Economic Policy

INTRODUCTION

To understand the collapse of the socialist system, it is not enough to discuss the systemic reasons for its failure; it is also necessary to shed light on the economic policy followed by the CPs.

As already mentioned, it is generally accepted that the economic mechanism was shaped by the industrialisation drive - started first in the Soviet Union and later imposed on East European countries by the USSR - and was meant to serve it. This, of course, does not mean that only one kind of direction and pace of industrialisation or, more generally, development was possible. In the framework of the same economic mechanism, it could have been possible to accommodate quite different options with regard to the direction and pace of development, depending on government priorities or, in other words, on economic policy.

The same is true of social policy, understood very broadly to comprise the right to a job, quite an egalitarian distribution of income, stable and low prices for basic foods, services and shelter, and last but not least social security.

As has already been shown, consumer prices were burdened with a turnover tax. Most services were not subject to this tax. This was an economic policy decision which had nothing to do with the economic mechanism. Had services been exposed to such a tax, the economic mechanism would not have been affected. On the other hand, the application of the tax would probably have had a favourable effect on the expansion of services.

Let me mention another example, which may shed even more light on the difference between the economic mechanism and economic policy. In the traditional system, the authorities allocated a planned wage bill to enterprises. The actual wage bill depended on the fulfilment of plan targets. This arrangement was a systemic one. However, the increase in the wage bill for the overfulfilment of plan targets could be of varying size. And really, the adjustment coefficient changed several times during the existence of the traditional system. This was a matter of economic policy.

There is a tendency to blame the system for all the shortcomings in the working of the economy regardless of their nature. However, if we accept the thesis, which in my opinion is obvious, that, within the same economic mechanism, different economic policies can be followed, then it is important to distinguish between the responsibility of the two factors in the collapse of the socialist system.

Further on in the text I would like to discuss several economic policies which contributed to the dismal performance of the economy, and in the final analysis, to the collapse of the socialist system. I will start with industrialisation policy and then discuss the social policy, understood very broadly. While it is generally accepted that social security has a place in every progressive and humane society, the other three components of the social welfare policy (the right to a job, egalitarian distribution of income and low prices), which were characteristic of the socialist system without being a necessary component of the economic mechanism, can be questioned, mainly the way they were instituted. The economic policies discussed in this chapter were introduced during the traditional system and did not change substantially as a result of economic reforms.

INDUSTRIALISATION POLICY

All three countries, the least Czechoslovakia, needed industrialisation in order to be able to modernise their economy and to improve the well-being of their population. However, the way the industrialisation policy was applied contributed greatly to the failure of the traditional economic mechanism, in that it caused significant shortages and hampered the structural changes needed to satisfy changing demand at home and abroad and to keep up with the technological changes abroad. The industrialisation drive is to blame for the neglect of light industry, infrastructure and services, as well as some important social programmes.

To accelerate industrialisation political and economic leaders pushed for high economic growth rates for a very long time, often regardless of the possibilities of the economy. In their push, stress was placed on the rapid development of heavy industry and the armament industry (henceforth heavy industry is to be understood to include the armament industry), a policy largely motivated by security needs, as they were understood by Stalin and his successors. This policy was backed up ideologically by the so-called law of preferential develop­ment of the production of producer goods.

In the course of time, the rapidly growing heavy industry created its own powerful pressure group, whose interests became inseparably intertwined with the survival of heavy industry in a privileged position in the structure of the economy. The power of this group resulted from two factors. It had the support of the workers in heavy industry, a segment of the work force which was regarded as the mainstay of the regime and which shared in the privileges of heavy industry in the form of higher wages, and of the military establishment. In addition, many leaders of the Party came from this sector of the economy and were understandably well disposed to the interests of this group.

It seems that Polish economists, primarily C. J6zefiak (1981 and 1984) and A. Lipowski (1986 and 1988), devoted more attention to the pressure groups than economists from the other countries did. Perhaps this was because pressure groups were more powerful in Poland than in other countries. Both authors stressed that the heavy industry pressure group was responsible for the fact that the distribution of investment funds was much influenced by political considerations, and this was necessarily at the expense of objective criteria. According to Lipowski (1986) the pressure groups devalued planning so much that, in the 1970s, planning was of a purely ceremonial nature.

