THE NATURE OF A CENTRALLY PLANNED ECONOMY
AND ITS REFORM
Centrally planned economies, sometimes called "socialist economies," worked themselves into a critical economic position. Their characteristic system of control and management achieved limited material effect. Central planning and control, when confronted with the barrier of limited resources, completely lost its instrumental validity. Its usefulness was, after all, limited strictly to an ownership model characteristic of a socialist type of economy, of which the basic feature was the dominant role of so-called "socialized" property, declared to be the best from the point of view of social needs. Control over this type of property was exercised by directive and distributive instruments through which the volume and structure of production were set and resources were allocated according to directively imposed indexes of the final effect. The same methods were applied to steer the primary distribution of income, and thus to set the levels of payments for the resources employed.
The sphere of private ownership of the means of production, if allowed to exist at all, had very limited dimensions. In Poland, this sphere was strongly rooted in agriculture, but industry, commerce and services were mostly the domain of "socialized" property. Such a disparity between private and state-controlled spheres had to have economic consequences. The part of the economy linked directly to the market and able to react to its signals was limited in size and was under the destructive influence of the centralized system of resource distribution. On the other hand, the dominant part of the Polish economy, being detached from the market, did not react to the real scale and structure of social needs and had disproportionately low output in comparison to their costs. As years passed, the separation of the structures of production led to a strong increase of the amount of "empty" money.
The First Stage of Economic Reform
A centrally planned economy, using directive-distributive instruments of control, is to a great extent a matter of the past in Poland. Since 1981 the Polish economy has been undergoing a process of change called "economic reform". For most of the 80s this process did not bring noticeable results due to the very shape of the reform in its initial stages and especially to the lack of deep changes of the relation between the private and the "socialized" spheres of the economy. The legal foundations of the Polish economic reform were aimed clearly at preserving the constitutive features of the socialist economy and increasing its efficiency through some corrective measures. The primary task of the reform was not to change the existing economic model, but to make changes within the model.
Some conclusions may be drawn from basic documents describing the shape of a new economic system. The ownership structure of the economy was not to be changed, for the basic productive unit was to remain a "socialist enterprise," i.e., a state enterprise.(1) It was defined as a unit "comprising a collective body of employees and the part of all-national property allotted to it, . . . which should independently perform its productive and service activities within the centrally managed national economy." Reform was limited to making the state enterprise partly independent in the financial and decision-making spheres, and introducing worker self-management into the management system of the enterprises. These provisions were stated in the September 25, 1981 laws on state enterprise and worker self-management.(2)
No deeper changes were made in the principles of control over the economy. As a result of the reform, the Polish economy was to preserve its socialist character, i.e., it was to function within the system of central planning and not to respond to the market, for the reform envisaged "central planning as one of the basic principles of socialist economy."(3) Changes in this sphere boiled down to a reduction in the scope of central planning and its involvement in minute details. The latter change was supposed to make central planning more rational and effective. The relevant law stressed the great importance of planning, stating that the Polish economy "is a planned economy based on the socialist economic system," and that economic development and higher living standards of the population can be achieved through planning.(4)
Other legal acts issued later by the Council of Ministers limited the range of the freedom of the enterprises and of workers self-management. If economic reform is understood as a set of changes in the very foundations of an economic system resulting in the creation of new rules for its functioning, then it becomes obvious that fragmentary changes which transferred only some rights to enterprises and employees did not deserve to be called reformative. They did not produce a new property system which would introduce the private sphere into the main segment of economy, and they did not transform the relationship between the state and the economy, between the political and the economic spheres. The initial selective liberalization of economic life was accompanied by the activation of instruments of direct state control: detailed planning indexes were replaced by government orders,(5) and central distribution of resources and price and wage controls were preserved through a special tax system. Thus, the so-called "first stage" of economic reform resulted not in a new economic system, but in a new manner of functioning for the old one.
