Development of the Economies

INTRODUCTION

There is no doubt that the worsening economic situation in the 1980s was one of the decisive factors which brought down the socialist system. From the beginning of the socialist system up to the second half of the 1970s, the three countries could boast quite good results in economic growth rates, though they were marked by a falling tendency.

In the second half of the 1970s the situation changed forever. In the beginning of the 1960s, most socialist countries went through a decline; in Czechoslovakia there was even an absolute decline, but soon the economies recovered. This was not the case after the second half of the 1970s; the relatively high rates of the past did not return. It is possible to argue that the three countries, one more than the others, found themselves in an economic crisis.

In this chapter I will try to analyse the reasons for the decline in economic growth rates and for the plunge of the economy into stagnation. I will also discuss briefly the evolution of the standard of living.

COMMON REASONS

There were several reasons for the decline in economic growth rates which were common to all three countries. One of them was that the sources of extensive economic growth were increasingly exhausted. Labour shortages were compounded by declining growth rates in the working-age population, a phenomenon which was strongest in Hungary. In the 1960s the average growth rate of the working-age population was 0.5 per cent, in the 1970s 0.2 per cent and in the 1980s it turned into a negative rate, -0.5 per cent (SE, 1986, p. 51 and 1990, p. 47).

Of course, labour shortages could have been overcome had the governments managed substantially to improve labour utilisation and make significant progress in solving structural deficiencies in the economy.

The investment rate, which in the 1970s grew faster in some countries than was envisaged in the plan, in the 1980s substantially declined (see Table 8.1). The lower investment rate had to bring down the rate of economic growth for the sake of coping with disequilibria, but at the same time it slowed down capital replacement which is a precondition for technological progress.

Increasing shortages of raw materials and energy were another important factor. The extraction of raw materials and fuels in the USSR, which supplied the other countries of CMEA, was shifting more and more to the Eastern regions with unpleasant climatic conditions and often difficult access to deposits; therefore productivity in the extracting industry was declining, and cost per unit of production, also due to high transportation costs, was increasing. Expectations of more economical use of raw materials remained mostly behind planned targets. Though the material intensity of products was much higher than in advanced industrial countries, the three countries did not manage to reduce it at the same pace as it was being reduced in Western countries, one reason being that the former lagged behind the West in the development of high technology industries which are less material intensive (see Drucker, 1986).

The three countries were, in addition, affected, though with some delay due to the pricing formula in CMEA, by the explosive increases in oil prices which resulted in worsening terms of trade, except for Poland.

The slump in the West, accompanied by protectionist tendencies, made the competition for Western markets more difficult for CMEA

Table 8.1 Some indicators of performance (annual growth rates in per cent)

♦ Data for 1971-5 and 1976—80 refer to national income distributed.

For Czechoslovakia, RS 1987, pp. 20-9 and SR 1992, pp. 30-9. For Hungary, SE 1990, pp. 2-4, 9 and 14.

products. On the other hand, Western corporations tried hard to increase their exports to Eastern Europe. Western banks were more than willing to finance the trade deficits which arose; they tried to recycle the petrodollars, and they also regarded loans to East European countries as safe investments, believing that, if something went wrong in the borrower countries, the Soviets would bail them out (Fekete, 1983). (See also p. 85.) In addition, the developing countries had increasingly become competitors of East European countries in Western markets.

The taking-up of loans from the West in the first half of the 1970s, mainly by Poland and Hungary, had to be serviced, and this necessarily contributed to balance of payment deficits.

The reaction to external factors was slow; they were to some extent under-estimated, perhaps because the effects of the explosive price increases were for some time cushioned by the price policies in CMEA and, when measures were taken, they were quite half-hearted; the countries were somehow reluctant to face reality (Urban and Ler, 1982 and 1986; Hohmann, 1985).

Some Soviet ideologues were delighted that the oil price explosion caused serious difficulties in Western economies and at the same time produced windfall profits for the Soviets. Retrospectively, it is possible to say that oil price increases in the final analysis affected the Soviet bloc more than developed capitalist countries. The latter managed to overcome the resulting recession, albeit with some bruises, due to new technologies and oil conservation, but for the socialist camp this was the beginning of an economic crisis which contributed largely to the collapse of the socialist system. Instead of using the windfall profits for modernising the civilian economy and helping East European countries, the Soviets squandered them for military purposes to a great extent.

The worsening economic situation was reflected in a gradual decline or stagnation in the standard of living, mainly in real wages. (It is, however, important to stress that decline in real wages in Poland and Hungary was minimal compared to what happened in the transitional period to a market economy.) What was annoying was that the gap in the standard of living between the socialist countries and Western countries was increasing.

People appreciated the fact that many services were available without charge, such as education and health care, or at a low charge, such as housing. But there were many complaints about the delivery of services, especially in health care. People disliked the idea that the elites had access to better care than the rest of the population; health services were supposed to be delivered according to need and not according to position. The authorities tried to deliver health care at minimum costs, and this was reflected on the one hand in insufficient funding of new technology and, on the other, in the relatively low remuneration of health-care workers, mainly physicians. Poor funding caused health care in East European countries to lag increasingly behind the West in medical technology and the newest medications. Patients in need of foreign medicine had to fight hard to get it from the authorities, or beg from relatives or friends abroad. The system of tipping physicians (see Chapter 3) introduced a two-tiered care system: a better one for those who could afford to and were willing to bribe the physicians, and a worse one for those who could not afford to or were not willing to support the corrupt system. It was mainly surgeons who expected big tips. The gratuities undermined discipline in hospitals; a corrupt doctor did not dare enforce discipline at his workplace.