Needless to say, this heavy-industry pressure group was the natural protector of the traditional system in opposing changes in the economic mechanism, mainly those which were related to the market mechanism, for fear that those changes might affect heavy industry unfavourably, and thus the pressure group hampered needed changes in the structure of the economy. It also influenced the distribution of investment funds in favour of heavy industry.

This policy of the fast development of heavy industry led necessarily to high investment ratios. Not only this, but whenever the overheated economy could not handle all investment projects, and this was quite often, heavy industry was little affected, since it got priority in raw materials, machinery and manpower. The preferential treatment of heavy industry at the expense of other industries, including light industry, meant that wages were paid without being matched with a proper flow of consumer goods.

The preferential treatment of heavy industry was also co-rcsponsible for the high material intensity of products and discouraged attempts to find ways to reduce it.

The rapid development of heavy industry, as already mentioned, was also motivated by the arms race with the USA. This race imposed, not only on the former USSR but also on East European countries, a great economic burden in the form of high military expenditures, relatively higher than in the USA, since the USA had a much higher GNP per capita than the Soviets or East Europeans had. There are still no reliable figures on real military expenditures over the period, but it is, no doubt, clear that they swallowed up a high percentage of the GNP² and they were made at the cost of other outlays which were important for the standard of living. In addition, the arms race drained the most talented, bright and innovative professionals from the civilian economy. Needless to say, the results of this policy also reduced the effectiveness of the centralised system in that incentives were weakened.

When Reagan came to power in the USA, the arms race intensified. The American president calculated that an increased arms race would economically exhaust the Soviet Union and its East European allies. To cope with this threat the Soviet Union exerted pressure on East European countries to contribute to the intensified arms race in the form of increases in the military budget. In the 1980s the Soviet pressure was no longer as effective as in the past. First, the Soviet grip on East European countries weakened to some extent because of the worsening economic performance of the Soviet Union itself. Second, the countries learned how effectively to resist Soviet demands. A high Hungarian functionary, who must have known about his country’s contribution to the arms race, told me that the usual tactic was to promise and then not fulfil. Even so, Hungary’s military expenditures were quite high, around 8 per cent. Probably Czechoslovakia and Poland contributed a similar sum.

No wonder that some economists in the past saw the cure for the dismal working of the socialist economy primarily in changes in the economic policy. For example, in Poland, M. Kalecki, the renowned economist, took such a position (see Kowalik, 1987). It seems that his book on economic growth (1963), in which he showed the merits of balanced growth and how it could be achieved, was meant as an argument against obsession with economic growth and as back-up to his views on the role of economic policy.

EMPLOYMENT POLICY

The employment policy that was pursued contributed on the one hand to full employment, but on the other it had a negative impact on economic efficiency and incentives. It also contributed to labour shortages. The reasons for this development will be examined on two levels: first, on a very general level and later, on a microlevel.

With the start of the first five-year plan the Soviet Union followed a policy of employment maximisation which had two objectives: to maximise output as an integral part of the industrialisation drive and to bring about full employment. The stress was on the first objective, but by pursuing it the second was also achieved in the course of time. This employment policy was later embraced by East European countries.

The industrialisation drive brought about a massive influx of workers to industry. Most of them came from agriculture. The liquidation of small-scale businesses, which was an integral part of the liquidation process of the private sector, also provided an important source of labour. Finally, housewives increasingly became an important component of the growing supply of labour. Many of the newly employed could not be instantly put to their most productive use, because they had to be trained even for the simplest work and because the rapid influx of workers created tremendous organisational problems connected with placement in suitable jobs. Apart from the short period in Hungary and Poland - 1956 - when both countries suffered from unemployment, the number of economically active people grew rapidly. In the 1970s, all potential labour was more or less absorbed into the labour force³ and after some time labour shortages started to be felt. The first country which experienced labour shortages was Czechoslovakia.

