Behavioral aspects of centralization-decentralization in development planning

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March 1964

Preliminary ^— Not to be quoted

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BEHAVIORAL ASPECTS OF

CENTRALIZATION—DECENTRALIZATION IN DEVELOPMENT PLANNING*

By

Nathan D. Grundstein and Abdul G. Khan

Graduate School of Public and International Affairs University of Pittsburgh

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^Prepared, for delivery at the Conference 011 National Economic Planning, Session II —

"Man-Maahine Simulation and Gaming for Developing Economies,'1 Pittsburgh, March 26, 1964

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BEHAVIORAL ASPECTS OF

CENTRALIZATION—DECENTRALIZATION IN DEVELOPMENT PLANNING

By

Nathan D. Grundstein* and Abdul G. Khan*

Assumptions and Methodological Choices

A decision model of the Tinbergen type is assumed by this paper. In the

pages which follow, some of "the behavioral factors that can influence the

contents of the key analytic variables are necessary for the analytic solution

to the decision model" will be made explicit. (DAG paper) It is further assumed

that the effects of the different behavioral factors inherent in the contrast¬

ing design of structures for the implementation of development plans can result

in alterations in the content of the data variables included in economic plans.

In turn, this will affect the analytic solution of the decision model.

(DAG paper, p. 9)

What such an assumption implies is that no system will be viewed as

completely deterministic so far as the production of any specific plan model is

concerned. That is to say, a given model outcome, with its specific data var¬

iables and coefficients and relationships and social welfare preferences that

appear as the result of planning procedures in a given economy, is not that

the only model that could have been produced. Nor is that given model outcome

an administrative optimum, in the sense that if another and better model could

have been the product of the procedures and structure by which development plans

are formulated, it would have been forthcoming. To reject the foregoing assump¬

tion is to reason that there is no other plan model for the economy that can

-•Graduate School of Public and International Affairs, University of Pittsburgh

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be considered to be administratively optimal as against the model which was

actually produced by the operation of the behavioral factors indigenous to a specific system for administrative planning.

The assumption, to the contrary, is that a range of model outputs is possible; that behavioral factors introduce large degrees of freedom into the

process by which plan models are formulated; and that these degrees of

freedom

allow numerous choices to be made with respect to the economic plan models

which are proposed for adoption by the planning authorities. Administrative procedures and instruments

of control of plan decisions allow the

management

of the behavioral factors. In this manner control of the model outputs takes place. Thus, in effect, the administrative procedures

whereby development

plans are formulated are devices for managing processes

by which choices with

respect to plan models will be formulated and by which models

will be allowed

to emerge as objects for administrative choice itself.

Finally, it is assumed that the elements of comparability is present as between any two development plans or models. The content of a model is ex¬

pressed in terms of specific coefficients and relationships, the latter en¬

compassing data analytic and behavioral relationships. (Bjerve) The assumption

is that as between two models, their respective contents can be compared and judgments of more or less optimality in relation to an economy can be made.

Absent this assumption of comparability, the inequalities which exist between

models and which are critical for disposition of the problems of optimality

or maximization in development planning could not be disposed of.

(8 Mge. Scie. 383 -- Good)

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A choice of strategy of research method for dealing with centraliza¬

tion—decentralization factors in development planning has been made. It

has been decided not to begin with formal definitions of centralization and

decentralization and build from these. Such a starting point does not lead

to fruitful consideration of the simulation and gaming problems that are our ultimate concern in dealing with the centralization and decentralization fac¬

tors in development plan administration. Our interest does not lie in formal categories or classification. Nor does our interest lie in determining whether

or not empirical data falls within a formal classification.