Shortage of housing was another factor which frustrated many people, mainly the young who wanted to enter into marriage and people whose marriage broke up.¹ In the beginning of the socialist system housing was treated as a social service which must be provided from state funds and at low rents.

The standard of living was also negatively affected by the delayed and insufficient supply of modern products in general, but especially of electronic products. The high prices of the products was another factor. It was mainly the young people who wanted to enjoy the fruits of modern technology and did not want to be behind their peers in the West. They had no understanding, and rightly, for an economic policy of the government which hampered the satisfaction of their demand.

What was also of importance was that all these electronic products were invented in the West. This in itself increased the prestige of the West, mainly in the eyes of youngsters, and decreased respect for the East. The superiority of the West in producing new electronic products was linked to capitalism and the lag behind the West in this activity to socialism. If one adds to this that Western contemporary music and dance, which became part of the lifestyle of most youngsters in the West, had a powerful resonance in the East (because the entertainment mentioned reflected their feelings too or because it came from the West), then there were additional reasons for most young people to adore the West and with it capitalism, and to despise the East and with it socialism.

A shortage of automobiles and their relatively high prices was another issue which angered people. They resented the fact that they could not get a car instantly even if they had the cash, and had to wait 3 to 4 years for delivery.

People wanted to travel and see the world like their peers in Western countries. The shortage of cars was not the only obstacle. Travel restrictions, mainly in Czechoslovakia, which were imposed for political reasons and/or non-availability of foreign currency, were an even greater hindrance. The political elite was reluctant to allow freedom of travel for fear that the visitors to foreign countries would be overwhelmed by the abundance of consumer goods and ‘poisoned’ by anti-socialist thought in the West. No doubt, travel abroad, which in the 1980s increased considerably even in Czechoslovakia, was an important factor in the rise of a credibility gap between the population and the regime. Typical East European tourists, supplied with suitcases of canned food instead of hard currency, dependent on relatives or friends for accommodation if they did not have a car with a primitive trailer - as was mostly the case- and short of money to buy some of the goods not available at home as gifts for their families, felt humiliated and angry at the regime. In addition, because of the humiliation and because tourists’ judgement about countries they visit is very much influenced by superficial impressions, tourists had a tendency to see Western countries only in rosy colours and did not fail to share their impressions back home with friends and those who were regarded as trustworthy. Needless to say, the negative impact of travel abroad from the regime’s viewpoint was largely of its own making because it did not pay proper attention to consumer demand. In addition, it was foolish not to recognise that the ‘poison’ could not be kept out in the existing advanced state of communications.

It was the political elite’s great mistake to disregard the fact that people wanted to enjoy themselves and to take full advantage of all possible pleasures. They wanted to use their incomes according to their priorities and not according to the priorities of the planners, and were tired of constant shortages.

POLAND

In the 1960s the Polish economy grew quite fast, but suffered from large disproportions and therefore the authorities decided to introduce a minor reform, with the primary objective of improving the incentive system. An integral part of this reform was supposed to be a huge, upward adjustment of prices by the end of 1970, with the purpose of improving market equilibrium and price relativities. This intention of the government triggered riots which were suppressed by brutal force.²

To placate the public, W. Gomulka, the leader of the Party, was ousted. The new leader, E. Gierek, rescinded price increases and promised a new strategy of economic development. The new strategy, which lay in restructuring and modernising industry with up-to-date technology bought in the West with Western credits, and in simultaneously improving the standard of living of the population, turned out to be a huge failure. The imported technology was excessive and could not be effectively absorbed, and the expectations that loans would be paid back by commodities from the modernised enterprises did not materialise. Poland was not able to produce many products which could be competitive on Western markets, and the slump in the West reduced its chances even more.

To reconcile the workers Poland resorted to a policy of high wages. In the period of 1971-5 real wages increased on the average by 7.2 per cent annually (see Table 8.1). These huge increases in wages, which were not matched by increases in consumer goods, were inflationary.

Poland did not react quickly to the price changes in foreign markets. Instead of investment, which was very dependent on imports, being scaled down, it continued to grow and with it foreign debts piled up. As a result servicing costs and the balance of payment deficit increased. In 1973 foreign debts amounted to $3 billion and their servicing to 17 per cent of exports, still a bearable burden; in 1974 the debts amounted to $15.3 billion and their servicing required 55 per cent of exports, and in 1980 the debts jumped to $24.1 billion and their servicing came to 101 per cent of exports. Of course, the growing debt was also caused by high interest rates. In order to be able to meet its interest obligations Poland had to take up new loans.³ All this happened at a time when the terms of trade were not really deteriorating. In 1979, a year when the terms of trade did deteriorate slightly, they were the same as in 1970 (Mieszczankowski, 1984; Jςdrychowski, 1982, pp. 99, 152-4).

The investment drive was one of the main causes of inflation. It was focused on huge new projects in metallurgy and engineering at the expense of the modernisation of existing factories. Because of overinvestment new productive capacities were put on stream with great delays while wages - not matched by consumer goods - were paid to workers. Market disequilibrium was compounded by the worsening situation in agriculture. A change in agricultural policy⁴ combined with poor weather brought down agricultural growth rates in 1975-6 after an impressive growth in 1972-4 (Mieszczankowski, 1984; Kisiel, 1984).

