SWP-718
The Environment for Technological Change in Centrally Planned Economies Public Disclosure Authorized
Kazimierz Poznanski
WORLD BANK STAFFWORKING PAPERS Number 718 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILEC kit ei ,V
WORLD BANK STAFF WORKING PAPERS Number 718
The Environment for Technological Change in Centrally Planned Economies
Kazimierz Poznanski
The World Bank Washington, D.C., U.S.A. Copyright (C 1985 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A.
All rights reserved Manufactured in the United States of America First printing January 1985
This is a working document published infornally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation of its boundaries, or national affiliation. The full range of World Bank publications, both free and for sale, is described in the Catalogof Publications;the continuing research program is outlined in Abstracts of Current Studies. Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Sales Unit, Department T, The World Bank, 1818 H Street, N.W, Washington, D.C. 20433, U.S.A., or from the European Office of the Bank, 66 avenue d'eina, 75116 Paris, France.
Kazimierz Poznanski is associate professor of economics at Rensselaer Polytechnic Institute (Troy, New York) and a consultant to the Development Research Department of the World Bank.
Library of Congress Cataloging in Publication Data
Poznaiiski, Kazimierz. The environment for technological change in centrally planned economies.
(World Bank staff working papers ; no. 718) Bibliography: p. 1. Technological innovations--Europe, Eastern. 2. 1'echnology and state--Europe, Eastern. 3. Central planning--Europe, Eastern. I. Title. II. Series. HC244.Z9T47 1985 338'.06 84-29193 ISBN 0--8213-0496-8 Abstract
This survey looks at the relationship between economic performance and the environment for technological change in centrally planned economies to draw some lessons about what is needed for successful development. The lessons are drawn from the experience of the Soviet Union and the countries of Eastern Europe, countries with the most experience! in trying to manage technological change under a centrally planned system. The lessons are important for developing countries that have either centrally planned economies or mixed economies that combine aspects of central planning and market allocation. The main lesson is that reforms limited to changes in the organization and administration of research -- accompanied by minor improvements in such things as diffusion targets, bonus systems in enterprises, and procedures for technology imports -- are not enough to bring about big improvements in technological performance. What these economies seem to need to accelerate the pace of technological progress is a reform of the fundamental principles governing the allocation and use of productive resources. Condense
Cette etude examine les rapports qui existent entre les performances de
1'6conomie et: un climat favorable ai l'adoption des nouvelles techniques dans les pays a planification centrale. On en tire des enseignements sur les ingredients necessaires pour reussir le d6veloppement. L'experience de l'Union scvi6tique et des pays de l'Est, qui les premiers ont essaye de g6rer l'adoption de nouvelles techniques dans le cadre d'une 6conomie planifi6e, en sera la le9on. C'est une lecon importante pour les pays en developpement a planification centrale ou a economie mixte, c'est-A-dire les pays oh cohabitent la pianification centrale et le march6. La premiere leqon est que les reformes qui se bornent a modifier l'organisation et l'administration de la recherche - accompagnees de petites ameliorations dans des domaines tels que les r6gions visees, les systemes de prime dans les entreprises et les formalites d7importation des nouvelles techniques - ne suffisent pas si l'on veut obtenir de gros progres technologiques. Ce qui parait manquer a ces systemes economiques, s'ils veulent accelerer le rythniede leur progres technologiquie,c'est une reforme des principes de base de la distribution et de l'utilisation des ressources de production. Extracto
Se examina en este estudio la relaci6n entre el desempenioecon6mico y el ambiente para el cambio tecnol6gicoen los paises con economia de planificaci6ncentralizada a fin de extraer algunas enseiianzasacerca de lo que se requiere para el exito del desarrollo. Las enseiianzasse han derivado de la experienciade la Uni6n ',ovi6ticay los paises de Europa
Oriental, que tienen la mayor experienciaen la labor de administrarel cambio tecnol6gicobajo un sistema de planificaci6ncentralizada. Esas ensenianzasson importantespara los paises en desarrollo que tienen ya sea economias de planificaci6ncentralizada o economias mixtas en las que se combinan aspectos de planificaci6ncentralizada y asignaci6nde mercados.
La principal enseinanzaes que las reformas que se limitan a los cambios en la organizaci6ny la administraci6nde la investigaci6n,acompaniados de mejoramientosde menor importanciaen aspectos tales como las metas de difusi6n, los sistemas de bonificacioneen las empresas y los procedimientospara importar tecnologia,no son suficientespara producir grandes avances en el desempeiiotecnol6gico. Lo que estas economias parecen necesitar para acelerar el progreso tecnol6gicoes la reforma de los principios fundanientalesque rigen la asignaci6n y utilizaci6nde los recursos productivos.
Contents
Summary ix
I. How Central Planning Affects Technology Policy 2
II. Policy Reforms at the Margin 4
Research and Development 6
Investment 13
Production 20
Imports of Technology 28
III. How the East's Technology Measures Up 32
East v. West in Productivity 35
East v. West in Technology 38
East v. NICs in Technology 41
IV. What Explains the LackLustre Performance 45
Risk-reward Explanation 45
Zero-price Explanation, 47
Closed-economy Explanation 50
V. Conclusions 52
Tables and Figures 53
References 59
Summary
In all stages of technological change, from inventive activity to the phasing out of obsolete products or processes, the centrally planned economies face problems that are far greater than those of the industrial market economies. These problems are best seen in the Soviet Union and the countries of Eastern Europe, countries with the most experience of central planning. These countries have, as industrial latecomers, continued to lag behind the West in their technology. And despite the investrnentof greater shares of their national income on research, they have also failed to show any advantage in productivity growth. At the same time, the newly industrializing countries, with their quasi market systems and greater openness to the world economy, have been catching up with and sometimes surpassing Eastern Europe and the Soviet Union in many critical industries and getting closer to the technological level in the West. The technological deficiencies of the centrally planned systems show up in aggregate indicators of performance. During the period covering roughly 1950-65, the average growth of total factor productivity in the Soviet and Eastern European economies was lower than that in developed market economies but higher than that in developing countries. More recent comparisons of the Soviet Union with western economies show t-hat the level of total factor productivity in the Soviet Union is generally lower than that in the United States and Western Europe. They also show that the growth of total factor productivity in the Soviet Union has been comparable to that of the United States and United Kingdom, but generally Lower than that in the rest of Western Europe and Japan, which have been catching up with the United States. Moreover, the growth rate of total factor productivity in the Soviet Union has steadily declined since the late 1950s. To cope with these problems, the Soviet Union and the countries of Eastern Europe have introduced many reforms to stimulate technological change, mainly since the early 1960s. The first important line of charge was an attempt to merge the originally separate research institutes either with associations of enterprises producing similar products or with individual large enterprises. Another important reform throughout the region has been full-cycle planning of research work. For each major project, targets are set
- iLX - x -
to cover the development of technology and its full commercial application in the economy, with users and expected effects specified. To improve control, purely administrative arrangements have been replaced by contractual ones, and along with the move to contracting, the research institutes have become business accounting units. And to enable researchers to benefit from the commercialization of research in industry, there have been several reforms to provide bonuses to supplement wages at research institutes. But little has been done to create procedures for licensing technologies by one organization (a research institute or enterprise) to another. Investment decision-making, always one of the main functions of planners, remains highly centralized all over the region (except in Hungary). Central planners decide not only on the allocation of investment resources to branches of the economy but also on the construction of new plants, the expansion of existing plants, and any sizable purchases of machinery. Moreover, the choices of technology for projects -- choices that determine capital intensity and the like -- are also in the domain of planners. The bureaucratic apparatus for deciding about investments makes it difficult for planners to respond flexibly to problems and possibilities. From the early days of central planning, technological change in enterprises has been promoted through the plan targets set by the central authorities. Reforms affecting this lowest level of the organizational hierarchy have generally been aimed at providing some kind of order in the various technological targets passed on to the enterprises. They have also been aimed at attaching a higher priority to these targets to counterbalance other, often conflicting, objectives and at improving the system for monitoring the fulfillment of the technological targets. The focus on output maximization continues to dominate the plan targets that central authorities set for enterprises, but over the years the priority given to quality has significantly increased. State-sponsored organizations for rating quality are of some help in upgrading quality. An important element of central pressure on enterprises to improve quality is the standardization system, which specifies technical requirements for the manufacture and performance of particular products. Some countries have also designed financial incentives to stimulate enterprises to upgrade the quality of their products. And to relax the constraints of pricing rules, enterprises - xi - are being allowed to set the prices of new products higher than those of the products being replaced. A growing appreciation for the need to eliminate obsolete or inferior products and processes has resulted in several adjustments. The prime instruments for speeding up this elimination have been the production plans for enterprises. But the central authoriltieshave found it difficult to. agree on the products and processes to be deemed obsolete, and even unanimous decisions by planners to scrap obsolete products have met much resistance in enterprises. Moreover, the region has not been active in restructuring its economy by curtailing production and investment in branches where the economic advantage over other countries is doubtful. Eastern Europe and the Soviet Union have also been strongly interested in obtaining western technology, even during the years of the highest political hostility. The acceleration of imports from western countries since the mid-1960s has had many purposes. Generally, the goal of the Soviet Union and the Eastern European countries has been to use western technology to revitalize their technologically stagnating industries and if possible to catch up with the West. Imported technology has also been expected to provide products technologicaLly advanced enough to make the Soviet Union and Eastern Europe more competitive in the world market. While Hungary and Poland have seemed interested in getting more involved in world trade, the Soviet Union and Bulgaria have been interested in export promotion only to repay the technology bill to the West. In sum, however, there have been no fundamental changes in the management of technological change, the reforms of the 1960s and 1970s notwithstanding. Technological development is still governed more by the visible hand of the central authority than by the interplay of researchers and the users of research results, while most research continues to be conducted by institutes, not by enterprises. Another continuous feature is the reliance on domestic rather than foreign sources of technology, whether through copying or invention. Yet another is the priority given to investment in new plants, particularly in the capital goods industries. As a result, little of the potential for upgrading existing plants is pursued. What systemic factors might account for the relatively poor technological performance in Eastern Europe and the Soviet Union? Why has the - xii -
latest wave of reforms not greatly improved efficiency in the region? The system now operated by countries other than Hungary can be called a rationalized version of the traditional planning model. The rationalizations have included some ostensibly far-reaching changes in planning methods (such as integrating physical and financial plans), in organization (such as linking institutes and enterprises that deal with similar products), and in the motivation of rnanagers and workers (such as relating wage funds to the economic performance of enterprises and research units, with performance measured by aggregate indicators, such as current profits). The systemic modifications have left aside, however, the most important, core elements of the central planning machinery, with only Hungary trying to change the core. So, reforms in the way of financing activities, pricing products, or rewarding managers and workers have generally not made much impact on the pace and direction of technological change. These reforms, at their best, have involved fine-tuning. The limited impact of the changes makes the central planners look for more changes. But the main result has been an expansion of new regulations, not a strengthening of the motivation for efficiency in industry. There are several plausible explanations for this poor technological performance. The most important one is the wav allocaLive decisions are made unrder central planning. T'he system of decisicrn-making strongly affects the motivation of state-owned enterprises and research establishments to engage in technological change. The allocative mechanism puts these agents in a situation where productive factors have zero prices, a situation that inspires littie interest in cost-reducing innovations or in innovations aimed at quality improvements. The lack of interest in quality improvements is reinforced by tl-ewea. influence of buyers. narticularly consumers, on allocati;e decisions. This explanation seems more plausible than the fact th&: ris.ksassociated with technological change are not matched by commensurate rewards. CornpLementirngboth these possible explanations is the facE that the economies of the region, trading mainly with themselves, are closed to many technological possibilities and pressures extant inr the rest of the world. The main conclusion is that a celtrilly planned economy can obtain modest improvements in its technological development by tinkering with policies and institutions -- but accelerating the pace of technological - xiii -
progress appears to hinge on changing the fundamental principles governing the allocation and use of productive resources. Reforms limited to changes in the organization and administration of research -- accompanied by minor improvements in such things as diffusion targets, bonus systems in enterprises, and procedures for technology imports -- have absorbed much of the energy spent on systemic changes over the last decade. But these have not been sufficient to bring about big improvements in technological performance. Broader reforrnsto redesign the allocative system -- perhaps following the first steps by Hungary, the most technologically successful country in the region -- are needed to bring such improvements about. But even the Hungarians will probably have to consider more funda- mental reforms, if they are to bring their performance up to that in the West.