By virtue of a choice of research method which rejects formal defini¬

tions of centralization and decentralization as a starting point, this paper will of necessity progress backwards into the factors of centralization and

decentralization. The first portion will make more explicit the behavioral

factors and the ways in which they can enter into and influence the formula¬

tion and implementation of development plans. Its object is to lay the foun¬

dation for ascertaining the precise way in which problems of centralization and decentralization become significant for development planning and imple¬

mentation. It will also lay the foundation for giving a content to centrali¬

zation and decentralization that should have particular relevance for constructing conceptual frameworks for ordering behavioral data concerned with development planning. Ideally, ^we will end with an understanding of what centralization and decentralization factors are in development plan administration that are useful for purposes of simulation and gaiming

In consequence of this methodological choice, we will start with some

empirical country data (Norway especially, Hungary,and Poland incidentally)

and begin to make a preliminary patterning is a first ordering of the behavioral

variables. It has an heuristic character and is intended to assist in pointing

the search of empirical country data to those behavioral variables that are

significant by virtue of their potential effect on development planning outcomes Here again an assumption is made that some typology of plan implementing sys¬

tems is desirable and will be possible at some future stage. The desirability

of such a typology lies in the fact that, if successful, it will open the way to alternative ways of game play and alternative designs for simulation of de¬

velopment plan administration. To begin with empirical country data, and to make a preliminary ordering of this data, therefore, is to make a start on

laying a foundation for the desire typology of development plan administration systems which will enter into the eventual simulation of development planning

itself.

The Economy As A Multiechelon System

So far, an economy has been treated as a single echelon system for plan¬

ning purposes. In this paper, however, the economy will be treated as a multi-

echelon system. The simulation of development planning that is envisaged will

differentiate each echelon of the economy as a plan administration subsystem.

Once appropriate characteristics of this multiechelon system are formulated, they will be designed into the gaming and simulation itself. As a multiechelon system, an economy is regarded as having (1) a macroeconomic level, (2) an industries-directorate level, and (3) an enterprise production level. At the macroeconomic level the decisions respecting the national plan, such as national goals, budget allocations, and social preferences, ^are made. The industry-direc

torate level corresponds to the ministry level of a country and will be treated

as the equivalent of a sector in the economy. It is at this echelon that the

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interindustry problems also will become apparent. The enterprise-production

level corresponds to the interfunctional level of the firm ^as it is known in

business literature. The interfunctional level of the production enterprise will not be dealt with in this paper, thus leaving only the other two echelons of the economic system namely, the macroeconomic level and the industry-direc¬

torate level for analysis. Treatment of the spatial dimension will be emitted, however, as it is the special concern of a separate conference paper.

The partial decomposition of the economy that is implicit in breaking

it down into a multiechelon system for development plan administration helps

to identify the behavioral variables that ^are significant for development planning at each echelon. The logic whereby each echelon is differentiated is given in Table I. Its categories enumerate the comparative factors which pro¬

vide the basis for differentiation. They are used to help identify the con¬

trolling relationships of centralization—decentralization within each echelon.

Centralization and decentralization are modes of organization design choices.

Each echelon presents a set of these choices.

Centralization—Decentralization: The Macroeconomic Level

At the macroeconomic level development planning administration starts with a decentralized set of information flows. To this may be coupled claimants

who prepare component budgets. At the macroeconomic level, the motivational factors which influence or determine the behavior of the participants ^are not clear. The claimants may be functional only -- i.e., have no psychological

identification with the beneficiaries of the component budgets -- or they may be claimants with psychological identifications that transform their functional role into a psychological one. With psychological claimants, at any rate, an

TABLE I. Comparative Factors: Two-Echelon Economy

No.

Jj

Comparative factor Macroeconomic level Industry-directorate level

=1. Number of parties Multi-party system Two-party system

2. System goals Social-welfare function Plan-indices

3. Behavioral assumptions Competitive strategies

of a gaming character

Managed incentives—induced

motivation patterns

4. Analytic problem Algorithn for the solution

of a resource allocation problem

Decomposition into production programs

C Analytic technique Input-output & mathematical programs (Macroeconomic analysis)

Pricing, volume & product- mix analysis ("partial"

economic analysis)

€. Administration techniques Coordinated _process of successive approximation

Production-program

directives

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assumption of conflict of interests on the part of the participants is con¬

sistent with empirical data. Bjerve makes the observation that: "Agencies

and persons who prepare component budgets generally regard themselves as pro¬

moters of public or private interests which they believe are best served by extending resource utilization in their particular field as far as possible."

