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Investment Policy for Economic Development: Some Lessons of the Communist Experience*

Published online by Cambridge University Press:  07 November 2014

Z. M. Fallenbuchl
Z. M. Fallenbuchl*
Affiliation:
Assumption University of Windsor
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Extract

Communist experience in the field of investment policy for economic development is particularly instructive in connection with such problems as the determination of the rate of investment which results in the highest possible rate of growth; balanced versus unbalanced development; and the role of the rate of interest in the efficient allocation of investment funds. Our purpose is to examine this experience in relation to the first of the above problems. Since the three problems overlap, however, the paper relates to some extent to the other two.

It is suggested that the investment experience of Communist countries is relevant for developing countries in general. Although the results of various policies have been conditioned by the specific institutional framework of the Communist countries, they seem to depend also on the logic of the process of economic growth and of the basic economic problem of allocating scarce resources. Communist economists have been forced to admit that some aspects of economic development are as difficult under socialism as they are under capitalism, although until recently this fact was consistently denied. It is also possible, as has been suggested by Professor T. Haavelmo, that the process of economic growth can be seen most clearly when it is studied in a centrally planned economy, where major complications of a market economy are absent. Moreover, some features of the Communist system reflect the leaders' desire to achieve fast economic growth, and such measures as a high rate of forced saving and a large volume of public investment may be found in any country trying to accelerate its development.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 29 , Issue 1 , February 1963 , pp. 26 - 39
Copyright
Copyright © Canadian Political Science Association 1963

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Footnotes

*

A paper presented at the meeting of the Canadian Political Science Association in Hamilton on June 9, 1962. It is based in part on my Ph.D. thesis, “Capital Accumulation and Allocation in the Communist System” (McGill University, 1961), and in part on additional research which was made possible by a grant from the Canada Council.

References

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2 The following recent opinion illustrates the essence of the old attitude: “It is necessary to eliminate a naive optimism from the Marxist thought. For a pseudo-Marxist there is no problem which could not be solved by the nationalization of the means of production … It is not true that nationalization solves … every social, economic, political, moral and other problem. It is not true that there cannot be, in the short run, such a growth of population which would make an increase in the standard of living and the achievement of full employment impossible … It is not true that the nationalization of the means of production is sufficient to abolish economic inequality and to remove the poverty of the masses …” Lipinski, E., “Ekonomia, ekonomia!” (“Economy, Economy!”), Nowa kultura, Warsaw, 08 5, 1956 Google Scholar, reprinted in his Rewizje (Revisions), (Warsaw, 1958), 93–4.

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12 For example: Bruton, H. J., “Growth Models and Underdeveloped Economies,” Journal of Political Economy, 1955 CrossRefGoogle Scholar; Kurihara, K. K., The Keynesian Theory of Economic Development (New York, 1959), 50–3.Google Scholar

13 Goodwin, R. M., “The Optimal Growth Path for an Underdeveloped Country,” Economic Journal, 1961, 756.CrossRefGoogle Scholar This recent article solves analytically the problem of the optimum rate of saving and investment along somewhat different lines from those which are discussed below.

14 Erlich, A., The Soviet Industrialization Debate, 1924–1928 (Cambridge, Mass., 1960).CrossRefGoogle Scholar

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16 Marx, K., Capital (London, 1907), II, 457.Google Scholar The Soviet economists point out that although Marx used his equations of expanded reproduction to analyse growth under capitalism, his theory is even more applicable to the socialist economy. Koryagin (Socialist Reproduction), 4; Strumilin, S. G., “O socjalistycznym sposobie produkcji” (“On the Socialist Way of Production”), Ekonomista, no. 2, 1959, 244.Google Scholar

17 Lange, , ed. (Problems of the Political Economy of Socialism), 13.Google Scholar As late as 1957, a leading Polish Marxist, Professor B. Mine, criticized “bourgeois” economists for maintaining that the socialist economy could be analysed with the help of the laws and theories developed by capitalist economics and claiming universal applicability. Discussing the view, expressed by ProfessorRonimois, H. E. (“The Cost-Profit-Output Relationship in a Soviet Industrial Firm,” this Journal, 1952, 173)Google Scholar that the non-Communist theory of the firm can be extended to cover the firms operating under the Soviet central planning, he stresses that this overlooks the fact that “the replacement of the private capitalist ownership of the means of production by the national ownership has created new conditions of production L. and new economic laws …” Minc, B., Zagadnienia ekonomii politycznej socjalizmu (Problems of the Political Economy of Socialism) (Warsaw, 1957), 48–9.Google Scholar