The Environment for Technological Change
in Centrally Planned Economies
How does central planning affect the environment for technological change?
The question is important because many of the world's developing countries are centrally planned. Moreover, other developing countries have mixed economies that combine aspects of central planning and market allocation. An exploration of the relationship between economic performance and the environment for technological change in centrally planned economies can highlight issues important for successful development. I rely here on observations gleaned from the literature on the Soviet Union and the countries of Eastern Europe -- countries with the most experience of central planning and the longest record of attempting to manage technological change under a centrally planned system.
This paper begins by briefly describing the classic perception of technology and technological change by central planners -- and how that perception shaped the formation of technological policies and institutions.
After noting that the success with these policies and institutions was less than that hoped for by the early 1960s, the paper details reforms since introduced for research, for investment, for production, and for imports of foreign technology. It next compares the region's technological performance with that of the West and that of the newly industrializing countries -- mainly during the 1970s and early 1980s.
The author thanks Carl Dahlman, Richard R. Nelson, Bruce Ross-Larson, Gene Tidrick, and Larry Westphal for ;ncisive and insightful comments that greatly improved the arguments in this paper. The paper then proffers some explanations for the region's lacklustre technological performance. The fact that productive factors have zero prices seems more plausibLe as an explanation than the fact that risks associated with technological change are not matched by commensurate rewards.
Complementing both these explanations is the fact that the economies of the region, trading mainly with themseLves, are closed to many technological possibilities and pressures in the rest of the world. The main conclusion is that a centrally planned economy can spur technological development by tinkering with policies and institutions -- but only up to a point where continuing progress appears to hinge on changes in the fundamental principles governing the allocation and use of productive resources.
[. How Central Planning Affects Technology Policy
Under the traditional central planning of the 1920s and 1930s, technology was seen as a public good -- and technological change was seen as a linear process, with invention followed first by developmental work and then by implementation. These classic principles led naturally to the centraLized production and implementation of technological change. The central authority decided what research wouLd be undertaken -- Largely through its alLocation of funds for research. The central authority decided how state enterprises would use major inventions -- largely through its allocation of the labor, capital, and materials needed to innovate production. The central authority even decided which production lines would be eliminated as technologically obsolete, which plants would be refitted and reoriented, and which plants would be closed down. - 3 -
Not much has changed, the reforms of the 1960s and 1970s notwithstanding. Technological development is still governed more by the visible hand of the central authority thaniby the interplay of independent researchers and major users of research results. Almost the entire research potential operates in institutes, not in enterprises. Early on, the responsibility for inventive activities was spread over a few central
institutions, with academies of science playing the key role. Under the reforms of the 1960s, the responsibilities shifted mostly to branch ministries and to special ministerial bodies that oversee all research. Most of these
research establishments still concentrate their research on the problems of
single industries -- usually in efforts rr.ountedLhrough a large scale mobilization of resources. All these facts make the research establishments nearly exclusive as suppliers of technology (almost three-quarters of the
inventions certified and put into use in the Soviet Union came from research
institutes and similar establishments [Martens and Young 1976D).
Another continuous element of technological policy is the priority
for implementing inventions through investment in new plants, particiularly in
the capital goods industries. Beginning with the Soviet llnion in the earlv
1930s and Eastern Europe in the late 1940s, the region embarked on a policy of
massive diffusion of existing technoLogies throtughlarge-scale investment in
new plants. These countries have continued the pattern. Cohn estimates that
only around 25 percent of industrial investment in the Soviet Union in the
1970s was directed toward modernization of existing plants, compared with
almost 50 percent in the United States (i976, p. 454). Authorities have,
however, begun to give more attention to investment En the technological
modernization of existing p'lan.s - to ren fng those piants, changing
manufacturing processes, and tne like. - 4-
Yet another continuous element in technology policy is the general
reliance on domestic inventions. In the first years of industrialization after the second world war, the region supplied almost all its own technology, often intensively copying western technology -- partly because of the difficulty of getting western technology but also because of the desire to develop an independent technological trajectory. This trend continues, even
though all the countries in the region have since the late 1960s become
interested in more extensive commercial transfers of western technology.
II. Policy Reforms at the Margin
The Soviet Union and the countries of Eastern Europe have, as the later
section on technological performance will make cLear, had trouble closing technological gaps between their industry and that in the West. Their limited ability to upgrade their technology has made them pay a price in productivity growth and economic expansion. These countries also have paid a price in
consumer welfare, since consumers do not enjoy the same variety and quality of
goods. To cope with these problems, the Soviet Union and Eastern Europe have
introduced reforms to stimulate technological change, mainly since the early
1960s.
Poland and Czechoslovakia originated the idea of the mixed model, but
then retreated to join most of the other countries in more cautious reforms.
Hungary, on the other hand, largely dismantled detailed planning as the
primary instrument of managing state-owned enterprises, and since 1968 has
operated a mixed economic system. Under this model, state enterprises are
given almost no direct goals for production and the like. They are guided indirectly through a complex system of rules on credit, price-setting, wage-
fund determination, and so on. Private and cooperative enterprises are allowed to operate in many sectors of the Hungarian economy, such as services.
The system now operated by courntriesother than Hungary can be called a rationalized version of the traditional planning model. These rationali- zations have included some far-reaching changes in planning methods (such as
integrating physical and financial plans), in organization (such as linking institutes and enterprises that deal with similar products), and in the motivation of managers and workers (such as relating wage funds to the economic performance of enterprises and research units measured by aggregate indicators, including current profits).
These systemic modifications have left aside, however, the most
important, core elements of the central planning machinery, with only Hungary
trying to change the core. So, reforms in the way of financing activities,
pricing products, or rewarding managers and workers have generally not made much impact on the pace and appropriateness of technological change. These
reforms, at their best, are fine-tuning. This limited impact of the changes makes the central planners look for more changes. But the main result has
been an expansion of new regulations, not a strengthening of the motivation
for efficiency in industry.
Research and Development
Industrial research was traditionally performed mostly by separate
organizations called institutes, expected to work exclusively for the
enterprises reporting to the same branch ministry, and directly subordinated
to the central ministries through plans. Only rarely were research
establishments built into larger enterprises and responsible to their - 6 -
management. This organization was expected to bring many benefits, including
the effects of larger scale, the elimination of duplicate work, the extension of the time horizon, and the selection of projects according to the social
(not private) rate of return.
The scheme put in place before the second world war continued to meet
the requirements of planners during the first years after the second world war, but it soon became apparent that research projects were not coordinated with the needs of potential users. Lacking much of the needed information on technological matters, the central authorities depended strongly on advice from the research institutes, thus bringing in bias in favor of suppliers of
technology. Several important changes in the original scheme have since been made to solve this problem.
Integrating research institutes. The first important line of change has been the attempt at merging the originally separate research institutes
either with associations of enterprises producing similar products or with
individual large enterprises. This reform has been pursued most vigorously in
the Soviet Union, where it started in 1965 and accelerated after 1973, when
authorities decided to make the associations common to all branches of
industry. Similar changes have been made by Bulgaria and Romania, starting in
the early 1970s (Skoczny 1982).
These merged organizations, called scientific-Droduction associations
in the Soviet Union, are of two basic types. In one type the formal authority
lies in a single (usually the largest) participating enterprise. In the
second type, the leading institute is in charge of all the members, including
enterprises (Poznanski 1977). The first 600 scientific-production
associations were set up in 1970 (Bornstein and others 1980). Now there are
4,100, with total production estimated at 48 percent of industrial output in - 7 -
the country. About 95 percent of these associations fall in the first category (Zarzow 1982, p. 62).
In many cases this integration oE research institutes and industrial enterprises is merely an organizational rearrangement, under which research
institutes and enterprises are not fully controlled by these associations, but continue to receive their orders from two other places: in the Soviet Union from the State Committee for Science and Technology and from the respective branch ministriess (Amann 1983). And the financing of research by institutes and enterprises comes largely from different sources, often at different
levels of the organizational hierarchy.
Planning research. Another important reform throughout the region has been full-cycle planning of research work. For each major project, targets are set to cover the development of technology and its full commercial application in the economy, with users and expected effects specified. To enforce those targets, the central authorities name a leading research
institute to issue orders and oversee the work. Most of the countries also classify projects to give preferential treatment to the most important.
In the Soviet Union the first step in this direction was in 1966, when the coordination plans for research projects were instituted. In that year 246 coordination plans were listed, covering about 3,000 projects of
special importance and representing 40 percent of the research budget. In
1976 these plans were replaced by scientific and technical programs, also
aimed at distinguishing sharply between projects of different priority and at
providing better grounds for the reinforcement of state control over priority
projects (Zaleski 1976).
These planning modifications force research institutes to analyze where a given technology is going to be used; and with what effects, rather -8-
than simply to look at the possibilities of pushing forward the technological frontier. They also give potential users of new technology the opportunity to take part in decisions on the parameters of new technology and the timing of research. There nevertheless is some inflexibility in the decision-making due to the many participants. Moreover, the system of planning, even though allowing planners to consider competing alternatives, does not facilitate further corrections. The alternatives are rather quickly narrowed down and after completing this preliminary stage, there is much reluctance to pursue more than one alternative. And there is an unwillingness, or inability, of the central authority to terminate unpromising projects or reevaluate the whole original strategy (Campbell 1976, pp. 97-112).
Contracting for research. To improve control, purely administrative arrangements have been replaced by contractual ones, and along with the move to contracting, the research institutes in most of the countries have become business accounting units. This reform started in the Soviet Union in 1962
(NoLting 1976a, Berliner 1984), and soon almost all research institutes in that country turned to a business accounting system based on contracts for work. In the Soviet Union the reform introduced two forms of legal agreements
- contracts and work orders for research, the former drawn up by the branch ministries. To back up plan-targets with legal obligations, all contracts and work orders cover the specification of expected results, the terms and schedule of finiancial compensation, the deadline for delivery of completed work, and the penalties for delay or unsatisfactory results. As a rule research institutes are offered preferential payments (higher profit markups) for faster delivery or better-than-expected performance of resuLting inventions. - 9 -
To work well this contractual system would require that the users of the resulting technologies (enterprises and branch ministries) are demanding and scrupulous in executing their agreements with research institutes. The system of contracts (and work orders in the Soviet Union) does not force users to be demanding, however. Ambiguity aboult the exact definition of a final. product makes it easy for institutes to cLaim that their projects have been completed even though they have not met the requirements set by their cLients. It also makes it easy for enterprises and branch ministries to accept formally the results of a project if they are not too concerned with the product. Nor does this contractual system provide strong motivation for timely and well-focused research. Except for some minor financial sacrifices
(lower or no markup), the research institute runs no risk of not being paid for a failed project.
