A Lesson of “ Sozialpartnerschaft”
-I. Transformation and Dissolution
After the “ Velvet Revolution” in the East, many economists held the opinion that a change from a centrally planned economy to a market economy is historically unique.
This is certainly partly true, because such changes have occurred several times, though the scope and economic and institutional surrounding o f the transformations were highly different.
In Austria such a change occurred twice, first, after World War I and a second time after World War II. This re-marketization was certainly not a specific Austrian deve- lopment, because most o f the European economies had to face similar problems, but in Austria in the former case, it had to be performed under specific circumstances - the dissolution of the Austro-Hungarian Monarchy - and a very specific policy was used for transformation.
In World War I authorities tried to introduce a sort o f planned war economy making use o f the private cartel organization within industrial branches and the banking system. With the help of the leaders o f cartelized branches, the government founded semi-autonomous Zentralen in order to regulate the market, especially to reduce shortages in raw materials, foodstuffs, energy and foreign currencies.
Enterprises had to report the stock of their commodities and peasants had to deliver at fixed prices. Control systems for import and export were also introduced. The government interfered with price formation; prices and wages were fixed - although the price-control never worked well - and even apartment rents came under control.
State subsidies were given to state owned and private armament industries.
In 1917 the Generalkommissariat fü r Kriegs- und Übergangswirtschaft was founded. Its leading personalities - especially Richard Riedl from the Ministry of Trade - believed that Austria’s return to peace time economy should be accompanied by state intervention, price regulation, subsidies for industry and agriculture, and also for a new form of societal security. In their ideas the so called “Etatismus” was the future form of economic and social organization.
After the breakdown of the Habsburg Monarchy and at the beginning o f the First Republic, social democrats became dynamic leaders in the great coalition with the Christian-Socialist Party. At the end of 1918 and early 1919 they continued to adopted institutions and organizational measures o f the war economy. Central Europe sought to tackle the shortage of foodstuffs, raw materials, energy and foreign currencies and the danger of high inflation by state interventions. Additionally, a “statist” ideology prevailed: the social democrats, influenced by the revolution in Russia and the
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establishment of a Council Republic in Hungary and Bavaria, maintained that a new period of socialism with economic planning, Sozialisierung of private enterprises - all with the help of government and state - was imminent. At the end o f 1919 Ludwig von Mises, later one of the most important fighters against etatism, economic plan- ning, and state intervention wrote: “ Die Republik hat das wirtschaftliche System des Kaiserreiches nur noch verschärft, sie hat die staatssozialistischen und merkantilisti- sehen Tendenzen des Militarismus ausgebaut und erneuert.” 1
But in reality - although some nationalization was accomplished and the Rätesystem was discussed - Austria had to integrate its new state and economy into a world econo- mie system of market economies. Within the large imperial economy of the Habsburg Empire before World War I, tendencies toward a self-sufficiency prevailed. During the war years when the Central Powers were cut off from the world market, there was no other alternatives. But after the dissolution of the empire into several small countries, it seemed necessary to return to the market system and to liberalize foreign trade. From the Austrian point of view, it was vital to resume all economic activities and connec- tions with the successor states, especially to acquire energy and raw materials for the production of industry and foodstuffs for the population. Exports to the successor states should have been facilitated and the position of Vienna as the financial center of this region should have been preserved. Therefore liberalization took place very quickly in the banking system and then, of course, in export industries. Administrative regulation of international financial transactions ended in November 1920, state permitted more liberalized import and export trade at the beginning of 1921.
But the way back into market economy was paved with problems of administered prices, a large deficit in the state budget and the decline of the Austrian currency at home and abroad. The wage and price controls were generally canceled in 1919 and 1920, but rents, food prices and service fees in the public sector (railways, postal service, commodities of state monopolies like salt and tobacco) remained regulated.
State subsidies allowed these prices to remain at a low level. But the subsidies amounted to 25% of the total budget in 1920 and nearly 60% in 1921. Additionally, since a great number of civil servants whom the young Republic inherited from the monarchy had to be paid, enormous deficits arose, which had to be financed by central bank loans - with the notorious inflationary consequences.
