Communist Economies INDUSTRY WITHOUT A PRICE MECHANISE

Press, Volume XCVIII, Issue 28999, 14 September 1959, Page 10

Communist Economies INDUSTRY WITHOUT A PRICE MECHANISE

[By tM Industrial Bditor of tha “Financial Tima*"] (Haprintad by Arrangtmtnt]

The Western economist who visits a Communist country finds a somewhat bewildering situation. The problems with which his opposite numbers there are grappling have a familiar ring, but the terms in which they are described and the framework in which they are studied are often startlingly strange. Although the examples quoted below come from Bulgaria, which I know best, the general picture which they illustrate applies in greater or less degree to almost every East European country. Perhaps the biggest difference from the West is the absence in these countries of a price mechanism as we know it. In Western economies the basic relationship is between supply and demand, and it is the pricing system which brings the two into adjustment. But in Commuist economics demand is relatively unimportant. The price of goods is fixed, not by relation to demand, but at a level which will cover the expected cost of production and at the same time provide the rate of profit (usually varying between 3 and 5 per cent) which the State deems appropriate in each particular case. Notable Discrepancies Once the price has been fixed it tends to be rigid. There is a standard price for each product all over the country, and if a shop manager in Bulgaria finds that a particular item in his shop is priced either too high or too low he can change it only by getting special permission from the Committee of Labour and Prices. As a result, one comes across some remarkable price discrepancies in the shops. There is, however, provision in the

system for price reductions for a commodity which goes into mass production. A slightly different system obtains for agricultural prices. In Bulgaria the system of compulsory deliveries "by the collective or co-operative farms to the State has recently been abolished; instead the farms supply fixed amounts of produce to the State at standard prices. Any excess production above this can be sold on the free market, if a higher price can be obtained in this way; and in many farms the peasants sell their own produce from their individual holdings on the free market. These transactions, although on a small scale, are regarded by the State as a useful check on the accuracy of the official prices. However, in agriculture there are considerable variations between the different countries in the Soviet bloc. In Poland, for example, in the last few years, there has been a big growth in the private sector in farming. Capital Accumulation

The basic relationship in a Communist economy Is the division of national product between consumption and capital accumulation, which is of course closely tied up with the parallel problem of the degree of priority to be given to heavy industry. Since most of the funds for capital investment come out of “company” profits, the higher the rate of accumulation the higher the price level. In Bulgaria in 1953 28 per cent of national product went to capital accumulation. This is close to the 30 per cent, level, which most economists there seem to regard as about the practicable maximum. In 1956 when the economic “thaw” began the rate dropped to 16 per cent., and it is currently a little over 20 per cent. The whole economic system depends on a constant flow of accurate statistics from the various enterprises to the centre, and one of the constant pre-occupations of Communist administrators is to ensure that there is no falsification of the statistical returns. Hidden Stocks Almost certainly there are cases of factory managers failing to declare their total production, and building up hidden stocks of finished goods which can either be üßed when needed or traded on the black market in exchange for some particularly scarce material needed by the factory; also there is a constant danger of firms over-stating their stock requirements or skimping quality in order to increase the quantity of output If the falsification of statistical returns were to go beyond a certain level, of course, the economy would simply faii to function.

From these returns—again the example is taken from Bulgaria —the Central Statistical Bureau produces an annua] economic report. The report centres on three main tables. The first gives the net national product, the second the distribution of income and the third the distribution of manpower resources and demand —from which is calculated the demand for mechanisation. From the income statistics it is possible to calculate personal consumption •by subtracting taxes and savings). To this has to be added the figure for “public consumption (which roughly corresponds to what we call welfare payments). By subtracting this combined total net national product, it is possible to tell whether the proportion going to capita] accumulation is high enough. If it is higher than planned there is scope for a round of wage increases or—more commonly—price reductions, in order to increase consumption. “Norm” Concept For factory manager and worker alike, life centres upon the concept of the “norm.” which is the amount of output required. One’s income depends on the extent to which one exceeds or falls below one’s norm. Norms’ are usually revised annually, and sometimes more

frequently if there is a drastig change in production methods. The factory manager gets « bonus if his factory producm more than the required norm. This can be quite important For example, the production manager of Bulgaria’s leading chemical works has a monthly salary gj 1,600 leva (about £BO at ths official rate of exchange)— inci« dentally this is exactly twice ths average earnings of workers ig the factory and slightly mon than twice the average for th< country as a whole. But his bonus in recent months has been anunta 1000 leva a month above this; W factory usually exceeds its nonta by between 10 per cent and U per cent. After the total planned output for a factory has been decMM. a certain proportion of the VtaM of this output is set aside total wage-bill. It is then up ta the factory management to determine the distribution of ths wage-bill among the workers,

There is • national minimum wage (at present 400 leva a month), but apart from, this the factory management has full discretion as to the distribution of wages. If output exceeds or falls short of the target or norm, then the total wage-bill expands or contracts in proportion.

When Targets Are Mime* There are a number ot problems about this system of wage determination. Many of them are familiar to Weston industries which operate pay. ment-by-results systems—for example, the well-known difficulties of fitting non-production worker* into the system.

The most serious problem, however, is the' ever-present

possibility of targets not being fulfilled because of factors outside the control of the workers or the factory manager. Some of the trade union leaders in Bulgaria are arguing that in such circumstances the worker should not be penalised by having part of his wage withheld, which is what happens now. The trouble is that until he can produce a certificate from the authorities to say he has delivered a given number of goods, the factory manager cannot draw money from the bank to pay wages (though a certain proportion of toe. wage-bill is in fact paid in advance). The whole economic system, in fact, if applied In its full theoretical rigidity, would be intolerable and probably unworkable. But, especially in a small country like Bulgaria, the system tends to be applied fairly loosely and there is a certain degree of flexibility and tolerance.

—— " " THE SATELLITES COMPARED - • FopulaTotal trade Of which with: Other Soviet tlon turnover Russia bloc m. million dollars % % Bulgaria .. 7.7 370 54 30 Czechoslovakia .. 13.4 1413 33 27 East Germany .. 17 Ji 1,890 45 22 Hungary .. .. 9.8 680 23 34 Poland .. 28.5 1,059 25 23 Rumania .. 17.8 390 45 23 Source: E.C.E. Bulgarian and Rumanian others for 1958. figures are for 1957;