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Enterprise Guidance in Eastern Europe
A Comparison of Four Socialist Economies
By David Granick PRINCETON UNIVERSITY PRESS
Copyright © 1975 David Granick
All rights reserved.
ISBN: 978-0-691-04209-1
CHAPTER 1
The Analytic Framework
One way of viewing the four countries treated in this book is that they represent a continuum with regard to detailed, centralized decision making in industry, ranging from Romania to the G.D.R. to Hungary to Yugoslavia. The difficulty with this perspective, however, is that a major discontinuity exists between the three CMEA countries on the one hand, and Yugoslavia on the other.
The three CMEA countries share the common feature that each is guided by central planning and decision making from a single center. In each of these three countries, all of industry can properly be regarded as a single organization subject to common direction. In each, the appointment, promotion, dismissal, and monetary rewards of managers of suborganizations (e.g., of enterprises) are determined by a common central authority. While the methods of direction by the center differ substantially among the three countries, all are directed to the same goals: efficient execution of the center's decisions.
This characterization does not apply, however, to contemporary Yugoslav industry, which cannot properly be conceived as subject to the decisions of any single authority. Instead, Yugoslav enterprises should be regarded to a considerable degree as independent power centers, whose actions are coordinated primarily through the market place.
Thus, while the market serves as a major mechanism of coordination in both Hungary and Yugoslavia, its function is fundamentally different in the two economies. In Hungary, it is the chosen mechanism for carrying out central decision making; in this regard, market transactions among enterprises are comparable to interdivisional sales within a single large and decentralized capitalist firm. In Yugoslavia, on the other hand, the market is the mechanism for interrelating genuinely independent organizations.
This major discontinuity leads me to pose somewhat different questions concerning CMEA and Yugoslav industry. Since the managerial systems of the three CMEA countries are all designed to solve the same problem — the efficient coordination of the country's industry to carry out centrally determined objectives — they will be analyzed within a common framework; the same analytic factors in managerial control are relevant to all three. But the Yugoslav economy is organized to reach rather different objectives, and thus it is convenient to examine it within a different analytic framework.
The purpose of this chapter is to discuss in general terms the main factors which are examined in each country study, and to present a rationale for selecting these particular factors for emphasis. The particular analytic frameworks are chosen precisely because they are built around those factors which will serve as the heart of the empirical analysis of the remainder of this book.
National Managerial Systems: The Three CMEA Countries
If it is accepted that Romania, the G.D.R., and Hungary are all centrally guided and controlled, then the state-owned industry of each country can be treated as though it were all part of a single, national corporation. National Communist Party and government decision makers, together with the planning committee and functional ministries as their staff support, and branch ministries as their line organs of command, can be compared to a corporate headquarters. Intermediate organizations — the centrale in Romania, the VVBS and Kombinate in East Germany, and the giant enterprises in Hungary — can be compared with divisional headquarters of a corporation; individual enterprises in Romania and the G.D.R., and factories in Hungary, can be compared with the field units of a capitalist firm. The relevant approach to coordination of CMEA industry is in terms of managerial theory.
The orthodox model. In the recent past, western analysis of the operation of enterprises in centrally planned socialist economies has rested primarily upon an implicit form of a model which is closely related to microeconomic theory of the operation of capitalist firms. Enterprise managers are conceived as maximizing a clearly defined objective function subject to constraints; this objective function is the managers' own personal incomes both in the current year and in the time-discounted future. Managerial bonuses are assumed to be a useful proxy for such income. These bonuses, in turn, are a nonlinear but well-specified function of quantified measures of the enterprise's performance compared to planned performance. Managers are thus motivated to concentrate their efforts upon the achievement of those measures of success which are most important in the bonus function (these are called "success indicators" in the literature), but to avoid major overachievement relative to plan because this will lead to the raising of plan targets in the future and thus to the reduction in the sum of all discounted bonus receipts.
This analysis treats the managers as independent and maximizing decision makers. Planners influence managerial decisions through their choice of the parameters which affect managerial bonuses: (1) the selection of the particular success indicators which are to influence bonuses, and the weighting of these indicators in the bonus function; (2) the level at which the planned indicators are set for a given enterprise in the current year, and (3) the degree to which the increase in this planned level in future years is influenced by the enterprise's current performance; (4) the shape of the nonlinear bonus function relating achieved performance to the planned indicators.
