PIECEMEAL ATTEMPTS TO INVIGORATE THE CZECHOSLOVAK ECONOMY

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• Collection: General CIA Records
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• Publication Date: April 1, 1964
• Content Type: BRIEF

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CONFIDENTIAL
Current Support Brief
PIECEMEAL ATTEMPTS
TO INVIGORATE THE CZECHOSLOVAK ECONOMY
CIA/ RR CB 64 - 28
Apv .1 1964
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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CONFIDENTIAL
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WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
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PIECEMEAL ATTEMPTS
TO INVIGORATE THE CZECHOSLOVAK ECONOMY
Last February the Czechoslovak regime announced a package of new
economic measures designed to provide a sounder foundation for renewed
economic growth without increasing government expenditures. These
measures, which are to take effect gradually, include (1) new bonuses
for farmers and increases in farmers' pensions and housing subsidies;
(2) new bonus arrangements in industry; (3) changes -- mostly reduc-
tions -- in social security benefits; and (4) increases in rents and in the
prices of meals in factory canteens, medical prescriptions, school sup-
plies, and nursery care for children.: These piecemeal measures, how-
ever, do not get to the heart of Czechoslovakia's basic economic problems.
The regime hopes that these measures will induce more farmers to
stay in agriculture, workers to work harder, and older workers to post-
pone retirement. The favorable effects on incentives are likely to be
small, however, and there is a risk of considerably increased popular
dissatisfaction.. The resentment, especially on the part of urban workers,
many of whom will suffer a decline in real income, will, be all the greater
in that a liberal policy of social benefits had been the most appealing
aspect of an otherwise unpopular system.
During the past 2 years, economic growth in Czechoslovakia has
come to a halt, economic policy has become confused, and popular dis-
satisfaction with living conditions has grown more outspoken. Possible
remedies have been proposed and discussed since mid-1962, but the
growing weakness of the Novotny leadership, the fear of adverse popular
reaction, the opposition of vested interests, and the lack of agreement
on basic issues have prevented any strong action.
In early February of this year the regime finally decided on certain
piecemeal measures, many of which had been proposed originally as
long as 18 months ago. These measures, which. are to go into effect
gradually, still do not get to the heart of Czechoslovakia's economic
problems. They do not deal with such basic questions as the scope and
method of central planning and administration of the economy, nor are
the measures much concerned with the concrete problems of industrial
structure. A lively debate on such questions still is going on in the
official press, where many economists are even advocating a decentral-
ized system of economic control similar to that of Yugoslavia. The
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regime has announced that a few obsolete plants would be closed down
this year and some 15, 000 workers transferred to other industrial jobs;
however, a comprehensive program for industry will not be available
for the next year or two, or until the long-term plan to 1970 is elabo-
rated. The new measures are designed mainly to stimulate the incen-
tives of workers and farmers without increasing government expendi-
tures -- a limitation imposed by the fact that the national income is
expected to increase only 1.4 percent in 1964.
The stagnation of agricultural production, which was partly a
result of the flight of labor from agriculture since 1956, has forced
the Czechoslovak regime to do something about farmers' incentives.
Now that agriculture is almost entirely socialized (about two-thirds
of agricultural land is in collective farms, and another 24 percent is
owned by the state), farm incomes are too low and other benefits are
too limited to keep young people on the farms or to recruit competent
agricultural labor from outside. In the second half of 1963 the regime
began to face up to this basic problem by desisting from actions that
had been weakening farmers' incentives. For example, the restric-
tions on home slaughter of livestock were eased, and the ban on free
market sales was partly lifted.
The recent measures involve, in addition, some positive incentives.
Social security benefits for collective farmers and agricultural workers
are to be increased in 1964, although probably not for all farmers and nct
to the level of nonagricultural workers. To qualify for these benefits,
the farmer no longer will have to give up his private plot. More favor-
able terms will be given to farmers than to nonagricultural workers for
building cooperative apartments and houses, as shown below:
Apartments
(Percent of Total Cost)
Source of Financing Urban Areas Collective Farms
Contribution by the state 30 30
Membership shares 40 25
Thirty-year credit 30 (at 3 per- 45 (at 1 per-
cent interest) cent interest)
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The state will contribute more than 30 percent in some cases, and the
farmer's membership share will be covered by the collective in an
interest-free loan that will be written off entirely if the farmer con-
tinues to work for that collective for 10 years. The new housing bene-
fits probably will be provided mainly to the young and skilled farmers
that the regime is trying to keep in or recruit for agriculture. Sub-
stantial bonuses have been promised to workers on state farms for
increasing production of crops and to collective farmers for increasing
production of various items, particularly milk. The basic wages of
state agricultural workers with special skills (such as tractor drivers
and repair workers) are to be increased. Additional measures will be
taken later to increase farmers' incentives, including a rise in procure-
ment prices for agricultural products.
