Table Of ContentCONTRIBUTIONS
TO
ECONOMIC ANALYSIS
159
Honorary Editor:
J. TINBERGEN
Editors:
D. W. JORGENSON
J. WAELBROECK
NORTH-HOLLAND
AMSTERDAM NEW YORK · OXFORD · TOKYO
PLANS AND DISEQUILIBRIA
IN CENTRALLY PLANNED
ECONOMIES
(Empirical Investigation for Poland)
WOJCIECH CHAREMZA, MIROSLAW GRONICKI
University of Gdansk, Poland
NH
1988
NORTH-HOLLAND
AMSTERDAM · NEW YORK · OXFORD TOKYO
PWN—POLISH SCIENTIFIC PUBLISHERS · WARSAW
(ς) PWN—POLISH SCIENTIFIC PUBLISHERS—WARSZ AW A—1988
AU rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photo-
copying, recording or otherwise, without the prior permission of the copyright owner.
ISBN for this series: 0 7204 3100 X
ISBN for this volume: 0 444 70100 1
Publishers :
ELSEVIER SCIENCE PUBLISHERS B. V.
P. O. Box 1991
1000 BZ Amsterdam
The Netherlands
PWN—POLISH SCIENTIFIC PUBLISHERS
Warszawa
Sole distributors for the U. S. A. and Canada
ELSEVIER SCIENCE PUBLISHING COMPANY, INC.
52 Vanderbilt Avenue
New York, N. Y. 10017
U. S. A.
Library of Congress Cataloging-in-Publication Data
Charemza, Wojciech.
Plans and disequilibria in centrally planned economies: empirical investi-
gation for Poland/Wojciech Charemza, Mirostaw Gronicki.
p. cm.—(Contributions to economic analysis: 159)
Bibliography: p.
ISBN 0-444-70100-1 (U.S.)
1. Equilibrium (Economics) 2. Economic policy. 3. Central planning—Poland.
4. Poland—Economic policy. I. Gronicki. Miroslaw. II. Title. III. Series.
HB145.C47 1987
339.5—dc 19 87-22891 C1P
PRINTED IN POLAND
INTRODUCTION TO THE SERIES
This series consists of a number of hitherto unpublished studies, which
are introduced by the editors in the belief that they represent fresh
contributions to economic science.
The term 'economic analysis' as used in the title of the series has been
adopted because it covers both the activities of the theoretical economist
and the research worker.
Although the analytical methods used by the various contributors
are not the same, they are nevertheless conditioned by the common
origin of their studies, namely theoretical problems encountered in
practical research. Since for this reason, business cycle research and
national accounting, research work on behalf of economic policy,
and problems of planning are the main sources of the subjects dealt
with, they necessarily determine the manner of approach adopted by the
authors. Their methods tend to be 'practical' in the sense of not being
too far remote from application to actual economic conditions. In addi-
tion they are quantitative.
It is the hope of the editors that the publication of these studies
will help to stimulate the exchange of scientific information and to
reinforce international cooperation in the field of economics.
The Editors
PREFACE
The purpose of this study is to investigate interrelations between plan-
ning mechanisms and disequilibria in a case where the planning decisions
are centralized and are exogenously given to enterprises. A particularly
important question in this context is whether disequilibrium (or more
precisely: positive excess demand on consumption and labour markets)
is a necessary fate of centrally planned economies, or whether it could
be replaced by another disequilibrium regime at a certain stage of their
development. An answer to this can be given by discussing some
auxiliary problems: in particular—can a planning mechanism be used
as an efficient tool in reducing disequilibrium, what is the role of money,
prices and wages in excess demand formation, and is foreign trade an
accelerator or a brake with respect to equilibrium? Perhaps the most
controversial question is : 'Is it possible to equilibrate markets (to go
sufficiently close to equilibrium) over a certain period with the use of
some policy instruments and, if so, what should the desired levels
of these instruments be?'
Our intention has been to build a model which could be used generally
to answer these questions. It is exemplified by the case of the Polish
economy. Apart from our national preferences, Polish economy in the
sixties and seventies seems to be a promising field for the application
of a disequilibrium theory. Phenomena such as full employment and
growth, full employment and economic collapse, changes in foreign
trade and investment policies, overnight changes in the degree of
repressed inflation, 'price revolutions', panic buying and shortages were
more evident in Poland than in the other CMEA countries. Last but
not least, the statistical data which have been available to us are
in relatively good supply.
