Growth decomposition in the socialist Czech economy

Soukup, Marek; Žídek, Libor Article Growth decomposition in the socialist Czech economy DANUBE: Law, Economics and Social Issues Review Provided in Cooperation with: European Association Comenius (EACO), Brno Suggested Citation: Soukup, Marek; Žídek, Libor (2021) : Growth decomposition in the socialist Czech economy, DANUBE: Law, Economics and Social Issues Review, ISSN 1804-8285, De Gruyter, Warsaw, Vol. 12, Iss. 1, pp. 1-12, https://doi.org/10.2478/danb-2021-0001 This Version is available at: https://hdl.handle.net/10419/242177 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0 GROWTH DECOMPOSITION IN THE SOCIALIST CZECH ECONOMY Marek Soukup1, Libor Žídek2 Abstract Economic growth in centrally planned economies was declining with the duration of these economic systems. There were multiple reasons for this development. Deeper insight can be provided by dividing economic growth into extensive and intensive parts. The goal of this article is to estimate the share of extensive and intensive aspects of economic growth in the socialist Czech economy in the last two decades of the socialist era (1970–1989). We conclude that the extensive growth in this period stood for approximately 55% of the overall growth. This figure is broadly twice higher than comparative numbers for the post-communist period. Keywords Centrally Planned Economy, Economic Growth, Extensive Growth, Intensive Growth, Czech Republic I. Introduction Economic outcomes of socialist economies were worsening during the centrally planned era. Economic historians provide multiple explanations for this development. One of the pivotal aspects of the socialist economies was the character of economic growth. Generally, we can distinguish between extensive and intensive aspects of growth. The former is caused by increasing the amount of production factors (labour, capital etc.) into the economic system. Intensive economic growth is, on the contrary, generated by more efficient use of the sources already used in the system – in other words by increasing productivity of production factors. Overall economic growth is always caused by both of these aspects, but the difference lies in the share of the extensive and intensive parts. Socialist economies generally inclined to extensive patterns of economic growth. As time progressed, the availability of new sources in the system was diminishing, which contributed to a declining pace of economic growth. In reaction, the socialist planners set 1The University of Edinburgh, South Bridge, Edinburgh, EH8 9YL, Great Britain. E-mail: [email protected]. 2Masaryk University, Faculty of Economics and Administration, Lipová 507/41a, 602 00 Brno, Czech Republic. E-mail: Libor[email protected]. 2 Marek Soukup, Libor Žídek: Growth Decomposition in the Socialist Czech Economy ambitious goals regarding productivity increases, which were not accomplished. The goal of this article is to estimate the share of extensive and intensive aspects of economic growth in the socialist Czech economy in the last two decades of the socialist era (1970–1989). There is a plethora of literature dedicated to measurement of economic growth and its structure. A significant portion of this research focuses on the centers of economic activity, such as China (Zhu, 2012) or the US (Shackleton, 2013). Others concentrate on East Asia in general (Felipe, 1999) or other developing countries. However, it seems that scientists have been less concerned with Eastern Europe and the post-Soviet area. Among studies which are the closest to out area of interest, are Arazmuradov, Martini, Scotti (2014) who studied total factor productivity (TFP) in the successive countries of the USSR. The same has been done, with more or less significant focus on a certain part of the economy, for instance by Zhang (1997) or Iradian (2007). A study researching into the TFP in the Czech Republic was conducted by Djankov, Hoekman (2000). Nevertheless, our study aims to examine the growth of a particular country during the socialist era, that is, the composition of growth in a centrally planned economy. For all we know, this has not been done yet. The cornerstone of our inquiry is the Solow model of economic growth. However, unlike many other studies, we do not estimate the model econometrically. Instead, we use the model to derive two indices – one for extensive, and the other for intensive growth. These two indices break the overall growth into two parts and represent the percentage share of each of them. The methodology is based on the seminal paper by Solow (1956), as well as the classic books by Barro, Sala-i-Martin (2004) and Acemoglu (2009). Moreover, the derivation of the indices follows Ramík (1986), Mihola (2007), Hájek, Mihola (2009) and Mihola, Wawrosz (2014). Researchintotheeconomies of the formerEasternBloc suffers fromashortageof data. The economists from the University of Economics in Prague tried to fill the gap by estimating GDP and its composition. This has been done for the period between the years 1970 and 1990 (the data for the preceding decades unfortunately do not exist at all). Moreover, these data describe only the economy of the Czech Socialist Republic – one of the two parts of the former state of Czechoslovakia. The paper is organised as follows. We analyse the characteristics of economic growth during the socialist era in section II. The following section is devoted to the formal description of the model. The fourth to data and specific settings of the model for the socialist Czech economy. Our results are examined in the fifth section. II. Characteristics of economic growth in the socialist era The communists took control of Czechoslovakia in 1948. They immediately introduced a centrally planned economic