This model has the attraction that it can be used to explain where and why decisions of enterprise managers will lead to results which are dysfunctional from the viewpoint of the central authorities. The model is based upon an assumption that is clearly comparable to the profit-maximizing assumption for firms which is the basis of microeconomics of capitalist economies. It permits the construction of a microeconomics of socialist economies which is the counterpart to the microeconomics of capitalist economies.
There is, however, a fundamental difference in the justification which can be offered for the assumption of managerial-income maximization in socialist enterprises and for profit maximization in capitalist enterprises. The latter assumption is justified on the basis that enterprises which do not act in this fashion are unlikely to survive in the long run. In a planned socialist economy, however, the survival characteristics needed for enterprise managers to retain their functions are not determined through the working of a market economy, but rather by the administrative decisions of higher authorities. What is required for socialist economies is a managerial analysis, and the "orthodox model" described above is only one possible subset of relevant managerial models. Although this specific model may have considerable value as applied to the Soviet Union, the country for which it was most particularly developed, it may be a poor tool in analyzing other Soviet-type economies.
I shall argue in the country studies that, in fact, the elaborated orthodox model is a poor tool for analyzing the behavior of production units in either Romania or the G.D.R. Furthermore, it is clearly not relevant to Hungary, since central plans are not developed in that country below the level of the ministry. Thus a broader — and therefore, unfortunately, less specific — framework is required which can encompass both this and other models.
Like the orthodox model, the framework to be presented rests upon a distinction between the enterprise and the center. It also conceives of enterprise managers as economic men, and ignores considerations of ideology and the public weal in analyzing their behavior. Where it differs is in the breadth of factors going into economic reward for managers and, more significantly, in the choice of instruments of influence which are available to the center.
Key factors of the managerial analysis. The following two equations summarize the postulated relationships, the independent variables being those which will be given particular attention in this book.
(1) Managerial Effectiveness = f (Signals Rationality, Specific Indicators, Plan Ambition, Measured-Success Reward)
(2) Measured-Success Reward = f (Bonuses, Careers, Income Inequality)
The terms are defined as follows:
Managerial Effectiveness. Managerial effectiveness of the industrial system at the level of individual branch ministries. Effectiveness is indicated by the ability to achieve objectives desired by the center.
Signals Rationality. Degree of rationality of cost, pricing, and other signals (such as weighting of different products in an output index) that serve as methods of aggregation and are provided to enterprise managers. The criterion used for rationality is that of guidance to actions desired by the center.
Specific Indicators. Degree of central use (backed by penalties and rewards) of specific quantified performance indicators and detailed resource allocations for enterprises.
Plan Ambition. Degree of ambition incorporated in planned targets given to enterprises, whether these planned targets be expressed through the medium of many specific indicators or in one or a few generalized indicators, and with this level of ambition of plans being enforced by penalties or rewards.
Measured-Success Reward. Degree of differential reward of managers dependent upon overall measured success. Such success may be measured by a weighted average of a large number of specific indicators, or by a single aggregative indicator such as profits. The relevant feature is only that it be quantified in some fashion.
Bonuses. Nature of bonus system used for enterprise managerial personnel.
Careers. Nature of career lines of enterprise managerial personnel.
Income Inequality. Degree of income inequality between ordinary workers, rank-and-file engineers, and the various levels of management within enterprises and in managerial organs above them. Particular stress is placed upon the degree of income inequality between rank-and-file engineers and the various managerial groups.
The literature dealing with socialist planned economies has given considerable attention to Signals Rationality and Plan Ambition. It is the treatment of the remaining variables, as well as one aspect of Plan Ambition, which is somewhat original here.