Considering the situation in which Poland found itself, the five year plan, approved in 1975 for 1976-80, was still an ambitious one (Mosoczy, 1979, p. 136). Not until 1976 were the Polish leaders finally prepared to act; the so-called economic manoeuvre stipulated a substantial decrease in investment and a shift of resources to consumer-goods industries in order to arrest the rapidly developing market disequilibrium, which was also worsened by the failed attempt to increase the prices of foodstuffs. (The Polish leaders again tried to restore market equilibrium by attempting to increase prices substan­tially. As soon as the government saw that the workers were determined to riot to thwart such attempts, price increases were rescinded.) Furthermore, the document called for a reversal in the balance of trade situation in order to arrest the increasing indebtedness. Even before this, some changes in the system of management, which in substance meant greater interference with enterprises, had been carried out.

Again the leaders mismanaged their own decision: investment was reduced but, at the same time, the construction of the second stage of the huge metallurgical combine in Katowice was started. In addition, imports were slashed in an arbitrary way, which aggravated the developing shortages (Kisiel 1984; Fallenbuchl 1986, p. 371).

As a result of the rise of Solidarity (see Chapter 6) and its political ambitions, the Polish CP found itself between a rock and a hard place. Solidarity tried to achieve its objectives by strikes and pressure for higher wages, activities which contributed to a decline in output and an intensification of market disequilibrium. The decline in coal production in particular, combined with a reduction in material imports from the West, had a multiplying, negative effect on total production. GDP continued to decline, this time dramatically - in 1981, by 10 per cent and in 1982, by 4.8 per cent (sec Table 8.1).

On the other hand, the Soviets used the carrot and stick method to make the Polish leaders act against Solidarity. In 1980 the Soviets offered help in the form of more oil which the Poles could use as payments for purchases in the West. But when the Soviets saw that despite their pressure Solidarity was becoming stronger, they made it clear that they would not hesitate to invade Poland and in addition tightened the economic screws. At the trade negotiations for 1992 the Soviets offered to deliver to Poland 4.1 million tons of oil against the Polish request for 13.1 million tons (Jaruzelski, 1992, pp. 34 and 249).⁵

The outlawing of Solidarity in December 1981 (see Chapter 6) was done primarily for political reasons and to forestall a Soviet invasion.⁶ But economic considerations also played an important role, as M. Rakowski mentioned in his book (1991, p. 34). Martial law enabled the Polish leaders to renew, at least for a while, the semblance of market equilibrium by huge price increases. The existing widespread shortages threatened to bring the economy to the point of collapse.

The three year plan for 1983-5 was fulfilled in many of its important aspects. National income distributed increased by 15 per cent against the planned 10-12 per cent, but was still far from the pre-crisis level of 1978. In the following years the economy continued to grow so that in 1989 the national income distributed was only 6.5 per cent below the level of 1978 (See RS, 1988, p. XXXIII; and MRS, 1992, p. 344). According to G. Kolodko*s (1992, p. 18) computations the growth of net national income was positive for the period 1980-9, though the increment was quite small, only 0.3 per cent.

However, many problems which had plagued the economy before 1986 were not removed or solved. Economic equilibrium was not achieved. Inflation was still in double figures (in 1986 it even increased to 18 per cent from 15 per cent in 1985; this was, however, not so bad compared to what happened in 1990, when consumer prices increased by 586 per cent); it was fuelled by the budget deficit, primarily as a result of growing subsidies and the inability of the government to bring wage growth under control. (What was also worrying was that wage growth was marked with growing inequities in the distribution of income.) Exports to non-socialist countries were not increasing and foreign indebtedness continued to grow and therefore imports from those countries were again slashed, to the extent that they had an unfavourable effect on further development of the economy. In restructuring the economy little progress was achieved {Report..., 1987).

As noted above, in 1987 the Polish central authorities announced the second stage of the economic reform. An integral component of the reform was to be a radical price reform including huge increases in the retail prices of food, coal and energy in order to bring about market equilibrium and rational price relativities. It seems that the IMF and World Bank pushed in this direction.

Aware of the bad experience with price reforms, the Polish government this time approached the preparation for the reform cautiously. It asked the population to approve the reform in a referendum. It hoped that, if the reform was approved, an explosion of discontent could be avoided. In order to sweeten the pill of price reform it promised compensation for wage earners and pensioners and for the depreciation of the purchasing power of savings (within three years) (ΓL, 1 November 1987). Many Polish economists were against the reform, realising that under the existing conditions it could not solve the problems it was intended to solve. In addition, they argued that in foodstuffs demand and supply were in balance. Solidarity, which was underground, but still had considerable influence on the public, was not interested in supporting government efforts. As could be expected, the public rejected the price reform. As a result the Polish leaders carried out a smaller price reform in 1988, but without achieving their goal. On the contrary, consumer prices increased by 60 per cent in 1988, whereas wages rose by 81 per cent, which meant an increase in real wages of 14 per cent and an increase in market disequilibrium (see Table 8.1).