system. The system was based on hierarchical organisation of the whole production and on nationalisation. Economic results in the first years seemed to be positive and the economy achieved high rates of economic growth – see Figure 1. However, the trend in the next decades was declining and average growth of social product in the 1980s was just 1.8% per year.3 3Socialist economies officially used a Net Material Product (Social Product) indicator. The main difference in comparison to GDP was that it included material productions and excluded most of the services. DANUBE, 12 (1), 1–12, DOI: 10.2478/danb-2021-0001 3 Figure 1: Changes in social product 1950–1989 in % Source: Statistické ročenky Československé socialistické republiky 1971–1990 There are multiple reasons to blame for this development. As a pivotal element, low efficiency of the overall centrally planned system and low efficiency of using resources is often mentioned. Efficiency on the global level can be approximately expressed by dividing economic growth into its extensive and intensive parts. This division broadly expresses twofold reasons for economic growth (in practice economic growth is always comprised of the mix of both). The reasons for extensive part of economic growth lie in adding more sources (labour force, investment or land) into the production process. On the contrary, increasing efficiency of the use of the sources is expressed in the intensive aspects of economic growth (e.g. Berend, 2009). All centrally planned economies were inherently prone to grow extensively rather than intensively (e.g. Adam, 1995). There were relatively many free sources at the beginning of the communist era and they contributed to high economic growth. But these new sources were naturally diminishing as time progressed and so was economic growth. The reasons for the prevalence of the extensive character of growth lay in the very basis of the functioning of the system – it lacked competitive pressure (Roemer, 1994) typical for the capitalist system; the structure of the economy was monopolistic (e.g. Lavigne, 1999). The system did not support economic initiative partly because of the state ownership, but on the contrary, in practice it encouraged companies to seek inputs maximisation and outputs minimisation (Knaack, 1984). In addition, the overall planning process was highly inefficient as well. There were multiple proofs that the economic growth had an extensive character. First and foremost, there was an omnipresent and lasting shortage of everything from raw materials, via semi-manufactured goods and energies up to labour force (e.g. Kornai, 1980). At the same time, although the economy did not have any spare capacities (e.g. Holman, 2000), many “idle goods” were produced (nobody wanted to purchase them – they were produced just to accomplish the plan) (Myant, 2003). The rate of energy and raw materials per unit of production was in comparison to market economies very high – by the end of the 1980s, the consumption of energy per a percent of GDP was 4 Marek Soukup, Libor Žídek: Growth Decomposition in the Socialist Czech Economy eight times higher than the average in European countries (Berend, 2009). Adversely, comparative kilogram prices of the productions were very low – Czechoslovak producers received fewer dollars than western producers for one kilogram of production (e.g. Zeman, 1990). The indirect proof of prevailing extensive growth was in the catastrophic state of the environment that was devastated by extensive use of sources. This extensive character of economic growth was well known to economic planners in the centrally planned systems (e.g. Hába, 1988; Průcha, 1988; Malý and Herc, 1988) as well as to experts abroad (e.g. Nuti, 1981). It was considered to be one of the main drawbacks of the socialist economic system. The authors’ opinions varied on estimating the period by which the sources of extensive growth were already exhausted. For example, a textbook of central planning from 1988 mentioned that the extensive sources were already nearly totally exhausted in the first half of the 1960s (Průcha, 1988). Adam dated this state to the 1970s (Adam, 1995) and Hába to the early 1980s (Hába, 1988). The communist economists and politicians struggled to increase the intensive share of economic growth (e.g. Hrnčíř, 1987; Průcha, 1988). Nykryn in 1988 wrote that: “the basic strategy of the economic development of the Czechoslovak Socialist Republic is aimed at detaching itself from the largely extensive development, the promotion of qualitatively new intensive tendencies. . . ” (Nykryn, 1988, 329). The communist politicians often set ambitious goals in this respect. These efforts were expressed among others in economic reforms (1958, 1968, 1980). They sought to increase independence of the state-owned companies of the economic centre in hope that these companies would increase their efficiency. But these expectations were not lived up to. The goals for increasing efficiency were ambitious for respective five-year plans too – see Table 1. The regime for this reason supported high level of investment and spending into research and development but these sources were not used in an efficient way either (Berend, 2009). The extensive character of economic growth lasted regardless of the effort of the centre (e.g. Swain, 1998) and eventually led to stagnation of economic growth (Adam, 1995). Průcha for example wrote: “In terms of strategic goals of intensification of the economy, however, the seventh five-year plan [1981–85] did not become a qualitative breakthrough”. And the main goal for the eight five-year plan was again: “transition of the economy to an intensive type of development” (Průcha, 1988, 69). These failures contributed to the economy’s lagging