations with
the enterprises is broadened in this manner, enabling the bank to exercise
- closer control over the operations of the enterprises.
This practice disregards two objective economic categories: credit, and
cost accounting. Here credit is used on an artificial basis, and from the
positions of subjective views. Credit, by its very nature, is intended
merely to resolve the contradictions between the production and turnover
time of goods, r.~;~pectively to finance the economic units' temporary needs,
' and bank control of the economic units can be exercised only on the basis
of credit arising in this manner.
Starting out from the mentioned practice, the most extensive and most in-
tensive bank control would exist if all internal resources of the enter-
prises were replaced by bank credit. The approach up to now makes this
possible, because the limits of credit have been exceeded. The substitu-
tion of credit for internal resources was employed extensively in the past.
But it was justifiably criticized, and rejected as improper and inefficient.
Cost accounting is being violated at present by the fact that credit is be-
ing forced on the enterprises, and they must pay interest on it. Credit is
often used also to let bank control fill the gaps in the application of
~;ost accounting, to supplement the inadequate self-interest of the Enter-
~~rises in t heir operations. Tnstead of creating the conditions for com-
pliance with cost accounting, and of elaborating the questions of the en-
terpise employees' monetary incentives and accountability in general, the
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bank's work is thus substituted for the practical activity of the enter-
- prises. At the same time it is clear that the bank cannot do the enter-
prises' work for them. ~redit and in~erest, no matter how high, will nev~
- er have the necessary ef~ect if the enterprises do not �ully comply with
cost accounting, if they do not ke~p track of every koruna. This again re-
quires breaking down the system of monetary incentives and accountability
to every employee of the enterprise.
If we consider the entire reproduction process and the bank's role, credit
must be provided for the enterprises with due respect for the essential
proportions of the social reproductxon process, i.e., only from the tempor-
_ arily idle monetary resources of other enterprises. Here the amount of
credit for the reproduction of capital assets is determined by the monetary
resources disengaged from the turnover of capital assets and by that pro-
portion of profit which is earmarked for the expanded reproduction of capi-
tal assets. In other words, credit for the reproduction of capital assets
must be provided from the monetary resources that '.he enterprises accumu-
late or must accumulate, _~r the renewal and particularly for the expanded
reproduction of their capital assets, and for their development in general.
The volume of the sources of credit for the reproduction of capi.tal assets
simultaneously determines also the objectively necessary proportion of such
credit within the sources for financing the reproduction of capital assets,
or the enterprises' capital construction.
The use of credit for individual investT~.~nt projects, just as of all the .
other sources for financing investments, stems primarily from the need of
building a highly efficient structure of the national economy, in combina- ~
tion with international economic integration, and from the place of the
national economy within the complex of the CEMA community's economy.
Under conditions when it is inevitable that the enter~prises equally util-
ize their economic resources and attain a certain rate of return, the in-
vestor enterprises themselves can ensure--with the effective assistance of
their supervising agencies and of the central managing organs--maximally
efiicient utilization of all economic resources, and hence also of the
sources for financing investments, including credit.
- It is questionable whether the banks, even if they were to specialize by s
individual branches and sectors, could better master the problems of the
investor enterprises than these enterprises themselves and their supervis-
ing agencies. The banks could hardly do so even if they had the appropri-
ate experts- -mechanical, chemical, agric~ltural engii.eeYs, etc --because
the employees of an enterprise know best its problems and have, or should
- have, moMetary i.n~entives based on the enterpr~3e's operation.
After such a thorough review of an ~nves~ment projects, in combination
with monetary incentives and accountability, the use of credit as one of
the sources for financing investments is incorporated in the plan that
the competent organs approve.
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Finally, a prerequisite for the proper use of credit is the application of
cost accounting at the banks.
