Notes and References

1 Thoughts on the Causes of the Collapse of the Socialist System

1. Brzezinski is using the term the communists used to characterise the capitalist system.

2. In his review of Fukuyama’s book M.

3. ‘The Mechanism is, in other words, a kind of Marxist interpretation of history that leads to a completely non-Marxist conclusion’ writes Fukuyama (131).

4. According to the author, Schumpeter (1950) Capitalism, Socialism and Democracy and Nelson and Winter (1982) An Evolutionary Theory of Economics belong to the group of evolutionary economists and to the second which professes a conservative political philosophy, Burke, (1790) Reflections on the Revolution in France^ Popper (1971) The Open Society and its Enemies and Oakeshott (1962) Rationalism in Politics and other Essays.

5. I do not think that Murrell is correct when argues that ‘... gradually policy returned to its natural path in ensuing months’. He has apparently in mind the Polish attempt to stimulate the economy in the second half of 1990. Once the stimulation brought about an increase in inflation, the policymakers returned to their old policies.

6. As in other places of her book, here too, she is not very specific about what she means by anarchy.

7. A good overview of Lange’s views as well as of the debates about market socialism is given in the introduction to the volume of papers edited by Bardhan and Roemer (1993).

2 The Traditional Economic Mechanism

1. Some economists distinguish the two terms, but I will use them interchangeably.

2. I cannot cite all or most publications on the topic mentioned. Therefore only a few names will be given. Bornstein and Fusfeld (1970); Gregory and Stuart (1989); Kornai (1992); Nove (1980) and Spulber (1991). With the exception of Kornai’s book all others deal with the Soviet system.

3. This right of choice of job did not exist from the start of the system. For a long time employees could not move freely from one job to another. It is interesting that the freedom to quit a job was instituted first in the USSR and only later in East European countries.

4. Gross value was computed in constant wholesale prices and included for a long time the value of the final products, semi-finished products and the value of subcontracting services for other enterprises.

5. For example the 1967 price reform in Czechoslovakia brought about a huge increase in wholesale prices, but this did not affect consumer prices.

6. In many consultations I had about the reasons for the collapse, the following two stood out: the large overestimation of planning’s ability to coordinate the economy and insufficient incentives. Here I would like to mention specially the names of two scholars who stressed this point, J. Mujzel and G. Revesz.

7. It is known that many people in the line ups were employees who were supposed to be at their jobs.

8. This is not to say that enterprise managers did not have room for manoeuvring; as has already been shown, the authorities made their decisions on the basis of information they received from enterprises.

9. The last three paragraphs rely very much on Berliner’s study (1981).

10. It is also known that the allocation of inputs to enterprises and the monopoly position of suppliers generated a lot of corruption.

11. A. Bajt (1971) gave a good survey of the theories of cycles under socialism which were published before 1971. In 1981 T. Bauer, a well-known Hungarian economist, made an important contribution to the theory of cycles under socialism.

3 Economic Policy

1. When Y. Malenkov, the new leader of the Soviet Union after Stalin’s death, stated in his programmatic speech that the new leadership would put greater stress on the development of light industry, he was reminded by N.

2. In 1990 Shevardnadze used the figure 25 per cent for the USSR (Fukuyama 1992, p. 345).

3. This manifested itself in very high participation rates.

4. The offering of an increase in the wage bill for an overfulfilment of plan targets was not a necessary component of the traditional system. It is known that in the 1965 Soviet economic reform, which did not go beyond the framework of the traditional system, the institution of overfulfilment was restricted. Also the Polish government limited it at one time to instances of approval in advance (see Adam, 1973; Fick, 1964).

5. I have heard from several friends who had family members hospitalised in the 1980s in Czechoslovakia that they themselves cleaned the rooms where their relatives were lying ill, and the toilets. They did these jobs voluntarily because of the shortage of cleaning staff at the hospitals.

6. Stalin attacked wage levelling as a petty bourgeois idea. In his talk with Emil Ludwig, Stalin said: ‘Only people who are unacquainted with Marxism can have the primitive notion that the Russian Bolsheviks want to pool all wealth and then to share it out equally* (quoted according to Lane, 1982, p. 22).

7. It can be assumed that in Hungary the situation was not much different.

8. This policy was not carried out consistently since other criteria which applied contradicted the social criterion.

9. Collective farmers’ households spent relatively more on clothing and footwear than non-collective farmers. In addition, the non-rural popula­tion got compensation in the form of cheap utilities, city transport and shelter.