Despite efforts to improve the working of the economy by further reform, the situation did not improve. The attempt to silence Solidarity did not succeed; the defeated referendum only increased the disillusionment with the regime and the distrust of the ruling elite, and increased the popularity of Solidarity. In 1988 a wave of strikes broke out, supported by Solidarity. The central authorities were indirectly forced to look for a way out in a dialogue with Solidarity. This time they did not have to be afraid of Soviet intervention. Gorbachev’s leadership had dropped Brezhnev’s doctrine. And so in April 1989 government and Solidarity representatives agreed in roundtable negotiations to restructure the political as well as the economic system. As to the latter, the representatives agreed to introduce market relations and competition, allow free development of ownership structures including privatisation, develop self-management, and limit central planning to the formulation of government policy - to mention only the most important principles. In the sphere of economic policy, it was concluded that the budget deficit should be reduced by slashing subsidies and selling apartments, shops, productive facilities, etc. In order to protect the consumers from inflation, a 80 per cent wage indexation was promised. The preservation of the principle of full employment was pledged (ZG, 1989, no. 16; TL, 7 April 1989).

The June 1989 parliamentary elections brought about a shattering defeat for the Party, and the Solidarity leaders managed to manoeuvre it out of political power.

The fluctuations in economic growth were reflected in the evolution of the standard of living. Of the three countries under review Poland had the worst record until 1971-5, when real wages grew quite fast (see Table 8.1). In the period 1976-80 there was a considerable decline in the growth rates of real wages, though on the whole they were still positive. The increase in prices during martial law brought about a dramatic decline in real wages; they dropped by 25 per cent, approximately to the level of 1972-3. In other words, the increases in real wages, which the workers pushed through when the government wanted to appease them, were to a great degree lost. The government used martial law, when the public was quite intimidated, to reduce the standard of living. No doubt, the performance of the Polish economy could not sustain the existing level of real wages. However, most workers had no great understanding for the government problems (and rightly) and blamed the system and the government for the dismal performance of the economy and low real wages. When in 1988 the government was most anxious to hold the line on real wages, they surged by 14 per cent; they remained, however, 10 per cent below the 1981 level, the martial-law year (ß5, 1983, p. XXXV; 1992, p. XXIX).

Private consumption per capita was much less affected by the price increases during martial law; it declined by only 12.3 per cent. The main reason for this difference was that nominal transfer payments grew much faster than nominal wages and salaries (see RS, 1987, p. 93). Interestingly enough, in 1988 when real wages increased substantially, private consumption per capita increased only moderately.

An important indicator of consumption is the consumption of meat, all the more because the Poles attached high priority to it and therefore were willing to forgo other purchases in order to maintain the level of meat consumption. Their habits were encouraged by the historically relatively low prices of meat. And therefore consumption of meat in Poland was higher than in other countries at the same level of economic development. In 1970 consumption of meat and meat products reached the level of 53 kg per capita. In 1975, when real wages were relatively high, it increased to 70.3 kg. In 1982, it plummeted to 58.5; since then it has continued to grow slowly: in 1988 it reached 67.8 kg (MRS, 1989, pp. XLVIII-XLIX).

On the whole, the 1980s were characterised by a decline in the standard of living, which was much more far-reaching than in Czechoslovakia or even in Hungary. The situation in Poland was compounded by shortages and by the rationing of some products. People were forced to spend a lot of time, including work time, in queues. Needless to say, people were tired and angry. Their anger was enhanced by what they heard about the standard of living and supply of goods in capitalist countries and by what they themselves had experienced or what they believed were the experiences of others abroad.

CZECHOSLOVAKIA

Of the three countries under review Czechoslovakia was the most developed before World War II. It belonged to the developed countries of Europe; it was not far behind Austria in terms of GNP. In the 1960s, it started to fall behind Austria in the pace of growth and, in the second half of the 1970s, the rate of economic growth started to decline.⁷ According to Komarek (1989), in the period 1979--88 the growth rate of national income distributed was only 1.5 per cent on the average; if this figure is deflated, the growth rate was below zero. In 1980-2 economic growth slightly declined (0.8 per cent on the average) and in 1983-4 Czechoslovakia, like Poland and Hungary, experienced a recovery. (In Poland the recovery was the strongest and in Hungary the weakest, see Table 8.1.) The recovery in Czechoslovakia was, on the one hand, the normal result of the cyclical development of the economy which was influenced by the business cycle in the West and, on the other, was due to the increased deliveries of fuels and materials from the Soviet Union. Some conservation also helped. But soon the economy started to decelerate again (Dyba, 1989).

Taking the period 1978-89 as a whole it is possible to argue that economic stagnation was caused by internal and external factors, among them labour shortages, shortages of raw materials and fuels, an inability to restructure the economy, the increasing gap in the technology level compared to the West, and, of course, the explosive oil-price increases. Furthermore, labour productivity and capital productivity were declining.

Labour shortages, which were felt in all three countries, were the most acute in Czechoslovakia. Already in 1975 the economic participation rate in Czechoslovakia had achieved a very high level (83.2 per cent) and no further major increases were possible. The increment in the working-age population, which in the second half of the 1970s was only 0.6 per cent on the average, declined in the 1980s to 0.4 per cent (ST?, 1992, pp. 30-1). The situation was compounded by the demand for labour in the service sector which was undermanned. The authorities hoped that the needed labour for new capacities could be gained from enterprises scheduled for closure. However, closure plans materialised to only a small degree.