In his 1983 work J. Kornai expresses the view that full employment in the traditional economy was not the result of ‘specific economic policy measures’ but of institutional conditions. ‘It is the consequence of the soft budget constraint that demand for resources grows almost insatiably. Demand for resources, including demand for labour, necessarily has to grow as long as it does not hit the supply constraint.’ To him labour shortage is ‘one of the manifestations of resource shortage’ (p. 29). In his 1992 book he repeats that full employment was not the result of conscious economic policy. To him it is ‘a by-product or side-effect of the process of forced growth’. In the next paragraph he no longer insists that full employment is entirely the result of institutional conditions. Full employment is not only ensured ‘by the principles and practical conventions of employment policy but by the operating mechanism of the classical system, above all the chronic, recurrent shortage of labor’ (p. 210).

By forced growth J. Kornai apparently means growth resulting from the industrialisation drive. In my opinion the industrialisation drive played a paramount role in bringing about full employment and, at a certain stage, the development of labour shortages. But to me the industrialisation strategy which was applied, combined with ambitious growth, was the result of economic policy. I have already mentioned above that within the traditional system a different strategy of economic development could have been pursued. It is possible to imagine a strategy which followed a more balanced growth with less ambitious economic growth rates. After all, the growth drive after a while created disequilibria in the economy and, in order to eliminate them, the authorities had to slow down the expansion of the economy. The fluctuations in economic growth which East European countries experienced were the result of this policy of maximum growth (see Goldmann, 1964 and 1964a; Bajt, 1971). Thus the decision to introduce industrialisation with great stress on heavy industry and to pursue maximum economic growth was an economic policy decision and was motivated to a great degree by security considerations.

In addition, without conscious economic policy measures the economies of some countries in certain periods would have had to grapple with unemployment (cf. Granick 1987, p. 69).

The industrialisation strategy had not only an impact on economic policy measures, but also on systemic arrangements, some of wich furthered employment increases and contributed at a certain stage of development to labour shortages. Thus the labour shortages that arose were the result of systemic factors and economic policy, besides the demographic factors, which also played a certain role. In my 1984 book I discussed this problem in great detail. Therefore I will only summarise it here.

Demographic factors were important, mainly in Czechoslovakia and Hungary. In the second half of the 1970s in both countries there was a reversal in the growth of the working-age population (see Chapter 8).

Hoarding of labour by enterprises was perhaps the most powerful factor in bringing about labour shortages. There were several motivations for such behaviour. One was the reaction to the ratchet principle, i.e., to the authorities’ tactics in setting plan targets for enterprises. Since not having reliable information about enterprise capacity, the central planners used a simple method: they increased plan targets each year (see Chapter 2). The reaction of enterprises lay in accumulating reserves, including labour, in order to be able to cope with the authorities’ taut plans.

In my opinion the institution of taut plans was, on the one hand, of a systemic nature, and on the other hand, a tool of economic policy. It was of a systemic nature when it was used as a tool to counter enterprise interest in soft plans in order to be able not only to fulfil but also to overfulfil assigned plan targets. It was a tool of economic policy when it was to serve the drive for maximum economic growth and thus the industrialisation drive.

The linking of the growth of the wage bill to the fulfilment and overfulfilment of the output target was also often an incentive to hoard labour. Even if the adjustment coefficient was lower than unity, it was often advantageous to overfulfil⁴ the output target. Often the availability of labour reserves was decisive as to whether the overfulfilment was possible; hence, a tendency to hoard labour.

The uneven spread of the work load during the year, which was a frequent phenomenon in the traditional system for various reasons, one being the late completion of annual plans, was another reason for hoarding. Enterprises usually tried to fulfil the plan by ‘storming’ at the end of each month and at the end of the year. Such a work rhythm encouraged enterprises to keep a workforce fairly close to the needs of the period of peak activities.

The assignment of employment limits, which amounts to labour rationing, encouraged labour hoarding too. Enterprises reacted to it as consumers do to the rationing of consumer goods.

Up to now I have mentioned several reasons, predominately systemic, for labour hoarding and thus for labour shortages. The next to be discussed will be the reasons for labour hoarding and labour shortages which were primarily the result of economic policy. One such reason was that, whenever the government set a ceiling for average wage growth, enterprises tried to hire workers who could be paid below average wages in order to have a fund for wage increases for skilled workers. Such hoarding occurred even in Hungary after the introduc­tion of the 1968 economic reform. Another motive was the government policy of obliging enterprises to make available ‘brigades’, mainly for helping agriculture.