Pricing the results of research. One question about managing research in any economic system is whether the results of research should be priced and, if so, how. In the original planning system, no prices were applied to the results of research. With the changes in research management in the 1960s the central authorities decidled to promulgate regulations on the pricing of research products, including technical services for industrial enterprises. According to one line of arg;ument the reason for pricing is simply to reflect better the value of research, providing users with better information on the "economic scarcity" of their technology inputs and allowing research institutes to finance their expansion from current revenues. The other perspective on pricing is that prices should be directLy related to economic benefits, allowing research institutes to share the advantage of applied inventions with the user.
In the Soviet Union, for example, the research institutes have to - 10 -
cover their expenses (including wages) with the revenues from contracted work,
paid not simply in accord with the costs of a project but in some proportion
to the utilitarian value of the technology delivered and the timing of work
completion (Nolting 1976). The markup on top of actual costs of research is
also tied to the type of work and the quality of technology. Markups higher
than average are paid for faster completion of projects and better technical
parameters than negotiated in the original contract (Poznanski 1977a).
Customers are obliged by law to pay the costs of work as agreed.
But the way the pricing system works makes it difficult to verify
costs (Poznanski 1981). In Poland, for example, a uniform markup around 15 percent is agre!ed on, regardless of the results (Poznanski 1982). Moreover, even though planners expect enterprises not to allow for cost overruns by
research organizations, the planned costs are commonly revised upward. But in
some countries, such as the Soviet Union, the research institute has to cover additional expenses needed to improve the new technology, if its initial
parameters are below those stated in the contract, and if additional corrections take more time than agreed with the customer.
The markups go into one fund that supplements basic wages. If
bonuses were paid to individuals directly involved in projects, the attractiveness of reward would be greater. Only Poland has gone beyond the bonuses paid through a joint fund. In 1973 a special fund was introduced to
allow the teams involved in research projects to participate directly in the
results of commercializing the research in industry. Research institutes were
authorized to collect a percentage of the cost reductions over the first three years and to pay individuals directly involved in the research. It has been
recently revealed, however, that the effects of commercial applications have
been arbitrarily calculated, with some researchers given astronomic sums for - 11 -
trivial technological improvements, and with some enterprises transferring money to the fund for technologies developed without any participation of the recipient research institute (Poznanski 1981).
The bonuses provided by these schemes cannot compete with those that continue to be offered by the supervisory bodies for compliance with the traditional plan target for research. As Amann reports (1983, p. 31) the research budget remains a key criterion in the Soviet machine-tool industry -- one of the few branches on the forefront of the reform movement -- and the most important bonuses paid to institutes depend on the fulfillment of this target. Why? The branch ministries, having control over institutes, find it easier to execute these rather formalistic targets than to enforce the efficient use of resources for research.
Licensing the results of researcl. Little has been done to create procedures for licensing existing technologies by one organization (a research institute or enterprise) to another. Potential users of a given technology continue to have unhampered and costless access to domestic technologies in most countries in the region, once these technologies have been developed and paid for by the initial recipient. Among the few attempts to introduce domestic licensing has been the series of regulations in the Soviet Union allowing enterprises to sign contracts and charge other enterprises for the transfers of technology. In the late 1960s enterprises were allowed to charge others for the direct costs of a contract -- such as those of preparing blueprints and giving technical advice -- but these charges were not intended to help the enterprise recoup the costs of research. A series of decrees in the early 1970s made it clear that only very limited charges are permitted.
Hungary has moved further than other countries in the region in instituting a domestic licensing system. Its enterprises have been given - 12 -
legal protection through domestic patents and the ability to charge other
users (including foreigners) for subsequent commercial application of the
technology. ALso important, individuals not affiliated with a state agency
can sign a license with a domestic or foreign enterprise as well. The
domestic purchase of technology has to be covered by the users from their
profits, thus making them at least theoretically sensitive to the price
charged by the offering enterprise.
The reports from the Soviet Union and Hungary on the effectiveness of
licensing are mixed. Soviet economists say that licensing has not yet worked
due to the low sums an enterprise can charge the potential user. The Soviet media are full of complaints by suppliers that entered contracts and found the
returns less than gratifying. But in Hungary the state buyers do not try to
shop around for technologies because they have found the costs of shopping to be too high. And on many occasions, workers sabotaged technology taken from
other enterprises, in part because they did not want their bonuses reduced to
pay for that technology (Dezsenyi-Gueuellette 1984).
Investment
Decisions about investment. Investment decisions, always one of the main functions of planners, remain highly centralized all over the region.
Central planners decide not only about the allocation of investment resources
to branches of the economy but also about the construction of new plants, the
expansion of existing plants, and any sizable purchases of machinery.
Moreover, the choices of technology for projects -- choices that determine the
appropriate capital intensity and the like -- are also in the domain of
planners. The enterprises generally have decision-making power only for minor
projects, though they influence decision-making through informal channels -- - 13 -
say, by manipulating data used to evaluate investment projects.
Under the traditional system, state enterprises have no right to acquire other enterprises, whether in the same branch or outside it, by purchasing all or some of their assets. Ihis means that innovative enterprises cannot make capital acquistions that would promote the diffusion of a given innovation. Nor are there any substitute mechanisms -- such as centrally decided mergers -- that would enable enterprises to propagate technological change through organizational fusion. Most of the central decisions about mergers are motivated by considerations other than diffusion, such as considerations of scale, simplified procedures, and so on.
The bureaucratic machinery for investment decisions makes it difficult for planners to respond flexibly to problems and possibilities. To ease this problem, some of the countries have tried to delegate some investment decisions to managers, a reform that has succeeded only in Hungary, and there, only half way. The way this works is by permitting enterprise managers to seek investment resources from banks. But in fact, investment credits are not distributed purely on the basis of how profitable is the project submitted to the bank, since banks are given very specific instructions by planners about who deserves what (reportedly, banks in Hungary are given more than a dozen different criteria of project evaluation, one of which is profit). It is estimated that onLy 10-15 percent of enterprise projects are covered by their own means, while the balance is financed by credits obtained from the banks (and occasionally by the budget). This gives the planners strong leverage on the decision process for "decentralized" investments. Thus, there is much sharing of investment decisions by enterprises and the investment planners. - 14 -
So far, there has not been much interest to get the private sector -- that still in existence -- more involved in investment decision-making. Only the Hungarians have introduced a viable package of policies to expand the nonstate sector in recent years. The intention has been to reverse the drop of the private sector's share in total employment from 24 percent in 1960 to only 4 percent in 1970 (Tardos 1983). The expansion of private enterprises has been encouraged in services, including restaurants, and small stores. In most cases state establishments have been simply leased or sold to private individuals, and flexible arrangements have been made concerning pricing, bookkeeping, and transactions. This does not mean, however, that the
Hungarian government has embarked on a large-scale reprivatization of the economy, certainly not in the key manufacturing industries.
Instead, the Hungarian government has decided to promote cooperatives, also by allowing mixed forms of production, where state enterprises subcontract elements of their work to internal cooperatives. For instance, the government recently decided to allow small cooperative groups to operate within state-run farms and enterprises. Moreover, similar cooperative groups with separate accounts can be estabLished within state-run industriaL enterprises to manufacture products of their choice and price them on their own. The financial rules applied to them are the same as for state-run enterprises.
Financing investment projects. The logical complement of the heavily centralized traditional version of the investment system has been budgetary financing of the projects. Central planners had both the authority to
initiate projects and the financial means to carry projects out. Not much has changed in the financial rules since the setting up of the original system, considering that the investment decision-making rules have not changed either. Budgetary financing has done little to promote technological change, mainly because it does not provide strong incentives for the investors to search for optimal projects or to economize on scarce investment resources.
Though not limitless, investment funds have a zero price to associations and enterprises that a plant or production line is built for. Due to the obvious scarcity of investment resources handled by the central authorities, the lower-level organizations have had to cornpete for them with other units from the same branch of industry. This competition is resolved not by the economic benefits of projects, but by connections and bargaining power.
To make investors sensitive to the planned schedules and costs of projects, central planners have been experimenting with various instruments, including financial penalties for overruns. In Poland, for instance, the banks are responsible for overseeing the progress of projects, and they penalize investors for overruns by withdrawing specified amounts of money from their calculated annual profits. Another instrument, also in Poland, has been to tighten the cash flow to enterprises chat do not comply with the centrally determined deadlines for depreciating budget-financed projects (Glikman and
Poznanski 1976).
Despite the continuous politicaL calls to improve technological performance, almost none of the countries in the region has experimented with an investment fund aimed exclusively at Einancing risky technological changes. Funds for narrowly defined activities have been created to stimulate export-oriented production as in Hungary and Poland but not to promote technological change. An exception is tlhe recent Hungarian decision to set up special central funds (with the heavy involvement of the finance ministry) to promote technological change in severaL sectors of the economy, but only state-owned enterprises can apply and the funds are much smaller than for - 16 -
export promotion.
Because standard-setting and similar measures have been of little help, many countries in the region have looked to nonbudgetary forms for financing investment, including the wider use of discretionary funds by enter- prises. The assumption has been that enterprises would be more careful in allocating their own funds. But most of these discretionary investment funds have been short-lived or only a marginal source of investment resources. As a rule, the funds accumulated at the enterprise level have been cut back whenever an economy was going through difficulties. In PoLand, where every shock has led to the short-run expansion of budgetary financing at the expense of enterprise funds, the share of these funds in the total investment has only occasionally exceeded 10 percent. The enterprise funds have also been cut back because of attempts by the central authorities to restore their previous power and to avoid what they see as confusion resulting from indepen- dent decisions by enterprises.
The other line of changes has been to expand the role of bank credits. But in almost all cases the selection of investment projects has remained centralized -- their financing has simply been shifted from the state budget to the state banks, carefully following the detailed decisions by central authorities for the execution of projects. By and large, no positive real interest rate was charged before 1980 or none with any relation to the current scarcity of investment funds. Only after 1980, due to successive upward corrections, did the interest rate acquire practical meaning (for example, the real rate was 6-7 percent in 1981).
The only country in the region to reduce radically the role of budgetary financing is Hungary, where only about 50 percent of total investment is financed from the state budget, mostly in infrastructure. The - 17 -
rest is financed from bank credits and resources accumulated by enterprises.
The enterprises are allowed to apply for credits, and the available funds are, in theory, distributed competitively. The credits are supposed to be paid back with interest from the profits earned by the borrower (that is, from the excess of revenues over recurrent costs). Profits are also a source of funds for investment, aLthough they represent the smallest segment of the investment pool.
Recently there has also been some interest in instituting a capital market in Hungary to stimulate more efficient use of investment resources by
the state enterprises. The government announced in 1982 that a limited bond market would be opened. Bonds are available only to state-run enterprises and
cooperatives, but the intention is to allow private citizens to buy and sell
bonds as well. Bonds offer a higher yield than most bank accounts. This
reform is still in an early phase, but there is an indication that this move
is intended as a first step of an attempt to shift responsibility from the
state bureaucracy to a capital market.