The application o~ cosic accounting as an objective economic category of
the socialist economy is not a matter of arbitrary choice. Tt must be em-
ployed wherever the objective needs so require. zn general these needs
can be defined, as the needs et distribution, in accorda.~ce with the objec-
, tive economic law of distrik~ution based on p~rfo~mance. Which means tha~
cost accounting must be used, necessa~ily and unavoidably, in the entire
sphere of production as well as in the entire sphere of circulation--in
trade and within the fir?ancial (banking) system. On the other hand, it
cannot be employed in the area of public cor~sumption or, more accurately,
in the area of publicly financed consumption.
The application of cost accounting by enterprises in the sphere of produc-
tion is generally recognized. Its use by trade enterprises is likewise
recognized. Unclarified remains only the questi.on of using cost account-
ing in financial institutions, insurance enterprises and in banks. There-
fore it will be desirable to at least point out the basic facts that de-
termine the use of cost accounting in banks.
The activities of production enterprises, rrade enterprises and banks are
mutually intelinked. If the social reproduction process is to proceed
smoothly and in conformity with the plan, the trade enterprises must medi-
ate the exchange of a growing volume of produced goods, and the banks --on
the bas is of the increasing sources of credit and demand for credit--must
mediate a growing volume of credit that is objectively given by the in-
creasing volume of output. Proc~uction enterprises, trade enterprises and
banks create an integral whole, and therefore they must have an equal self-
interest in the fulfillment of their tasks.
The banks are responsible for ensuring that the credit relations do not
exceed the period of time for which the sources of credit were made tem-
porarily available.
The mediation of credit constitutes the banks' output. It involves oper-
ating costs--expenditures of live labor and embodied labor--that must be
recovered. The banks' development requires appropriate resources--i.e.,
profit--in the same way as at other enterprises in the spheres of produc-
tion and circulation.
From the mentioned facts it follows that it is 8esirable to employ cost
accounting at banks. This is generally ~ecognized also in practice. I~
all socia:list countries, the banks have cost accounting incorporated in
their statutes. Zts application, however, raises several open questions,
but these aze not peculiar to banks alone.
Consistent application of cost accounting in the spheres of production and
circulation requires solving parzicularly the question of pricing, ~he use
of depreciation by the enterprises, the share of profit that the enterprises
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may retain, the system of the individual employees' monetary incentives
and accounrability, and the use of in~urance~as an objective economic and
financial category.
3. The Forms in Which Bank Credit's ~egular Influence on Enterprise Oper-
- ations Manifests I tself, With 5pecial Attention to the Reproduction
of Capital Assets -
Bank credit can exart effective influ~nce only if cost accounting and a
system of monetary inc entives and a~countability--in a breakdown by indi-
vidual employees--are consistently employed at the enterp~ises, parallel -
with forming and observing the proportions of the process of social repro-
duction, during the so cial product's conti~nuou~ realization and with the
use of credit as an ob jective economic category. The forms in which this
influence manifests it self are diver~e. Let us mention at least the prin-
cipal aspects of bank credit's influence in the reproduction of the enter-
prises' capital assets.
If the enterprises are to attain a certain profitability, they must fully
utilize their existing capital assets (operating them in two or even three
shifts per day), and they may expand their capital assets--with the pos-
sible use of credit--only if their profitability will develop favorably.
While providing monetary incentives for eve~~y employee, the enterprises
intensively and systematically apply the principles of comprehensive so-
cialist rationalization, modernize, reconstruct and renew their capital
assets, and flexibly replace their old and obsolete capital assets with
more efficient ones. They do not always have sufficient internal re-
sources to do so, and in such cases credit can be of considerable help to
them. If the investment projects are very efficient and offer a high
rate of return, ;:he bank may provide credit even if the enterprises do
- not contribute any internal resources.
Highly ef.ficient investments are usually the ones that permit rapid prac-
- tical application of advances in science and technology, rapid growth of
the formation of mater ial and financial resources, savings of manpower,
and a rise in the soc i al productivity of labor.
The effect of credit, its contribution to the entergrise, stems from the
fact that expanded reproduction of economic resources can take place even
when the enterprise does not yet have sufficient internal resources for
this purpose, and that credit--through its share in financing the expand-
ed reproduction of economic resources--contributes toward improving the
enterprise's economic results. In general the effect .:redic could be
measured by comparing the situations of two enterprises of essentially the
same size, at the beginriing and the end of a given period, where one of _
the enterprises uses credit while the otha~ 3oes not. Although this is a
theoretical study, in principle it comprehen:ively defines the efficiency
of credit.