(Planning in Norway, p.35) In practice it has meant that, given "a demand surplus", component plans of claimants "will in aggregate exceed total avail¬

abilities." Planning administrative procedure ^may move through a process of

successive approximations to a centralized determination of a national plan

for economic development. In Norway, "The final ex ante figures of the national budget are arrived at by an administrative process of successive approxima¬

tions, i.e., the first estimates proposed by the various planning agencies are

adjusted and readjusted until consistency appears to be achieved." (Bjerve,p.20)

At the macroeconomic level, therefore, there may be no administratively manipulable reward and incentive system designed to influence plan decision

behavior. "In principle, a decision on economic policy may be considered to

imply decisions on the quantitative change of government variables with the object of maximizing a social welfare function (so that certain goals are

achieved) subject to a given set of quantitative data, a set of definitional relationships, and a set of behavior relationships (psychological, institutional,

or technological) between the variables of the model." (Bjerve, pp. 19-20)

The control and manipulation of participant behavior respecting entries in the

national plan are necessarily more indirect and more difficult to achieve.

There is a conflict of interests on the part of claimants for resources who regard themselves as representatives of the affected social entities comprising

» •

the institutional components of the economy. The issue at the macroeconomic level is whose preferences will dominate in the competition for resources and

at what quantitative level or magnitude will they be expressed in the national plan. Bjerve puts the Norwegian situation succinctly:

"In a decentralized planning organization.... the various govern¬

ment agencies preparing preliminary plans for the allocation of imports, building materials, and other resources make more or less conflicting claims on scarce resources. National budgeting aims, inter alia, at reducing these conflicts, partly by negotia¬

tion and bargaining between the repsective agencies and partly by

the dictation of coordinating bodies. The goal is to arrive at plans that correctly reflect the social welfare preferences of

the Cabinet, and not merely the preferences of government agencies subordinate to the Cabinet -- but, of course, this goal can never be fully achieved. Elimination of inconsistencies due to differ¬

ent judgments of facts and to insufficient communication among different government agencies is more easily insured."

The foregoing fixes the function of centralization at the macroeconomic level. What remains to be ascertained are what kinds of behavior are likely

to take place under conditions of administrative centralization of social wel¬

fare preference decisions. A plan authority with a centralized power of

decision can resort to two decision means: (1) directives originating in

hierarchical control and (2) negotiation and bargaining. The mere enumera¬

tion of these is of little significance. What gives meaning to their utiliza¬

tion in planning administration is some comprehension of the differences which

constitute the business of centralized national economic decisions.

Here the examination of planning experience in Norway by Bjerve is enlightening. He looks at the sources of the deviations between projected

and actual plan performance. By ^so doing, he exposes organizationally based

differences over national plans which must be disposed of by a central authority

with powers of decision at the macroeconomic level. The following types of

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deviation have behavioral origins and are designated as primary deviations:

(1) methodological; (2) intended; (3) unrealistic anticipations; (4) shifts

in social welfare preferences; and (5) faulty execution of plan directives.

The methodological and intended deviations have a special significance

for purposes of simulation of development plan administration. The methodo¬

logical deviation reveals that an asymmetrical administrative relationship

exists among those engaged in plan information analysis within the adminis¬

trative process of successive approximations. The phenomenon of asymmetrical

administrative relationships in plan information analysis takes the form of

information deference in the sequential stages of successive approximations.

