TRADITIONAL CENTRALLY PLANNED ECONOMIES

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TRADITIONAL CENTRALLY PLANNED ECONOMIES
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Introduction

• Brief description of typical CPE
• each country may vary considerably from the
  typical in certain ways
• adapted from A. Brown and E. Neuberger (1968)
  International Trade and Central Planning An
  Analysis of Economic Interactions
• No real model of socialism
• Marx did not model socialism -- he modeled
  capitalism

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Preview

• Objectives of Typical CPEs
• Key Elements
• Planning Mechanisms
• Primary Mechanisms
• Consequences of Planning Mechanisms
• Arguments Supporting Planning
• Undesirable Outcomes
• Adjustment Mechanisms

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Objectives of Typical CPEs

• Rapid growth
• planners typically target very rapid growth, much
  higher than capitalist countries
• Industrialization
• not all sectors promoted equally
• emphasis on heavy industry
• Centralization of decision making and control

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• Illustrative quotes
• We are fifty or a hundred years behind the
  advanced countries. We must make up this gap in
  ten years. Either we do it or they will crush
  us.
• Stalin at the First Conference of Workers in 1931
• Surpassing Britain and catching up to the United
  States within fifteen years
• Selected Works of Mao Zedong since 1949, vol. 6,
  p. 635, 1992, Central Archive Publishing House.
• A slogan during the Great Leap Forward

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Key Elements

• Social (state) ownership
• seen as a primary means to
• achieve rapid growth
• maintain centralized control
• CPEs are command economies
• centralized, bureaucratic management of economy
• detailed physical planning

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• CPEs are pressure economies
• high rate of forced saving
• taut planning of
• outputs
• inputs
• inventories
• CPEs are priority economies
• planning based on priorities reflecting
• political criteria
• socialist ideology

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• CPEs rely on extensive development
• growth and industrialization through massive
  increases in resources
• the alternative is intensive development --
  growth through productivity increasing innovation
• CPEs are closed economies
• foreign trade suppressed
• used only as a safety valve to complete domestic
  plans

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• CPEs are shortage economies
• shortages are chronic
• not just occurring temporarily
• shortages are general
• applying in all spheres of the economy
• shortages are intensive
• severely affecting economic actors and decision
  making in general
• does not preclude surpluses

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• CPEs depend on a totalitarian, repressive state
• state permeates the whole of society
• complex system of surveillance
• the Party
• mass organizations
• residential organizations
• labor union
• professional organizations
• youth organizations
• police

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Planning Mechanisms

• Designed to achieve
• rapid growth
• industrialization
• safeguard centralized control
• Three primary mechanisms

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Primary Mechanisms

• Vertical coordination and control
• reliance on vertical channels of information
• horizontal channels repressed
• threefold separation of economic activity
• intersectoral
• between different sectors of economy
• interfirm
• between enterprises in a given sector
• interdepartmental
• between departments of a given enterprise

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• System of Material Balances
• physical planning
• balancing of equations in physical units
• sequential
• successive approximation rather than simultaneous
  solution of equations
• Taut Planning
• output maximization
• input minimization
• inventory minimization

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Consequences of Planning Mechanisms

• Discontinuous Planning
• plans cover long periods in which plan not
  supposed to be changed
• reduces enormous burden of planning
• Discontinuous Incentives
• sharp line between success and failure
• encourages fulfillment of plan
• bonus for 100, nothing for 99
• little attention to differences in degree

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• Multiple Criteria
• no single standard of value in planning process
  (e.g., prices)
• no single standard for control or performance
  evaluation (e.g., profits)
• everything expressed in non-additive, physical
  units
• results in proliferation of instructions and
  performance standards
• helps safeguard centralization
• often causes breakdown in control
• the one-ton nail

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Arguments Supporting Planning

• Socioeconomic reorganization
• formation of new elite
• power more easily shifted to adherents of the
  controlling ideology
• equalization of income distribution
• social ownership allows economic development
  without resort to highly unequal distribution