Labour shortages also had their origin in the fact that labour was not fully utilised. All three countries suffered from huge losses in the potential work-time fund. Some estimated the losses in the range of 20-30 per cent. These great losses were caused by deficiencies in planning, in the organisation of the production process, lack of discipline in the workplace and absenteeism. In the next chapter I will try to explain why the authorities were not able to cope with these great losses.

Thus labour shortages were combined with gross underutilisation of the labour force. Labour shortages were felt primarily in services, but also in other sectors of the economy. In Czechoslovakia, for example, new industrial enterprises had difficulty recruiting the necessary workforce, whereas at the same time Czechoslovakia had many obsolete enterprises which employed a large number of workers. True, the planners designed plans for shutting down obsolete enterprises though, compared to what was economically needed, their number was modest, but even this did not materialise. For political reasons they did not want to push the scheduled closure of enterprises too hard. Also lack of proper housing hampered the mobility of workers from one place to another.

In my opinion, labour shortages could have been entirely removed or at least substantially eased had the governments embarked on a fast mechanisation of auxiliary jobs. All three countries had a huge number of people employed in auxiliary jobs, such as in the transport of materials and products within enterprises, and the sorting and shelving of goods. Greater mechanisation, mainly in the handling of materials, could have released large numbers of workers, some of whom could have been used in services where labour shortages were the greatest.⁵ The politicians surely knew about such a possibility, but did not have the courage to carry it out. Such an action would have required a shift of investment from other sectors, even from heavy industry, an action which might have been resisted by the heavy industry lobby. What was no less important, an expansion of services would require more subsidies, unless the government was willing to increase prices.

A more reasonable employment policy could have eliminated labour shortages, maintained full employment and brought about a better satisfaction of consumer demand.

Full employment was one of the promises of the socialist programme. Unlike capitalism, socialism committed itself to making the right to a job one of the principal rights and it was incorporated in the constitution of the European socialist countries. This did not happen until employment achieved a level which could be characterised as full employment. Full employment had its advantages but also many disadvantages due to the way it was achieved and maintained. In my opinion, the right to a job should be regarded as one of the elements of human rights because unemployed people are not really fully-fledged citizens. In addition, unemployment is costly to society. It means a loss of output and taxes, increased state expenditures and, on top of this, social and psychological costs which cannot be quantified.

In the socialist countries full employment also had its costs. Combined with labour shortages it became a source of underutilisation of labour, lack of discipline in the workplace and an impediment to the restructuring of the economy.

WAGE POLICY

This subchapter can be started with the statement that socialist countries followed a policy of low wages in relation to per capita national income. This is not to say that this was a deliberate policy; it was rather a result of other policies. One of them was the industrialisation policy combined with the arms race. The industria­lisation policy generated an obsession with economic growth, reflected in increasing investment ratios which were to a great degree at the expense of consumption. On top of this, a quite significant proportion of government expenditures was earmarked for the military, which also burdened consumption.

A further reason for low wages was the policy of employment maximisation. This, combined for a long time with rigid job security and the workers’ inability to quit jobs according to their choice, undermined labour discipline, hampered labour mobility in accordance with the needs of the economy and thus contributed to the low level of productivity.

The policy of low wages was not only affected by employment policy; it also had an effect on employment. It contributed to an expansion of employment, mainly of women. Many women, who would have preferred not to take a job in order to devote themselves fully to their child or children, were forced to take jobs in order to supplement their family budget.

The policy of low wages which helped the authorities to achieve their goal of mobilising women into jobs turned out to be a two-edged sword. It not only encouraged women to take jobs, but it also exerted pressure on the authorities to create jobs for social reasons.

The policy of low wages had an effect on wage differentials, mainly skill differentials. It is understandable that, if the average level of wages is low and the governments want to improve the well-being of the poorest segments of the population, as was the case in the three countries, wage differentials for skills cannot be very wide. In addition, one of the articles of socialist ideology was a more equal distribution of income. Therefore it could be expected that once communists seized power, there would be a tendency to narrow wage differentials, as the Soviet CP did in the 1920s and after Stalin’s death.