There is a social-psychological base to information deference as be¬

tween agencies in the procedures for plan information analysis. The illus¬

tration that is given by Bjerve explains why the secretariat of the national (plan) budget is reluctant to substitute its data for that of the industry specialists of the industry directorate projecting production levels. It explains why a change in data variables that could be achieved by simple di¬

rective of a coordinating authority with superior hierarchical status may not be done at all. The given set of relationships between the parties is

set forth in diagram A. Bjerve writes about the basis of the information deference that enters into the foregoine set of relationships:

"'Methodological deviations are those caused by methodological errors.

They are deviations which "may result from the use of more or less incorrect information on behavior relations and the commission of errors of logic by

those who take part in the national budgeting. Deviations are quite likely

to occur for such reasons because of inadequate knowledge of the economy and

the reliance on deductions from the implicit national budget model made more or less intuitively by administrative procedures....They are particularly likely to occur in periods of shifts in fairly well established

'average*

behavior relations...." 'Bierve, d.52,>

Diagram A: Relationship Between Industry Directorate and National Budget

Secretariat on Production Plan Information

(Norway)

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"....it requires some courage to substitute for these projections (of the industry specialists of the Industry Directorate) figures

arrived at by the secretariat itself. If the specialists cannot be convinced that the figures of the secretariat are correct, and

if perhaps interministry rivalry also enters into the picture, the position of the secretariat is rather weak, inter alia, because

this body has only a very incomplete numerical model at its disposal

and must rely quite substantially on judgments. Partly for the same reasons, the projection by successive administrative approximations

within an incomplete explicit national budget model involves the risk that the interdependency of the economy is not sufficiently

considered." (Bjerve, p. 119)

Intended deviations serve as reminders of the mixed motivations of the

plan participants. With mixed motivations, to deal with, the central plan

decision makers resort to administrative strategies in order to control the

decisions about social welfare preferences and quantitative levels or magni¬

tudes that are at the heart of a national economic plan. Intended deviations

have the character of strategic maneuvers or gaming strategies in a competi¬

tive situation with a lot of information unknowns. The rationale behind in¬

tended plan deviations in the Norwegian national (plan) budget has been set forth as follows:

"A cabinet may....be tempted to include intended deviations in a number of national budget entries in order to obtain from its sub¬

ordinates the action decisions which it really wants, or, similarly

in order to influence the behavior of the parliament, of various groups of individuals and enterprises, and of foreign countries.

*

The cabinet, in submitting a national budget to the parliament, may choose between submitting plans that (a) reflect its own prefer¬

ences, even though it knows that political oppositions ^may necessi¬

tate some modification, ^or (b) are politically realistic in the

sense that the cabinet in advance attempts to take into account the preferences of the parliament, or (c) include an element of

game in the sense that the plans neither directly reflect the pref¬

erences of the cabinet nor are politically realistic, but are de¬

signed to motivate the best possible action by the parliament

(from the point of view of the cabinet). The last case means that

the plan submitted includes an intended deviation from the real plan;

for instance, appropriations for new roads smaller than the amount which the cabinet wants to spend for this purpose are proposed

because the cabinet believes that the parliament in any case will

* •

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vote for an expenditure higher than proposed. Furthermore, since projections for some variables may motivate decisions of the par¬

liament with respect to other variables -- e.g., projections of prospective tax incomes may motivate decisions ^on government ex¬

penditure, the cabinet may include intended deviations in projec¬

tions for the former variables in the hope of obtaining the

particular plan decisions wanted as regards the latter variables."

(Bjerve, pp. 46-47)

The use of intended deviations _may be constrained by generic adminis¬

trative norms, such as "The principle that the national budgeting is to be

1realistic'--which implies a minimal use of intended deviations." (Bjerve,p. 48)

In the case of projections of production, a bias of underestimation is favored

for intended deviations. The explanation for this involves the consequences of projections that are too optimistic.