18 Minc, (Problems of the Political Economy of Socialism), 274–5.Google Scholar

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20 Discussing the reasons for lower rates of growth in Poland in 1949–57 than in the USSR, a Polish economist explains that “the main reason seems to be the limited raw materials base and its slow development in contrast with the almost unlimited and quickly developing Soviet base.” Rakowski, M., Nasza gospodarka i jej perspektywy (Our Economy and Its Perspectives) (Warsaw, 1958), 15.Google Scholar

21 Karpinski, A., Zagadnienia socjalistycznej industrializacji Polski (Problems of the Socialist Industrialization of Poland) (Warsaw, 1958)Google Scholar; Kuzinski, S., Glowne proporcie rozwoju gospodarczego Polski Ludowej (The Main Proportions of the Economic Development of People's Poland) (Warsaw, 1960)Google Scholar; Erlich, A., “The Polish Economy After October 1956: Background and Outlook,” American Economic Review, Papers and Proceedings, 05, 1959 Google Scholar; Balassa, B. A., The Hungarian Experience in Economic Planning (New Haven, 1959)Google Scholar; Free Europe Press, Hungarian Investment Policy under the New Course (New York, 1954).Google Scholar

22 For example: Villard, H. H., Economic Development (New York, 1957)Google Scholar, or Brand, W., The Struggle For a Higher Standard of Living (The Hague, 1958).Google Scholar

23 For example: Koryagin, (Socialist Reproduction), 52.Google Scholar

24 Minc, B., “Problemy teorii reprodukeji socjalistycznej” (“Problems of the Theory of Socialist Reproduction”), Ekonomista, no. 5, 1956.Google Scholar Professor Kalecki has demonstrated that the rule is not a necessary condition, as the Soviet economists claim, for economic growth. Kalecki, M., “Dynamika inwestyeji i dochodu narodowego w gospodarce socjalistycznej” (“The Dynamics of Investment and National Income in the Socialist Economy”), Ekonomista, no. 2, 1956.Google Scholar

25 Stolper, W. S., The Structure of the East German Economy (Cambridge, Mass., 1960), 11.CrossRefGoogle Scholar

26 Pashkov, A. I., Ekonomicheskii zakon preimushchestvennego rosta proizvodstva sredstv proizvodstva (The Economic Law Concerning the Faster Growth of Production of the Means of Production) (Moscow, 1958), especially pp. 175–200 Google Scholar, and his article in Voprosy ekonomiki, Moscow, no. 6, 1958. Professor Mine defended his views in an article, “O wzroscie produkeji srodkow wytwarzania i przedmiotow spozycia—odpowiedz tow. A. Paszkowowi” (“On the Growth of the Production of the Means of Production and Consumption Goods—A Reply to Comrade A. Pashkov”), Ekonomista, no. 2, 1959. The rule was also supported by Academician Strumilin in (“On the Socialist Way of Production”), 243–4.

27 Lipinski (Revisions), 82.

28 Brus, W., “Wzrost a Model” (“Growth and the Model”), Zycie gospodarcze, Warsaw, no. 2, 1959, 2.Google Scholar

29 Kalecki (“Dynamics of Investment”).

30 Lipinskl, , “Rewizje” (“Revisions”), Nowa kultura, 09 9, 1956 Google Scholar, reprinted in his book (Revisions), 141.

31 Karpinski, (Problems of the Socialist Industrialization of Poland), 14 Google Scholar (agriculture), 20 (light and consumption industries); Rada Ekonomiczna przy Radzie Ministrow (The Economic Council at the Council of Ministers), Przeglad biezacej sytuacfi gospodarczej kraju i zadania stojace przed polityka gospodarcza ( The Review of the Current Economic Situation of the Country and the Tasks of Economic Policy) (Warsaw, 1957), 44 (housing), 55 (farms).Google Scholar

32 Lipinski (Revisions), 82.

33 In the Soviet Union not more than 4 per cent of the total number of metal-working machines could be replaced annually during the period 1956–60, which meant that the machinery could not be replaced more often than every twenty-five years. Golovcov, A. in Amortizaciia v promyshlennosti SSSR (Amortization in the Industry of the USSR) (Moscow, 1956), 82.Google Scholar A similar situation existed with respect to steel-rolhng mills. Taking into consideration the rate of construction of new plants only a very small proportion of existing units could be replaced or modernized. P. Bunich in ibid., 20.