The way that planners in Hungary operate financial instruments
reduces the innovative stimulus possible from financial instruments. Economic
regulations are frequently modified or replaced by a new piece of
legislation. During 1968-76 the government made more than 700 changes in the
financial rules, and the number of various "legal interpretations" and
"internal instructions" passed by branch miinistries was probably very high as
well (Szabo 1974, pp. 1-9). This instability of rules makes profit more
dependent on revisions and additions to law and less on a real effort by
enterprises, thus reducing the motivation for technological change.
Also reducing the motivation of enterprises is a heavy tax on
profits. The burden of taxation has been fluctuating in the past years due to - 18 -
changes in tax legislation, but always around a very high level. In 1972 about 63 percent of annual profit increases were collected by the state, with another 4 percent added to reserves. Only 33 percent of the incremental profit was kept by enterprises to provide them with resources for investment
(27 percent) and wage increases (6 percent). This means that the growth of profits has only a small impact on wages (see BaLazsy 1979).
What also "softens" the effect of financiaL rules on the behavior of state-run enterprises -- in Hungary, but also in other countries -- is that most financial instruments are highly individualized. For example, all taxes other than levies linked to wages are differentiated by branches of the economy, or even by segments of particular branches. The motive is to help unsuccessful enterprise, particularly in financing their wage needs. But this reduces the pressure on inefficient enterprises to come up with technological improvements, especially if they can count on the planners' good wilL to collect lower (or no) taxes over long periods. At the same time, efficient enterprises are discouraged from undertaking some needed changes in production because these offer only a small return.
Project execution. The choices made centrally are translated into concrete projects mostly by the specialized organizations called investment project bureaus. By and large subordinated to the branch ministries, their function is to formulate the designs for new plants and production lines and to specify the machinery that is to be installed and the sources of that machinery. This gives the bureaus an important voice in influencing the way new technology embodied in machinery is spread through the economy, though not necessarily in line with what is desired by or optimum for enterprises for which new capacity is built.
The separation of project activities from the production by - 19 -
enterprises has to have some impact on technological changes, since the
investment project bureaus lack much of the detailed information available in enterprises, particularly that about incremental changes undertaken by an enterprise without assistance from the bureau. Moreover, the enterprises lack power in pushing the bureaus in a desired direction, since the bureaus are financially independent of the enterprise management.
Since the beginning of central p;Lanning, most construction work has been assigned to special organizations, with only some left to the industrial enterprises. These construction organizations were originally subordinated to various central bodies, particularly to the branch ministries, local authorities, and special central bodies purely responsible for construction work. The organizations have a statutory obligation to provide services for a
given branch of industry or a territorial area, and only exceptionally are
they assigned jobs outside their administrative unit.
This way of organizing construction has slowed diffusion by placing
the construction-service enterprises in a monopolistic position, and enabled
them to pursue their interests at the expense of customers. By and large, the
construction enterprises prefer routine projects (Schroeder 1979, pp. 323-
24). They also tend to prefer large projects, which make them look better and
require less total supervision (thus hurting the diffusion of smaller
projects). For the same reasons, they prefer projects with longer building
periods.
Production
Plan targets. From the early days of central planning, technological
change in enterprises has been promoted through the plan targets set by the
central authorities. The ongoing evolution of decision-making on - 20 -
technological changes at this Lowest level of the organizational hierarchy has generally been aimed at providing some kind of order in the various (call them) technological targets passed on to the enterprises. It has also been aimed at attaching a higher priority to these targets to counterbalance other, often conflicting, objectives and at improving the system for monitoring the fulfillment of the technological targets.
A good illustration of the process of providing order is the evolution of technological targets in East Germany. Until 1960 the state enterprises were receiving three separate plans, one for adopting the finished designs and processes, one for standardization, and one for undertaking technical-organizational measures. In 1961 the list of plans was expanded to include the introduction of research results, the implementation of important inventions, and the goals for automation of manufacturing processes. The next step was in 1962, when these plans were split in two sections, one for product changes, the other for process technologies. This set of technological targets remains a main vehicle for central intervention into technological change at state enterprises (Bentley 1981).
This set of targets is supplemented in East Germany, and in other countries of the region, by other plan targets intended to pressure enterprises to make some other technological improvements and adopt other rationalization measures as well. From the very first years of central planning, the enterprises had been given targets for annual reductions in the costs of production, changes in labor (or total factor) productivity, and savings in the use of inputs, such as energy. These targets have had high priorities in periods of economic stress.
Motivations for efficiency. The central authorities in all Eastern
European countries and the Soviet Union run a "nomenklature" system for - 21 -
appointing industrial managers and other top official3. Throughout the
region, there has been a continuous trend toward replacing political appointees, who dominated the picture in the first years of central planning, by professional staff, mostly with technical education. Other professionals who have made it to the top in industrial management are those with education in economics, accounting, and organizational theory. This preference for technocratic staff has made the state-owned enterprises operate more according to technological considerations.
There have also been some attemp:s at basing personnel decisions on an explicit evaluation of technological performance, such as the policy announced by Andropov of firing managers unable to keep the quality of production sufficiently high. This explicit policy has some limits, however, because the managerial group is part of the political structure which the central authorities have to canvass for support. So, harsh personnel decisions can backfire if the managers find the sanctions unacceptable and react by refusing to support the central authority.
The complement to direct personnel decisions is a system of monetary rewards for good technological performance. Until the mid-1950s there was no explicit system of centrally supervised financial rewards aimed specifically at technological innovation in enterprises. Since then, explicit systems have been developed in all countries of the region. These systems link general bonuses, particularly those for managers, to the fulfillment of technological
targets. They also use separate funds for rewarding the personnel of enterprises for successful individual technological projects sponsored by the central authorites or undertaken by the enterprises. But the payments to
individuals are generally small, not more than 2 percent of total salaries and around 5 percent of salaries paid to nonline workers, such as supervisory - 22 -
personnel and design engineers (BerLiner 1976 and Freris 1979). So the
payments do not have much effect.
Pricing goods. The technology policy implemented in the first years
of Soviet planning directed technological changes without the intervention of
prices, which were seen as useless except for their computational function.
This fundamental principle has not changed much since. Enterprises are
expected to provide data on costs, but the decision on most prices is left to
the authorities. Prices are by and large calculated as a sum of costs plus a
profit markup. For a given type of product, they are set on the basis of the marginal supplier's cost.
In some countries, price-setting has been partly passed down to
associations and enterprises to simplify the procedures for approving price
revisions. But with few exceptions (farm markets in Bulgaria, Poland, and the
Soviet Union), prices of new goods continue to be set centrally in all
countries in the region, except Hungary. In Hungary enterprises determine most prices the!mselves, but on the basis of a centrally decided framework that
obliges them to move toward world prices. Enterprises are excluded from
pricing decisions for only a few goods of special importance (to allow the authorities to protect lower income groups or keep inflation low).
The centralization of all decisions on product prices limits the
flexibility of prices in following numerous changes in supply and demand. To
soften these limitations, the price commissions in most countries are
supported by many research institutes, design bureaus, and the like. They are
obliged to gather necessary information on the cost of production and to
perform time-consuming calculations. Most of these organizations represent
the interests of their branch of industry, making the problem of reliability
great. - 23 -
For the most part, the effort in price reforms has gone not into the
locus of decision-making but into the methods of calculating prices. Some changes have been aimed directly at having prices promote technological change. The most important reform has been that in the late 1960s by the
Soviet Union, to give the state-owned enterprises the right to apply of above- average markups (above the average for the whole group of producers of a
similar product) for new goods (Berliner 1976). These prices can be charged by the innovating enterprise only for a certain period, usually three to four years, after which the price (in practice,, the markup) has to come down to the
average for the given group of products. All decisions within this system are
set by the central authorities, and they are responsible for the yearly
reductions to the lowest final level.
There is not much evidence that the attempt to use price rules to
stimulate technological change has proved successful. A common practice among
state enterprises in Poland and the Soviet Union has been to apply for
temporarily higher prices for goods often representing a very minor or
insignificant improvement over the original ones. And due to the slowness of
decisions by the state pricing bodies, the gradual diminishing of preferential
prices to the branch average is not fully executed. In the Soviet Union, for
instance, many preferential prices are left at their higher value
indefinitely. Although of little help in promoting technological changes, the
preferential prices are seen by many as a vehicle for inflation.
Upgrading quality. The early policy priorities did not inspire
enterprises to upgrade the quality of their products. Even long-lasting
deteriorations of once high-quality products were frequent. Maintaining and
improving quality obviously requires some additional work by manufacturing
personnel and remaking or scrapping some poorly made products. This - 24 -
conflicted, however, with the primary function of enterprises determined by the central authorities: to maximize output from the scarce inputs.
The focus on output maximization continues to dominate the plan targets that central authorities set for enterprises, but over the years the priority given to quality has significantly increased. Several devices, such as the pricing changes noted earlier, have been built into enterprise plans to promote high quality. In addition, in the 1960s most of the countries introduced obligatory rating systems for all products to specify quality, and central authorities used these systems to set targets for enterprises and decide on the removal of products from production. For instance, part of
Soviet industry has since 1968 operated a system of rating all products in three categories every three years (Hill 1984). Relying on these ratings the central authorities give yearly targets for the proportion of new output classified in the highest category of quality, and those in the lowest category are targeted for termination (see the next subsection).
The more accurate the assessment of quality, the more effective the promotion of product improvement can be. The most objective assessment would be one by an institution independent of the supplying enterprise, but involving a representative of the latter. The presence of the customers is needed too. In some countries, institutions of that type exist, such as the
Soviet state rating commission (Gustafson 1981, p.33) comprising the principal customer, the branch ministry, and representatives from other central administration agencies. These institutions face many problems, however, among them the heavy influence by the interested branch ministry, which also has the best knowledge and equipment needed for tests of quality.
The state-sponsored organizations for rating quality are of some help
in upgrading quality, but they cannot protect consumers from shoddy goods. In - 25 -
all countries of the region the voice of consumers is heard through the official media, which frequently publish critical opinions on low-quality goods and their manufacturers. Generally, however, there are no journals exclusively devoted to the expression of consumer opinions and the institutionalization of the consumer movement is embryonic. One exception is
Poland, where a formally independent consumer protection organization was set up in 1982, with a widely available weekly magazine completely devoted to quality and price issues. Hungary also has some forms of consumer protection.
An important element of central pressure on enterprises to improve quality is the standardization system, which specifies technical requirements for the construction and performance of particular products. In the Soviet
Union, the State Committee for Standards sets technical standards for most manufactured products. Since 1968 the realization of tho3e standards has become one of the targets for enterprises in the annual plans. By raising state standards, the central administration can pressure enterprises to upgrade their products. As Hill (1984) reports, the standards in many branches of the machine industry tend to follow those represented by western models of machinery. But the enterprises have considerable opportunity to make the Committee soften its requirements, and the practical execution of the standards in force is not easy to obtain (see Martens 1984).
Some countries have also designed several financial incentives to stimulate interest among enterprises in upgrading the quality of their products. Generally, the product quality targets (they are not standards) are associated with preset bonuses and sanctions. But few specific funds are designed for paying bonuses. Instead, the fulfillment of product quality targets is one element in the performance revaluation of an enterprise determining the bonus payments to managers. The only important attempt to - 26 -
create a direct link between quality and incentives has been the experiment with above-average profit margins for new products of the highest quality.