"Too optimistic projections, by entailing an overestimation of government incomes and of currency incomes, tend to motivate an increase in government expenditure and to encourage decisions

which affect the balance of payments adversely. Considering these possible effects, too optimistic a projection appears to involve

a greater risk than too pessimistic a projection — the more so because politically a modification of policy in an expansive di¬

rection is much easier to implement than a modification in the opposite direction."

"The fact that the projections are published may introduce a bias

of underestimation, inter alia, because these figures play (or played) a role in wage negotiations, in bargaining for foreign aid, and in political propaganda." (Bjerve, ^pp. 120-121)

Neverthetheless, primary deviations in economic plans resulting from unrealis¬

tic assumptions about exports and gross investment have been estimated as

having directly influenced projections of production to a much greater degree

than have intended deviations.

Given parliamentary government and given the conditions of a multiparty competitive situation for the making of macroeconomic decisions for develop¬

ment planning, the resort to intended deviations if responsive to the effects

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of publication of the contents of the national plan. But rather than its being a matter of publication or no publication, for Bjerve stresses that the advantages of publication are without question paramount, it is instead a mat¬

ter of "the amount of detail and the kind of projections to be included in

such a publication." (Bjerve, p. 352) Intended deviations are not entirely

avoidable.

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13

The administrative _process of successive approximations yields particular instances of the ways in which procedural,organizational

and psychological factors at work within a system influence the

informational base for development plan decisions. Their influence

extends beyond discrete bits of data. Through the data it enters into

the coefficients assigned to the specific variables, and through the

effects it has _upon the numerical values calculated for these

coefficients,

it enters

into

the relationships between these variables

as these relationships are expressed in the governing equations. Taken

in their total,

the various

types

of

plan

deviations that

have

behavioral origins may cumulate so as to have a significant effect

upon plan decision outcomes. Given an analytically optimal solution

for an economic plan as a norm for purposes of

comparision, the

extent of the behaviorally influenced solution can be ascertained.

Feasibility criteria derived from the analytically optimal solution

to the development plan can then be brought to bear upon the plan decisions which result from the effects of behavioral factors.

From a simulation standpoint, the designers of

the

Development

Administration Game will have to provide the information for plan decisions in a form which will permit the operation of behavioral factors. The information which enters into plan decisions, therefore,

will be the information which is the product of the behavioral relation¬

ships between the participants in an administrative procedure for development planning. Successive approximations is a form of admini¬

strative procedure for macroeconomic planning. Given a set of organization

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14

conditions under which there is a dispersion of power to prepare component budgets by ^a number of agencies motivated by ^a

claimant psychology, and who, in

consequence,

tend

to

regard

every

other

claimant as a competitor for scarce resources, then the

administrative

procedure of successive approximations has a particular utility.

At the macroeconomic level the plan decisions that have ^to be made

are decisions about social welfare preferences; reconciliation decisions

intended to screen out inconsistencies and conflicts between component budgets submitted by authorized agencies; projected levels

of

magnitude

of anticipated

production, imports, consumption, investment, and the

like; decisions aggregating component plans into composite economic plans; decisions of consistency with respect to the composite

national economic plan; and decisions of planning methodology ^— such

as computational rules, data bases, and

assumptions.

What is being managed through successive approximations as an administrative procedure is the element of plan inconsistency. It is

in this context that it can be said "The major weakness of decentralization obviously lies in the risk of

inconsistency." (Bjerve, p.34)

Here

the

practical question becomes that of what inconsistencies survive. The procedures of successive approximations through consultation and negotiation to emerge as residual inconsistencies for disposition by

the final authority. In Norway, at least,

"There

is still a

considerable

need for coordination when the preliminary component budgets reach

the National Budget Division for the first time. The major function

of the National Budget Division is to satisfy this

need." (Bjerve, p.35)

♦ •

15

The foregoing by-passes questions that are closer to the threshold of choice in selecting between centralized-decentralized relationships

and designing their administrative content. Given decentralized information flows_; given decentralized component budgets; given

the motivations of claimant psychology and claimant initiative in the preparation of component budgets^; given demand surplus in relation

to resources — given all

this,

two large questions

of

choice are

precipitated. First, what procedural choices are likely

for

centralized macroeconomic decision making to be feasible?