behind the developed countries. In the following sections were estimate the proportions of extensive and intensive parts of growth in socialist Czech economy. III. The model For the basic computation of the ratio of intensive and extensive growth, we use the basic Solow model in the form: Yt=AtF(Kt,Lt)(1) where Ytstands for aggregate product, Atfor total factor productivity (TFP), F(.) for production function and Ktand Ltfor capital and labour. DANUBE, 12 (1), 1–12, DOI: 10.2478/danb-2021-0001 5 The same is true for values in any other time period4(for discrete time) or every moment of time (for continuous time). By dividing the equation for time tby the same equation with lagged values, we get the following relationship: Yt Yt−1 =At At−1 F(Kt,Lt) F(Kt−1,Lt−1)(2) Denote I(Y)=Yt Yt−1,I(A)=At At−1and I(F)=F(Kt,Lt) F(Kt−1,Lt−1)and take logarithms of the above expression to get: ln I(Y)=ln I(A)+ln I(F(K,L))(3) which is the main equation of interest. From the Solow setting, it follows that the share of growth explicable by F(K,L), that this, by the sheer amounts of production factors employed in the production process, is called extensive growth. The rest, which is called intensive growth, is in Solow terms interpreted as technological level of the particular country. In other words, how the variable Ais supposed to measure how effectively the production factors are being transformed into the final product. However, it is necessary to make an important note right at the outset. The interpretation of A(or TFP) as a technological level stems solely from the assumptions of the very commonly used Solow model. In fact, the so-called intensive growth actually represents what we cannot explain by the employment of capital and labour, and therefore can comprise much more that technology (which is difficult to measure). As Abramovitz (1956) put it, TFP is the measure of our ignorance. Nevertheless, we will be using the term ‘intensive growth’ in due course. Now we can define the parameters of our ultimate interest. Let the parameter of extensity be: e=ln I(F(K,L))  ln I(A) + ln I(F(K,L))  (4) and the parameter of intensity: i=ln I(A)  ln I(A) + ln I(F(K,L))  (5) By definition, it must always hold that: |e|+|i|=1 (6) because these parameters decompose the overall growth into two parts. This also means that the values eand iare unit-free. Therefore, we have defined the parameters which will allow us to determine the composition of economic growth. 4Yt−j=At−jF(Kt−j,Lt−j),j∈R 6 Marek Soukup, Libor Žídek: Growth Decomposition in the Socialist Czech Economy IV. Data and model specification Dataset The rather simple methodology introduced above will be applied to a unique dataset developed by economists and statisticians from the University of Economics in Prague (KEST 2018). This dataset comprises the yearly time series estimates of Czech GDP between the years 1970 and 1990 that was created using ESA 2010 methodology. The uniqueness of these data lies in the fact that the macroeconomic time series of the postcommunist countries usually start (at best) in 1990, that this, after the totalitarian regime was overthrown. For detailed methodology of estimating the data, see Sixta, Vltavská, Fischer (2013) and Sixta et al. (2016). For our purposes, labour, capital and GDP are of interest. We used the indicator of employment in the economy as proxy for labour and gross capital formation for capital. GDP is real. All data originate in the above-mentioned dataset. The standardised variables are depicted in Figure 2. Figure 2: GDP, Labour, Capital (standardised) Source: Authors The last variable we need is the Total Factor Productivity. Since all the other necessary variables from equation (1) are known, we get TFP simply from: At=Yt/F(Kt,Lt)(7) Specific model Now we have to define the functional form of F(Kt,Lt). In this paper, we use the standard neoclassical (Cobb-Douglass) production function in the form: F(Kt,Lt)=Kα tL1−α t(8) DANUBE, 12 (1), 1–12, DOI: 10.2478/danb-2021-0001 7 where αis the capital income share and 1 −αthe labour income share. Taking the ratio of compensation of employees and the total GDP and taking the average over the whole considered time, we get 1 −α=0.45 and therefore α=0.55. Now we can rewrite the previous general formulas in their specific form: Parameter of extensity: et= ln K0.55 tL0.45 t/K0.55 t−1L0.45 t−1  ln At/At−1 +  ln K0.55 tL0.45 t/K0.55 t−1L0.45 t−1   (9) Parameter of intensity: it=ln At/At−1  ln At/At−1 +  ln K0.55 tL0.45 t/K0.55 t−1L0.45 t−1   (10) V. Results The computed parameters of intensity and extensity are depicted in Figure 3. Figure 3: Extensity and intensity parameters Source: Authors Figure 4 captures these shares. Every bar of this plot is of height =1, representing the whole change in growth in the particular year. Each column is then divided between the extensive and intensive growth. 8 Marek Soukup, Libor Žídek: Growth Decomposition in the Socialist Czech Economy Figure 4: Growth composition Source: Authors Table 1 summarises the numerical characteristics of the data and results. The first and third line also contain the five-year plans set by the government of the former Czech Socialist Republic. Table 1: Summary of the data and results (with five-year plans) Growth rates (%) 1971–1975 1976–1980 1981–1985 1986–1990 All periods average GDP 4.94 2.81 0.93 1.91 2.65 GDP plan 5 5 1.5−2.1 3.2 Labour 0.48 0.74 0.52 −0.21 0.39 Labour productivity 4.44 2.06 0.40 2.13 2.26 Labour prod. plan 4.75 4.55 1.4−2 2.9 Capital 9.69 1.98 −3.02 1.81 2.61 TFP −0.41 1.41 2.55 1.33 1.22 Shares (%)* Extensity 65.96 58.89 51.18 47.63 56.44 Intensity 34.04 41.11 48.82 52.37 43.56 * – the overall shares are computed from absolute values. Source: Authors; Zákon č. 115/1971 Sb.; 70/1976 Sb.; 125/1981 Sb.; č. 87/1986