Terminating obsolete production. Another aspect of quality promotion is the elimination of inferior products. In the first decades of rapid postwar industrialization, removing obsolete lines of production was by no means critical. With the vast investment programs and increases in employment, the demand for products -- of any quality -- largely exceeded supplies. This in turn made the leadership link economic advancement with output. From that perspective, eliminating technologically obsolete but physically operational lines of production was seen as undermining the main goal of maximizing output. But by the early 1960s, the need to eliminate older lines became more obvious, partly due to the involuntary stockpiling of such consumer goods as wool and cotton stockings and old fashioned vacuum-tube radios. The additional pressures on old production lines came in the 1970s in response to input constraints, such as those on energy and materials.
The growing appreciation for the need to eliminate obsolete products and processes has resulted in several adjustments. The production plans for enterprises have been the prime instrument for speeding up this elimination.
As noted earlier, the production plans in most countries in the region carry explicit commands for products to be terminated in a given period. Those targets are set on the basis of detailed information that enterprises provide
to their branch ministries. Products of a certain age are classified in a
separate category, and among them the selection for termination is made by
interested ministries, usually with a certain desirable average age for a given group of products in mind (Berliner 1976).
The decisions by planners to scrap obsolete products are usually
surrounded with controversy, and there often are strong forces operating on - 27 -
the enterprise against the termination. Wiorkers, for instance, tend in many instances to push for the continued use olf certain machinery and production of traditional products, since they are familiar with them. And managers may feel uneasy about eliminating production lines that still provide some benefits (such as to serve as a buffer in periods of pressure).
Nor do central authorities, for the same reasons, easily reach unanimous conclusions about obsolescence. The authorities in Eastern Europe and the Soviet Union tend to prefer partial changes in existing plants and, if need be, complete restructuring rather than closure. In general, the branch ministry or the lower level units down to the enterprise are responsible for absorbing employees who lose their assigned work due to the replacement of old production lines by newer ones. This policy greatly reduces the concerns workers have about replacing old machinery or shifting to new products. But it is not costless, since partial changes and restructuring of existing plants can be more expensive than other choices, such as building a completely new plant.
So far the region has not been active in restructuring its economy by eliminating branches where the technological advantage over other countries is doubtful. To introduce such a policy would require many new instruments that are not widely developed, if they exist at all (retraining programs, compensation schemes, cross-industry placeimentoffices) Hungary is introducing some of these instruments to make its recently announced structural policy work properly (Poznanski 1983). And Poland has introduced compensation schemes and some other instruments to reallocate labor and other resources to priority industries as well. - 28 -
Imports of Technology
Eastern Europe and the Soviet Union have been strongly interested in obtaining western technology, even during the years of the highest political hostility. The large-scale expansion of imports has been recent, however.
The acceleration of imports from western countries since the mid-1960s has had many purposes. Generally, the goal of the Soviet Union and the Eastern
European countries has been to use western technology to revitalize their technologically stagnating industries and if possible to catch up with the
West. Imported technology has also been expected to provide products technologically advanced enough to make the Soviet Union and Eastern Europe more competitive in the world market. While Hungary and Poland have seemed interested in getting more involved in world trade, the Soviet Union and
Bulgaria have been interested in export promotion only to repay the technology bill to the West.
This recent drive to import western technology has been accompanied by several important policy modifications During the first decades of the cold war, the only two important ways of acquiring western technology in the region were through noncommercial channels (industrial espionage and illegal copying of patent-protected goods) and through imports of technology embodied in industrial machinery and equipment. The latter imports have traditionally taken the lion's share of hard-currency expenditure in those countries
(Poznanski 1984a).
The countries of the region have since the mid-1960s expanded the role of commercial channels. Several new approaches have been tried, one of them by the Soviet Union, which more than any other country in the region focused its policy on importing technology through turnkey plants. Almost all the biggest projects based on the latest western technology have been of this - 29 -
type. In chemicals, dozens of complete installations have been set up by western contractors. In the automotive industry, the two major projects have been also turnkey arrangements (at Togliatti for passenger cars and at Kamaz for trucks). Many turnkey plants have been imported for other manufacturing branches as well, such as a complete factory for small, high-quality bearings and a numerically controlled lathe plant. Such projects have become very important in Eastern Europe as well (Zaleski and Weinert 1980).
The imports of turnkey plants have lowered the organizational and technical effort by the Soviet Union to get new lines of production on stream, as well as the risk. But they are also costly, too costly for the countries of Eastern Europe, which are severely constrained by the low availability of western currency because they lack things easily sold on western markets, such as gas, oil, and gold. So, the turnkey projects in Eastern Europe have been mostly limited to the chemical industry. Now, even Soviet planners seem to view this policy as too expensive, for they are clearly trying to shift from building turnkey plants to the retooling of old plants. For example, the makers of the domestically designed passenger car (Moskvitch) are paying car makers in Italy and France to help in the developmental work for a fuel- efficient front-wheel-drive car and in the acquisition of western equipment.
Nor have imports of turnkey plants ensured against delays or cost overruns. In the Soviet Union, many such projects were delayed substantially
(at least three years for the Togliatti passenger car plant and the truck plant on the Kama River). Even with the hielp of western companies, the time needed for construction is generally much longer than in the West. In the chemical industry, for instance, the construction period for turnkey plants was three to four years longer than in western countries (Hanson and Hill
1978). - 30 -
As a way of paying for turnkey plants, firms in the Soviet Unio and
Eastern Europe have tried to exploit buy-back agreements (also called countertrade) with firms in the West. In many cases, western companies have
exchanged complete industrial plants or entire production lines for long-term
supplies of goods, particularly raw materials, often at fixed prices agreed in advance. In the Soviet Union alone, contracts of that type were signed for almost $20 billion during 1973-77. Almost 90 percent of Soviet deliveries of natural gas to OECD countries were done through this type of contract in 1968-
74. Some Eastern European countries have also entered contracts or other
agreements requiring some reciprocal supplies of goods to the West.
What, then, about licensing? Soviet purchases of licenses in 1965-77 were several times higher than in the years before, but less than a tenth of
those by Japan in the 1970s (Hanson 1983). Czechoslovakia and Poland, the main importers of licenses in the last decade, paid royalties on their
licenses of $119 million in 1981, much above the level reported ten years
before (less than $20 million in 1971). The payments in 1981 were
nevertheless low by the standards of many borrowers of western technology
outside the region. For example, Brazil and Mexico, with comparable combined
industrial capacity, paid an estimated $1,200 million for license agreements
in that year (Poznanski 1984).
Poland has coupled Licensing agreements with purchases of western
machinery. Its technology has been acquired through license agreements for
such industries as machine building, transport equipment, and telecommunica-
tions equipment (especially radios, cassette recorders, and television
sets). Poland has been among the most innovative importers of technology
through licenses, such as with its negotiations on small farm vehicles with
General Motors of the United States. - 31 -
Hungary puts much more effort than the others toward building up
industrial cooperation agreements with western suppliers of technology: that
is, agreements providing for long-run mutual supplies of components and in
some cases for joint production for specific markets. These agreements open doors for the informal flow of technology in ways almost impossible under turnkey projects and license agreements: say, for the inflow of the production experience of western partners and for the joint development of new projects with reciprocal flows of technology. Of more than 800 cooperation agreements between western companies and the region in 1975, 228 (almost 30
percent) were with Hungary. Poland was second with 216 agreements, the Soviet
Union third with 196 in 1975 (Poznanski 1984d).
While different, the policies of the Soviet Union and the Eastern
European countries have shared an important common element: none has tried to
rely on foreign direct investment as a primary source of technology. This
fact distinguishes Eastern European and Soviet policy toward technology
imports from the approach taken by many of the rapidly growing countries of
Latin America and the Far East. Total direct equity investment by western
countries in Eastern Europe is estimated at about $100 million in 1983,
whereas the cumulative value of the western investments in 1980 was $7.5
billion in Brazil arid $5.9 billion in Mexico (Poznanski 1984a). Many other
developing countries have relied heavily on overseas investors: an example is
the Philippines, where the foreign direct investment stock approached $1.8
billion in 1980. But foreign direct investment has played only a minor role
in the development of South Korea, one of the most rapidly growing developing
countries (Westphal, Rhee, and Pursell 1981; Dahlman and Sercovich 1984). - 32 -
III. How the East Measures Up to the West and South
The question of how the centrally planned economies measure up to the market
economies has been a subject of debate since 1930s, with the theoretical discussions of the allocative efficiency of centrally planned economies by
Mises, Hayek, and Lange. In a recent analysis Nelson (1979) concludes that most theoretical arguments show centrally planned economies to be less
efficient in pursuing technological changes, but that there is no ground for
claiming that some elements of nonmarket control are not necessary -- or for
claiming that private agents can take care of all innovative activities in a
way that satisfies the aggregate welfare maximization objective.
Empirical evidence supports Nelson's claim. (See the tables at the
end of this paper for comparative data on research and productivity.) One
critical problem the East faces is the low efficiency of its research
potential. It is difficult to measure this type of efficiency because there
are no good ways of calculating research output (see Freeman 1975). Analysis
of foreign patents shows, maybe in an exaggerated way, the inefficiency of
research in the region. For instance, Poland employed 83,000 researchers in
1979, France 67,000. The work of researchers resulted in 855 patent
applications abroad by Poland and 19,276 by France -- a more than twentyfold
difference. In fact, the number of patent applications for France was almost
twice as high as that for Eastern Europe and the Soviet Union combined
(Maciejewicz and Monkiewicz 1982, p. 23).
Another indicator of the research sector's low efficiency is the
small number of technologies licensed by the Soviet Union and Eastern Europe
abroad. In Poland, for instance, only five or six technologies were licensed
in the postwar period, with annual royalties from all license agreements of - 33 -
only $1-2 million (Maciejewicz and Monkiewicz 1983). The combined annual receipts for the Soviet Union and Eastern Europe were $40-50 million, comparable to royalties recently paid to such countries as Norway or Sweden.
The system also appears to induce a bias for process innovations rather than product innovations. The stuclyof innovations in Polish industry by Poznanski (1980, p. 254) showed that more than half were process innovations (48 of 86 innovations whose nature was identified). Another study of 164 innovations in several Polish industries in 1977 showed that new processes dominate technological change in the economy (Poznanski and others
1977). This picture differs from that for market-type enterprises, which generally are preoccupied with new products.
Another system-related problem is slow diffusion. For instance,
Soviet industry was in the forefront of developing oxygen steel-making and continuous casting. It introduced these technologies on a limited scale in
1958, only a few years after the western pioneer, Austria. But the share of these technologies in total steel production in the Soviet Union is now a third that in most western countries. According to Poznanski (1983) the share of the oxygen-steel process in total steel production was 17 percent in the
Soviet Union in 1970 compared with almost 56 percent in West Germany, even
though the two countries built their pilot plants at almost the same time.
The Soviet Union and Eastern Europe have been slow in the diffusion of
technology despite higher investment rates than most of the western countries
and despite their emphasis on capital goods as the means to diffuse
innovations. So, the slower diffusion can be ascribed not to physical
constraints but to systemic problems.
