Leslie Holmes, Communist economy: The performance of centrally planned economies

There are numerous problems involved in attempting to assess the performance of Communist economies. One is that comparison with both non-Communist systems and sometimes even between Communist systems is difficult because of the use of different measurement methods. Thus Yugoslavia used a different method for measuring the overall growth of its economy (Gross Material Product) from that used by China until 1985 and Comecon member states (Net Material Product, NMP), which in turn differed from the method most commonly used for measuring Western economic growth (Gross Domestic Product, GDP). It is not necessary to understand the differences between these methods, but rather the fact that they exist and make direct comparison problematic, and that using NMP instead of GDP makes growth look higher, since it excludes much service activity.

At least as serious a problem as the method used is the reliability of the statistics. A number of officials from Communist statistics offices admitted in the 1990s that they had sometimes been required to massage figures for political reasons, so that they would appear more impressive. Sometimes, particularly in the early years, important economic statistics simply were not published by the Communist authorities. Partly because of this, and partly in order to understand better what was happening in the Communist world, both scholars and intelligence agencies in the West used to produce their own estimates. Given all this, economic growth figures for Communist states have to be treated with extreme caution, and should never be fetishized or treated as necessarily being accurate. With these caveats in mind, Table 2 provides an overview of economic growth patterns in several Communist states. Since the basis of these statistics is Communist sources themselves, the most striking point is that most Communist states enjoyed very impressive growth in the 1950s and 1960s, which slowed down in the 1970s, and even more so in the 1980s; Cuba – in the first half of the decade – and China were notable exceptions to the 1980’s trend.

But overall economic growth is not the only way in which performance can be measured. Given their own stated priorities, the Communist states can also be judged in terms of unemployment rates, inflation, labour productivity, and Gini indices. Most Communist states claimed to have no structural unemployment. By this they meant that people whose work was no longer required – perhaps because of modernization of techniques in their workplace, for instance – would not be unemployed for an indefinite period because of this. Rather, the person would be retrained, during which time they would be paid. What Communist governments rarely admitted was that there was often underemployment, particularly in the countryside. And the most transparent of the Communist systems in Eastern Europe, Yugoslavia, did not attempt to hide unemployment anyway; the official rate was 7.7% in 1970, and 11.9% by 1980 (ILO figures). The unemployment figures for other Communist countries are mostly Western estimates (e.g. 5.4% for Cuba in 1979), although China has in recent years openly acknowledged structural unemployment.

Communist states also often claimed to have little or no inflation. But this claim was disingenuous. Sometimes, the inflation was highly visible, as with the price rises on food that resulted in mass protests in the USSR in 1962 and in Poland on numerous occasions. More frequently, the inflation was hidden, or what economists call repressed. The most obvious sign of this was shortages and rationing; these are signs of imbalance – disequilibrium – in an economy just as much as overt price inflation. By the 1980s, there were long lists of rationed basic foodstuffs in Cuba and Romania, for example; while the lists were shorter in countries such as Poland, their very existence revealed repressed inflation.

In the early years, most Communist economies grew impressively on the basis of extensive methods, notably mobilizing the workforce (i.e. increasing the percentage of people going out to work, typically through mobilization of women). But once an economy has soaked up this additional workforce, further growth requires a more intensive approach. A prime factor in this is to increase labour productivity, making workers more efficient. The problems of innovation and incentive already outlined meant that labour productivity did not increase in most Communist states to anything like the levels necessary if these states were to catch up with and overtake their capitalist rivals.

Although Communist states never claimed to be committed to economic equality, they were in theory committed to lower income differentials than in market economies. A common method for measuring income inequality is via Gini coefficients, which are calculated by taking half the expected difference in income between two randomly selected individuals as a proportion of the mean income of a population. In fact, over time analysis of income distribution in the USSR reveals that some periods had much flatter distribution periods than at others, so that policies on this were not consistent. However, a comparison of the Gini coefficients of a number of Communist states in the late 1980s indicates that the gap between rich and poor was narrower than in most Western states. Gini coefficients are often presented on a 0 to 100 (percentage) scale, and are then called the Gini index: the higher the percentage, the wider the income gap, and hence the greater the inequality. In 1986, Czechoslovakia had a Gini index of 19.7% – making it the most egalitarian of the East European countries – compared with 22.1% in Hungary, 24.2% in Poland, and 27.6% in Russia. By way of comparison, the UK index at that time was 26.7% – higher than the East European states just listed, but slightly lower than the Russian figure.

Communist economies generally operated in very different ways from how capitalist economies operate. The state was much more involved in them, and the so-called ‘invisible hand’ of the market was not merely invisible, but largely non-existent. For all their shortcomings, Communist systems were reasonably effective at transforming largely rural agricultural economies into urban industrial ones. In the early years of Communist power, they were also able to boast high growth rates. However, most economies enjoy high growth rates when in transition from a predominantly agricultural to a predominantly industrial base. Moreover, many of the Communist economies had high growth rates in the years following World War II; again, most types of economic system have high growth rates when recovering from a war. Thus, while it is often argued that Communism was an efficient and effective method of modernizing an economy, it must be borne in mind that many non-Communist states performed as well as or better than their Communist counterparts. For example, while China’s annual average growth rate 1965–80 initially looks impressive at 6.4%, it was in fact lower than the annual average rates in Brazil, Indonesia, South Korea, and Thailand.

Thus, if we are to focus on the achievements of Communist economies, it would be more on the provision of basic needs – housing, healthcare, education, public transport – for most citizens. Conversely, citizens as consumers of goods were in general poorly served.

But what of the Communist states that have been described in this book as economically post-communist? Under Deng, the Chinese Communists argued that marketization is not incompatible with socialism. This was not a particularly controversial or novel claim, since other Communist states had earlier argued that elements of marketization, notably competition between enterprises, were acceptable in a Communist economy. Once marketization had been introduced in China, the next question was whether or not privatization was acceptable. For several years, the Chinese Communists adopted an innovative approach to this; the state continued to own the means of industrial production, but was willing to rent them out to entrepreneurs. But at the end of the 1990s, the Chinese finally passed a law that permitted private ownership of large-scale means of industrial production, such as factories. Did this represent a renunciation of Marxism? No straightforward answer can be given to this question.

One reason is that Marx’s views towards the end of his life were in some important areas different from those in his earlier years. But if it is accepted that Marx was generally more inclined towards determinism than voluntarism, then his argument that countries have to proceed through various stages of economic development and be predominantly industrialized and urbanized before they can be ready for socialism and communism means that the Chinese position can be defended. The growth and development of the Chinese economy since the late 1970s has not only been impressive, but has also allowed it to make substantial progress towards catching up with the West. According to the World Bank, China’s average annual growth rate between 1987 and 1997 was 10.3%, while it was 9.5% between 1997 and 2007. By the latter date, it had the world’s fourth largest economy, according to both the IMF and the World Bank.

From the perspective of the Chinese Communists, however, the problem with acknowledging the later Marxist argument on the need to proceed through development stages is that Marx also saw the historical need for a bourgeois democracy preceding a genuinely socialist transformation; while the Chinese Communists have sought partly to address this by encouraging wealthy entrepreneurs to join the Communist party, there are unquestionably serious tensions in such an approach. A similar problem will face the Vietnamese Communists. According to the World Bank, Vietnam’s annual average growth rate 1987–97 was 7.7%, and 1997–2007 was 7.2% – impressive by almost any criteria. But whether this will be sufficient to protect the Vietnamese Communists against challengers wanting democracy remains to be seen, especially if the economy encounters major problems.