10. The cheapness of bread encouraged people to use it to feed animals.

11. In 1956 in Czechoslovakia the authorities initiated research to find out the extent to which the existing distribution of the turnover tax under the existing structure of consumption favoured individual income groups.

12. In the 1950s in Czechoslovakia, the authorities tried to counter the growing practice of tipping by prosecuting health providers who accepted them, but later abandoned this idea. In Hungary the authorities legalised tips as long as they were given after the services were extended.

13. In Czechoslovakia, the action of moving the exponents of the old regime from large cities was already in preparation. At the last moment it was stopped.

14. The usual propaganda argument was that in the West unemployment benefits were higher than wages in the East.

4 Labour-Management Relations and Incentives

1. In the 1950s a French delegation visited the biggest enterprise in Prague. It had long conversations with managers and workers alike. The spokesman of the delegation, according to reliable sources, summarised his impressions by saying that there was a difference between France and Czechoslovakia: in France you are allowed to criticise the president of France, but not the foreman, whereas in Czechoslovakia the situation is the opposite.

2. In Canada and West European countries the position of the top manager is more restricted.

3. Not all socialist countries adopted the idea of one-man management. In China, up to the middle of the 1970s, collective management existed in enterprises.

4. This subchapter and the next rely heavily on two of my earlier books (1979 and 1984).

5. This is less true in unionised firms. However, their number has much declined in the past decades.

6. Political prisoners, who were forced to perform hard work, were assigned jobs.

7. Among the students expelled, many were in the last year of their studies.

8. I was forced to work for 7 years (1951-8) as a skilled worker in the biggest factory in Prague after being recalled from my diplomatic post, and therefore I intimately know how workers behaved. For example, many workers left their workplace 20-30 minutes before the end of the shift, often without having a replacement for the next shift. They used the time for their ablutions so that, when the shift was ending, they were already standing at the time clock.

9. The well-known classical saying of workers that the government pretends to pay us and we pretend to work reflected the situation quite well.

10. In the United States workers are afraid of losing their jobs because it is usually difficult to Γmd new ones and also because in most cases they lose health care insurance at the same time.

11. The Hungarian 1968 economic reform introduced considerably differ­entiated bonuses. Top managers were entitled to bonuses amounting to 80 per cent of their basic salaries, whereas workers to only 15 per cent of their earnings. The division of funds earmarked for wages and bonuses between the two items was controlled by top managers to a great degree. Since top managers were interested in maximising bonuses, whereas workers wanted to maximise wages, a conflict of interest developed which threatened the peace of enterprises. Therefore the authorities soon modified the bonus fund (Adam, 1979, p. 153).

5 Foreign Economic Relations

1. CMEA was established in 1949. Needless to say, this institution was the result of Soviet initiative. The founders of CMEA were, besides the USSR, Poland, Czechoslovakia, Hungary, Rumania and Bulgaria. Albania and East Germany joined later. CMEA had also non-European members: Mongolia (from 1962), Cuba (1972) and Vietnam (1978). Yugoslavia was an associate member.

2. Safarikova (1989) took a similar position when she argued that the international socialist market did not have the attributes of a real market; it was rather a bidding place, where individual economies tried to sell their low quality commodities at higher than international prices to exporters of raw materials and semi-products, who accepted such deals for payment reasons.

3. To V. Shastitko (1990) the corrections did not reflect objective processes.

4. The reader who is interested in a short review of the debate should consult Brada (1991) and Lavigne (1991, pp.241-52).

5. Holzman also advances another possible explanation; this is based on custom union theory, which in my opinion is less convincing.

6. According to Kornai (1992, p. 358) CMEA countries agreed in 1975 on ’sliding’ oil prices which meant that prices were adjusted each year on the basis of a five-year average.

7. To make an objective judgement about the advantages the small countries enjoyed from getting cheap raw materials, one would also have to take into consideration other factors, inter alia, the interest rate the exporters paid on investment credits.

8. These data are based on 1967 US dollars calculated from national data at the official exchange rate.

9. According to computations (see Gajdeczka, 1989, vol. 2, p.383) the total debt compared to exports in 1987 was 95 per cent in Czechoslovakia, 342 per cent in Hungary and 542 per cent in Poland. The debt in terms of per capita was the highest in Hungary.