Industries in Eastern Europe and the Soviet Union are slow to shift
away from obsolete technology. For instance, the steel industry in these - 34 -
countries continued to expand production from traditional installations
(Bessemer and open-hearth) long after 1967, when new equipment based on basic oxygen technology began to be installed. In western countries, by comparison, output from traditional installations has declined since shortly after the basic oxygen process became established in 1961 (Slama 1981). In the car industry, both the Soviet Union and Poland built large plants for manufacturing new western licensed models in the last decade, yet they continue to make cars using the technology of the 1950s (like the more than thirty-year old, domestically designed "Syrena" still made in Poland in 1984).
These countries appear to be equally slow in the diffusion of domestic and foreign technology. As Hanson (1981, pp. 37-38) pointed out in his recent account of Soviet imports of western technology, there has been almost no diffusion of technology acquired by several newly constructed chemical plants to other, older plants in that industry. A study by a Polish research team (Nowicki and others 1978) shows that in one branch of the Polish chemical industry only 14 percent of western licensed technologies purchased for this sector in 1966-75 have been adopted outside the original production lines. The corresponding shares were 30 percent for machinery, and 24 percent for metallurgy.
Slow diffusion of new technology is reflected, among other things, in a high age for machinery and other equipment. The average service life of chemical installations was 28 years in the Soviet Union during 1961-66, compared with 11 years for the United States in 1974. In the machinery industry, the respective averages were 26 years and 8-12 years; in electric power 39 years and 18-20 years; and in textiles and apparel 28 years and 9-14 years (Cohn 1979). The average service life in Soviet Union has been reduced since then, but it continues to be much higher than in the United States, even - 35 -
though the United States channels far fewer resources into gross investment.
Because of the slowness in diffuSing new technology and in terminating obsolete products and equipment, the quality of many goods manufactured in the region is disappointing, even among products of once-high standards. Czech consumer goods, once highly valued by the Eastern European and Soviet customers, are seen now as being mostly obsolete and of low quality, even by Czechs. In 1982 about 40 percent of the textile products supplied by the Czech industry for domestic needs were classified as defective and were subject to complaints and claims by consumers. In the same year, the
Czech media reported that many domestically manufactured passenger cars remained unsold because of unsatisfactory quality and outmoded styling.
East v. West in Productivity
The deficiencies of the centrally planned systems show up in aggregate indicators of dynamic efficiency. One aggregate indicator of
technological performance is total factor productivity (TFP), the productivity
of all inputs combined. During the period covering roughly 1950-65, the
growth of TFP in the Soviet and Eastern European economies averaged 2.5
percent a year, compared with 2.7 percent a year in developed market economies
and 2.0 percent in developing countries. (The figure for centrally planned
economies is only for the manufacturing sector, which generally has faster TFP
growth than the total economy.)
More recent comparisons of the Soviet Union with western economies
reach three broad conclusions. First, the level of TFP (static efficiency) in
the Soviet Union is generally lower than tlhat in the United States and Western
Europe, with the possible exception of Italy. Second, the growth of TFP in
the Soviet Union has been comparable to that of the United States and United - 36 -
Kingdom, but generally lower than that in the rest of Western Europe and
Japan, which have been catching up with the U.S. The Soviet rate of (total factor) productivity growth measured in real national income per unit of factors in 1955-70 was 2.4 percent a year (Bergson 1978). Although this rate is higher than 1.6 percent in the United States and 1.8 percent in Great
Britain, two already advanced countries, it falls well short of Japan (5.9 percent) and Italy (4.4 percent), two other industrial latecomers. The Soviet rate was also lower than that of France (3.9 percent) and West Germany (3.4 percent). Third, the growth rate of TFP in the Soviet Union has steadily declined since the late 1950s. Bergson (1983) reveals that Soviet productivity increases were close to those of the western productivity leaders only during the first postwar years, after which Soviet performance worsened. The deterioration of productivity growth in the Soviet Union has continued since, with the rates for the late 1970s well below 1 percent a year. Overall, these studies suggest that the Soviet Union --unlike Japan and most of Western Europe -- has been generally unsuccessful in closing the technological gap with the United States.
Other good data available for a direct comparison of two countries, one from the East and one from the West, are those on the relative labor productivity of the Hungarian and Austrian economies (Roman 1979, pp. 313-30;
Boguszewski 1979, p. 31). Hungary has been one of few Eastern European countries interested in continuous observation of changes in its productivity relative to other eastern countries and to western economies. The best country to compare Hungary with is Austria, because of its historical ties with Hungary and the similarities in the scale of economic potentials and in the demographic situation (mature and almost stagnant populations). - 37 -
Data for the early 1970s show that the labor productivity in
Austria's basic industries represented 140 percent of that in Hungary
(France's was 208 percent). The biggest difference was in mining, where the
Austrian productivity was 250 percent of that in Hungary. Respective figures were 170 percent in gas and electricity, 150 percent in the machinery industry, and 135 percent in chemicals. The smallest differences were in textiles, where the Austrian labor productivity was only 15 percent higher than Hungary's. The only important sector in which Hungary had an edge (15 percent) was food processing.
Hungary, with its mixed system, performs above the average for the region. This is suggested, among other things, by data on patents granted by western countries to Eastern Europe. The time series of western patents,
1967-82, indicates that Hungary was the only country in the region which radically increased its patenting in western countries in the second part of that period. The number of patents was twice as high in 1972-78 as during
1967-72. Hungary also reports the highest number of western patents per capita (Poznanski 1984).
A higher pace of technological change has helped Hungary to improve the technological content of its exports more during the postreform years than other East Europeans and the Soviet Union. For instance, Hungary has been much more successful in increasing the share of machinery and transport equipment in total exports to western countries -- at the expense of less technologically complex manufactures and rionmanufactured products. Hungary increased this share from 6 percent in 1970 to 13 percent in 1980, whereas for the region as a whole (including the Soviet Union) it was 8 percent in both
1970 and 1980. Hungary was also paid, per kilogram of its products, an average price 70 percent higher than the other Eastern Europeans and the - 38 -
Soviet Union. That also reflects, at least partly, its superior technological performance (Poznanski 1982).
But these data reflect some nonsystemic factors as well. One is that
Hungary is traditionally more dependent on foreign trade and therefore is under stronger pressure to expand and optimize its exports, say, through providing patent protection for goods sold outside. Moreover, Hungary is relatively poor in natural resources, so it has to focus its production on less material-intensive items -- those with higher prices per kilogram. One can also speculate that Hungary, as a small-scale economy, has to be more careful in foculsing its production, and is more pressed to improve existing technology in order to avoid losses in foreign markets. So, Hungary's technological performance is superior to that of other centrally planned economies in the East, for systemic and nonsystemic reasons. Nevertheless, it is worse than that of Austria, which is by no means a productivity leader in the West.
East v. West in Technology
Of the many studies of the technological gap between the centrally planned economies and the industrial West, the most comprehensive is by Amann and his colleagues at Birmingham University (Amann, Cooper, and Davies
1978). Among their key conclusions is that Soviet is ahead of or even with that of the United States in only a few sectors -- in a few traditional industries, such as steel-making, and particularly in some military industries, such as conventional weaponry. For instance, Soviet tanks were superior to the western models in the 1940s and 1950s. But in the 1960s the western powers had moved ahead, onLy to have new Soviet efforts destroy this lead. In ballistic missiles the Soviet Union was behind the West in the 1960s - 39 -
and early 1970s, but two new generations of ICBMs have helped the Soviets close the technological gap, at least for the moment (Halloway 1983, 276-307).
But the Amann study revealed that the Soviet Union lags far behind the most advanced western countries in most civilian technologies. These include many consumer industries, passenger cars, and chemicals. In computer production (particularLy peripherals) the Soviet Union remains 10 to 15 years behind the West, both in technology incorporated in their domestically designed models and in the stock of computers in use. While computers of the second generation made up all the computer stock in the United States in 1960, the Soviet Union reached this share only in 1975 (Goodman 1984). By that time, most of this generation of computers were replaced in the United States by third generation units (those based on integrated circuit technology).
The Amann study is instructive, but it goes only to the early
1970s. The most recent update of this study (Cooper 1984) shows that the original picture still applies. The Soviet industry lagged seven years behind in third-generation computers and is now behind the United States in the production of personal computers by at least five years. For another example, the Soviets launched the first commercial production of microprocessors in
1976, four years after the United States. And its first 64K dynamic random- access memory was brought to production in 1983, compared with 1978 in the
United States (see table 4).
Nor has there been much improvement in the speed of diffusion in the
Soviet Union of a once implemented technology. Cooper shows that the Soviet
Union appears in the 1970s to have been irnproving its diffusion in modern chemicals, pulp and paper, nuclear power, and color television sets. This improvement can be attributed, however, to the slowdown among the western nations and their gradual switch to even newer technologies. Moreover, in - 40 -
some industries (iron and steel) Soviet performance has deteriorated in relative terms. To illustrate, the share of continuously cast steel in total
Soviet output was 6.9 percent in 1975, when this share for Great Britain was
8.4 percent, only a quarter higher. In 1982 the Soviet share was 12.1 percent, while the British share was 38.9 percent, three times more. The
Soviet lag in part reflects continued investment in new plants using outmoded
Bessemer and open-hearth technology.
The evidence provided by Cooper leads to the general conclusion that the recent effort by the Soviet Union to reduce the technological gap by extensive borrowing of western technology has not been successful. A similar observation can be drawn from several recent case studies. Goodman (1981) shows for the computer industry, among the priority sectors of the Soviet economy in the last decade, that this effort helped the Soviet Union reduce the gap only slightly -- or at least prevent the gap from widening in the mid-
1970s. But the gap began recently to widen again due to an abrupt acceLeration of technological advances among western manufacturers (personal computers and radical changes in the parameters of computer chips).
A look at branches of industry that have acquired large amounts of western technology nevertheless shows that most of them have gone through a tremendous technological transformation. For instance, in passenger cars, countries such as Poland, Romania, and the Soviet Union have moved from poorly organized production of old vintage models to mass manufacturing of western- licensed models, with a technology at least fifteen years ahead of the traditional, domestically designed models. Similar progress has been reported by the chemical industries, particularly in modern petrochemicals. Many
countries in the region (such as Hungary and Czechoslovakia) increased the
shares of plastics and other petrochemical products in the production of - 41 -
chemicals to equal those of the leading western producers, including West
Germany.
East Germany is often viewed as the most technologically advanced country in the region, but it is not much closer to the western level of technology than the other economies. Little systematic work has been done to measure the distance between East Germany and the other countries of the region, or that between East Germany and the West. But there are reasons to believe that even if East Germany has kept a technological lead over more backward countries in the region, this difference has probably diminished in the last few years. All the available indicators -- such as relative export- unit prices, the share of machinery and transport equipment in total exports to western countries, or the absolute volume of trade with western economies
-- seem to support this statement.
A look at products designated by planners to serve as "export locomotives" suggests that progress has been made in only a few cases, such as the Soviet expansion in chemicals destined for western markets (ammonia). But the Soviet Union invested a lot in building up export capacity in the car industry, with only limited initial success. Recent data show that the Soviet exports stagnated a few years ago, mostly because western customers are less concerned with the prices of cars and more concerned with the running costs.
Soviet cars -- fuel-inefficient and often poorly-built -- cannot compete with more advanced cars in western markets.
East v. NICs in Technology
Neither the study by Amann, Cooper, and Davies nor its update by
Cooper give information on how successful the Soviet Union and Eastern Europe have been relative to other economies that are trying to catch up with the - 42 -
West: that is, the economies of Asia and Latin America. Poznanski (1984) has recently done this kind of comparison in a study that compares Eastern Europe
-- mostly ignored in the earlier comparisons -- and a group of the newly industrializing countries: Argentina, Brazil, Mexico, Taiwan, Hong Kong,
South Korea, and Singapore.