The sphere of private economic activity, although still very limited, especially in industry, gradually began to attract more interest. New claims for equality of rights between the private and the state-controlled spheres could be heard. Finally, a special law of great importance, issued on 23 December, 1988,(6) gave a higher status to private initiative. This bill, which allowed for free entry and removed many bureaucratic barriers hampering the development of private enterprise, allowed the private sphere to take a more prominent place in the national economy.
The effect of these changes was a slightly new shape for the socialist economy. While in the past it had been a centralized state economy with a strictly licensed and marginally sized private sphere in non-agricultural sectors, with the new law it entered an unstable, transitional phase. The central system of control lost its edge and the structure of ownership was partially opened to changes. As opposed to the clear-cut model of socialist economy, the subsequent model was unclear and transitional. It was no longer a typical socialist economy, but not yet a market economy. The new opportunities for private economic activity should not be mistaken for "marketization" of this economy. The state's share of the overall capital resources was still overwhelming, and its domination of the external environment of the private sphere remained sufficiently strong and limiting for the latter still to be licensed.
This analysis of transformations in the Polish economy during the first two thirds of the 80s and its conclusions as to their sufficiency and proper direction make it necessary to raise the question of the nature of the desired economic reform. If a reform is a set of changes bringing an economy from an initial to a target stage, then it is necessary not only to define the specificity of the economy to be reformed, but to point out at least the basic features of the target system, its potential effects and the ways in which this transformation may be accomplished.
The above-mentioned features of the centrally controlled economy make it evident that persistence of that type of economy relied on deprivatization of the spheres of ownership and management. Central management is feasible and relatively effective only when ownership of the means of production is centralized as well. This interrelation could not be changed by the fact that, along with centrally managed and dominating
state property, there existed a marginal private sector. The latter, as was said before, was too small to be competitive or complementary to the former, to which it was instead subordinated. This was the position as well of the private sphere, not only in production, distribution and exchange, but also in consumption. The first three of these phases of economic activity were under direct control: they were based mostly on "socialized" property and the position of the single person participating in them was merely that of an executor. The fourth phase, consumption, although seemingly private, proved also to be under external control through the models propagated (e.g., the "socialist consumption model"), the supply structure corresponding to these models, and even direct quantitative control of access to commodities (e.g., ration cards).
With the elimination of the market as the key institution in which exchange value is decided, and after renouncing the information function of the interaction between supply and demand, this economy deprived itself of the basic source of allocative criteria. Its most serious negative effect was the lack of microeconomic optimization in production and consumption.
If the specificity of a socialist economy is known and its disvalue can be seen clearly in its poor market achievements, the vision of the target economic model in the reform remains unclear. As may be concluded from the legal acts initiating economic reform in Poland, the intended target model could have been a socialist economy with a market in which state enterprises could compete with each other within a slightly loosened cincture of central control. The economic system would have preserved its basic features while, at the same time gaining some elasticity. The relationship between the state-controlled and private spheres would not have changed.
Similar traits could be found also in the concept of the reformed Polish
economy, presented in the program of "Solidarnosc" trade-union.(7) The first
thesis of the program stated that: "Directive-distributive system of control
over economic life which hinders rational management must be abolished. In
this system, enormous economic power is concentrated in the hands of the
party and bureaucratic machine." Nevertheless, the problem of individual
participation in the system of ownership was not touched upon. The basic unit
in the economy was to be a "social enterprise," i.e., one managed by
employees and designed to administer a part of the national property. In such
a case, the Polish economy would remain nationalized, but social control over
its basic units would be wider and enterprises would be more independent in
making decisions concerning the conditions, volume and choice of production.
The Second Stage of Economic Reform
The program of the second stage of economic reform, proposed in 1987, slightly changed this vision of a target economic model. On the one hand, it was assumed that central planning would be more general and part of the planning would be shifted to enterprises. This novelty was not that important, however, for the crucial role still was played by the system of central distribution of resources. Enterprises, while still being state property, were granted a little more freedom in their relations with each other and with other economic agents (e.g., creation of corporations), but they were not so free in their behavior as producers. On the other hand, it was declared that the system would be more liberal in accepting new economic activities undertaken by the representatives of private sectors.(8) Licensing was to be replaced by simple registration.