10. It is worthwhile mentioning that if, in the trade of CMEA countries, market relations prevailed, some countries could not have afforded to produce cars.

6 Political and Ideological Factors

1. Whatever the name of the CP was, here it will be called CP. The Polish CP was called Polish United Workers* Party and the Hungarian was called Hungarian Socialist Workers’ Party. Only the Czechoslovak CP had the word communist in its name: it was called the Communist Party of Czechoslovakia.

2. It is known that the CPs kept a close watch over the activities of the non­communist parties through their agents inside the parties. In Czechoslo­vakia, for example, each of the non-Communist parties had its own daily paper. But the CP determined the number of copies the non-Communist parties were allowed to publish. The quota was well below demand.

3. Most of the time there were informal factions which, of course, did not operate openly.

4. One Hungarian political scientist mentioned to me the excellent example of M. Nemeth, the last socialist prime minister. He was a member of the Party apparatus. In 1988 he was promoted to the powerful post of Party secretary for economic affairs and several months later to the post of prime minister. In his function he, no doubt, contributed to the rapid collapse of socialism. Apparently he felt that the regime was untenable and he wanted to have some credit for its fast demise. And indeed, he was rewarded by the West: he was appointed to the position of deputy managing director of the European Construction Bank. His ‘commit­ment’ to socialism was best manifested in his refusal to become a candidate of the Socialist party in the 1990 elections. He also earned the gratitude of the West, mainly Germany, by allowing East German tourists in Hungary in August 1989 to go to West Germany instead of East Germany. This provision, which was taken in cooperation with G. Horn, the foreign minister of the day and the present leader of the ruling Socialist Party, put into motion forces which accelerated the collapse of the socialist system in Czechoslovakia.

5. Z. Brzezinski (1989), not known as a great friend of communism, wrote the following about it: ‘Communism thus appealed to the simpletons and to the sophisticated alike: it gave each a sense of direction, a satisfactory explanation, and a moral justification. It made its subscribers feel self- righteous, correct and confident all at once* (pp. 2-3).

6. What is also interesting is that nco-libcralism, a right-wing ideology which adheres to laissez faire_t found many adherents in both countries, not only in the ranks of non-communists, but also in the ranks of ordinary members and functionaries of the CPs, among them many former dogmatic communists. Some of the new neo-Iiberals were later elevated to high functions in the non-communist governments.

7. Because capitalist countries adopted social programmes which were first advocated by socialists and were first applied in socialist countries, many social scientists started to talk about a convergence of the two systems.

8. In Czechoslovakia, Charter 1977, an organisation of dissidents, used the Helsinki accord as a cover for its activity.

9. Of course, the West used other means too, to bring down the socialist system. See Chapter 10 for the diplomatic efforts made.

10. A critical analysis of Kadarism is given by two Hunagarian philosophers, F. Feher and A. Heller (1990, pp. 71-87).

11. O. Sik (1990) gives a good insight into the rise of the ‘Prague Spring’ and the Soviet-led occupation. Z. Mlynar’s book (1980) is of great importance because it sheds light on the Soviet scandalous treatment of the Czechoslovak leaders.

12. Feher and Heller (1990, pp. 91-110) give an evaluation of the role of the ‘Prague Spring’ in the efforts of the East European emancipation.

7 Economic Reforms

1. This statement refers to Novotny’s leadership; Dubcek who came to power in 1968 was very reform-minded.

2. This was the view of a very well-known Polish economist who was critical of the regime. There were many others who were thinking in the same way.

3. In his review of Kornai’s The Socialist System, W. Brus (1993) stresses in substance the same point.

4. In brief, the so-called Brezhnev doctrine meant that the socialist camp was responsible for the socialist development of its members. A Strayer from the socialist path should be put back on track with the help of the camp. In other words it meant that the USSR had the right to intervene in the internal affairs of socialist states.

5. My explanation of the price changes is somewhat simplified, because I do not take into consideration the differences in the Czechoslovak and Hungarian reform.

6. The authorities in Hungary could interfere directly in the economy when the security of the country was involved and when deliveries to CMEA countries were threatened. In such cases they could make enterprises do what the authorities believed was necessary. Enterprises, however, were entitled to compensation, if such interference caused financial damage.

7. In the Czechoslovak reform of the 1960s, unemployment compensation was introduced, but not because the authorities intended to create a genuine labour market; it rather was intended as a provision in case some unemployment arose as a result of the economic reform or of the plan to liquidate obsolete and inefficient enterprises, a plan which was carried out to a very limited degree.