Second,

what is the state of planning technology for analytic solution of

macroeconomic plan decision problems? To what extent, in other words,

can centrally determined analytic solutions delineate the quantitative

bounds to guide and contain the administrative procedure of decision?

Planning

in Norway is characterized by decentralized administrative bargaining around component budgets with strategic interventions by superior authority for ^purposes of coordination.

"The

merits of the Norwegian national budget model do not seem to lie so much in the ability to predict prospective economic development and government behavior (which may not be better than in the case of other methods)

as in the possibilities of applying the model for improving the consistency of ^a large number of assumptions and projections made by

different policy makers and at different points of time."

(Bjerve,

p. 335- 336) As to the second of the questions raised in the text, see

Frisch,

Ragnar ^-

"Macroeconomic

Planning and the Basic Policy Chart" (March

20,

1964, MIMEO, Grad. School of Public and International Affairs, U.

of

Pgh)

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16

Centralization-Decentralization: Plan Decisions and Plan Implementation Effecting a transition between echelons of the economy is one

of the problems of plan implementation. How to transform decisions

about the economic plan into decisions of implementation will be treated

in terms of decisions about industry production. The empirical

universe reveals almost polar extremes of country practice. In Norway a clear distinction is made between "plan decisions" ^—

decisions which officially determine the content of economic plans ^—

and "action decisions" ^-- which are decisions of plan implementation.

"Plan decisions _may be characterized as tentative action decisions which _{may or may} not coincide and conform with final action decisions."

(Bjerve, p.18)

The administrative ^process of successive approximations has the effect of reconciling plan

decisions, but

the reconciliation

of action decisions does not necessarily follow. Aside from the problems connected with the administrative enforcement of plans

(Bjerve, p.44),

and with the number of controls available to the

government to influence the direction of economic development

(Bjerve, pp.352-354),

there is ^no sufficiently reliable analytic technique

for the transformation of plan projections of industry production

into production action decisions for an individual enterprise.

"Since even the most detailed entries in the national budget are

aggregates, the national budget model does not assure — not even in

the definitional sense — the consistency of plans and projections

at the enterprise level."

(Bjerve, p.336)

Finally, it has been said

17

of the Norwegian economic plan that

"the

projections

for individual

industries motivate action decisions to a much

lesser'degree

than

I

the projections of gross national

product." (Bjerve, p.122)

The other polar extreme is exemplified by planning practice

for light industry in Hungary over an eighteen month period.

(Kornai,

J.

Overcentralization in Economic Administration, Oxford 1959. Its primary ^concern is

"with

four branches of state-owned and ministry-

controlled industry: The shoe,

leather,

woollen,

and

cotton

trades."

pref.x) There industry plans were treated as the equivalent

of

enterprise production decisions. Through the progressive hierarchical

and administrative decomposition of national economic plans, the plan decisions for light industry were transformed into action or

production program decisions. As

such, they

were

treated

as

binding

and obligatory on the industry managers of enterprises who were

charged with implementation of the industry production program.

Two factors _appear to account for the difference between Hungarian

and Norwegian practices. The first is that in Hungary the macroeconomic plan was binding and all of the implementing instructions were

treated as authoritative directives at every echelon. In Hungary,

furthermore,

the technical difficulties with decomposition of

aggregate production plans as an analytic solution for determining production programs for individual industry enterprises were side¬

stepped. Both of these factors collapse into a single, culturally

based explanation of Hungarian planning practice.

• ' •

13

The Hungarian practice can be ascribed to the effects of ideology,

a purely cultural

factor. After quoting the

statement

of Stalin,

"'Our plans are not forecasts, nor guesses. They are

instructions.'",

Kornai explains the overcentralization in economic administration

in Hungarian light industry

by

going on to say:

Those who are wedded to administrative methods of a kind which seek to make use of nothing but beyond

instructions, and who

wish to base the direction of economic life entirely on a

comprehensive and minutely detailed system of

binding instructions,

were furnished with ^an

'ideology'

by the thesis I have

quoted.