It is clear that two crucial spheres of the state's direct involvement in economy, i.e., ownership and management, were gradually changing their character. Management was being decentralized, though direct control measures were still present. The structure of ownership was becoming more open for change. Private initiatives were promised more liberal treatment, although they were to remain a less important supplement to the state-controlled sector. As even these more liberal rules of registration could hardly make them more competitive, the private sector would have to change to force market behavior from state enterprises. Its complementarity would be limited only to some segments of the commodity market, while it could not become a partner in the input market. Such a double-sector structure of property produced an inconsistent economic system in which the service and manufacturing private sector would be limited through input links by the still non-market state sector.
PRIVATIZATION
The state of affairs created by the laws binding since the beginning of 1989 has been quite different from that of the Polish economy prior to 1981. The result of the law on economic activity and another one which allowed foreign capital to be invested in Poland(9) was that the field for private economic activity has become wider. Although it is too early for complete data on new private enterprises registered after January 1989, it is known that most of them have not been industrial, but rather service and commercial units. This might have been caused by scarcity of private resources, and especially by uncertainty as to the stability of the new policy towards the private sector. Irrespective of the reasons, the new economic situation supported by the 1989 regulations obviously could be accepted as the desired target of economy.
For some time it has been almost a common conviction, especially among economists, that transformation of the Polish economy into a more effective and elastic entity compatible with market needs requires deeper changes which effect its roots in property. Restriction of changes to expansion of private sector alongside the dominant state sector is not an optimum solution. The required "marketization" of the economy can take place only when management is in the hands of those institutions directly involved in economic activities and when the right to determine the economic parameters of an activity is based upon ownership of the managed property. In other words, the target economic system is a pluralistic market economy in which everyone who is able is entitled to economic activity; no part of economy is reserved exclusively to but one type of ownership. In such a system, private initiative should be allowed in regions formerly reserved for the economic super-agent, i.e., the state.
At present, the term "privatization" is very often used in discussions of the prospective shape of the Polish economy. The term relates directly to the process of transition to market economy model. The notion of privatization is not the best one in this context, for it suggests a uniform system of private ownership as the only alternative. From the point of view of macroeconomic effects, exclusivity of no one type of ownership should be presumed ex ante. When looking at the countries which have no problems with market equilibrium and where such a situation is not reached at the consumer's expense, we notice a clear constructive function of private property and of a diffused system of decision-making. Such conclusion, however, cannot be arrived at ex ante but ex post. The superiority of a given type of property, of a specific form of economic activity, can be judged only through its market effects.
Irrespective of the shortcomings of the notion of privatization, its meaning is important. The term describes the process of taking people out of the system in which they are only one element among the employed resources and turning them into co-owners and participants in decision-making. Privatization of the state property would mean, in this case, the transformation of the people employed in this property into its co-owners. Their participation in ownership would be a reason for their participation in the distribution of net effects. One of the advantages of such a solution is the fact that it is not new, because it has been tested in all market economies. The deregulation processes under way in some Western economies have proven that this method has not lost its attractiveness.
"Economic enfranchisement" can be a source of many advantages, both in the short and long run. The most important short run advantages can be:
- a deflationary effect connected with the transformation of a section of personal monetary resources into capital and investment of this capital in title deeds, thus weakening the pressure of empty money on the market;
- personal incomes would be composed of wages and profits from the invested capital, thus weakening the pressure of wages on costs and prices and weakening the inflationary pressure provoked by the supply-side;
- people would be free to decide how to spend their incomes. Thus far an average person has had limited opportunities in this sphere. Though money could be either spent or saved, the latter alternative led to a decrease in the purchasing power of money. In the new system, people would have the right to make investment decisions and to become active economic agents. Thus, the private sphere would enter the realm of investment policy as well.