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The effect of credit multiplie~ with the growth of investment projects, pro-
vided they are efficient projects. At present this applies particularly to
investment projects that sexve to gradually develop a highly efficient struc-
ture of the national economies in ~he individual socialist countries, and
simultaneously a highly efficient structure of the economy of the CEMP: r.om-
munity.
A highly efficient structure of the national economy make~ it possible to re-
solve the contradiction between the growth of large-series production and the
domestic market's limited purchasing power. Tn the same manner it resolves
also the contradiction between the need to rapidly develop the productive
forces on the one hand, and the practical inability of a single country to
develop all the necessary branches of science, technology and production.
With the realization of a highly efficient structure of the national economy,
the social productivity of labor rises at a fast rate. This permits the
formation of real sources of credit, which are a prerequisite for stable
= monetary development.
Interest is paid for the use of credit. Al1 economic units, and hence also
_ the enterprises, strive not only to utilize credit efficiently, but also to
repay it as soon as possible. The enterprises are able to do so only if
they comprehensively make their operations more economical and take into ac-
count all the factors of raising labor productivity and improving their eco-
nomic results.
Conclusion
If we summarize the results of our investigation into the questions of the
effective influence of the banks, respectively of bank credit, on the be-
havior of the enterprises in their economic activity, with special attention _
to the reproduction of capital assets, we come to the following conclusions:
1. Credit significantly influences the actions of enterprises only if they
consistently employ cost accounting as an objective economic category of the ~
socialist economy, employ a system of monetary incentives and accountability
in a breakdown by employees, observe the proportions of the process of so-
cial reproduction and treat credit as an objective economic category.
2. Enterprises resort to credit only when they have exhausted their internal
resources, and they strive to repay their credit as soon as possibie.
3. Credit significantly contributes toward the development of the enter-
prises, toward the expanded reproduction of their economic resources, and
thereby also toward increasing the economic results of the enterprises.
4. Credit's contribution grows commensurately with the size and effective-
ness of the investment projects.
5. By helping to finance investment projects that raise the social produc-
tivity of labor, credit significantly influences the favorable development
of the currency, i.e., its stability and the rise of its purchasing power.
COPYRIGHT: VEDA, Bratislava, 1981 11 '
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POLAND
POLISH ECONOMIC ILLS ANALYZED
Milan IL SOLE-24 ORE in Italian 31 Mar 81 p 3
[Interview with economist Bronislaw Minc, Warsaw University, by Carlo
Boffito, place and date not given]
[Text] Among leading Polish economists, Bronislaw Minc is perhaps
most outstanding by reason of his enormous experience; he is also the
author of a great many books, some of them published in Eastern Europe,
in the Soviet Union, and in China. Feltrinelli brought out the It alian
version of his "The Political Economy of Socialism" (1967) and of his
"New Economic Policy" (1977)� Until 1953 Minc headed the coordinating
section of the State Planning Committee, and from 1g53 to 1968 was di-
rector of the Economics Institute at the Polish Academy of Science.
Since 1948 he has been a professor at the Warsaw School of Advanced
Planning ar~d Statistics.
- For all these reasor~s, we thought it would be a sound idea to interview
an economist of his stature and experience, since he could be of great
help in explaining the evolution of economic thinking in the socialist
countries and in shedding some light on the positions their economists
are taking today in the aftermath of the recent crisis in the socialist
economy.
_ _
- - -
[Question] You had a voice in the current debate in Poland on economic
reforms; what is your position?
[Answer] I believe that the bureaucratic system of corporate management
by the state is hopelessly inefficient; it is, if not the sole cause,
certainly one of the prime causes of the pr~esent state of affairs.
[Question] In what way?