It provides a

'theoretical formulation'

which overrates

the

value of instructions and lends support to an excessive use of them. It also expresses profound contempt

for

other

methods of operating the process

of

economic

administration.

This sentence, or, more

precisely, the dogmatic edifices of

economic thought which have been erected upon it, were,

in fact,

a

reflection of

an

undesirable

state

of affairs. They served,

at

the

same

time,

to

maintain the existence of that

state of affairs by virtue of the authority

of theory and the

force of

propoganda, and this in

turn

led

to an

intensification

of undesirable

practices."

(p. 200)

Ideology can impose ^a socio-political resolution

of the problems

of production plan execution at the industry ^- directorate level

without taking into account the difficulties inherent in the interdependence of the economy and for which analytic techniques

of plan decomposition may be brought into play in order to

provide

a logical planning basis

for

action decisions respecting ^programs

of

production.

By contrast, the

situation

in

Norway with

respect to

the binding

character of the national economic plan is subtle and full of nuances.

It does not bind the Norwegian Storting, nor

do

the

resolutions

of the Storting bind the cabinet so far ^as national plan decisions

19

are concerned. In essence the Norwegian situation has

been

described as follows :

"Inasmuch ^as the National Budget is presented to the Storting

and the electorate as statements on prospective government action,

and

to government

agencies

^as

directives for their

prospective decision making,

its political and administrative

implications would be thought to be clear enough. However,

in

practice the cabinet has not always regarded

(and

obviously

cannot always

regard)

the national

budget

as

embodying its

final statements and directives. Nor have subordinate

government bodies always conceived the

directives

as

mandatory,

not even when they have been intended as

such."

(Bjerve, p.36)

An attempt can be made with ideologically

buttressed plan

directives to ride roughshod over

the difficulties of decomposing

economic plans into specific production programs

through analytic

techniques of various kinds. The degree

of

solution

possible

through analytic techniques is crucial for those

choices concerned

with balancing centralization against

decentralization in the

administration of decisions of implementation about industry production

programs. Primarily because

of

the

methodological difficulties

involved in treating economic interdependencies

of this complexity,

only partial analytic solutions are possible. The

difficulties and

complexities are made very clear by Montias in his critical and

detailed

survey of central economic planning for industry in Poland.

(Montias, J.

Central Planning in Poland, Yale 1962) Analytic solutions do not

allow direct transformation of plan decisions into action decisions.

In planning administration there is an intersection

of the

analytically based technology of planning

and

the

design of

administrative relationships in the organization for planning. How

does the former constrain choices about the latter; and how does

20

the latter build _upon the options extended by the former? The

study by Kornai of experience with centralized planning administration

in Hungarian light industry illustrates how the one may

be

at variance with the other. His study is a detailed and well-

documented analysis of the behavioral content of centralization-

decentralization relationships for production plan administration

at the industry-directorate level. It deals with a class

of

problems that has ^as its focus the production program and output of a particular enterprise within an irdustry sector and the interdependent responses of the industry planning authority

and

the enterprise managers who are within its jurisdiction.

Production plan implementation for an industry breaks down into a set of two-party relationships: the directorate and an industrial enterprise.

The industry directorate is the central authority. There

is

a contrast in practices for the formulation of enterprise production plans for the period before 1954 and the period after 1954. The pre-1954 practice was characterized by the

"quasi-plan"

which allowed

for discrepancies to exist between the plan and the actual

enterprise output. Given the condition that the requirements for

home and foreign trade to be met by production were not known in specific detail at the time the annual production plans for

individual enterprises or industries were being formulated, prior to

1954 the practice was to take rough

"'notifications

of

requirements'"

and use these as a basis for a "quasi-plan." This plan set forth

• 41 £

21

a "detailed product — mix of goods that would be

produced,

on a

hypothetical

basis,

and

the

aggregate value

of production

was calculated on the basis of this product ^-- mix, which being hypo¬

thetical, was never exactly realized in

practice." (Kornai,

pp.