In the 1930s Stalin ignored the idea of a more equal distribution of income.⁶ He introduced a system of wide wage differentials which favoured in the first place the protectors and defenders of the Stalinist system: state security institutions, the officers of the army and propagandists. With Khruchshev’s coming to power, this trend was reversed. Khrushchev’s successors continued this policy of narrowing wage differentials. This policy was again reversed under Gorbachev (Flakierski, 1993).

After the CPs in East European countries seized power, they embraced the policy of narrow wage differentials, mainly in Czechoslovakia. (It should be mentioned that World War II and its aftermath had already brought about quite a narrowing of wage differentials compared to the pre-war situation.) Besides ideological reasons there were also political reasons for this. The countries were confronted with the problem of how to distribute the growing industrialisation costs and the armament burden. It was clear that agriculture alone could not foot the bill. To distribute the costs evenly, thus affecting badly paid income groups and blue-collar workers, would have hurt CPs politically. Therefore they tried to solve the problem primarily at the expense of white-collar workers and better- paid groups.

In Czechoslovakia in the period 1948-53 there was a dramatic change in the level of average wages between the material and non­material spheres, due largely to a dramatic change in the income differentials between white- and blue-collar workers. According to Hron (1968) average wages in education and culture in 1948 were 24.7 per cent higher than in the national economy, and in health and welfare the difference was 20.8 percent. In 1953, average wages in education and culture were 11.1 per cent lower and in health and welfare 12.4 per cent lower than in the economy as a whole. A similar change occurred in industry between engineering and technical personnel on the one hand, and manual workers on the other. In 1948, the average wages of the former were 65 per cent higher than those of the latter; in 1953 the figure was 32 per cent (for more, see Adam, 1984).

The situation in Poland was similar. Kalecki’s analysis (1964, pp. 91- 101) shows that real incomes of manual workers increased in the period 1930-60 by 75 per cent, whereas those of non-manual workers declined by 26 per cent in the same period. It can be assumed that the dramatic change occurred mostly in the period after the seizure of power by the communists.⁷

After 1955 there was a small improvement in wage differentials for skill, but it did not last long. The same was true of Czechoslovakia and Hungary during the economic reforms in the 1960s, but afterwards the narrowing continued. Needless to say, it had negative consequences for hard work, inventiveness and initiative, as well as for the socialist system.

Even in the traditional system the politicians promised to remedy the situation, but not much happened. Blue-collar workers were against changes in wage differentials, and the politicians were afraid to challenge them. There were also practical impediments to a challenge. In profit-making enterprises the actual wage bill was dependent on the fulfilment of plan targets, and the wages of most blue-collar workers were paid on the basis of piece work. This arrangement gave enterprises some flexibility with regard to remuneration and gave workers the possibility of exerting pressure for wage increases. Budget- financed organisations, which comprised mostly white-collar workers, did not have such an advantage. There, the actual wage bill could increase only with the explicit approval of the authorities. To some degree this was also true about the salaries of white-collar workers in profit-making enterprises. Their salaries were determined from above and could be manipulated by reclassification of white collar workers into higher skill groups. But there were narrow limits to such manoeuvring (for more, see Adam, 1984).

As a result of such a policy, even in the 1980s engineers with a university education, not in a managerial position, and junior physicians received wages at the level of average skilled workers. Such narrow wage differentials not only had a negative impact on the economy, but also weakened the position of the CPs. The intelligentsia saw the narrow differentials as evidence of an undervaluation of, and disrespect for, their work and they resented them. On top of this, there was the nomenclature, an institution which excluded talented people from positions of responsibility, simply for political reasons. No doubt, wage dispersion policy was one of the factors which contributed to the collapse of the socialist system.

CONSUMER PRICE POLICY

In the previous chapter, the price system was subjected to criticism from a systemic viewpoint. The criticism was directed, inter alia, against the rigid stability of consumer prices which was intended as an anti-inflationary provision.The consumer price policy, which turned consumer prices into an instrument of social policy, merits criticism too. Using consumer prices for social purposes was not a necessary component of the rigid price stability. The rigid price system would not have been affected if price relations had been neutral to social problems.