34 In Poland not more than 2.4 per cent of the total number of metal-working machines could be replaced annually during the period 1950-55 which meant that each machine could only be exchanged after forty-two years. Lissowski, W., Problem zuzycia ekonomicznego srodkow pracy (The Problem of Economic Depreciation of the Means of Production) (Warsaw, 1958), 242.Google Scholar

35 Minc, (Problems of the Political Economy of Socialism), 371–2.Google Scholar

36 Nagy, I., On Communism (New York, 1957), 187.Google Scholar The Communists' claim, which was officially maintained until 1955, that technological progress did not create obsolescence in a planned socialist economy was, at least partially, responsible for the situation. Bolshaia Sovetskaia Enciklopedia (Great Soviet Encyclopedia) (2nd ed., Moscow, 1950), II, 291.Google Scholar This claim was even regarded as a proof of the superiority of the system although, as a Polish economist has recently stressed, “this enforced situation [was] caused by the shortage of modern machines and equipment …” Lissowski, (The Problem of Economic Depreciation), 94.Google Scholar

37 “It was mainly for doctrinal reasons that interest was eliminated in principle from the economic life in the Soviet Union and in the countries of people's democracy with the exception of Yugoslavia.” Plocica, A., “W sprawie zastosowania procentu” (“On the Introduction of Interest”), Zycie gospodarcze, no. 19, 1958, 2.Google Scholar

38 Fiszel, H., Zagadnienia cen i rachunku ekonomicznego (Problems of Prices and of Economic Calculations) (Warsaw, 1958), 81 Google Scholar; Brus, W., “Niektore problemy teorii cen w gospodarce socjalistycznej” (“Some Problems of the Theory of Prices in the Socialist Economy”) in Lange, , ed. (Problems of the Political Economy of Socialism), 171.Google Scholar

39 Strumilin, S. G., Na putiakh postroieniia komunizma (On the Roads of the Development of Communism), a Polish translation (Warsaw, 1959), 11.Google Scholar

40 Engels, F., Anti-Duehring, a Polish edition (Warsaw, 1949), 277.Google Scholar It is significant that Professor Mine, discussing the applicability of Marx's equations of reproduction in the socialist economy in his book published in 1957, did not mention the possibility of diminishing productivity, although he pointed out that the equations did not show that technological progress and a more economic use of resources could improve it. (Problems of the Political Economy of Socialism), 92–5.

41 Secomski, K., “O proporcjach i dysproporcjach w gospodarce polskiej” (“On the Proportions and Disproportions in the Polish Economy”), Ekonomista, no. 6, 1956.Google Scholar

42 In 1956 about 72 per cent of the total investment funds had to be allocated for the continuation of constructions which had been started in previous years. This proportion was raised to 77 per cent in 1957 and it was not improved in 1958. Rada Ekonomiczna przy Radzie Ministrow, Glowne problemy sytuacji gospodarczej kraju (The Main Problems of the Economic Situation of the Country) (Warsaw, 1958), 88.Google Scholar

43 Michal, J. M., Central Planning in Czechoslovakia (Stanford, 1960), 180–1.Google Scholar

44 “O zadaniach w dziedzinie inwestyeji w latach 1961–65” (“On the Tasks in the Field of Investments in the Years 1961–65”), Nowe drogi, Warsaw, no. 7, 1960, 56.

45 Brus (“Growth and the Model”), 2. A formal analysis of this problem was presented by Professor M. Kalecki in “Wplyw czasu na wspolzaleznosc inwestyeji i dochodu narodowego a spolczynnik zamrozenia” (“The Influence of the Time of Construction on the Interdependence of Investment and the National Income and the Coefficient of Freeze”), Ekonomista, no. 1, 1957, and “O spolczynniku zamrozenia” (“On the Coefficient of Freezing”), Ekonomista, no. 6, 1958.

46 Kuzinski, S., “Zmiany w podziale dochodu narodowego” (“Changes in the Distribution of National Income”), Zycie gospodarcze, no. 7, 1959.Google Scholar

47 “XXI Zjazd KPZR” (The Twenty-first Congress of the Communist Party of the Soviet Union), Zycie gospodarcze, no. 7, 1959. On other causes of inefficiency, see Berliner, J. S., “The Informal Organization of the Soviet Firm,” Quarterly Journal of Economics, 1952, 347–53Google Scholar; idem, Factory Manager in the USSR (Cambridge, Mass., 1957); Nove, A., “The Problem of Success Indicators in Soviet Industry,” Economica, 1958.Google Scholar

48 Brus, (“Growth and the Model”), 2.Google Scholar

49 Lipinski (Revisions), 106. A similar situation can be observed in other Communist countries; cf. Stolper, , Structure of the East German Economy, 7.Google Scholar