The shortage of materials and fuels was caused by the irrational and ineffective structure of the economy, marked by the hypertrophic role of heavy industry, which was one of the main reasons for the Czechoslovak distinction of having a much higher consumption of energy and steel per unit of production than most advanced industrial countries. According to computations, made by the Czechoslovak Prognostic Institute, the consumption of steel for $1 million of GDP in the middle of the 1980s was 2.6 times higher in Czechoslovakia than in the developed capitalist countries. As to comparative energy consump­tion, the situation was much better, but it still was 46 per cent higher in Czechoslovakia than in capitalist countries. The conservation effort in Czechoslovakia remained behind that of capitalist countries. The latter managed to reduce the steel intensity of production in the period 1971— 85 almost twice as much as Czechoslovakia. In a comparison of energy conservation Czechoslovakia remained only 20 per cent behind (Vintrova, 1989).

The situation was compounded by foreign trade developments. The terms of trade continued to worsen as a result of the oil price shock, whose consequences were not fully felt until 1980 (compared to 1970, the terms of trade worsened by 10.6 per cent in 1975 and in 1984 the figure was 50 per cent, and improved only slightly in the next three years). The deficit in the balance of trade even with socialist countries was persistent enough for some time for debts to pile up (SR, 1988, p. 452).

The difficulties in foreign trade had their origins in the traditional system of management and in economic policy. The rigid shielding of enterprises from foreign competition worked against innovation. If enterprises know that they will get a price equal to domestic price regardless of prices on foreign markets for their commodities sold abroad by state foreign trade corporations - and this was the real situation - there is no incentive to try very hard to reduce costs. In addition, the planners did not take export needs and possibilities sufficiently into account in distributing investment.

Czechoslovakia was not successful in its effort to narrow its gap in technology with advanced industrial countries; on the contrary, the gap was increasing because, as already mentioned, that country, like the other two, was slow in its reaction to the explosive price increases in oil and less effective with regard to progress in technology. No doubt, the existing economic mechanism did not exert sufficient pressure on enterprises to innovate. Technological progress was also hampered by the slashing of imports from the West, where Czechoslovakia could get the machinery needed for modernisation (Altmann, 1987). Imports were reduced because the number of competitive products which could find a market in the West was declining, and, for political reasons, Czechoslovakia did not want to increase its indebtedness; on the contrary, it tried to reduce it. It was on the whole much smaller than in the neighbouring socialist countries at the end of the 1980s it was USS 8 billion (see Kouba, 1991). As a result, Czechoslovak trade with the USSR and other CMEA countries increased, at a time when the other two countries were reducing it. (For more, see Chapter 5.)

Czechoslovakia was only able to sell its products on Western markets at lower prices than Western countries did. A striking example is a comparison of export prices for one kilogramme of machinery. In 1970 the price achieved by Czechoslovakia was 58.7 per cent of that realised by Austria, whereas in 1985 it had declined to 25.8 per cent (Dyba, 1989). This difference reflected not only the lower quality of Czechoslovak products, but also discrimination against East European products generally. Western buyers used the weak bargaining power of East European exporters to their own advantage.

The central planners tried to remedy the situation both by an ‘intensification’ of the economic process (a more economical use of resources and an increase in labour productivity) and by a slowdown in economic growth to bring about a reduction in imports combined with a spur for exports, even at the expense of domestic consumption, in order to improve the balance of payments. The expansion of domestic fuel production (coal) - though at the price of huge investment and pollution - also had to work in this direction. This strategy provided some breathing space, but only for a short time (Vintrova, 1984; Levcik, 1981; Urban and Ler, 1982; Kusin, 1982).

The only solution to the problems faced by Czechoslovakia was to restructure the economy: to stop the extensive growth of heavy industry in favour of a modernisation of the industrial branches with the potential of exporting products which were skilled-labour-intensive rather than material- and energy-intensive (Komarek, 1989). This was all the more necessary because heavy industry required more and more investment, which could have been used for better purposes. For a long time, the heavy industry lobby saw to it that the industry received investment funds even at the expense of light industry and services.

In one of its 1987 meetings, the CC⁸ itself came to the conclusion that the existing structure of the economy was unsustainable because, among other things, it required investments which the economy could not afford. According to economic calculations, the further develop­ment of heavy industry and protection of the environment until the year 2000 would have required approximately three-quarters of all industrial investments. If the proposals had been accepted, few investment funds would have been available for new, high-tech industrial branches, and for the modernisation of light industry. The CC called mainly for the modernisation of the machinery industry (Sojak, 1987; Rude prdvo, March 20 1987).

Despite all the difficulties, Czechoslovakia had a good record in coping with inflationary pressures, incomparably better than Hungary, let alone Poland: open inflation in Czechoslovakia amounted on the average to 1.2 per cent annually in 1970-89 (see Table 8.1).

It also suffered from shortages, but these were not of the Polish magnitude and did not much affect the supply of consumer goods to the population. C. Kozusnik (1991), a staunch supporter of a market economy, characterised the Czechoslovak pre-velvct revolution econ­omy in the following way: ‘Despite some recurring gaps, the shelves of our stores were not empty, in∩ation was moderate, foreign debt was bearable, employment was full and the standard of living rather stagnated, and as far as it declined, this was not alarming’.

In most of the 1970s real wages - an important indicator of the standard of living - grew; they achieved their peak in 1978. From then on they stagnated. If hidden inflation is disregarded, they were 3.6 per cent higher in 1989 than in 1978. Of course, if hidden inflation is taken into account, real wages in 1989 were lower than in 1978. In terms of per capita consumption the Czechoslovak population fared better. It increased by 15.5 per cent in the period 1980—9 (ST?, 1985, pp. 24-5; 1988, pp. 23-4; and 1993, pp. 26-9).