The social function of consumer prices was primarily implemented through the distribution of the turnover tax. One of the principles of distribution was that the resulting consumer prices must benefit low- income groups per capita and thus mitigate the differences arising from employment incomes and the number of children. To this end, lower tax rates were set on the consumer goods which played an important role in the family budget of lower-income groups per capita, primarily important foodstuffs such as bread, milk and meat, but also on utilities.⁸ Low tax rates were applied to products important for the promotion of education, culture and propaganda, such as books, admissions to cultural events, etc. On the other hand, goods which were regarded as non-essential were taxed heavily. Especially high tax rates were imposed on tobacco products and alcohol.

As in other policy issues, here too the Soviet practice was imitated. In the Soviet Union, prices of clothing (with the exception of children’s clothing) and footwear were on the average burdened by turnover taxes much above average, the reason being a shortage of light industry capacity. East European countries took over this pricing policy, though they were in a different situation from the Soviet Union. It seems that the high taxation on clothing and footwear was also motivated by the desire to levy a higher tax on the agricultural population (Nagy, 1960, p. 60)⁹

Prices of services, with some exceptions, did not contain the turnover tax at all. Rents were set at a level much below depreciation and maintenance costs.

The policy described hurt the economy and turned out to be an impediment to its restructuring. Low prices for foodstuffs (e.g., meat) became one of the reasons for shortages and, in other cases (c.g., bread), for waste.¹⁰ The rigid price stability of many foodstuffs, at a time when agricultural procurement prices were rising in order to ensure higher incomes for collective farmers, led to a gradual decline in the turnover tax rates and finally to negative rates, namely subsidies, which made it difficult to maintain budget equilibrium. Not only this, but low prices for foodstuffs (e.g. meat) benefited higher-income groups in some cases more than the low ones for which they were intended.¹’ Low-income groups per capita would have been better served if subsidised prices had been limited to a small number of staples, and pensioners and families with several children, who mostly belong to low per-capita income groups, would have received higher pensions and family allowances, respectively.

Distorted consumer prices led to a distorted structure of consump­tion; to a bigger consumption of some foodstuffs than would have taken place with rational prices at the existing incomes. An example in point was the high consumption of meat per capita in Poland. In the 1970s the Polish consumption of meat was not much behind that of West Germany but, in terms of national income per capita, the lag was huge. In addition, the high consumption of meat caused Poland economic problems: it hurt its exports and Poland was forced to import more fodder.

A rational price system would have increased the demand for clothing and footwear and durables at the expense of foodstuffs, including meat. Such a change in structure would have had the advantage that the expansion of production of non-foodstuffs could have probably been combined with higher productivity.

Low prices for some services became an obstacle to the expansion of services since this would have required greater subsidies.

The consumer price policy, which was one of the reasons for the existing distorted price system, was at the same time an obstacle to a major economic reform, in which the market should have played an important role. In order for the market to have even a limited coordinating function rational prices are needed. However, a restructuring of consumer prices encountered political obstacles since it would probably have affected more low-income groups per capita.

SOCIAL SECURITY POLICY

When talking about the advantages of the socialist system communist leaders usually put social security and full employment in first place. Social security was a comprehensive programme which took care of most social problems. It was supposed to take care of the under­privileged, the sick and the aged. With some exaggeration it can be said that the social security programmes took care of people from the cradle to the grave. It should, however, be stressed right away that mostly the programmes were not carried out in the manner they were promised: some components of the programmes were implemented in a way that was contrary to the principles declared, and others could not be developed as promised because of insufficient funding, often due to the low priority attached to them.

Without going into great detail, the social benefits from the social security system could be divided into two groups: transfer payments (pensions, sickness benefits, family allowances, etc.) and services (such as hospital services, rest homes). Transfer payments were linked to employment incomes, whereas services depended on needs.

Old-age Pensions

The communist governments transformed the already existing splin­tered pension system into a uniform and comprehensive system, which in the course of time covered all the population. Collective farmers were included in the pension scheme later than state and enterprise employees, and it was several years before they were put on the same footing as employees. The pension system was based on the principle of universality and transferability. Everyone who was engaged in a legal economic activity (with the exception of house work) was entitled to a full pension after reaching the number of service years required for eligibility and the retirement age. In Czechoslovakia and Hungary the retirement age for men was set relatively low, 60 years, whereas in Poland it was 65. Women had a lower retirement age; it also depended on the number of children that they had had.