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• Mobilization of inputs
• capital formation
• high rate of forced saving and investment to
  achieve rapid growth and industrialization
  through capital formation
• labor recruitment
• facilitates recruitment of unproductive
  agricultural labor, unemployed urban labor, and
  women into industrial workforce
• labor training
• facilitates allocation of resources into
  education and vocational training

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• Acceleration and channeling of economic
  development
• growth of GDP
• pressure economy, priority economy, and extensive
  development used to achieve rapid growth
• direction of development
• ability to focus on high priority sectors
• regional development
• permits allocation of resources to develop
  lagging regions

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• Alleviation of market imperfections
• externalities
• planning takes a social perspective
• tautological argument
• planning typically produces more pollution
• monopoly power
• planning takes a social perspective
• inefficiency of monopoly due to decision makers
  placing firms interest over societys
• planning allows concentration w/o inefficiency of
  monopoly
• concentration a serious problem for transition

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• technological progress
• innovation can be motivated w/o inducement of
  patent protection
• central control allows rapid diffusion of
  innovations
• in reality, other forces work against innovative
  activity and adoption of new technology

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• Promotion of economic stability
• price-wage stabilization
• central control of prices and wages allows
  wage-price spirals to be avoided
• avoids capitalist volatility of investment
  spending
• insulation from international business cycles
• avoids stop-go fiscal and monetary policy typical
  of capitalism

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Undesirable Outcomes

• Administrative inefficiencies
• requires immense, rigidly organized bureaucratic
  structure
• unable to respond to change
• unable to respond to temporary opportunities
• cumulative shortages of outputs when crucial
  inputs become unavailable
• made worse by taut planning

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• Informal bargaining
• constant pressure to circumvent these rigidities
• formation and implementation of plans pervaded by
  bargaining
• allocation of resources on the basis of
  bargaining skills and political pull rather than
  by economic realities

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• Unreliable valuation criteria
• domestic prices
• prices set by planners on basis of political and
  ideological concerns
• prices also reflect reluctance of planners to
  allow prices to change once set
• thus unable to convey information on scarcity
• exchange rates
• exchange rates arbitrary
• cannot convey useful information

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• Microeconomic inefficiencies
• incentive system
• multiple criteria leads to ambiguous motivation
• uncertainties about how to satisfy plan
• plan can almost never be satisfied in all respects

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• discontinuous incentives lead to dichotomous
  motivation
• exaggerated schism between success and failure
  resulting in
• simulation
• misclassification of outputs to show more
  favorable results (one-ton nail)
• storming
• last minute spurt of activity as period nears end
• lethargy
• when obvious that targets wont be met
• hoarding
• illegal saving of inputs/outputs for next period

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• productivity
• slow rate of technological and product innovation
• poor output quality
• low labor and capital productivity
• inefficient investments
• inefficient enterprise location
• low utilization of capacity caused by supply
  bottlenecks
• stockpiles of unneeded inputs and unwanted
  outputs accumulate

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• firm size and specialization
• bias toward giant plants
• high transportation cost
• lack of specialization
• enterprises engaged in numerous, sometimes
  unrelated activities

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• Macroeconomic problems
• consumer satisfaction
• caused by high rate of forced saving
• caused by low priority of agriculture and
  consumer industries
• lack of consumer services
• unresponsiveness to consumer demands
• wrong assortment of products in terms of type,
  size, style, etc.
• lack of availability in certain locations

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• agriculture
• low priority causes exodus of most productive
  workers
• depletes long-term performance
• increases social problems of over-crowded cities
• reduces consumer satisfaction
• international specialization
• neglect of comparative advantage
• trade to correct planning errors
• Soviet wheat purchases from U.S. in 80s

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Adjustment Mechanisms

• International trade to make up for planning
  errors
• Bargaining to reduce rigidity of the formal
  structure
• Selective violation of instructions
• hierarchy of instructions
• Priority planning to assure meeting most
  important goals

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• Second economy
• unplanned economic activities
• legal private activities
• private plots
• illegal private activities
• illegal activities of enterprises seeking to
  fulfill plan assignments