Equally or even more important could be the long-run effects resulting from the real independence of economic units in the spheres of ownership and management, and from the new opportunities for social influence upon the behavior of the productive sphere. The most important among these would be:
- diffusion of economic power on the supply-side. (The place of the monopoly of the state as the owner and decision-maker having at its disposal an enormous part of supply would be taken by the network of independent producers, each of whom would be too weak to dictate the transaction conditions, thereby strengthening the position of demand.)
- shortening the channels of information between demand and supply so that the sphere of production could learn and react much more quickly to the changing market situation;
- the system of primary distribution would be brought closer to the market so that the remuneration for the various resources employed by enterprises would depend on their economic soundness and their position in the market;
- resources would be better allocated within the national economy inasmuch as members of society, while free in selecting their own investment strategies on the basis of clear criteria of effectiveness, to some extent could decide which production sector would get access to what amount of resources;
- social control over the activity of enterprises would be strengthened through the system of self-management, for the latter would be the real representative of the interests of the co-owner employees;
- attitudes towards work could be improved if the workers were co-owners rather than just employees, for this would result not only in a stronger personal involvement in work, but in a more critical attitude toward others' work and more care for the economic condition of the entire enterprise.
So far, these effects remain in part potential. They may prove to be realistic if the process of transformation of Polish economy is continuous and if it leads to an activation of the private sphere. Thus, the precondition is the political will to break the ideological canons which have proved to be so destructive for economic life. However, even without political obstacles the process of privatization faces two basic barriers: lack of proper knowledge and habits, and lack of financial resources.
The first barrier is connected with lack of awareness by people of possible ways of executing their rights as co-owners, their ignorance of investment strategies applicable in various situations and, generally speaking, the lack of sufficient knowledge about the functioning of the capital market. In addition, active participation by individual persons in the capital market can be hampered by their low propensity to save, by too strong an attachment to passive saving, and by unwillingness to take a risk in transforming their savings into investment capital. The other barrier may be even more important: the scarcity of disposable resources in Polish society. As the people are simply too poor to invest on a larger scale, the spread of the private sphere can be blocked.
However serious they may be, the two barriers do not rule out progress in privatization. Lessening their impact is only a technical problem. To break down these barriers time is obviously needed. That is why the process of the expansion of the private sphere must be spread over a period of time. For this reason the external political environment of the economic system is even more important because its proper shape can guarantee the continuity of the process of privatization.
The Catholic University of Lublin
Lublin, Poland
1. 1. See: Podstawowe zalozenia reformy gospodarczej (Basic Foundations of Economic Reform), (Warszawa, 1981), pp. 48-50.
2. 2. "Ustawa o przedsiebiorstwie panstwowym" (Law on State Enterprise), Dziennik Ustaw (nr. 24, 1981 r., poz. 122); "Ustawa o samorzadzie zalogi przedsiebiorstwa panstwowego" (Law on Workers' Self-Management in State Enterprise), Ibid., poz. 123.
3. 3. Podstawowe zalozenia, p. 29.
4. 4. "Ustawa o planowaniu spoleczno-gospodarczym" (Law on Socio-Economic Planning), Dziennik Ustaw (nr 7, 1982), poz. 5l.
5. 5. "Uchwala Rady Ministrow, nr 280, w sprawie zamowien rzadowych na materialy i wyroby" (Executive Act on Government Order, nr. 280), Monitor Polski (nr 1, 1983 r.), poz. 9.
6. 6. See: Rzeczpospolita (special edition: Warszawa, 1 January, 1989).
7. 7. "Program NSZZ `Solidarnosc' uchwaiony przez I Krajowy Zjazd Delegatow" (Program of "Solidarnosc" Trade-Union Adopted During the First Convention of Delegates), Tygodnik Solidarnosc (nr. 29, Oct. 16, 1981).
8. 8. Program realizacyjny drugiego etapu reformy gospodarczej (Program of the Second Stage of Economic Reform), (Warsaw, 1987).
9. 9. "Ustawa o dzialalnosci gospodarczej z udzialem podmiotow zagranicznych" (Law on Economic Activity with Participation of Foreign Subjects), Rzeczpospolita (special edition: Warszawa, Jan. 1, 1989).