In Poland and Hungary pensions depended on employment income. In Czechoslovakia the pension also depended on the work category in which one was active before retirement. There were three work categories based on working conditions and the risk to health and life. In the third category, where the maximum pension was the highest, miners, some workers in iron foundries, pilots and some other professionals who worked in similar difficult conditions, were included. Most of the intelligentsia was in the first category, where the maximum pensions were the lowest (Adam, 1991, p. 8).

One could argue that the classification according to working conditions was justifiable. But most of the intelligentsia did not think so; they saw it as a further proof of disrespect for their contribution to the performance of the economy and as a reflection of the wage dispersion policy which they resented.

The resentment was all the greater because this rule did not pertain to high CP and government officials nor to important CP activists. Higher pensions for the CP and government elite were given in all three countries.

Due to labour shortages pensioners were allowed to continue working, usually part-time, in some cases full-time, and to collect pensions. The pensioners were used as a reserve workforce: when their services were needed they were used and, if not, their employment involvement was limited. Usually manual-worker retirees had better conditions for employment, since the demand for their services was bigger.

Health Care

All three countries introduced universal and free health care which was financed from government expenditures. Of course, the funds needed to finance health care were taken from the tax on wages and profits, and were available from paying lower wages to employees. Where the wage tax was later abolished, as in Hungary and Poland, the missing funds had to be compensated by smaller increases in wages or increases in prices.

The free health care provided was comprehensive: it included medical treatment, hospital services, dental, prenatal, preventive and emergency care, medication (with some limitations), sanatoria, and stays at health spas, etc.

The introduction of a free health-care system was a noble idea; it gave primarily low-income groups, who in the past had limited access to health care, a feeling of security. It also contributed to the narrowing of differences in the standard of living because in no other field were the differences between the haves and have nots as small as in health care.

Health-care delivery was to be based on need, and for this reason there was supposed to be equal access to health services for all the needy. In practice the principle of equal access was violated by the authorities in two respects. First, the elite had special clinics and hospitals which were equipped with more up-to-date technology and which had access to foreign medication. What was worse was that the poor remuneration of physicians and nurses generated a corruption system in the course of time: health-care providers expected in addition to their salaries tips from their patients for their services.¹² The quality of services depended to a great degree on the amount of tips.

The significance and appreciation of free health care was also devalued to a great extent by the poor funding of health care which was reflected in a neglect of modern medical technology; in the distribution of state expenditures, health care was low on the list.

HOUSING POLICY

If the question is posed about the extent to which housing policy contributed to the collapse of the socialist system, the answer would be that it was a mixed bag with strong negative effects. On the one hand, the communist leaders made sure that the cost of shelter to its users was small, in some cases ridiculously small. This helped low-income groups per capita. On the other hand, construction of housing, mainly in the beginning of communist rule, did not receive the proper priority it deserved.

Setting the rent at a level which was below the depreciation and maintenance costs, combined with the policy - which was followed up to the middle of the 1950s - that construction of housing in urban areas was the exclusive responsibility of the government, created a disincentive for housing construction. The more housing units were constructed, the more state subsidies were needed. Since governments’ priority was the expansion of heavy industry, little funds were available for constructing dwellings.

After seizing political power, the communist rulers nationalised (municipalised) apartment houses and tried to solve the housing shortage by redistributing the existing living space according to strict norms. In Hungary, moving the exponents of the old regime from large cities, mainly Budapest, was also motivated by the desire to mitigate the housing shortage.¹³

In the middle of the 1950s, when the housing situation took on a critical dimension and the political situation was tense, the authorities decided to give a great role to cooperative housing and also to private housing in rural areas as a way to accelerate housing construction and to alleviate government financial involvement. For completeness it is important to say that, mainly in Czechoslovakia, cooperative housing was supported by loans at low interest rates and state subsidies. In most cases cooperatives also received land for a nominal price or without charge. Private housing was also supported by the authorities.

With the expansion of cooperative and private housing the role of state housing was reduced substantially. It was to be earmarked for low-income groups and for people who, due to their position, were entitled to a service dwelling.