[Answer] Well, you have only to ]~ok at the most obvious aspects of
this crisis. The product ion structure does not match the needs of the
~eople; the quality of production is generally poor; production ca-
pacity is not being fully utilized; cooperation among companies is
inadequate, and often that lack brings about actual plant shutdowns;
it is almost routine to encounter overproduction in several sectors ac-
companied by a bottleneck, perhaps even a prolonged cutoff in supplies
of certain products; ~he investment level is too high; it takes far
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too long to install new production equipment, and that in turn means
excessively long delays in the utilization of large amounts of capital.
[Question] Just what are the basic causes for these difficulties in
production?
[Answer] I am going to try to show you, with a little sketchy diagram,
the essential f actors in the operation of the socialist economic sys-
tem as it was originally designed and in the revised versions adopted
over the past 1$ years or so in the socialist countries. In the first
column you see the major economic activities: as~ertaining the current
level of production, establishing the v olume and structure of invest-
ments and the price structure.
The other two columns identify the agencies which; in the various so-
cialist economic systems, make decisions on production, investments,
and prices; such agencies may be monopolies or competitive (assuming
that they exist in a socialist economy), and thP state. In the tradi-
- tional socialist economy (see Table 1) it is the state that establishes
production, investments, and prices. However, the state may regulate
the current level of production in plants only indirectly, through the
system of success indices; in actuality, the state does not have ei-
ther the technical and managerial capacity or the necessary information
to act in any other way. In other words, the central authority sets an
index which pushes the plant to fulfill the plan and upon which depend
~~oth tlle base pay and the bonuses for the plant m.anagers. So then
,~at happens? By setting both prices ~ id indices the state determines
t.he volwne oF production, but the companies have a good deal of discre-
i.ion in tailoring the product mix, and therefore they give priority not
to the preducts people want, or to those necessary for economic growth,
~~u.t rather to those products which wi11 let them maximize the index to
,,r~ic}i wages and bo..uses are pegged. As a consequence we have on the
one liand widespread waste of manpower and of scarce materials, and on
the other a perpetually unsatisfied demand: the root cause. of the
costly and inadequate supply is the bureaucratic system of using indi-
ces to control companies.
~Qu.estion] Even in Italy we know that in the traditional socialist
economic system indices beget distortion in supply; the best known
instance is the case of a nail manufacturing plant whose index is
the tonnage of its output: that plant will turn out mainly very large
nai.l.s, thus wasting iron and idling workers whose jobs require small
nails. But weren~t the~economic reforms introduced specifically to
correct these flaws?
i_Ar.~~~:cr] Reforms have invariably promised to replace bureaucratic in-
tervention with economic tools (taxes, flexible prices, interest r~ates,
_ etc.), but they never did scrap the bureaucratic system of controlling
companies through the index, and until yo~x do away with that system
you are iiot going to be able to change anything in any substantial way.
L,et's go back to the diagram we used for the traditional economic sys-
,c;m, and look at Poland. The 1973 e -.,mic reform (Table 2) expanded
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TABLE 1- Traditional Socialist System
Companies
Monopolies Non-Monopoly State,r
Production X
X
- Investments x
Prices
TAB~,E 2- Economic System as Reformed in 1973
Companies
Monopolies Non-Monopoly State
Production X X
Investments X X
Prices X X
TABLE 3- 'Little Economic Reform' of November 1980
~ Companies
Monopolies Non-Mon~poly S~tate
Production X
Investments X
Prices X
TABLE 4-'Big Economic Reform' now under discussion in Poland
Companies
Monopolies Non-Monopoly State
Production X
Investments X X
Prices x
TABLE A Socialist Economic Svstem Without Success Indices
Companies
~ Monopolies Non-Monopoly State
Production X X
Investments X
Prices X X
- 1!~
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r~tc ~rrl~ttw u~r~ ULVLY
t;he discrotionlry in-house funds, which meant that companies could de-
cide for L-hemselves on a portion of their investments; they were also
granLed some leeway in fixing prices. The so-called little reform, in-
troduced in November 1980 (Table 3) took those prerogatives away from the
companies, in view of their inf lationary nature and, according to the
already published official plan, the "big reform" (Table 4) will allow
companies to decide upon their investments, but will return the authority
to set prices to the state.