8. In his report to the CC meeting R. Nyers, who was the Economic Secretary of the CC and as such in charge of the economic reform of the 1960s, maintained that the market categories would be used in a planned way. According to him ‘the labour force even in the future cannot become a commodity and not the market, but conscious, state planned manage­ment will have the decisive role in extended reproduction, in investment* (1968, p. 140).

9. T. Nagy, who headed the reform committees, mentioned in a 1988 interview (Ferber and Rejtδ, 1988, p.25) that he was told by the secretary of the CC not to come up with, inter alia, a proposal for changing the organisational system. Apparently the CP leadership was afraid that this might antagonise the bureaucracy.

10. In Hungary, the founding body had to exercise its right of veto at the stage of selecting candidates for the position of top manager.

11. For example, the Hungarian economist T. Liska (1965) came up with the idea of entrusting the banking system with the running of state property. The banks lease the property to the highest bidder in organised auctions. Apparently Liska assumed that the utilisation of assets would be more efficient under the management of lessees than under state management. In my opinion this proposal could be applied to some small- and middle­size enterprises, but I have doubts about its practicality with regard to large enterprises. Nuti (1990) mentions the Liska proposal as one possibility. He also mentions large ‘state shareholdings in private companies’ as a form of management privatisation. Dreze (1993, p. 262) believes that labour-managed firms can be efficient ‘in moderate capital intensity firms’.

8 Development of the Economics

1. It was not an infrequent phenomenon that newlyweds had to move in with the parents of one of the couple in a two-room apartment or to continue to live separately. What was even worse was that housing shortages forced divorced couples to continue to live in the same apartment, even if one of the former partners remarried. Needless to say, conditions which deprived people of privacy led to frustration and conflicts.

2. Workers were outraged by the intended price increases mainly for two reasons. They were frustrated by stagnating real wages in the 1960s in any case, and were not willing to accept a further decline in the standard of living. In addition, the price increases, which included a huge rise in the price of meat, were announced just a few days before Christmas, when meat is bought in relatively large quantities.

3. W. Jaruzelski (1992, p. 29) maintains that in 1980 Poland got credit to the amount of $ 8.7 billion and paid out $ 8.1 billion in interest.

4. In the beginning of the 1970s, the Polish leaders tried to appease the private peasantry with various concessions (abolition of compulsory deliveries, price increases for agricultural products, extension of social security to the peasantry). When the political situation was consolidated, the Polish leaders started to talk about the importance of socialised agriculture, and this scared the peasantry (for more, see Brus, 1983, pp. 35-6).

5. Even in a relaxed international situation the Soviets would have exerted pressure on Poland. With Reagan’s decision to enter an enhanced arms race with the Soviet Union, the Soviet worries about Poland increased.

6. The US government was informed about the planned martial law by its agent in the Polish army general staff, Colonel Kuklinski. The fact that it did not pass on the information to Solidarity indicates that the USA also tried to prevent a Soviet invasion of Poland.

7. The estimates of how much Czechoslovakia fell behind Austria differ considerably. The estimate by the World Bank that Czechoslovak GNP per capita in 1990 was only USS 3,300 and thus only slightly higher than 20 per cent of that of Austria (see Dyba and Svejnar, 1991) was probably based on the official exchange rate of the Czechoslovak crown, which was much undervalued. The best way to estimate the performance of an economy of a country, mainly its standard of living in comparison with other economics, is with the help of an exchange rate based on purchasing-power parity. (This is not to say that such calculations are without problems; nevertheless, if they are made with proper considera­tion of all the factors they can give an objective result.) According to V. Komarek (1989), who made such computations, the Czechoslovak per capita GDP in 1985 was only 15-25 per cent lower than that of Great Britain, Austria and Belgium, and 15—40 per cent higher than that of Greece, Portugal and Ireland. According to E. Ehrlich (1991), Alton et al. estimated the Czechoslovak GNP per capita in 1986 at USS 7786. According to P. Havlik’s computations (1992), the Czechoslovak GDP per capita in 1985 was 76.3 per cent of the Austrian.

8. This was a meeting of the CC which discussed, among other things, the Czechoslovak contribution to the integration of CMEA.

9. Travel abroad was mostly in large groups, organised by state travel agencies. Because of the high prices of such travel, its participants were mostly people who had gained money in illegal ways. This was another reason for dissatisfaction.