We have not tried to go beyond 1980. Since 1980 so many drastic
changes have been made in the economic structure of Poland that the
X Preface
extension of the model into the future would be highly questionable.
Nevertheless, after 1980 some old habits survived. It would be worth-
while to look into the figures which show mistakes made in the sixties
and seventies and to derive a vision of the future from them.
The work presented here is essentially an empirical econometric
study. Consequently, we faced a question which is typical of almost
all empirical econometric research: 'What were we to do if we found
a problem which had been unsolved (theoretically or numerically)?'
The straightforward answer would have been to solve it. That is all
very well in theory, but in practice the number of unsolved problems
which appeared on the merge between theory and practice was so
great that the time taken to solve them would have exceeded ad
calendas Graecas the time in which they were to be implemented, or at
least to the time when the results would be only of historical value.
Basically, instead of spending several years on the programming and
computation of mathematically elegant relations, we decided to add some
stronger assumptions which enabled us to use relatively simple econ-
ometric software. This in turn hastened the date of the first results.
Bearing in mind the desire to present the results clearly, we have
not introduced the entire model all at once. The first introductory
chapter is intended to shed some light on Poland's economic situation
during the period under research, 1960-1980. In the next five chapters
the basic model, describing the households-planners relations in
terms of consumption, labour, money and plans are derived (Chapter
2), estimated (Chapter 3), used for calculation of excess demands
(Chapter 4), for simulation of some monetary policies (Chapter
5), and finally for providing optimal control experiments in which
consumption excess demand is minimized on a reasonable level of the
consumption volume (Chapter 6). In the next two chapters the basic
model is gradually extended. In Chapter 7 the production-investment
sector is added and considered in simulations of disequilibrium reduction
policies, and in Chapter 8 foreign trade is considered in a similar man-
ner. Finally, in Chapter 9 an attempt is made at summarising the results
by fomulating a better (e.g. less costly and more effective) ex-post
scenario.
The work is, to a large extent, based on our draft papers, seminars
Preface XI
and lectures presented at various conferences during the last few years.
Therefore, we are grateful to many scholars whose useful comments
on particular papers stimulated us in our progress. Among those who
helped us we would like to mention Janusz Beksiak, Phillip Hanson,
Zdzislaw Hellwig, Miroslaw Krzysztofiak, Mario Nuti, Richard Portes,
David Winter, and especially Richard E. Quandt. We wish to express
our thanks to Wladyslaw Welfe, not only for encouraging us to tackle
this problem, but also for his permission to use the W-3 data bank
at the University of Lodz.
We also gratefully acknowledge the financial support of ESRC
Research Grant No. B00230025 which, among other things, enabled
us to make part of the calculations in the Birmingham University
Computer Centre, and the permission of Andries Brandsma and Andrew
Hughes Hallett for the use of their optimal control computer package.
Last but not least, we wish to mention our great debt to Jola Murjas,
not only for her excellent typing of various versions of the manuscript,
but also for her continuous patience in converting our Anglo-Polish
into English. Obviously, we are solely responsible for all the remaining
déficiences.
University of Birmingham and Wojciech Charemza
University of Gdansk Miroslaw Gronicki
March 1985
Chapter 1
BACKGROUND: FACTS AND FIGURES FROM POLISH
ECONOMIC HISTORY
Before the Second World War Poland was one of the poorest countries
in Europe. According to estimates by Michal Kalecki, the per capita
national income in 1930 was one-sixth of that of the United Kingdom
and one-seventh of that of the United States. The damages and losses
suffered by Poland in the Second World War were extremely severe.
For example, before the war 32.5 mln inhabitants lived within the
current borders, whereas at the end of the war the population was
reduced to only 24 mln (this reduction was also due to changes in the
borders and to the migration of Poles and Germans in 1944 and 1945).
The per capita national income dropped by half between 1938 and
1946 and only 62% of pre-war fixed assets remained.
