It was not only in the West that the final decades of the twentieth century were marked by growing difficulties. The contradictions of central planning had long been apparent. The growth of material product had decelerated between the s and s, reflecting a declining rate of productivity growth more than declining rates of growth of inputs. The extensive-growth strategy of throwing more capital at the problem encountered diminishing returns. Between
– and – the incremental capital––output ratio (the add-itional investment share of national income necessary to produce an
additional percentage point of growth) rose in every East European country for which data are available.
The centrally planned economies broke down completely at the end of the s. Instead of growing, output shrank. With the planned economy unable to deliver the goods, political acquiescence gave way to disaffection and revolt, precipitating the collapse of the Soviet bloc, democratization, and the first hesitant steps towards market-oriented reform in . The limitations of central planning had long been clear, notably the difficulty of formulating a plan that properly took into account the complex internal wiring of the mod-ern industrial economy and the difficulty of eliciting effort in a sys-tem that provided few pecuniary incentives for performance. But these limitations became more apparent in the s and s as the advanced economies of the West evolved away from manufacturing towards services, and away from hierarchically controlled corpor-ations and Fordist assembly lines towards the decentralized organiza-tion and flexible specialization made possible by the development of new information technologies. Technologies facilitating the free flow of information were of course precisely what the dictatorial regimes of Eastern Europe had a particular incentive to suppress. And hierarchical control was all the planners knew how to do.
The mystery is why difficulties already apparent in Eastern Europe in the s and increasingly evident in the s took twenty years to culminate in crisis conditions. How was growth maintained through the s and into the s, in other words, given that the easy returns to the extensive-growth strategy had been exhausted? Part of the answer may be that much of the growth recorded in this period was really a statistical artefact. Quite simply, the numbers were cooked. In addition, East European governments consumed irreplaceable resources to which they attached no value when pro-ducing industrial and agricultural goods. Steel and chemical plants polluted the environment to an extent that would not have been permitted in the West, where democracy ultimately held leaders accountable. In the East, meanwhile, recorded output was boosted by pollution that created serious health problems for residents, in a process that could not continue indefinitely.
To the extent that growth persisted, Eastern Europe had the West to thank. With the liberalization of financial markets in Western Europe and the United States and the need to recycle petro-dollars in the
wake of the first OPEC oil price shock, Western money-centre banks sought new outlets for their liquidity abroad. They found them in Eastern Europe. The region’s cumulative borrowing rose from $
billion in to nearly $ billion by the end of the s. Foreign capital was essential for sustaining the extensive-growth strategy;
without it, consumption would have been squeezed even more severely, making it necessary to cut back on investment to quell incipient unrest.
Foreign borrowing had the further advantage of providing access to Western equipment and technology. Imports of capital goods and technology licences were directly proportional to the volume of for-eign loans, since East European exporters had little capacity to pene-trate Western markets and earn additional revenues. New technolo-gies developed in the West for the production of steel and chemicals were licensed, and some countries permitted the participation of Western companies in the development of production facilities.
Machinery imports from the West as a share of total imports rose from less than per cent in the mid-s to nearly per cent in the second half of the s. Where electricity generation capacity had lagged behind the growth of industrial production, countries imported the equipment needed to modernize this sector. Countries that exported agricultural goods (like Hungary) imported farm equipment. Where the production of textiles, apparel, and leather was important, they imported machinery for those sectors. It is easy to see how these forms of Western assistance helped to sustain the East European system, and how the curtailment of loans when the debt crisis struck at the beginning of the s so aggravated the economic difficulties of the East. The only mystery is why banks in the West remained gung-ho for so long.
The resumption of piecemeal reform also helped to sustain the planned economy by eliminating its most glaring inefficiencies. In contrast to earlier reforms, intended mainly to increase the efficiency of planning, reform in the s grafted onto the command economy elements of the market system. Limited numbers of prices, notably in the farm sector, were allowed to respond to the balance of supply and
Data for the Comecon six, from A. Koves, The CMEA Countries in the World Economy (Budapest: Akademiai Kiado, ), , cited in Derek H. Aldcroft and Steven Morewood, Economic Change in Eastern Europe since (London: Routledge, ),
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demand. In some cases, members of agricultural cooperatives were permitted to farm individually. In East Germany Kombinate were given increasing autonomy. In countries like Poland and Hungary producers were permitted to keep a portion of their receipts in for-eign exchange and to use it to finance imports of intermediate inputs and capital goods. In Hungary the central bank’s monopoly on credit was eliminated, and enterprises were authorized to extend com-mercial credit to one another and to individuals.
In Eastern Europe as elsewhere economic freedom and political repression ultimately proved incompatible. It was not feasible to give residents increased freedom to decide how and where to work while strictly limiting what they said. As individuals made location and production decisions more freely, the dissemination of dissident material became widespread. Just as perestroika (restructuring) and glasnost (openness) went hand in hand in the Soviet Union, political liberalization sprang from the seed of economic liberalization throughout Eastern Europe. With the Soviet Union in no position to intervene as it had in Hungary and Czechoslovakia in times past, there was no external force to prevent one thing from leading to another.
The ultimate consequence of political liberalization was thus noth-ing less than the collapse of central plannnoth-ing. As long as the Stasi was a threatening presence in East Germany and the secret police were a force to be reckoned with throughout the region, workers could be intimidated into expending effort. With the growing challenges to political repression, intimidation as a motivating force was removed, and the absence of positive incentives became a fatal liability. In East Germany, where the government had long relied on secret-police intimidation, was a poor year for growth, but was worse, and was a disaster, the worst in nearly three decades. After the fall of the Wall little effective police presence remained to keep work-ers from walking off with machinery and tools. With political liberal-ization the central contradiction of state socialism became clear:
property that officially belonged to everyone effectively belonged to no one. No one had an incentive to protect it.