10. The figures listed arc gross figures. The net figures were much smaller. Much of the credit which Hungary extended was not expected to be repaid.

11. Price subsidies on foodstuffs and services are not considered here.

9 Ownership Relations

1. ‘Who is not stealing (meaning from state property), is cheating on his family*. This was a saying during the communist regime in Czechoslo­vakia which characterises quite well the attitude of people to state property.

2. In 1953 collective farms had 376000 members; in 1958 the number of members declined to 169000, to increase in 1961 to 1 203900 (see Petδ and Szakacs (1985, pp. 257 and 445).

3. It is interesting that there was no mention of the private sector in the material of the Hungarian CC.

4. Gabor and Galasi (1981, p. 174) published earnings ranked by occupation. According to their figures, the earnings of a private retailer were second in rank after those of a minister. Other private occupations are not far from the top of the list. It is probable that the private sector earned more than was admitted.

5. Those who took advantage of such sales gained property very cheaply. Inflation made the repayment of credit very easy.

6. One can speculate that the government itself, being short of hard currency, purchased hard currency on the black market.

7. We disregard here the self-management arrangements in Poland and Hungary in the 1950s.

8. The composition of the Hungarian self-management body (enterprise council), which pertained in most enterprises, was such that it easily allowed a manipulative manager who had good relations with his employees to dominate it: managers could sit on the enterprise council (self-management body) as representatives of employees and the council could be convened only once a year (Sarkozy, 1985).

9. See Kawalec (1988), Krawczyk (1988), and Lewandowski and Szomburg (1988).

10. See, for example, Tardos (1988), and Kopatsy (1988).

11. I. Szelenyi (1988, p. 217) has devoted attention to structural changes in agriculture in socialist societies, particularly in Hungary, over a long period. Researching the economic activities of collective farms, he came to the conclusion that in the 1970s a process of embourgeoisement started in collective farms, a small group of farmers starting on their private plots (he calls them mini-farms) to produce for the market. These small entrepreneurs were the same people or their offspring who were engaged in production for the market before the communist regime. According to him the emergence of this petty bourgeoisie was possible because the Party bureaucracy acknowledged that the system could be rescued only by allowing a private sector.

12. I. Szelenyi (1990, p. 417) maintains that in the middle of the 1980s 70 per cent of the population were receiving earnings from the second economy.

10 The Soviet Factor

1. The Economy... (1990) is a joint work of four Western financial institutions.

2. In 1988 incomes increased by 9.2 and in 1989 by 12.9 per cent. At the same time the retail price index increased by I and 2 per cent respectively (Schroeder, 1992, ρ. 97, and The Economy..., 1990, p. 6).

3. Gorbachev himself acknowledged that his reform resembled the Hungarian one most of all (New York Times, 10 July, 1988, taken from Aslund, 1991, p. 151).

4. For more, see Hewett (1988, pp. 309-33), Aslund (1991, pp. 114-53), Adam (1989, pp. 169—89) and The Economy... (1990).

5. E. Shevardnadze, the former foreign minister of the Soviet Union, said to J. Baker, according to Bcschloss and Talbot (1993, p. 379), that had Gorbachev offered the 1991 union treaty proposal in 1988 or 1989, even the Baltic states would have accepted it.

6. Before the coup Gorbachev had the promise of Ukraine leaders that they would join the union. After the coup a great number of deputies voted for independence for fear of Yeltsin (see The Economist, 7-13 May 1994).

7. When Khrushchev was ousted he became a pariah.

8. This new style, which was also used in dealing with foreign leaders, ensured him popularity and trust in foreign countries. After a meeting with Gorbachev, Mrs Thatcher declared that it was possible to do business with Gorbachev, a compliment which she never used about talks with former Soviet leaders.

9. It can be assumed that Gorbachev was consulted about Kadars' ousting in 1988. It is not known what his answer was. One would not be surprised to hear that he agreed.

10. In his book W. Laqueur (1994, p. 67) takes a different position in maintaining that 'The arms race was regarded in Western capitals as a highly undesirable necessity rather than a deliberate strategy that would have dramatic results'.

11. Some social scientists argue that in Czarist Russia as well as in the Soviet Union security considerations triggered economic reforms (see Bova, 1992, pp. 46-7).

12. It is generally known that US trade unions and the CIA supported Solidarity financially.