The evolution of real wages and private consumption in themselves annoyed the population less than shortcomings in other indicators of the standard of living. The deficiencies in the delivery system of health­care services, as discussed above, was a permanent irritant. In Czechoslovakia the situation was worse than in the other two countries in that labour shortages were more extensive, and hospitals suffered from them more than other sectors of the economy, the main reason being wage policy. The slowness in satisfying the demand for housing was another reason for complaint. Perhaps a no-less-important factor which generated an anti-government mood was the fact that the selection of goods was falling behind that of Hungary, let alone Western countries. The public, in particular young people, were especially angered by the shortage of modern electronic products.

Limited possibilities for travel abroad was a special reason for anger and frustration, all the more because Polish and Hungarian citizens were not exposed to such restrictions.⁹ The realisation that the restrictions were imposed in Czechoslovakia for political reasons did not increase the prestige of the CP and the government in public eyes. On the contrary, it hurt the credibility of both, which was in low esteem anyhow.

The Czechoslovak intelligentsia more than that of the other two countries had reasons for dissatisfaction. Czechoslovakia had the narrowest wage differentials for skill. In addition, the pension system, with its categorisation into three groups according to working conditions and the physical exactness of the work before retirement, put the intelligentsia in an unfavourable position. On top of this intellectuals enjoyed less freedom of expression and research than in the other two countries.

HUNGARY

Up to 1973 the Hungarian economy grew quite rapidly. From then on economic troubles started to pile up. In the middle of the 1970s Hungary was grappling with a slowdown in economic growth, a worsening of the terms of trade, a growing deficit in the balance of payments and the negative growth of the economically active population.

When the oil price increases started to affect Hungary itself the terms of trade became worse. Increasing Hungarian orientation towards Western markets, whence a growing portion of raw materials was coming, affected the terms of trade unfavourably too. In 1979 the terms of trade were at their lowest point of the 1970s; they had worsened by 24.8 per cent compared to 1970 (SE, 1980, p. 321). In the 1980s, the terms of trade continued to worsen but at a much slower rate than in the 1970s. In 1989 they were 6 per cent worse than in 1980 (SE, 1990, p. 206).

In 1973 Hungary owed Western creditors (mostly commercial) US $ 2118 million, whereas by 1980 the debt had increased to $ 11455 million and in 1989 to $ 20390 million.¹⁰ Since interest rates were set according to changing market rates and, in the beginning of the 1980s, market interest rates went through the roof because of the restrictive monetary policy in the USA, debt-servicing obligations became an increasingly heavy burden on the Hungarian economy. In 1973, the interest on the loan amounted to 27 per cent of exports, in 1980 to 41.4 per cent and in 1986 it peaked at 75.1 per cent. After 1986 it started to decline (Merenyi, 1993). Of the three countries Hungary has had the highest debt per capita.

The economic development of Hungary was much influenced by so- called central development programmes (energy, natural gas, alumi­nium, petrochemistry, computer engineering) which had a preferential claim on investments. These were designed not only to satisfy domestic demand, but also to meet the demand of CMEA countries. Many of these programmes, financed partly by foreign credits, were coming to completion at the time when the second oil-price shock occurred. The new development programmes meant an increased demand for oil and raw materials. This was at a time when the Soviets declined to increase oil shipments beyond the previously agreed quotas. In addition, the increased need for imports of raw materials from the West hampered the import of new technology (Csikos-Nagy, 1983; B. Kadar, 1983).

A great many industrial branches, which were given preferential treatment, were not really the most profitable; distribution of investment was, despite the 1968 reform, still based very much on what the planners believed should be given priority and on obligations resulting from CMEA agreements, and much less on profitability. Mining, metallurgy and electric energy swallowed up 36.1 per cent of industrial investments in 1975-80, and in 1981-5 as much as 46.1 per cent, whereas machinery and chemicals, which were quite profitable, could not increase to the extent needed because of a lack of sufficient investment. In 1975-80 their share of investment was 33.5 per cent and declined in 1981-5 to 30.4 per cent (Crane, 1991). Hungary was trapped in a situation from which it was difficult to extricate itself. It had to invest more in basic materials and to import more of them in order to be able to export machinery products to CMEA and developing countries, and also to export semi-finished chemical and metallurgical products and the products of light industry to the West. Hungary was not able to compete effectively with its machinery on OECD markets. And this contributed to a growing gap between Hungary and Western countries in the technology used (see B. Kadar, 1983).

This development was necessarily reflected in declining growth rates. In 1976-7 GDP grew on the average at 5 per cent, in 1978 at only 4 per cent, in 1979 even less (1.5 per cent) and in 1980 there was no growth at all (SE, 1990, p. 2). The Hungarian authorities concluded that something had to be done about the situation. The economic community was split into two camps: one advocated a continuation of the old strategy of economic growth and a mobilisation of all resources for this purpose, and the other preferred to focus on the elimination of the external disequilibrium, even at the expense of economic growth. J. Hoos (1981) maintained that the first suggestion overestimated Hungarian capacity, whereas the second underestimated it. According to him Hungary opted for a new path in economic growth strategy which, in my opinion, was somewhere between the two suggestions and closer to the second. The new growth strategy was supposed to be increasingly ‘demand controlled growth’; namely, growth was to be based on demand arising from sales, preferably in demanding foreign markets, and demand which could be ensured in an efficient way. In other words, economic growth was to depend increasingly on the ability to increase exports. This was an almost revolutionary change in the strategy of economic growth, considering that previously fast economic growth was all but an article of faith. Supply was the only limit to growth.