The most spectacular change in relative technological levels has been in machinery and transport equipment, a fact well reflected in exports. Latin
American saLes of these goods represented 54 percent of Eastern European exports in 1970, but 216 percent in 1981. The share of Eastern Europe in OECD imports of machinery and transport equipment (which are technologically more complex than other trade goods) increased from 0.1 percent in 1970 to 0.7 percent in 1980, while that of the six newly industrializing countries increased from 0.1 percent to 4.1 percent over the same period. The newly industrializing countries were also paid higher prices than the Eastern
Europeans and the Soviet Union for their exports of similar goods to the
West. East Germany received $1.69 per kilogram of its passenger cars exported to the OECD in 1980, Czechoslovakia $2.18. Brazil was getting $3.58 per kilogram, and Mexico $4.58 in the same year. The price advantage of the newly industrializing countries was more or less the same for tires, engines, footwear, rotary electric generators, and textile machinery.
East European exporters have performed less well on the OECD market than Brazil, Mexico, and Argentina -- both groups representing similar economic potential. In all major product categories -- chemicals (SITC-5), manufactured goods (SITC-6), machinery and transport equipment (SITC-7), and miscellaneous manufactures (SITC-8) -- the three Latin American economies had a far smaller share of exports to the OECD than did Eastern Europe in 1970.
Except in chemicals, Latin America either either eliminated the initial gap by - 43 -
1981 or built a visible edge over Eastern Europe in its exports to the West.
Some case-study evidence reinforces the trade data (see Poznanski
1983, p. 313). While gradually reducing the difference in scale of steel production, the newly industrializing countries have moved more rapidly than the Soviet Union and Eastern Europe in the application of several newer steel- making technologies. Brazil increased its share of steel made with the oxygen process in the total output of steel from 10 percent in 1960 to 63 percent in
1979, and South Korea reached 70 percent by 1979. In contrast, the share of this technology in the Soviet Union increased from 3 percent in 1960 to 29 percent in 1979; in East Germany it reached only 9 percent in 1979. Countries like Argentina and Brazil are also more advanced in the use of continuous casting technology, even though they switched to this process at about the same time as the major Eastern European steel makers (early 1960s).
Even more dramatic is the slow pace of technological advance in the
Soviet and Eastern European consumer electronics industries, probably the outcome of a deliberate policy choice. The scale of production of most of these goods in the newly industrializing countries largely exceeds that of
Eastern Europe, and in many cases that of the Soviet Union as well. Moreover, the production in newly industrializing countries by and large represents higher technological level. For instance, electronic (digitaL and quartz) watches represented only 8 percent of the total output of this product in the
Soviet Union in 1980, while more than half of Taiwan and Hong Kong's watches were based on electronic technology. The share of color television sets in total production was 50 percent in East Germany in 1981, 37 percent in the
Soviet Union in 1982, and 11 percent in PoLand in 1980. In South Korea the
share for 1983 was 95 percent.
In computers, on the other hand, Eastern European countries continue - 44 -
to have a clear lead in the volume of production of central processors and peripherals. And these countries have moved quickly in some areas, again probably the outcome of a deliberate policy choice. Among the success stories in Bulgarian industry is the production of computers and peripherals, a small activity a decade ago and now a large one. This new sector provides much for- eign currency and is expected to finance the whole oil and gas bill to the
Soviet Union in the coming years. In contrast, a large investment in the much more experienced Polish industry has not produced similarly good results, for only a few computer systems are sold each year (Mundie and Goodman 1981). But some newly industrial countries -- such as Brazil -- are making technological- ly more advanced models, mostly of western origin, even with their lower production. Moreover, many of the newly developing countries operate much larger computer stocks than the Eastern Europeans (Poznanski 1984). The number of computers in use in all of Eastern Europe was estimated at 8,000 in
1980, while Brazil alone had around 10,000 systems, and Mexico 15,000.
In all stages of technological change, from inventive activity to the phasing out of an obsolete product or process, the centrally planned economies face problems that are far greater than those reported by the industrial market economies. As a result, the Soviet Union and the countries of Eastern
Europe have, as industrial latecomers, continued to lag behind the West in their technology. And despite their investment of greater shares of their national income in research, these countries have also failed to show any advantage in productivity growth. At the same time, the newly industrializing countries, with their quasi market systems and greater openness to the world economy, have succeeded in reducing their technological lag relative to
Eastern Europe and the Soviet Union in many critical industries and in getting closer to the technological level in the West. - 45 -
IV. What Explains the Lacklustre Performance
What systemic factors might account for the technological performance in
Eastern Europe and the Soviet Union? Why has the latest wave of reforms not greatly improved efficiency in the region? I conclude by trying to determine which features of central planning inhibit technological change and, hence, productivity growth. Sought here is an analytical framework for explaining the effects of central planning on technological change.
Risk-reward Explanation
There is a long tradition in the western literature of blaming the resistance that enterprise managers have toward technological changes on the highly uncertain environment in which they operate. Even though these managers do not face sudden changes in consumer taste or switches in demand to close substitutess, they are continuously confronted with risks following the insistence by central planners on exact fulfillment of annual targets set for total production and the output of some goods. This insistence makes managers afraid of the uncertainties that are typically associated with any major technological effort, for it puts state-run enterprises in a riskier situation than that of market enterprises, which have a wide range of acceptable outcomes, with output less important than profit.
Another feature of central planning that makes technological change particularly risky for industrial enterprises is the tendency among planners to demand uninterrupted increases in the volume of production and in supplies of specific goods (Grossman 1966, pp. 118-29). Plan targets for upcoming periods are generally extrapolations of previous performance, so enterprises that perform well in one plan period are likely to be given new targets - 46 -
demanding an increase in production of at least the same magnitude. Faced
with this planning practice, enterprise managers may be unwilling even to
introduce technologies that pose little difficulty, for moving the enterprise
failing the targets corrected continuously upward in the next plan periods.
A complementary statement that usually accompanies this argument on
excessive risk is that state-run enterprises do not take risks because rewards
are insufficient for enterprises and individuals to compensate for the risks
of engaging in technological change. Even though many in number, the various
rewards offered to Soviet enterprises are not high enough, particularly when
compared with the attractiveness of bonuses related to other goals, often in
direct conflict with the innovative effort (Berliner 1976). In addition, the
innovation record is viewed as less important than other indicators of
performance for promotions and changes of wage groups.
The problem with this risk-reward explanation of low innovativeness
is that its basis is an incomplete picture of the centrally planned economy.
It implies a rigidity of planning that does not exist. In fact, enterprises
sometimes operate with no clear plan targets, particularly when there is a
delay in setting goals for the coming plan period. More important, confirmed
targets are subject to revisions by branch ministries and higher authority when there is an indication that plan will not be fulfilled or when increases
in production are possible. In some cases, such as Poland during 1976-79, the
planning is so soft that it is more random than rigid (Montias 1983, pp.l-37).
The consequences of not meeting production targets are not as severe
as assumed in the risk-reward explanation. The most that sanctions for
failure involve are personnel changes for upper management staff. There is
not much evidence, however, that top managers are always punished for failing
to meet the plan, regardless of the reason (whether an unsuccessful innovation - 47 -
has led to this failure, or a more trivial mistake, or just bad luck in routine activities). In most cases, the rules of the party "nomenklature" prevent failing managers from being severely punished. At worst, managers are rotated to other, often equally respectable, positions. The risk-reward explanation also underestimates the ability of enterprises to present their failures as successes. Enterprises can redefine failures as successes, however socially inefficient they may be. They also are frequently in a position to make prices cover manufacturing costs, which again helps managers to avoid the risk of failing with an innQvation.
Zero-price Explanation
An alternative explanation -- integrating some of the aforementioned observations on the true nature of planning -- relates the weak interest of state-run enterprises for technological change to the system's inability to make enterprises cost-conscious (Kornai 1'980,pp. 231-46). The soft budget constraint makes state-run enterprises less sensitive than market-type enterprises to the costs of production. The budget is not binding for the state enterprises, since most of their production factors are provided at what effectively are zero prices. Capital investment is financed through budget subsidies or "credits" that do not have to be repaid on strict terms. And when faced with difficulties, the enterprises are in most cases rescued through the provision of additional resources or the relaxation of production targets or budget repayments, so there is no fear of bankruptcy.
Hungary is the only country that has started openly arguing for the reinstitution of bankruptcy. A fear of bankrupty can make enterprises exploit all possible ways of increasing their efficiency. This view, heretical by
Soviet and Eastern European standards, has many opponents in the Hungarian - 48 -
leadership. Managers of enterprises are accustomed to a paternalistic relationship with the central planners, who as a rule help out during periods of financial difficulty. The trade unions, enjoying some freedom from party control -- unlike their counterparts in other countries of the region -- are not sympathetic to change either, as they worry about the fate of workers employed by enterprises going-out-of-business.
So far, the bankruptcy legislation in Hungary is soft, and the state does not use its right to declare chronically deficit enterprises bankrupt very often. According to the law, a state-run enterprise can be pronounced bankrupt only after it has been given time for necessary "rescue adjustments." Hungarian firms receive direct subsidies and tax exemptions -- reaching up to 40 percent of the production costs in most industry (Szabo
1974, p. 7). This helps many inefficient enterprises to show profits, so they do not qualify for the bankruptcy procedure, even though they deserve it. In this permissive environment, only 10 Hungarian enterprises of 1,735 showed a loss in 1980, a crisis year in Hungary. Eleven enterprises were ordered to merge with others, and 13 enterprises were liquidated, numbers higher than in any year before, but still too low considering the real losses incurred by ill-managed enterprises (Kornai 1983).
Paralleling the lack of strong concern for production costs is a lack of concern for meeting real demands. The lack of concern for cost-saving creates unbalanced commodity markets. The buyers are forced to fight for superior goods, and producers with secure long-term markets do not have to innovate to stimulate demand for their goods. There is overwhelming evidence of inability to meet consumer demands in the late 1960s (Kornai 1971, pp. 242-
44). In Hungary only 22 to 33 percent of the orders placed for the most desirable cars were met in 1968. The ratio for telephones was around 33 - 49 -
percent, and for most clothing and shoes it ranged between 70 and 94 percent
in the same year. Similar analysis for the late 1970s shows that this gap between demand and effective supply, though diminished, continues to be substantial. The waiting period for apartments was seven years in 1979 (in
Poland, 10 to 12 years). For passenger cars the lag between initial or full payments and delivery was five years (Kornai 1984).
These permanent shortages are also reflected in a time-consuming buying process. A rare analysis of the time-budget in a sample of Polish families shows that shopping for food and cooking takes an average of two to three hours a day. And faced with a lack of the most desired articles, many consumers settle for less demanded substitutes. The Hungarian study shows that more than half of female buyers are forced to purchase shoes other than the most desirable. They have to buy winter shoes in summer time, or fashions and colors other than those desired at the time of purchase (Kornai 1984).
The lack of stimulus for cost minimization and for meeting real demands puts the state enterprises in a situation where they do not really need to innovate, at least not to undertake cost-reducing changes or to meet desired standards and qualities. In other words, it is not so much the fear of failing with innovation as the weak pressure to economize on resources that turns enterprises away from potential innovations. For the same reason, any efforts made do not have to be optimal. Thus the "zero-price" explanation answers questions about both reasons for the low frequency of innovations and about the factors behind inefficient technological changes.
