Socialism and the Centrally Economy: Future Prospects

Future Prospects In 1990 it became clear to many Soviet citizens and politicians that perestroika was promising more than it was delivering. The waiting lines for goods and services were as long as ever. Soviet citizens still had their bank accounts and pockets loaded with rubles that could buy little. There were few goods available in the shops. The poor, and possibly deteriorating, conditions were leading to stronger demand that the Soviet Union move more quickly to a market economy, as was being done in Poland. There are a number of basic problems with the perestroika reforms. 1. Private ownership of the means of production is limited mainly to cooperatives and has been further limited by bureaucratic regulations. A reform in 1990 allowed lifetime leasing of land, but land could not be bought or sold by individuals. 2. Hiring of workers by cooperatives and other private enterprises is limited by regulations that are likely to keep private enterprise on a small scale. 3. A stock market has not been allowed to operate. However, a March 1990 law allowed limited private ownership of farms and businesses and paved the way for eventually opening a stock market. 4. Heavy industry remains state-owned and under the control of the planners. 5. The ruble has remained a nonconvertible currency, making it difficult for enterprises and cooperatives to obtain sorely needed foreign machinery and equipment. The right to import goods is controlled by planners who allocate these rights on the basis of administrative criteria rather than selling them to the highest bidder. In short, perestroika has clearly not been designed to encourage free entry of resources into industries where products are strongly demanded. The price system still does not operate freely to encourage free enterprise and the satisfaction of consumer desires. As of 1990 the Soviet Union, by and large, remained a command economy. State orders still required many enterprises to produce goods that were not in great demand and adversely affected both the incentives and the ability of the enterprises to provide goods and services that consumers were clamoring for. The "state order" has prevented the flexibility that perestroika was supposed to provide. As state ministries burden enterprises with state orders to fulfill their planning goals, these orders get top priority. If managers fail to fulfill state orders they often find that it becomes difficult for them to obtain raw materials. The manager of the Yarolavle Motor Works, for example, knows that there is a great market for the tractors it produces. However, if the manager sells those tractors directly to farmers, without filling the state orders, the manager may not get steel to make more of them! In 1990, in fact, the manager of the factory devoted 100 percent of his productive capacity to filling state orders. In other words, the manager had a quota just as before. What is the solution for the Soviet economy? Some experts recommend a radical change that certainly would not appeal to any die-hard communist: "privatization" of state enterprises. The enterprises would be sold to private interests who would then use the assets to run a business as they saw fit. This would be like a massive corporate takeover where the ailing enterprises would either be dismantled or restructured to turn a profit. Many recommend that privatized enterprises be converted to corporations whose stock could be purchased by workers, state pension funds, or even foreigners. Entrepreneurship and competition could be encouraged to satisfy consumer de-mands, but this would require a better banking system to make loans to new businesses. Over the long run some of the ministries that regulate the economy would have to be dismantled. A system of unemployment insurance and aid to the poor would have to be established to ease the shock of rising prices and increased unemployment as the Soviet economy moves toward a market system. These recommendations are likely to be strongly opposed by many entrenched special interest groups within the Soviet Union. Reform and Change in Other Socialist Economies In the late 1980s, sudden and dramatic political and economic upheavals occurred in China and in the nations of Eastern Europe. In China, a student uprising was put down with force and the movement toward political and economic liberalization appeared to be halted. In the case of Eastern Europe, the nations of Hungary, Poland, Yugoslavia, Bulgaria, Czechoslovakia, the former German Democratic Republic (East Germany) and Romania moved toward greater political freedom and a commitment to restructure their economies. Reforms in China The People's Republic of China, which was established as a communist state in 1949, in the past functioned under one of the strictest forms of the command economy. China's five-year plans emphasized heavy industry, defense, and self-sufficiency. Wage differentials were frowned on as a way to motivate and allocate labor. Although planning was never as centralized in China as it was in the Soviet Union, production goals were often set at unrealistically high levels that were seldom attained. In the 1970s China opened its doors to international trade, foreign investment, and communication with the West as it had not done since 1949. At that time China began to rely less on planning and more on markets. Worker incentives were improved through a system of bonuses, and private enterprise, particularly in agriculture and consumer goods, were encouraged as a way to increase production. China's reforms resulted in massive and impressive growth of agricultural output. Industrial growth also expanded as foreign investment and joint ventures were encour-aged. The Chinese even developed a stock market! However, the political situation in China after 1989 resulted in a sharp reduction in foreign investment in that nation. Reforms in Eastern Europe In the past, most Eastern European economies have been heavily tied to the Soviet economy. These nations provided a ready market for Soviet raw materials and products, and, in turn, produced merchandise that was often exported to the Soviet Union. There was only limited trade with the West. Most of the Eastern European nations have been suffering from low and declining rates of economic growth, international trade deficits, low investment, and an obsolete industrial base. They are ravaged by pollution problems that resulted from heavy