Planned economy (1951-1988)

food industries finally started to fade away.¹⁴

different eras. First, in contrast to the free price settings during the market economy, prices were regulated during the four decades of planned economy era. The overall direct price determination by authorities was abandoned with the introduction of the New Economic Mechanism, and replaced by a mixed-price setting mechanism. This included the so called “free” prices set by enterprises – though controlled by the state via a set of regulations – and the still existing centrally regulated official prices.

These price regulation instruments included profit-margin restrictions, temporary “price stops”, laws of

“unfair prices”, informal instructions and direct price regulations at least one stage of the production process.¹⁸ Second, the shortage of goods was a prevalent phenomenon during the planned economy;

moreover it affected the diverse segments of the society unevenly: “Everything is available, just not always, not everywhere and not to everyone.”¹⁹ The situation was further distorted by the special foreign currency shops open only to the political elite.

During the planned economy political and ideological concepts favored a more compressed income distribution than what prevailed in other market economies. From Figure 3.6 we can see how far the system managed to compress the distribution of income by comparing the top shares during this era to the shares during the market economy decades before and after the planned economy. Beside the significant difference in the level of top shares immediately after the beginning of the new economic regime, there is an overall decreasing trend afterward. The reason behind the downward trend in the top shares is that the total income denominator is growing faster than the income accruing to the top shares.²⁰ The two distinct jumps in 1957 and 1970 are tightly connected to different reforms aimed to increase wage differentials of enterprise managers particularly via sharp differences in bonus payments to provide incentives resulting in higher productivity. The increasing trend from the mid-1980’s also occurred after managerial wage and bonus setting were delegated to enterprise councils.²¹ It is an interesting phenomenon that the top P90-95 and P95-99 series perfectly coincide during the era. Most likely it is a coincidence as it is not prevalent in the upper shares (see Figures C.10 and C.11 in Appendix).

How wage setting mechanism worked at the planned economy? Wage setting was a central com-ponent of the planned economy; different wage tables existed for blue and white-collar employees that based on ideological reasons decreased earning differentials between workers, intellectuals, adminis-trative workers and managerial staff. However for short reform periods the strict wage settings were relaxed and delegated to enterprises in order to increase production efficiency.²²

At the beginning of the era companies had no autonomy, production was planned centrally in every

18Swan (1990), pp. 248-251.

19Farkas, Pataki (1984), pp. 288-289.

20The population denominator is slightly growing during this period, that would ceteris paribus increase the top shares.

21Cukor (1990), p. 9, Héthy (1991) p. 1

22Boote, Somogyi(1991), p. 18, Éltető, Láng (1971), pp. 303-314

CEUeTDCollection

Figure 3.6: Top 1, 5 and 10 percent income shares in Hungary, 1914-2008

Note:Percentage of total income received by each of the top groups. Income is defined before taxes and excludes capital gains for 1914-1940, and includes capital gains for 1992-2008. For 1951-1988 income is based on earning tables. For 1914-1988 the fractiles are defined by total income excluding realized capital gains, and for 1992-2008 including realized capital gains also.

(For details see Appendix section C.2, C.3 and C.6.) Source:Table C.17

details, and market prices were set centrally without reflecting the demand and supply of the goods.

With fixed prices, artificially low raw material and energy prices the managers were not incentivized to realize higher profits through lower production cost or more efficient production, as they received their bonuses if the centrally planned production target quantities were fulfilled at any cost. These mechanisms led to low investment in research and development, lower quality, overproduction of some specific stocks, and shortage of other goods; moreover actual production was far from the five-year plan targets. Due to the visible defaults and the manifested discontent with the system during the 1956 revolution, partial reform corrections were introduced. The reforms aimed to provide higher welfare, which was only possible via increasing economic efficiency. The planners tried to achieve these goals via allowing more autonomy to enterprises by reducing the number of centrally given commands;

however the most crucial production indicators were still set centrally. Further changes concerned wage settings; instead of determining wages via the compulsory payroll figures it was regulated through wage allocation and average wage instructions, moreover enterprises received more freedom to set the allocation of bonuses.²³ Exactly after this partial reform the top income shares depicts a 12 percent increase in 1957 compared to 1955 displayed in Figure 3.6.²⁴

23Berend(1990), pp 2-14, 75-78

24The increase already in the 1956 shares is more likely to be due to the drastic jump in the income denominator in the year of the 1956 revolution. While the increase from 1957 can not be due to a change in the denominator as real per capita GDP went back to its trend level immediately in the year following the revolution. See Figure 3.1.

CEUeTDCollection

As the system required further reforms the New Economic Mechanism (NEM) program was intro-duced in 1968 giving more autonomy to enterprises. Instead of detailed commands on the resources to be used and production targets, the State tried to provide further profit incentives to the plans to meet with the central plan. Although more freedom was allowed for wage settings, average wages were still centrally determined with upper and lower wage limits for specific occupations. Additionally, if the enterprise wage bill increase was above a certain level, then heavy taxation was imposed. As part of the reform the profit was not taxed away completely by the state, but part of it was channeled into the profit sharing funds to be distributed among the managers and employees. Income benefits from the profit share were maximazed as the 15, 50 and 80 percent of wages respectively for the workers, middle-level management and top management. Figures 3.4 and 3.6 respectively depict a 11-26 per-centage increase in the very top shares, and a 5-7 perper-centage increase at the lower shares between 1966 and 1970 exactly after the introduction of the New Economic Mechanism (NEM).²⁵

The NEM favored those with skills and expertise, while those untalented party rank and file at the state or managerial apparatus who felt that their power was in jeopardy were against and heavily criticized the new mechanism and the profit sharing incentives of the managers in order to defend the “values of socialism” and the workers’ interest. Moreover blue-collar workers were also against the reform as they claimed it shifted the income distribution unfavorably for them. The elite wanted to get the support of the workers more than of the intelligentsia, so they started to decrease the earnings difference of skilled and unskilled workers especially after 1972, which seems to be a plausible reason behind the decrease in the top share after the jump in 1970.²⁶ The increase in the top shares from the mid-80’s happened parallel with the delegation of executive wage and bonus setting to enterprise level. All in all, these findings suggest that when strict wage settings were relaxed and delegated to enterprises the top shares started to increase.