The fewer the specific performance indicators both incorporated in the indices of plan fulfillment of enterprises and taken seriously by the enterprises, the more important is the effect of Signals Rationality (defined as the degree of rationality of aggregate measures of inputs and outputs which are provided to enterprises) on the decisions made within enterprises. However, no planning system — no matter how centralized — eliminates the problem of choice for the enterprise managements; even if all indicators were expressed in physical terms, many would still be aggregates reflecting a weighting of the components. (Output indicators almost inevitably combine different products within a single indicator with different weighting, enterprises would be motivated to fulfill a specific output indicator with a different mix of products.) Increase of the amount of Signals Rationality has an unambiguously positive effect on Managerial Effectiveness, and thus we might expect to see efforts to achieve such an increase made in both centralized and decentralized planning systems.
The greater the number of specific performance indicators, and the greater the detail of resource allocation provided to enterprises (i.e., the higher the value of Specific Indicators), the greater is the degree of potential central control over the economy, and the larger the potential for detailed coordination of the operations of different enterprises. The counterpart is that less decision making is left to the individual enterprise; i.e., the management function of industry is concentrated above the level of the enterprise. Enterprise management becomes simply an intermediary between true management and the labor force, much as has historically happened to foremen in large private companies in the West.
One problem involved in such an attempt at detailed coordination is that it may result in the realization — as opposed to the potential — of considerably less achievement of central goals for the development of industry than might otherwise be attained. Central managers find that their time is fully taken up with efforts to achieve consistency among the various performance indicators and resource allocations provided to enterprises, and that little opportunity is left for consideration of efficiency and direction. At the extreme, such a managerial system would be governed by consistent directives, but would be essentially out of control in that it would be unresponsive to changes in welfare functions, technological knowledge, or input availabilities.
As a compromise, detailed coordination may be pursued through a three-tier system. At the top are decision makers concerned with the direction of the economy and with setting only broadly defined goals for groupings of enterprises. In the middle, but still within the central apparatus, are located those managers responsible for integrating the operation of the industrial system and for helping individual enterprises meet the broad goals set for their sector by the top decision makers; the integrating solutions found by these middle-level managers are expressed through specific performance indicators and resource allocations. At the bottom are enterprise managers who fulfill the functions of junior executants, not too dissimilar from foremen.
Such a three-tier system would imply the concentration of managerial resources at the middle level rather than in the enterprises. Responsibility for working out measures by which to fulfill top decisions would be focalized here. The managerial effectiveness of the system would depend primarily upon the relationships between the top and middle tier, and the enterprises would represent a relatively uninteresting area for managerial investigations. The relevant degree of use of Specific Indicators would not depend upon the degree of specificity of goals and resources provided to the enterprises, but rather of those provided to this middle tier.
A three-tier system of this type has in fact been developed through the creation of centrale in Romania and of Kombinate in the G.D.R., and through the merging of what were earlier independent enterprises in Hungary. In all three countries, the creation of this system has implied the sharp reduction of the management role in individual factories. However, the centrala and Kombinat simply replaced the enterprise as the basic managerial unit, and in fact the former enterprises have tended to lose many of their earlier legal rights. This can be interpreted, as has legally been the case completely in Hungary and partially in Romania and in the G.D.R., as meaning that it is these new units which are in fact the "enterprises." Central control and coordination are unaffected.
Putting aside the three-tier case, there is the question of the degree to which a large number of specific performance indicators and resource allocations can be enforced upon the enterprises. The less consistent such indicators are with one another, the greater the extent to which the enterprises must choose which indicators they are to heed and which to ignore. The greater the degree to which central authorities are concerned with directing change in the economy, the less time they have available to give attention to insuring consistency among the indicators. Furthermore, consistency is easiest to attain when the level of performance required by each indicator is low; in this case, there is considerable slack at the enterprise level which can be used to meet the various indicators even when they are inconsistent at that performance level which had originally been projected for the enterprise. (I.e., performance can be sufficiently improved beyond the planned level so that all indicators are met or surpassed.) But if the central authorities set ambitious enterprise objectives, then the existence of indicators which are inconsistent at the level of performance originally projected by central authorities compels the enterprise managers to engage in trade-offs among the various measures of performance as shown by the different indicators. It is at this point that the enterprise managers inevitably become true decision makers.
(Continues...)
Excerpted from Enterprise Guidance in Eastern Europe by David Granick. Copyright © 1975 David Granick. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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