industry and lack of consideration of the social costs of pollution in their plans. Even Hungary and Yugoslavia, nations that enjoyed relatively high growth rates in the 1970s, experienced sharp slowdowns in economic growth in the 1980s. The economic difficulties of the Eastern European nations can be traced to the shortcomings of Soviet-style central planning that has stifled incentives to produce and innovate. Although they sought to modernize their economies in the 1970s and 1980s by importing Western technology, their growing dependence on imports from the West required that they expand their exports to pay for the imported capital goods. Unfortunately, lagging productivity growth in agriculture, which many of the nations neglected, resulted in low growth of output. They had trouble finding products that could be sold in Western nations to repay their foreign debts. Planning also resulted in resource distortions, as many products that could have been produced domestically were instead imported. These nations, most of which were members of the Warsaw Pact, also were burdened by high military expenditures that amounted to as much as 10 percent of GNP in the case of Bulgaria." Some of the Eastern European nations have had reform programs for many years. Yugoslavia has been a free spirit in the communist world since 1948 and has modified its system of central planning somewhat. Poland privatized much of its agricultural sector in 1956. Hungary instituted the "New Economic Mechanism"' in 1968 and has been the most liberal of the socialist nations of Eastern Europe since that time. (However, the Hungarian system did not really allow free markets to prevail on a wide-spread basis. Despite decentralized decision making by managers, bureaucratic forces still intervened in managerial decisions often thwarting innovations.) These reforms did little to offset the heavy reliance on central planning, however, and, to a great degree, all the economies of Eastern Europe remained basically command economies. The process of reform in Eastern Europe is likely to encounter the same obstacles as that of perestroika. The transition from a centrally planned economy, in which workers are paid low wages but enjoy subsidized goods that are in short supply, to a market economy, in which prices reflect marginal costs and equate quantities supplied with quantities demanded, is a difficult one. There is no way to improve resource allocation in these economies without making large groups of workers and consumers worse off temporarily. All these nations must confront the issues of private ownership of productive resources, the shift to market prices, and the unemployment and inflation that is likely to result from such a shift. They must also confront the end of government monopoly on production and increased competition and foreign trade. Heavy foreign debt will place an additional burden on them as they devote portions of their future income to repay that debt. They must therefore be able to compete in the modern global economy to gain the export trade necessary to earn foreign exchange. Poland had made the initial steps toward this difficult transition by 1990. The strategy chosen by its leaders was one designed to speed the transition from communism to capitalism. In January of 1990 Poland began the simultaneous elimination of government subsidies and price controls along with the closing of inefficient stores and factories. Prices were allowed to be influenced by supply and demand, and regulations were eased. Naturally, unemployment and the price level rose as a result. There were, however, fears of social unrest when unemployment rates began to rise higher than the modest levels experienced in 1990. As a result of Poland's massive "deregulation" of the economy and move away from central planning, sidewalk markets sprang up all over the nation. Enterprising Polish farmers and entrepreneurs found a ready market for fresh meat, sausage, sugar, coffee, and other products that had been in short supply. Many of them simply used their ingenuity to get around Poland's inefficient distribution system by picking up products directly from the mills and transporting them directly and quickly to locations where eager buyers could purchase them, often at prices lower than those charged in government stores. Another bold move of the reformers made the Polish currency, the zloty, freely and legally convertible to dollars and other hard currencies. This facilitated direct trade with such nearby nations as Germany. Convertibility of the zloty at a market rate, along with the increased availability of goods reduced hoarding of dollars in Poland. The next step to movement away from a command economy must be the privitization of state enterprises. Many of Poland's state enterprises were already having difficulty paying their bills in 1990 as rapid change in the economy reduced orders for their products. In 1990 Czechoslovakia and Romania faced a much more difficult task than Poland in restructuring their archaic economies. These two countries had borrowed less from the West than had other Eastern European nations in the 1970s and 1980s and had a lower debt burden. However, they also had an older industrial base. The old factories spewed pollution and suffered from low productivity. Czechoslovakia was working in 1990 to cut a budget deficit by reducing defense spending and reforming its tax system, while seeking ways to encourage foreign investment and introducing market pricing mechanisms. Heavy subsidies of food products had been the rule in Czechoslovakia, and elimination of those subsidies were given high priority. The shortages of food and other basic products in Romania was one of the leading causes of the revolution in 1989 that deposed Ceausescu. Its command economy wasted agricultural resources and poured millions into heavy industry and huge inefficient collective farms. In its first moves the new regime acted to allow farmers, who previously could have only small garden plots, to own 1.2 acres around their houses and lease additional crops. Farmers were then given the right to sell their crops on the market rather than to the government. Heavy industry in Romania in 1990 ran on equipment that was at least 20 years old on average. The quality of Romanian industrial products has been shoddy and the country suffers from a terrible pollution problem. The best estimate is that it will take many years to reconstruct the ravaged Romanian economy.