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TRADITIONAL CENTRALLY PLANNED ECONOMIES

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each country may vary considerably from the typical in certain ways. adapted from A. Brown and E. Neuberger ... constant pressure to circumvent these rigidities ... – PowerPoint PPT presentation

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Title: TRADITIONAL CENTRALLY PLANNED ECONOMIES


1
TRADITIONAL CENTRALLY PLANNED ECONOMIES
2
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

3
Preview
  • Objectives of Typical CPEs
  • Key Elements
  • Planning Mechanisms
  • Primary Mechanisms
  • Consequences of Planning Mechanisms
  • Arguments Supporting Planning
  • Undesirable Outcomes
  • Adjustment Mechanisms

4
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

5
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

6
  • 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

7
  • 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

8
  • 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

9
Planning Mechanisms
  • Designed to achieve
  • rapid growth
  • industrialization
  • safeguard centralized control
  • Three primary mechanisms

10
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

11
  • 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

12
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

13
  • 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

14
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

15
  • 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

16
  • 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

17
  • 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

18
  • 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

19
  • 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

20
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

21
  • 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

22
  • 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

23
  • 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

24
  • 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

25
  • 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

26
  • firm size and specialization
  • bias toward giant plants
  • high transportation cost
  • lack of specialization
  • enterprises engaged in numerous, sometimes
    unrelated activities

27
  • 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

28
  • 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

29
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

30
  • Second economy
  • unplanned economic activities
  • legal private activities
  • private plots
  • illegal private activities
  • illegal activities of enterprises seeking to
    fulfill plan assignments
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