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. 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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,