In spite of all these measures, housing shortages were not eliminated and affected negatively the family lives of those who could not find adequate apartments. In addition, due to various forms of housing construction and financing, housing was available to different people under varied conditions. All who had state apartments enjoyed low rents; this privilege was available not only to low-income groups, but also to many high-income earners. On the other hand, living in cooperative dwellings was much more expensive.

CONCLUDING REMARKS

Two topics have been discussed in this chapter: the industrialisation policy and the social welfare policy (after all, social security policy combined with the consumer price and full employment policy and also wage and housing policy could be labelled as welfare policy). The two had in common that the guiding principles for their implementation were determined by economic policy. As has already been stressed above, this economic policy was not a necessary result of the economic mechanism; it could have been possible to apply a different economic policy to a great extent without affecting the working of the economic mechanism. In addition, a better economic policy could have reduced the threat to the regime immensely.

The industrialisation policy could have been a blessing, but the way the policy makers implemented it, namely the excessive stress they put on fast development of heavy industry combined with maximum economic growth, turned out to be a very negative factor. The industrialisation policy led to a neglect of the infrastructure, services and the light and foodprocessing industries, and hampered a restructuring of the economy in accordance with domestic demand and the possibilities of exports. It also affected negatively progress in technology and the well-being of the population.

The socialist ideas of equality, social justice and solidarity with the weak, underprivileged and aged, and the promise of an economy of full employment without cyclical development, had a tremendous power of attraction after the war, mainly in Czechoslovakia. Even in Poland and Hungary, where strong anti-Russian sentiments existed which were translated into strong anti-communist feelings, socialist ideas had a strong appeal. Thus the communist leaders had in their hands a potentially powerful instrument for gaining the support of the people, and they were determined to use it. They also hoped that, by solving problems which the capitalist system could not or did not want to solve, the legitimacy of the system would be attained.

Of course, the effect of the social welfare system depended on the extent to which practice corresponded to the ideas professed. It is known that reality is never a true reflection of ideas. But the welfare system that was implemented suffered from too many shortcomings. Some of them have already been mentioned, and there is no need to repeat them. Some of the shortcomings had a common denominator, the idea that the proclamation of the intention to build socialism created conditions for the rise of the new man, homo socialisticus, and that taking measures as if he were already in existence would accelerate the process of his formation. This was the case when low salaries for doctors were set, narrow differentials for skill were introduced and pensions in Czechoslovakia were classified. Not much attention was paid to the fact that the people affected were not and could not be ready for such dramatic changes, and that their self-esteem and social position in society, as well as their interests, were badly affected, and that this must have turned them against the regime or at least discouraged them from supporting it. In addition, the measures mentioned were not really necessary.

What was even worse, the communist leaders did not apply the same rules they applied to the public to themselves and their close supporters. They had access to special hospitals, well-stocked stores, and they were not affected by the above-mentioned categorisation for determining the amount of pensions.

Another important common denominator was that when the two principles, equality and economic efficiency, clashed, the communist leaders did not try hard enough to find a proper balance, which in my opinion should have lain in the principle that equality should be pushed at the expense of economic efficiency only if the issue involved was a fundamental principle and there was no other way to achieve it. Full employment in a socialist regime may be such an example. Of course, its negative effects could have been greatly reduced by proper actions (sec Chapter 4). Attaching a social role to consumer prices was a kind of push for equality at the expense of economic efficiency which was not really necessary and useful. Equality could have been better served if the social role of prices had been reduced considerably and priority given to efficiency.

The welfare policy, which was believed to ensure permanent popular support for the socialist system, fulfilled this role until approximately the middle of the 1970s. From then on, its role was gradually eroded. This was not only because of its shortcomings, as mentioned above. There was a gradual build-up of the welfare system in the West, which in some respects was superior to that in the East, and this naturally reduced the power of attraction of the Eastern welfare system. Full employment was not part of the Western welfare system and, when the fortunes of the socialist system were already declining, the West suffered from high rates of unemployment. Nevertheless, the public in socialist countries belittled the fact that full employment existed there, partly due to anti-socialist propaganda¹⁴ and partly because people often appreciate advantages properly only after they have lost them.

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