3. Changes in Wages and Bonuses
Basic wages in 1964 are to remain at the level of 1963, except for
some construction workers and some foremen and technical personnel
in transportation and industry. A variety of new bonuses will be intro-
duced, however, to stimulate the introduction of new technology, en-
courage exports, reduce the consumption of imported materials, reduce
the administrative staff, and accelerate the completion of investments.
Moreover, new financial penalties will be imposed on managers, and
under some conditions on workers, for holding surplus stocks, squander-
ing materials, or producing goods for which there is no market. The
additional bonuses, however, represent only very small shares of the
total wage bill, and it remains to be seen whether they can be adminis-
tered with any more effect than in the past.
4. Changes in Social Insurance for the Nonagricultural Population
The increased benefits for farmers and the new bonuses for workers
apparently will be financed mainly by reducing pensions for the nonagri-
cultural population. The changes in pensions, some of which are not
scheduled to go into effect until next summer and others not until 1965,
are complex, and information on them is incomplete, but it seems clear
that, apart from farmers, many more people will lose than will gain.
The change affecting the most people (more than 900, 000) is the
elimination of partial pensions (one-third of the full pension) for people
who continue working for the first 5 years after reaching the legal re-
tirement age (60 for most men and 55 for women and for men in hazardous
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occupations, such as mining and aviation). In addition, the maximum
pension to be paid to those who continue working more than 5 years
after reaching the legal retirement age is to be reduced. These cuts
will save the government a good deal of money but probably will not
cause many of the pensioners who are working currently to leave the
labor force, because they would have to take too large a cut in income
(pensions being only 50 to 60 percent of wages at retirement). The
USSR, by contrast, recently introduced partial pensions for those who
continue working after retirement age as an inducement to later re-
tirement.
Other proposed changes in the Czechoslovak pension system, how-
ever, are inducements to later retirement. The length of employment
to qualify for a full pension will be raised from 20 to 25 years, a
measure that should keep some women in the labor force longer, al-
though very few men are likely to be affected, because men rarely
work less than 25 years. Effective on 1 July 1965, at least 150, 000
people who are eligible for minimum pensions may double their pensions
by working 5 years beyond retirement age. There also will be an in-
crease of 20 percent in the minimum pension, presumably in the interest
of a more equitable distribution of income. These added benefits, how-
ever, will be financed by a progressive tax on pensions.
The state will reduce its expenditures on subsidies for housing. In
Czechoslovakia, rents have been low in relation to incomes (about 2 per-
cent of the income of a typical worker's family) and have been iufficient
to cover even the cost of current maintenance of dwellings, the difference
being covered through state subsidies. One-fourth of Czechoslovak
families -- about 1 million, consisting mainly of workers' families --
have lived in state or factory-controlled housing. With some exceptions,
apparently substantial increase in rents for such housing will be made in
October, although no over-all figures have been given. One example
notes an increase in rent of 46 percent for a family of five with two
children. In addition to the increase in basic rents, an extra charge
of 1 percent will be levied for each square meter of living space in ex-
cess of standards established on the basis of size of family, and in
certain cases people occupying large apartments may be forced to
move to smaller quarters. On the other hand, there will be discounts
in rents ranging from 5 to 40 percent depending on the number of children
in a family.
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The state also will reduce or eliminate subsidies for various goods
and social welfare services. The result will be to increase the prices
of meals in factory canteens, medical prescriptions, schools supplies,
and nursery care for children. Price changes -- both increases and
reductions -- for a variety of other consumer goods also have been
announced.
6. Effects of the New Measures
The new measures probably will have a healthy, if not very sub-
stantial, effect on the Czechoslovak economy in the long-run. Although
they appear insufficient to stabilize the agricultural labor force or to
stimulate the farmers to greater efforts, the added incentives may slow
the outflow of young and skilled. people from agriculture. The revision
of bonuses in industry, although minor, probably is in the right direction.