The main target of the first post-war economic policy had to be the
reconstruction of the economy. This, however, was not an easy task,
not least because the great number of engineers, scientists and skilled
workers died during the war and the substantial number of those who
emigrated to the West.
During the first years of reconstruction the foundations of a new
economic system were introduced:
— on 6 September 1944 a new agricultural policy was announced; as
a result (and unlike in other Eastern countries where collectivi-
zation was later maintained) 76.2% (in 1983) of agricultural land
in Poland is in private hands, but only 5.7% (in 1981) of private
farms are bigger than 15 hectares;
4 W. Charemza, M. Gronicki
— on 3 January 1946 large and medium production enterprises (the
units employing more than 50 workers) were nationalized;
— from 1947-1948 private retail and wholesale trade was practically
liquidated (but it gradually recovered in later periods);
— on 10 January 1945 the Central Planning Office (CUP) was established
and a first system of planning was introduced (three-year plan
1947-1949).
The system of decentralized planning in the economy—managed
by CUP—resulted in the rapid growth rate of both consumption
and investment. The reconstruction period officially ended in 1950
when the national income reached its pre-war level. However, while
manufacturing output was greater than in the pre-war period, this was
not the case for agriculture.
The reconstruction period was followed by the first attempt to
'industrialize' Poland (six-year plan 1950-1955). The previous decen-
tralized planning schemes were replaced by a highly centralized one.
Priority was given to the rapid development of industry; heavy industry,
in particular, was substantially developed. The aims fixed by planners
were, however, too optimistic and plans were not fulfiled in almost
all sectors (for instance, for investment the proportion of the target
achieved was 98%, for consumption—87-90% and for real wages—
75-81%).
In 1949 the six Soviet-type centrally planned economies (USSR,
Bulgaria, Czechoslovakia, Hungary, Poland and Romania) formed
the Council for Mutual Economic Assistance (CMEA). This created
a base for further, more or less successful, economic cooperation
among the socialist countries.
In 1956 both the political and economic systems were slightly changed
away from the strict, highly centralized rules. The principles in planning
were revised and during the first half of the five-year plan (1956-1960)
the growth rate of consumption usually exceeded that of investment.
The huge investment backlog was reduced and the whole economy was
nearly stable. The new industries emerged then and especially the
branches of consumer durables like household electronic equipment,
cars etc.
Background 5
During the next two five-year plans (1961-1965 and 1966-1970),
the Polish economy developed smoothly. Due to successful geological
investigations made in the fifties and investment in heavy industry
the huge (even by the world standards) sulphur, copper and brown
and coke coal mines were built. It enabled the rapid development of
non-ferrous metals, certain branches of machinery and equipment
and chemical industries. The other industries were developing not as
quickly but even without the broad access to new technologies the
results achieved were undiscussive. However, the rate of growth of
the whole economy gradually slowed down, and the cost of continued
development along existing lines appeared increasingly prohibitive.
Personal consumption was growing more slowly than the net material
product, the growth rate of real wages was not considerable, and the
economic policy, less highly centralized than at the beginning of the
fifties, reflected deflatory aspects.
Priorities given to the manufacturing and state agriculture sector
led to two slowdowns of the economy. In 1962-1963 there were bad
harvests, and to avoid substantial disruptions on the consumption
market the growth rate was reduced and the expansion of the investment
sector was limited (about 20% of investment projects were cancelled).
When a similar thing happened in 1969-1970 the government tried
to freeze real wages for the next two years and announced overnight
price rises of foodstuffs by up to 40%. The impact of these decisions
was severe and eventually led to unrest in December 1970. Changes in the
government were then made and the new economic policy was introduced.
In the new period, the economic policy represented a reversal of some
of the decisions of the previous year. One of the principal objectives
became an increase in real personal income and consumption, and the
stabilization of food prices. In March 1971 food prices were restored
to the pre-December 1970 level and the government simultaneously
decided to increase the subsidies to agriculture and to the food industry.
To cover the higher demand for manufactured consumer goods a slight
acceleration of the growth rate of manufacturing was planned. This
new economic policy was embodied within a five-year plan which aimed
to improve the standard of living of Poles and eliminate the imbalances
of supply and demand in both production and consumption. Indeed,