[ Question ] What happens to the indices?
[Answer] According to the 1973 reform the major success index for a
company was ttie value added rate, to which the base pay was pegged on
a scale that varied from one sector to another. Under the '~little re-
form," ~.3 percent of any increase in net product will go into the base
pay fund, while any decline in net product will come out of it. Under
the new big reform the index would be cash flow or profit. These,
thou~;h, are still annual indices which give companies an incenti.ve to
c}ioose a supply structure which does not answer to the needs of the
economy, but does, above all, maximize their index, whatever it may be:
As a consequence you get distortions in supply and widespread shortages
which create cumulat ive difficulties and hamper the operations of the
economy as a whole. Furthermore, the indices, since they are perforce
~;hort-lived, p~~ a brake on technical progress and on the introduction
o~' new products: if an innovation will bE profitable in the long run
~ ui no~t; in the short term as is usually the case with innovations
~~~ill be shunned because it will lowF~ the yearly index. And there
~~~~~u have the reason for the sluggishn~ss of technical progress and for
f~li~; wretched quality of products endemic in the socialist economy.
Even if the company management wanted to do a better job, the system
~~~ould force them to do a bad one.
~
LQuestion~ What, in your view, might be a way out of this situation?
~Answer] T11e solution can be founcl only in total abolition of the
_i.ndex system. According to the diagram used before (Table setting
:l r:vels of current production would be left to the monopolistic and non
tiionopolistic companies (asswning we manage to reduce the high level of
cotlcentration we have to.day) . To get rid of the supply distortions we
must increase compani-es~ independence; to put them in a position where
they could afford to take risks and make innovations we must extend
their time horizons. The goal of companies must not be maximization of
their short-term indices, but satisfaction of demand; and the only way
t.o achieve this is by allowing the companies to s~ek an oN~imal profit,
by which I mean to optimize their profit over the loiig term.
~~u~~stion] How sho uld investment levels and prices be set, then?
[Answer~ Investments should be determined by the stat~ through the
bar~ks, which would have to provide scarce financial backing to compa-
nies which maximize satisfaction of the people's needs while respecting
i,i~e principle of long-term profitab'' ~ y. Self-financing should be
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confined to small investments in plant modernization; the central
role should be played by investment analysis done by the banking sys-
tem; the role of interest rates would also be revived. The state
should, finally, retain control over prices in the monopoly sector.
- [Question] What you would have then would be a system of market so-
cialism in which companies would operate under the discretionary con-
trol of the banking syste~n~t' is that right?
[Answer] I should not like to use the term "market socialism" because
in the system I am proposing investments, and hence future production,
would be decided upon not by the companies, but by the state through
the banking system.
[Question] What about distribution of profits?
[Answer~ Wages would be set as they are in the capitalist system, by
- means of negotiations with the unions. In Poland, wages are made up
of two parts: the fixed portion, which is considered income, and the
variable portion (pegged to the companies' success index), which is
the result of the manipulations I have been talking about. It is bet-
ter therefore to use the collective bargaining system, which has long
been thoroughly ~ested in the capitalist countries.
[Question] It seems to me, though, that to get your plan adopted you
would have to change the role the Party plays in the economy.
[Answer] Of course. Although I don~t want to minimize that problem,
which is a very big one, elimination of the index presupposes a change
in the role of the Party, which now cor.trols all corporate economic ac-
tivity through the bureaucratic index system.
[Que~tion] The Party would continue to exercise its control through
the banking system though, wouldn~t it?
[Answer] My proposal consists in adapting capitalist efficiency to the
. requirements of a socialist society. The nature of the system I pro-
pose is socialist in that it is based on state ownership of the means
of production: that state control would not be eliminated, but it would
be streamlined and made efficient.
COPYRIGHT: 1981 Editrice Il Sole-24 Ore s.r.I.
618z
Cso: 3104/234 END
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