This change in the growth strategy was substantiated by the need to import more and more raw materials and technology from non­socialist markets and for this purpose more and more adequate exports for demanding markets had to be produced in order to pay for the imports. However, it was difficult to find adequate markets for exports and therefore imports had to be slashed, as happened in 1982 (see Hoos, 1981).

The five-year plan for 1981-5 envisaged only moderate growth rates for national income produced (14-17 per cent for the whole period), and even much smaller rates for national income used (3-5 per cent) in order not to endanger external equilibrium. Investment was not to grow, and economic growth was expected from increases in productiv­ity. No promises were made about increases in real wages and personal consumption. Only some increases in low pensions were promised (Havasi, 1981).

The planners assumed that a restriction of domestic absorption for two to three years combined with an increase in exports would improve external equilibrium to such an extent that it would be possible after some time to return to a dynamisation of economic growth (Gazdasdgpolitika..., 1988).

The expectations for improvement did not materialise. On the contrary, the economic situation became worse in 1981-2. The slump in the West, the result of the second oil-price explosion, made it more difficult for Hungarian exports, and therefore the export plan could not be achieved. As a result economic growth also remained behind target, but it still was much higher than in 1980 (SE_i 1992, p. 2).

Polish events, the declarations of martial law and of insolvency, had created a small panic in Western financial markets and resulted in the imposition of a partial credit embargo on all East European countries. This probably prompted a sudden withdrawal of foreign currency, mainly by the Arab oil countries, from the Hungarian National Bank. The situation was aggravated by growing interest rates paid on foreign debts. Hungary was on the edge of insolvency (Csikos-Nagy, 1983; and Revesz, 1990, p. 105).

Hungary managed to avoid the worst by imposing tighter import restrictions and, by giving enterprises various incentives, encouraged them and foreign trade corporations to increase exports to hard currency countries. In 1983-4 the economic situation in Hungary improved for a while, as it did in the other two countries. The economic recovery in the West must have helped too. The country managed to balance its merchandise trade, though there was no improvement in the terms of trade. In 1978 exports covered only 70.4 per cent of imports from convertible currency markets, whereas in 1983 it was 115 per cent. In 1983-4 the government also succeeded in balancing the state budget (Nyers and Tardos, 1984). There were also some other signs of improvement - in energy saving, in a reduction in material intensity per unit of production, etc.

The rapidly developing private or quasi-privatc sector, as a result of the legislative changes in 1982 which opened up new possibilities for private business, had a favourable effect on the economy. In the state sector there was no turnaround in economic efficiency, perhaps one of the reasons being that for many workers the work in a state factory was only one of two jobs, in some cases even three, which they held.

Encouraged by the two relatively successful years the Hungarian authorities decided to accelerate economic growth. They backed up their decision by making some changes in the economic mechanism, going beyond the principles of the new economic mechanism of 1968 (for more, see Chapter 7). The seventh five year plan for 1986-90 envisaged for the first years an increase in the annual growth rate of 2­3.5 per cent. This was a modest goal, but still higher than the rate achieved in 1981-5 (1.8 per cent). What is also important to mention is that the plan did not envisage a reduction in domestic absorption: on the contrary, it assumed a small increase, including an increase in investment. The planners also promised a small increase in real wages (Hoos, 1985).

One of the objectives of the new plan was to reduce foreign debt by achieving a surplus in the balance of trade. The planners wanted to prepare an environment for possible new loans if such a need arose. Furthermore, the plan envisaged the achievement of a previous goal - a restructuring of the economy in accordance with the needs of exports (Gazdasdgpolitika...1988, pp. 97-8).

The five year plan was short-lived. The economy took a turn for the worse - but not instantly - so that the objectives in the plan became empty words, as many economists had predicted. In the beginning of 1988 the plan was abandoned, and the government embarked on a stabilisation programme. Soon after this, with the start of the crumbling of the socialist system, planning’s role in guiding the economy started to crumble too.

The expectations of faster economic growth materialised only in the first two years of the plan (the GDP grew by 5.4 per cent). Later, the GDP started to stagnate and, with the transition to a market economy, to fall. In 1989 the GDP was only 15.3 per cent higher than in 1980. Neither was the government able to increase real wages as promised. In 1988 real wages declined by 5.1 per cent (SE, 1990, p. 56 and pp. 2 and 15).

Instead of decreasing, the Hungarian debt doubled in 1985-7 in terms of dollars as a result of dramatic changes in the exchange rate between the dollar on the one hand and the yen, mark and other Western currencies on the other hand. The expectations pinned to foreign trade did not materialise either. In 1987, the balance of trade was almost in equilibrium, and in 1988 there was even a surplus, but not sufficient to cover the interest payable on debts. No progress was made in restructuring the economy to the needs of exports (Csikos- Nagy, 1988; Revcsz, 1990, p. 143; Gazdasagpolitika, 1988, p. 98).

Inflation, which from the end of the 1970s had accelerated and ranged from 6 to 8.6 per cent, amounted in 1988 to 15.9 per cent and continued to increase in the following years (SE 1990, p. 14). The introduction of a value added tax was corresponsible for the surge in inflation in 1988.