50 In the Soviet Union increase in employment was responsible for approximately 42 per Cent of the increase of the national income during the First Five Year Plan but for only approximately 20 per cent during the Second Plan. Riabov, N., Socialisticheskoie nakoplienie i ego istochniki v piervoii i vtoroii piatilietkakh (Socialist Accumulation and Its Sources During the First and the Second Five Year Plans), a Polish translation (Warsaw, 1953), 97.Google Scholar In Poland increase in employment was responsible for 50 per cent of the overall increase of production during the Six Year Plan, whereas in the subsequent Five Year Plan only 20 per cent of the increase could be expected to result from a higher employment and the remaining 80 per cent required an increase in productivity. Kuzinski, (The Main Proportions of the Economic Development of People's Poland), 111–12.Google Scholar

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52 For example, Nagy, , On Communism, 189–90 (Hungary)Google Scholar; Rakowski (Our Economy and Its Perspectives), 48 (Poland).

53 Kalecki (“Factors Determining the Rate of Growth”), 2. In Poland a number of such sectoral bottlenecks occurred during the Six Year Plan. For example, an increase in agricultural output, which occurred as the result of a drastic change in agricultural policy after 1956, could not be processed by light industry owing to previous under-investment in that branch. Rakowski (Our Economy and Its Perspectives), 40. Where-as the raw material section of the chemical industry was overinvested, the production of synthetic products and final manufactured chemical products was limited because “no resources were left for the development of more advanced stages of chemical manufacturing.” Kuzinski, (The Main Proportions of the Economic Development of People's Poland), 34.Google Scholar The whole investment process was adversely affected by the shortage of building materials resulting from under-investment in this industry.

54 The value of the coefficient m depends also on other features of investment policy: the allocation of investment funds between social overhead capital and directly productive capital, the allocation of investment among various branches of the economy and the efficiency of the choice of individual projects within each branch. The Soviet type of industrialization seems to be particularly capital-intensive. It is characterized by a considerable degree of autarky, disproportion between the development of industry and agriculture, priority of heavy industry, and a tendency to build excessively large plants and to choose excessively capital-intensive investment alternatives. The adverse effects of the Soviet-type policy of industrialization have recently been discussed in Poland: Secomski (“On the Proportions and Disproportions”); Karpinski (Problems of the Socialist Industrialization); Kuzinski (The Main Proportions of the Economic Development); and others. Similar effects were noticed in Hungary by Nagy, On Communism, and Balassa, Hungarian Experience in Economic Planning; and in East Germany by Stolper, Structure of the East German Economy.

55 Laski, K., Akumulacja i spozycie w procesie uprzemyslowienia Polski Ludowej (Accumulation and Consumption in the Process of Industrialization of People's Poland) (Warsaw, 1956), 33.Google Scholar

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57 Jasny, N., Soviet Industrialization, 1928–1952 (Chicago, 1961), 9.Google Scholar Dr. Jasny's calculations are based on “real 1926/27 prices.” This method tends to overstress the decline in the standard of living. A smaller decline is shown when the 1937 prices are taken, although the tendency is clearly visible. Chapman, J., “Real Wages in the Soviet Union,” Review of Economics and Statistics, 1954.Google Scholar

58 Nagy, , On Communism, 100.Google Scholar

59 Michal, , Central Planning in Czechoslovakia, 198.Google Scholar

60 Laski, (Accumulation and Consumption in … Poland), 270.Google Scholar

61 Stolper, , Structure of the East German Economy, 439.Google Scholar

62 Lipinski (Revisions), 82. It is surprising that Professor Kalecki has not taken into consideration the “consumption effect” in his analysis of the optimum rate of investment and regards the level of consumption as determined by political decisions. As Professor J. S. Berliner has pointed out in a private communication, reduced wages have also some counter-effects, such as drawing more women and old people into the labour force, as well as sometimes inducing greater efforts. This aspect has been omitted in the writings of the Polish economists which are here presented, perhaps because the negative effect was more clearly visible in that country during the Six Year Plan.

63 Staley, A. E., “The Revolution of Rising Expectations” in Daniel, J., ed., Private Investment (New York, 1958), 34.Google Scholar

64 Horvat, B., “The Optimum Rate of Investment,” Economic Journal, 12 1958, 755 n.Google Scholar The analysis of the concept of the optimum rate of investment which is presented in that article is conducted along different lines although conclusions are similar. It is based on the Yugoslav experience.