Closed-economy Explanation
The risk-reward and zero-price explanations have a common element: they see systemic deficiencies in relation to an ideally operating closed - 50 -
economy. This perception neglects many technological opportunities available through participation in the world economy, including direct involvement by foreign economic agents. Therefore, one should also try to evaluate the systemic deficiencies from the viewpoint of how the existing system affects the ability of the region to benefit from external resources.
Technological change is more international than it was in earlier decades: that is, many more economies are approaching and extending the technological frontiers for many products and processes. Moreover, the newest technologies typically are transferred commercially only through direct operations by foreign companies in a host country (Mansfield and others
1979). There is also some evidence that subsidiaries help in promoting the rapid diffusion of foreign technology in the country (Chen 1983, pp. 309-
21). Technological change can also be seen as more international now than before in the sense that an increasing number of producers, even those representing relatively large scale, have to rely on a wide network of foreign suppliers -- incorporating necessary technology -- to build a competitive product. To achieve this goal, companies subcontract the production of certain parts and components, and sign long-term contracts on such deliveries from abroad. They also enter cooperation agreements with technologically strong partners to assemble one product, or its modifications, in the different localities (in some cases including joint marketing of their products).
A look at the literature on technological change by Soviet and
Eastern European authors shows that the international aspects of technological development go unnoticed. Only one such aspect -- the need to import technology from other countries -- is widely recognized. But even these imports are seen mainly as a temporary measure rather than a permanent - 51 -
solution. There is even less discussion on the way existing systemic
arrangements affect possibilities for taking part in the international side of
technological change. The impact of the system on overall, not just
technological, relations with the outside world is downplayed in an old-
fashioned way. Systemic changes are seen not as essential but as corrective measures -- aimed at stimulating domestic competitiveness without breaking the
existing monopolies, providing some countercyclical dampers, or widening the
basis for determining prices for domestic goods.
Under the existing system, decision-makers at all levels of the
bureaucratic machinery view contacts with other economies as unworthy of a
strong effort or even as detrimental to such goals as the fulfillment of
annual output targets by state enterprises. The system also determines prices
independent of world prices. The implication of this is that calculations in
domestic prices -- to the extent that such prices affect technological effort
-- divert that effort from trajectories that are promising for developing a
competitive industrial structure. For instance, some economists claim that
underpriced labor inputs cause these economies to concentrate too much effort
on labor-intensive products, in which they cannot compete with the labor-
abundant developing countries. This by itself may reduce the attractiveness
of closer contacts with eastern enterprises for the potential partners in the
West or elsewhere. This inward-looking character of the system in the Soviet
Union and Eastern Europe is an important additional explanation for the
region's losing its technological edge over the newly industrializing
countries in several key manufacturing branches. - 52 -
V. Conclusions
The way allocative decisionsare made under central planning strongly affects the motivation of state-ownedenterprises and research establishmentsto engage in technologicalchange. The allocative mechanism puts these agents in a situation where productivefactors have zero prices, a situation that inspires little interest in cost-reducinginnovations or in innovationsaimed at quality improvements. The lack of interest in quality improvementsis reinforced by the weak influenceof buyers, particularlyconsumers, on allocative decisions. The allocative system also isolates national agents from the influenceof the world economy, delaying their reactions to global changes in relative scarcity and in tastes.
Based on the results of past tinkering, the Soviet Union and the countries of Eastern Europe will have to undertake major reforms of the fundamentalprinciples governing the allocation and use of resources. Reforms limited to changes in the organizationand administrativeprocedures for research and enterprises-- accompanied by minor improvementsin such things as prices, bonus systems, technologicaltargets, and procedures for technology imports -- have absorbed much of the energy spent on systemic changes over the last decade. But these have not been sufficient to bring about big improvementsin technologicalperformance. Broader reforms to redesign the allocative system -- perhaps following the first steps by Hungary, the most technologicallysuccessful country in the region -- are needed to bring such improvementsabout. But even the Hungarians will probably have to consider more fundamentalreforms, if they are to bring their performanceup to that in the West. - 53 -
Table 1. Research Effort by Selected Centrally Planned and Market Economies
R&D expenditureas Scientists and a percentageof Engineers in R&D gross domestic per 100,000 product (GDP) population 1967 1975
Centrally planned economies
Czechoslovakia 2.9 3.1 -
Hungary 1.8 2.8 21.4
Poland 1.4 2.2 29.7
Romania
Soviet Union 3.0 3.8 12.5
Yugoslavia
Market economies
Canada 1.5 1.1
France 2.0 2.0 12.9
Italy 0.6 1.1 6.2
Japan n.a 2.1 35.7
Netherlands 2.2 2.3 16.9
Norway 1.1 1.5 14.8
Spain 0.2 0.3 2.2
West Germany 1.9 2.3 16.1
United States n.a 2.4
Source: Various national sources. - 54 -
Table 2. Average Annual Growth of Factor Productivity, Soviet Union, Selected Periods (percent)
Period All sectors Material sectors
1950-60 1.87 3.63 1960-70 1.51 1.83 1965-75 0.94 1.32 1966-76 0.86 1.22 1967-77 0.76 1.12 1968-78 0.57 0.91
Source: Bergson (1983, p. 40). - 55 -
Table 3. Real National Income per Employed Worker, 1950-64
National income Average annual rate of growth per unit of factor, Country 1950-62 1950-64 1950-55 1955-64 1950-64
United States 2.1 2.2 2.7 2.0 2.0 Netherland 3.8 3.9 4.5 3.6 3.4 France 4.8 4.7 4.7 4.7 4.1 West Germany 5.2 5.3 7.1 4.3 4.6 Great Britain 1.6 2.0 1.4 2.5 1.4 Italy 5.4 5.2 5.3 5.4 4.7 Soviet Union 4.5 4.3 5.5 3.7 2.8
Source: Bergson (1968, table 53). - 56 -
Table 4. Leads and Lags in the Diffusion of New Technologies by the Soviet Union and the West
Year of first commercial production Soviet Union United States
Iron and steel industry Oxygen steel process 1956(+2) 1954 Continuous casting 1955(-7) 1962
Chemical industry Synthetic fiber-nylon 1948(+10) 1938 High-pressure polythene (est)1953(+12) 1941 Polystyrene (est)1957(+24) 1933 Polypropylene 1970(+13) 1957
Machine-tool industry Numerically controlled 1965(+8) 1964 Machinery center 1971(+12) 1969 Flexible manufacturing system 1971(+4) 1970 Industrial robot 1971(+8) 1968
Computers industry First generation computer 1952(+6) 1946 Second generation computer 1961(+4) 1957 Third generation computer 1972(+7) 1965 Single-chip micro computer 1979(+3) 1976 Home computer (plan)1984(+5-6) 1978-9
Electronic components industry Transistor 1956(+5) 1951 Integrated circuit (est)1968(+7) 1961 Microprocessor (est)1976(+4) 1972 64K dynamic RAM (est)1983(+5) 1978
Consumer goods industry Color television 1967(+13) 1954 Automatic washing machine 1980(+15) 1965(est) Digital electronic watch 1975(+3) 1972 Quartz electro-mechanical watch 1977(+5) 1972 Electronic calculator (hand-held) 1975(+4) 1971 Domestic video recorder 1975(+6-7) 1968-9 Dish washer (plan)1984(+11) 1973(est)
Source: Cooper (1984). - 57 -
Figure 1: Share of Oxygen-BlownSteel in the Total Output of Steel Ingots, selected countries, 1952-1980
Percent 86.6 80
South 76.2 Austria 65.9a 60 A w / 4 ~~~~~~~~~~~~~~65.9 60
/ / o~~~~~~~~~46.0 Romania
40 39.4
| J ~~~~~~Poland 20 ast
1950 1960 1970 1980 1982
Source: Poznanski (1983), InternationalLabor Office (1981), and InternationalIron and Steel Institute (1983). - 58 -
Figure 2: Share of Color Television Sets with the Total Output of Selected Countries, 1970-83
Percent
100 94.6
/South Korea United 77)1 Jaoan
o <_Stte 65.2
50 5.
EastTaiwa viet 11rion
1970 1975 1980 1983
Source: 1) On Soviet industry:Cooper (1984).
2) On South Korea: Monthly StatisticalBulletin, The Bank of Korea, Seoul, Vol. XXXVIII, 30 April 1984.
3) On East Germany: StatisticalPocket Book of the German Democratic Republic, Berlin, 1982, 41; other countries: Rocznik Statystyczny GUS, Warsaw, 1983. - 59 -
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C. Zarzow, "Reserwy Koncentracji Proizwodstwa," Planowoje Chozjaistwo, No.11 (November 1982). World Bank The Construction Industry: Employment and Development Issues and Strategies in of Small Enterprises Publications Developing Countries David L. Gordon, coordinating of Related Ernesto E. Henriod, coordinating author author Examines the potential role of the Interest Presents a profile of the construction World Bank in encouraging developing industry. Points out that construction countries to assist small enterprises work represents 3 to 8 percent of the and suggests that efficient substitution gross domestic product of developing of labor for capital is possible in a countries. Fostering a domestic capa- broad spectrum of small-scale manu- bilitv in construction, therefore, is im- facturing and other activities that are A Brief Review of the World portant. 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The text, organized along trv; cross-classify 120 occupations with lines of governmental administrative Pollution Control in Sao Paulo, fifty-eight industries; and provide in- responsibility for various industrial Brazil: Costs, Benefits, and formation about productivity (value pohcies, includes chapters on trade, fi- Effects on Industrial Location added per person engaged), energy nance, labor-technology relations, tax- Vinod Thomas consumption per person engaged, and ation, licensing and other direct pro- employment. duction controls, public enterprises, Staff Working Paper No. 501. 1981. 127 1980; second printing, 1982. 211 pages. infrastructure and location, industrv- pages (including annex, references). ISBN 0-8213-0126-8. Stock No. BK 0126. agnculture linkage, and th,e interna- Stock No WP 0501 S5. $20. tional environment. 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Introduces a new eco- Baken fertilizer industry in Volume 2, below.) nomic modeling language, GAMS, Brakel ISBN 2-7178-0328-9, Stock No. IB 0544, which decreases the time and effort re- Views the restructuring and moderni- $12. quired to construct and use industrial zation of manufacturing from the per- Volume 2: The Planning of sector models. spective of World Bank assistance in Vlm2Th lnlgoThe Johns Hopkins Unversity Press. 1984. the textile industry. Evaluates the roles Invetmen teProramsin Th Johs HokinsUnivrsit Pres. 184. of government, the financial system Fertilizer Industry 328 pages. and the private sector in restructuring. Artz ArmeaneM.Mr Chosi,Chkdiu AleAlxander d LCNo 83-18722.1H 3197, $30ISBN hardcover; 0-8018-3197-0,ISBN 0-79359pgs Stock World Bank Working paper No. 558 Meeraus, and Ardy J. Stoutjesdijk 8018-3198-9, Stock No. JFI3198, $15 pa- 1983. 59 pages. Discusses the main products and pro- perback. ISBN 0-8213-0252-9. Stock .No IVP 0558. $3. 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ISSN 0253-2115/ISBN 0-8213-0496-8