Toward Market Economics

For all its egalitarian vision and brutal controls, Communism is still basically an economic philosophy. Because of that fact, Eastern Europe today is caught up in a brutal but visionary economic revolution. From the Baltic to the Black Sea, reforms -- in various degrees and diverging directions -- are rippling through all East European countries. If the reforms succeed, they will not only break the glacial grip of Stalin ist "command economics" but reshape the societies and political structures of the Continent's entire Communist world.

Red Realism. The need for drastic economic change became painfully evident in the mid-1950s, when Stalinist-tailored war economies -- with their stress on heavy industry to the exclusion of consumer desires -- began to cause widespread discontent. Yugoslavia was the first to move, after its break with the Kremlin in 1948, introducing a system of decentralized planning and establish ing "workers' councils" as co-managers of its factories. In 1956, Poland's "bread and freedom" riots in Poznan triggered reforms that -- on paper, at least -- far outdistanced Yugoslavia's.

Soon even Moscow -- in the voice of Evsei Liberman -- was talking of "in centives" and the "profit motive," a green light to the East bloc that soon set Hungary, Bulgaria and even the Stalinist states of East Germany and Czechoslovakia to thinking about reform. Out of earshot of the West, economists began discussing things that the West would understand: bonuses and reinvestment, free prices and the need for incentives, even the accumulation of wealth--once a heretical thought under "egalitarian" Communism. Quite independently of one another, the prophets of profit began coming to the same conclusion: rigid Stalinist-style central planning must cease.

Planned Antagonisms. No East European economy had suffered so painfully under the stagnation of Stalinism as Czechoslovakia's. As the "machine shop" of the East bloc, Czechoslovakia had been forced by Moscow to concentrate its energies--without significant

Soviet reinvestment--on building the machine tools (and weapons) that the Soviets needed. Stalinist-minded Czech central planners (called "oxen" by many Czechs) blithely pumped billions of kroner in subsidies into moribund enterprises in order to make their master plans come true on paper. By 1963, Czech economic growth, which had been booming at 8% in 1949, had skidded to nothing--indeed, it actually was in decline, an unheard-of event in a planned economy.

Last week Czech economists were putting the finishing touches on an economic reform program designed to rectify that disastrous situation. It shatters the rigidity of central planning, establishes realistic prices and eliminates subsidies, forces each Czech factory to pay its own way or close down. In its sweep and good sense, it transcends any other reform plan in Eastern Europe.

Its architect is Professor Ota Sik, 47, a wavy-haired, affable Pilsener who has proved the most outspoken, articulate and inventive "icebreaker" in Eastern Europe. "There was no other way but to start using the market again," says Sik (pronounced Schick) in explaining his reform plan. "If we take free enterprise to mean free price competition in the market, then even socialism cannot do without this enterprise."

Sik himself might once have considered such thought pure heresy. An old-line Communist apparatchik (he survived the Nazi death camp at Mauthausen, along with Czech President Antonin Novotny), Sik learned his Red economics after the war as a party man, not as an academic. Independently of Russia's Liberman, he had become by 1957 acutely aware of the "economic antagonisms" generated by the lack of market relationships in Red economies. His criticisms (ordered up by Novotny himself) were shrugged off by the Stalinists, but Sik persisted in working toward reform. In December 1963, his 20-man investigative committee demanded a thorough shakeup of the economy, and last year it was approved by Novotny and the Central Committee.

Toward the Crest. Basic to Sik's scheme is the decentralization of planning. The party economists in Prague will become Communist equivalents of Western investment analysts, leaving all short-term decisions to the individual factory managers. Says Sik: "In the U.S. or in the West, there is a decisive criterion reflecting efficiency--the level of profits. We intend that instead of simply transferring all gross income [profits] to the state, as we did previously, only a part of the gross income will be transferred in the form of a tax." What remains will belong to the enterprise involved--whether a Skoda plant or a brewery--and the manager will make his own decision on how much he wishes to reinvest for future development and how much he wishes to pay out to his employees in bonuses.

The impact on Czech workers will be great. Under the Stalinist system, workers received the same pay no matter how hard or indolently they labored. Now they will share in the profits of their work and, if their enterprise is highly successful, may receive incentive bonuses of up to 20% of their total wages. On the other hand, Sik's plan guarantees only 92% of the state-set wage, and if their plant grows inefficient the workers will suffer pay setbacks.

The entire aim of the bonus plan is to generate drive among a heretofore lazy labor force. "Differences in income are not contrary to socialism," argues Sik. "Differences in the future will be greater than in the past, with its egalitarian wage system." Previously under Communism, doctors and other professionals earned no more than common workingmen. "Now," says Sik, "we encourage people to grow rich."

Key to the whole Sik reform is prices. "If the system is to work as a market," says Sik, "it needs real market prices." Only a few staples--mainly foodstuffs and fuel--will have centrally fixed prices. All others will be allowed to move freely in response to supply and demand. Sik feels there is competition enough among domestic producers to keep prices healthy, though he does not rule out the need for price-fixing at the top, if need be, to control inflation. On the foreign-trade level, he hopes that competition in the realistic world of market prices will force specialization on Czech industry. "At present," he explains, "we produce 78% of the total world spectrum of types of machinery. This is impossible for a small country. Thus we hope our measures will hasten specialization." Already some 1,300 "redundant" Czech factories have been closed, and another 1,400 of them may shut down before the reform wave crests.

Substitute for Subsidies. Impact on the managers is bound to be brutal. "It is much harder [under the new system] to estimate future capital-goods needs,"

Sik allows. "The central plan will make only a rough estimate. The previous system was nonsensical precisely because it tried to determine future trends without knowing what the technological trends would be." Now central planners will only advise the banks about the climate of investment to guide them in their credit policies. Instead of handing out fat subsidies as in the past, the Czech central bank will charge 6% interest on capital loans--a price that should "make plant managers all the more concerned to develop in the right direction. Already the Czechs have established Western-style business-administration schools to teach the new economic skills to managers who in the past were totally unaware of even the world market prices of goods they were producing. "If they don't adapt," says Sik ominously, "they will be replaced."

Nuts & Bolts. Last week Sik and his aides were busy drafting the myriad regulations that will take effect on Jan. 1. These include such nuts-and-bolts matters as the exact level of taxation to be charged on enterprise profits, the exact proportion of bonuses, the exact changes in various wholesale prices arising from the end of subsidy. They may not succeed: the "oxen" with their Stalinist axes have cut down reform before and may stall it again before the New Year rolls around.

Because the failure of the old order was more spectacular in Czechoslovakia than in any other East European economy and because the scope of the new order is so sweeping, Sik's reform could well light a beacon that would illuminate the economies of all Communism. A failure could as easily bring the glacier of centralism crashing down again. In any event, Communism as an economic philosophy has already been altered beyond Marxian recognition. All that will be left of the Communist system is state ownership of property. The problems and the motives of the entire economy will be enterprising and free.

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