The worsening economic situation from the second half of the 1970s necessarily had its impact on the standard of living. The slightly declining standard of living gradually undermined the credibility of the government. No doubt this was one of the contributory factors in the collapse of the socialist system.

The decline in real wages was not as dramatic as it has been in the transition to a market economy. In the period 1978 (when real wages reached their peak) to 1989 the real wages of blue- and white-collar workers declined by 9.6 per cent; of this the greatest decline was in 1988 (see Table 8.1). In other years real wages declined minimally. The government tried hard for political reasons not to allow much erosion of real wages. To this end it used a portion of foreign loans to support consumption. However, workers, who were used to annual real wage increases, soon felt the difference and did not like it.

At the same period real incomes, which also include transfer payments, increased by 15.1 per cent. Private consumption per capita (computed in constant prices of 1980) increased by 11.4 per cent in the period 1980-8. (SE> 1990, pp. 14 and 214). Private consumption - as well as real incomes - reflects not only incomes from the principal job, but also from the second and in some cases the third occupation. Furthermore, it includes incomes from private activities, whether legal or illegal. Apparently, if the trends in the standard of living are judged simply on the basis of incomes as a whole, then one can hardly argue that there was a decline. In my opinion, not only the benefits of economic activities, namely incomes, should be considered, but also costs in terms of expended labour, energy, etc. Two jobs, which were performed by a large portion of the population, could not be carried out without a negative effect on the health of the population and family life. Health statistics confirm this.

Average pensions grew faster than earnings in the period discussed. New pensions were higher than the old ones, while at the same time low pensions disappeared with the dying off of old pensioners, and for this reason the average pension grew. Since the compensation for inflation lagged much behind the rate of inflation in most cases, the purchasing power of most pensions declined. In addition, the conditions for pensioners’ extra earnings worsened in the course of time.

It is often argued that social programmes¹¹ in the countries under review were a great burden on the economy. I have come across comparative figures for Hungary only. It can be assumed that figures for the other two countries were not much different. In 1981, according to E. Gacs (1986), who compared Hungary’s social expenditures with those of OECD countries on the basis of figures published by that organisation, Hungary’s social expenditures made up 20.8 per cent of GDP, one of the lowest in Europe. What is quite surprising is Hungary’s government expenditure on health care - only 3 per cent of GDP. Expenditures on health care in 1983, when statistical yearbooks started to publish figures on health care alone, made up 4.2 per cent of government expenditures and 4.8 per cent in 1988 (SE, 1986, p. 330, and 1990, p. 319). Of course, real expenditures on health care were much higher: none of those computations include gratuities paid by patients to doctors.

On the other hand, expenditures on pensions compared favourably with OECD countries. They made up 7.8 per cent of GDP, which was more than in Britain, Canada and the USA (Gacs, 1986).

CONCLUDING REMARKS

In the 1980s the economies of the countries under review performed poorly. This was true primarily of Poland, which experienced a huge decline in economic growth in 1979-83. Taking the period 1980-9 as a whole, it can be said that economic growth in the three countries was marked by stagnation. Neither Czechoslovakia nor Hungary suffered a decline in economic growth of the magnitude they suffered in the transition to a market economy.

Naturally, the poor performance in economic growth had an unfavourable effect on the standard of living, especially on real wages. In this regard Poland, if shortages are also considered, fared the worst and Czechoslovakia the best. In Poland there was a huge decline in real wages in 1982, but in the following years workers managed to obtain increases so that in 1989 real wages were almost on the level of 1980. However, the real wage pertaining to the countries discussed should be taken with some qualification, mainly with regard to Czechoslovakia, because in their computation hidden inflation was not taken into consideration. On the other hand, it should be borne in mind that consumption per capita was more favourable.

Of course, real wages alone are not a good indicator of the standard of living, if the availability of consumer goods is not considered. Of the three countries Poland had the worst record and Hungary the best with regard to the supply of consumer goods. Poland suffered from huge market disequilibria. As to inflation Poland was again worst off and Czechoslovakia the best.

The economic situation in the 1980s was thus bad, but there was no unemployment. Whoever wanted to work could easily find a job. Nevertheless people were very dissatisfied: the perception of the economic situation in the minds of the people was much worse than it was objectively. This was not only in Poland where the situation was especially difficult, but also in the other two countries. There were primarily two reasons for the popular perception mentioned. The economic stagnation lasted a long time and there seemed to be no prospect of improvement. In its propaganda the communist regime promised continuous improvement in the standard of living; even in the face of the economic difficulties the communist leaders continued to insist that there would be a turnaround, but there were no reliable signs that this would soon happen. In addition, the dissatisfaction was fuelled by the lack of access to the achievements of modern technology. People wanted to use their earnings according to their priorities. Those who could afford it wanted to be able to buy a car as soon as they had the cash and travel abroad without any administrative restrictions. They wanted to have access to a large selection of entertainment gadgets at affordable prices. They wanted to enjoy life like their peers in the West. The neglect of consumption by the socialist planners turned a great proportion of the population against the regime. It was to be expected that such a policy of neglect could not be pursued with impunity for long.

The second reason was that the anti-socialist propaganda managed to convince the public that its aspirations could be easily achieved if the socialist system was replaced by a market economy. And the transition to a market economy seemed to be painless according to the propaganda.

The only legitimacy of the socialist system was the promise that it could ensure a growing standard of living, full employment and an extensive safety net. When it turned out that the standard of living was stagnating, the legitimacy of the system was undermined.

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