2-3)

At the same time administrative practice was such that the top management of the individual enterprises formulated their own

proposals for annual plans. A procedure known as

"'planning back'"

was

followed,

which meant that

"annual

plans, as

approved by the directorates,

had to be elaborated in

further

detail by the

enterprises

themselves, before resubmission

to

their directorates."

(Kornai, p.4)

Subsequent to 1954 the practice of

'quasi-plans'

was abandoned in favor of the practice of the determinate plan,

which required a correspondence between the annual production

plan for the enterprise as prepared by the industry-directorate and

the output by the enterprise. The top management personnel of the enterprises played very little part in the formulation of these

annual plans of a determinate nature. The decomposition of national economic plans into enterprise production programs proceeded by progressive administrative stages.

"Five _year plans and annual plans for the national economy are

passed.by Council of Ministers and by Parliament respectively.

These plans determine the tasks set for individual industrial ministries by ^way of ^a multiplicity of approved plan index

numbers. The ministries divide these tasks between the industrial directorates which, in turn, break them down

further for individual enterprises.

» » •

- 22 ^-

All this follows from a basic principle of planning

which has hitherto been thought to permit

of

no alternatives: plans should always have the character of instructions. The

doctrine taught has been that ^every approved plan index number, should at

the higher

level to

which it applies,

be broken down and divided _{up among} the units of a lower

level,

since

it was held

that

the

execution of

the

government's

economic plans could not be secured without establishing a closed chain of interdependent

instructions."

(Kornai,

pp.

1-2)

The relationships generated ^as between the formulator of

annual plans and their implementor are a response to the above conditions; While the criterion of the determinate plan assumed

that an annual production plan as formulated by the industry

directorate is an authoritative and binding directorate

that

must

be adhered to, the fact of the matter is that they were

defective

as instructions. They failed

"to

amount to effective

instructions."

(Kornai, p.9)

The central concerns of the centralization ^- decentralization

relationships that emerged in practice began here. Their

ineffectiveness as instructions was due to their not being linked

with financial incentives for the top enterprise managers. It

was also the result of the annual plans being too generalized

for enterprise preparation of specific and detailed production programs. In short, the information defects in the content of the

annual plans was such as to be at variance with the requirement that they be treated ^as determinate plans by both parties. The

information defects were not only those of an inadequate level of

detail,

but also

of

vitiating

uncertainties

about

information

put

forth as a basis for a production program. Current production programs

were influenced by interruptions in supplies of materials, by

changes

- 23 -

in production requirements and by changes in the demand

for

finished goods

(fashion,

weather, purchasing power,

and

export

orders all have an element of uncertainty about them which influences

current production

programs),

and by alterations

of national

economic plans

which, if frequent, will denigrate convictions about

the seriousness with which annual plans should be believed.

The conclusion of Kornai ^was that "it is impossible to plan

all current production for ^a year ahead in light industrial enterprises

with absolute precision." (p. 17) The key problem for the

administrator ^— when a program of current production is the focus of

administrative attention in devising plan implementation relationships

at the industry-directorate level ^— lies in capacities for production

program and not in plan decentralization into a fixed program

of

plan indices of production and production ^program detail. Consequently

it is the sensitivity of organizational ^response to the plan flexibility

needed for adaptation to short-tun changes and fluctuations which

cannot be reliably estimated in advance for ^as much as a year

should be the determining criterion of choice. The overcentralization

that was condemned by Kornai was shown to be dysfunctional because of the bureaucratic obstacles it imposed as barriers to the

achievement of flexibility in production plans for current production.

(Kornai,

pp.

22-27)