The cuts in social insurance and the decline in state subsidies for housing
and other services will make the real income of workers depend more on
wages and therefore may induce workers to work harder. The rise in
rents, in addition, should permit better maintenance of some houses.
The regime prpbably decided to make these changes this year so that it
could then concentrate its attention on the basic questions of economic
development in the next 5-year plan.
On the other hand, the regime may be taking a considerable risk in
the short term because of the widespread dissatisfaction that the. measures
will cause, especially among urban workers and pensioners. Living con-
ditions on the average probably will not change in 1964 -- a planned in-
crease of about 1. 5 percent in per capita personal consumption probably
being offset by a decline in government expenditures on goods and ser-
vices used by the population. However, there will be significant changes
in the distribution of income. It will be a considerable sacrifice for
nearly 1 million working pensioners to give up an average of about 18 per-
cent of their monthly income. About 1 million households, consisting
mainly of workers' households but including some privileged Party mem-
bers, will have to pay higher rents. Furthermore, increased prices
for such things as meals in factory canteens and school supplies will
annoy practically everyone in the cities, although the effect on real in-
come will be very small. Farmers, people with many children, and
some pensioners will be better off, but the farmers at least are likely
to feel that the benefits are still inadequate.
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Finally, the regime, but cutting down its liberal program of social
benefits and raising rents, is losing a big item in its propaganda. Liberal
social benefits and low rents probably had been the most appealing aspect
of the Communist system for the workers. Although these benefits
fostered grudging acceptance of the regime by the workers, they did not
encourage hard and effective work.
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The measures described in this publication (and covered by the fol-
lowing sources) were discussed at a plenum of the Central Committee
on 20-21 January 1964, in the 1964 plan and budget, in measures of the
government, and in a radio-TV address by Premier Lenart.
Rude pravo, 26 Jan 64, p. 2-4. U.
Ibid. , 29 Jan 64, p. 3-4. U.
Ibid. , 30 Jan 64, p. 5-6. U.
Hospodarske noviny, 31 Jan 64, p. 7. U.
Rude pravo, 30 Jan 64, p. 3-4. U.
Ibid. ,8 Feb 64, p. 1-2. U.
CIA. CIA/RR ER 63-20, The Demise of Czechoslovakia's Third
Five Year Plan (1961-65), Aug 63. C.
CIA CIA/RR EM 64-3, Czechoslovakia In 1963: The Year the
Economy Stood Still, Feb 64. C.
Wages and incentives-
Rude pravo, 12 Feb 64, p. 2. U.
!bid., 15 Feb 64, p. 2. U.
Changes in social welfare:
Rude pravo, 19 Feb 64, p. 2. U.
Ibid. , 28 Feb 64, p. 2. U.
Housing and rents.
Hospodarske noviny, no 5, 31 Jan 64, p. 6. U.
Rude pravo, 31 Jan 64, p. 4. U.
Statisticka rocenka CSSR, 1963 (Statistical Yearbook of the
Czechoslovak Socialist Republic, 1963), Prague, 1963,
p. 145, 146. U.
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Rude pravo, 13 Feb 64, p. 2. U.
Ibid. , 26 Feb 64, p. 2. U.
Ibid. , 27 Feb 64, p. 2. U.
Ibid., 6 Mar 64, p. 2. U.
25X1A
Analyst:
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 CONFIDENTIAL
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Project No. 16. 5123 Report Series CIA/RR CB 64-28
Title Piecemeal Attempts to Invigorate the Czechoslovak Economy
(C onfidential)
Responsible Analyst and Brandh , A/E
RECOMMENDED DISTRIBUTION TO STATE POSTS
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30 April 1964
MEMORANDUM FOR: Chief, Dissemination Control Branch, DDICR
FROM : Chief, Publications Staff, ORR
SUBJECT
: Transmittal of Material
It is requested that the attached copies of CLAIRR CB 64-28,
Piecemeal Ahem is to Invigorate the Czechoslovak Economy, April
1964, Confidential:, be forwarded as follow,:
State, INR Communications Center,
Room 7818, State Dept. Bldg.
Suggested distribution for Embassies
in . Moscow. Prague, and London
The du;; ..., j, n reCueslLd by
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BY -- "W10051
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