Product Slump in Czecho-Slovakia: A Critical Overview*

Issue title: Economic Transformations in Russia and E. Europe

Article type: Research Article

Authors: Mertlík, Pavel

Affiliations: Institute of Economic Studies, Faculty of Social Sciences, Charles University, 11001 Prague 1, Smetanovo nábř.6, The Czechlands

Note: [*] Draft versions of this paper were presented at the Fourth Annual Conference of the European Association for Evolutionary Political Economy (EAEPE) in Paris, France, November 1992; at the Fifth International Annual Conference of the Society for the Advancement in Socio-Economics (SASE) in New York, U.S.A., March 1993; and at a workshop of the International Institute for Applied Systems Analysis (IIASA), Vienna, Austria in Prague, The Czechlands, April 1993. The author is obliged to the Foundation for European Economic Development (FEED), to the Czech Literary Fund (ČLF) and to the Hlávka Foundation for their support that enabled him these conference presentations.

Abstract: The macroeconomic development of Czecho-Slovakian economy after the start of the transition process to a market economy in January 1991 was characterized by a deep two-digit recession. In the year 1992 the recession continued. Real investment, real personal consumption and real exports decreased substantially, as well as real incomes and real retail sales. However, the contraction of the aggregate demand cannot be treated as the sole cause of this recession: the decrease of aggregate supply was also significant. We should rather speak about a slumpflation or a stagflation in former Czecho-Slovakia. Conventional interpretations of the 1991–1992 Czecho-Slovakian output development describe the recession as a result of the dramatic restrictive policies of the government, of the collapse of the former COMECON market and sales crisis on Western markets, and of the necessary adaptive restructuralization of the supply side of the economy after its liberalization. These explanations are to some extent correct, but they are insufficient. Moreover, the role of the governmental restrictive macroeconomic policies in the decrease of Czecho-Slovakian output seems to be limited because the analysis of the monetary policy of the year 1991 does not allow to consider its character as restrictive. Also the ‘soft’ approach of the government towards insolvency and mutual indebtedness of state-owned enterprises parallelling the non-existence of the institute of bankruptcy had important secondary monetary consequences. The decrease of the aggregate supply has several sources. Besides monopolization and input costs increase, we may identify two important factors belonging to the area of institutional change: the loss of governmental control and the ‘privatization agony’. Regarding monopolization of Czecho-Slovakian economy, after liberalization of prices the need of setting higher markups emerged for enterprises. This was not only due to their degree of monopoly but also to the fact that mark-ups inherited from the system of central price-setting were very low, not covering marketing costs. The need to overcome the factual undervaluation of goods together with the monopolistic behaviour of firms created a significant supply-side recessional inflationary push. The loss of the state control over the economy opened space for the so-called ‘spontaneous privatization’. Managers of the state-owned enterprises were establishing their own private firms and organizing contracts between them and state-owned enterprises. The prices at which these contracts were negotiated were significantly advantageous for their private firms – the managers were using transfer prices. Thus, the assets of the state-owned sector were invisibly being shifted into the hands of owners of related private firms. This practice led to the reduction of the output of the state-owned sector, and consequently to the decrease of (at least) statistically displayed GDP. Another crucial point of the macroeconomic development was the behaviour of the state-owned enterprises and their managements during the course of the privatization process. The process of privatization created a situation of uncertainty in which the short-run goals of managements seemed to be the only rational ones. On the other hand, managements of state-owned enterprises had a chance to participate significantly in the process of distribution of national assets. The core of their behaviour was the way how they worked out the privatization projects of their enterprises. They often recommended to sell their state-owned enterprise to a ‘formerly appointed owner’, which usually was their own private firm or some foreign firm. Or, they chose the method ‘all for vouchers’, believing in the possibility of a manager or employee buy-out for investment vouchers. In all these three cases the managers were interested in low market value of their state-owned enterprise: to save their own capital or the capital of their foreign partner (and to secure a provision from such a contract), or, in the third case, to be able to get the controlling packet of shares of their enterprise for vouchers wh ich they had collected. In all three cases they had the same opportunity of diminishing the market value of their state-owned enterprise: to manifest its inefficiency, that means to reduce its output, employment, profit, etc. This specific behaviour of the managements of the state-owned enterprises seems to be another important source of the decrease of output of the state-owned sector, and thus of GDP.

Keywords: Czechoslovakia, privatization, monopolization, institutional change, CPE, transition, transformation, economic reform, voucher method, loss of state control, fiscal policy, monetary policy

DOI: 10.3233/HSM-1993-12407

Journal: Human Systems Management, vol. 12, no. 4, pp. 313-324, 1993