As long as food prices and service fees remained low, wage-claims wer moderate and trade unions were more interested in the enactment of social security laws. The roots o f the “Social Partnership” between representatives of employers and workers which one can find in the social insurance system even before the war and also in the so called Beschwerdekommissionen of the big industries of the war period, played no role in 1919 and 1920. At this time all problems were managed by Government and Parliament.
But the social democrats left the Government in autumn, 1920. The improvement of social security was stopped, but maintained on a very high level. Wage claims increased and, as trade unions were successful in the indexation of wages, inflation.
1 L. von Mieses, Die politischen Beziehungen Wiens zu den Ländern im Lichte der Volkswirtschaft. Vor- trag, gehalten in der 258. Plenarsitzung der Gesellschaft der Volkswirte am 2. Dezember 1919, Wien,
!919. p. 14.
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inherited from the war years, accelerated. When subsidies for food were canceled according to the Abbaugesetz in 1922 by the Conservative Government, inflation reached its climax. Postwar disturbances subsided only with the stabilization o f the Austrian currency in context with the so called “Geneva Protocols” o f 1923.
The real consequences of this “transformation” for economic growth are not entirely clear, because they must be seen in the context with the dissolution of the Habsburg Monarchy and its short-term negative impact on the Austrian economy.
Production, consequently, suffered heavy losses, and GDP reached the prewar level only in 1928, years later than most of other European countries.2
2. Gradual Transformation by Social Partnership
After World War II the scene had changed considerably. First, Austria inherited the elaborate planned war-economy of the Nazi-German Reich. Nazi-Germany abando- ned market system as an instrument of economic coordination quite early as a part of war preparation (Neuer Plan). Prices, wages, foreign trade and international financial transactions were strictly regulated. This system was further intensified during the war, when nearly the whole production and distribution came under administrative control.
Austria inherited not only the economic system, but also the economic situation.
Total output had decreased more than 50% compared to 1937, the last year of Austria’s independence, while the volume of money in circulation had increased sixfold. Nobody envisaged, at this moment, a réintroduction of the market economy.
A socially acceptable distribution o f the scarce means of living could certainly not be expected in this way. So the Austrian Government (or the Governments of the Aus- trian Provinces) retained the system of regulating production and distribution o f com- modities as well as that of fixing prices and of rationing investment and consumer goods - although not as intensively as during the last years of the war. But it should be stressed, that none of the two leading political parties of Austria - the _ • » Ö sterreichs sehe Volkspartei and the Sozialistische Partei Österreich - envisaged fundamentally a non-market economic system. They regarded the given system as transitory, and one that would finally lead to some sort of market economy.3
The Austrian situation resembled than that of nearly all other European countries.
All of them had introduced rationing of consumer goods as well an allotment o f raw materials, energy and semifinished goods during World War II. There existed wide- spread wage and price regulation. Likewise foreign trade and international financial transactions were strictly controlled. In most countries the money in circulation had grown considerably.4
None o f the European countries removed all regulations at once; all o f them pre- ferred a gradual approach. They canceled the rationing of consumer goods together
2 F. Butschek, Die Österreichische Wirtschaft im 20. Jahrhunden, Wien-Stuttgart, 1985. p. 46.
נ Ibid. p. 75.
4 F. Grotius, “Die europäischen Geldreformen nach dem 2. Weltkrieg.” Weltwirtschaftliches Archiv, Band 62. 1949. p. 106.
with the state allotment of raw-materials, energy and semifinished goods. Price and wage-regulations disappeared relatively early, or became inefficient. This was a consequence of the rise of an inflationary pressure, which forced governments and central banks to react. All of them undertook an internal monetary devaluation which rarely led to an immediate stabilization of their currencies. Devaluation was often not consistently accomplished, or governments were not in the position to balance their budgets, and inflation continued.
One example of the latter development was France. The regulation o f the French economy was rooted in the thirties. In 1937, the Commission de surveillance des Prix were established. The extended war-time regulations remained in force after 1945, moreover, they became a part of the Planification Indicative. Price policy was direc- ted by the Direction Generale des Prix.5
The French strategy, nevertheless, resembled neither Soviet-type central planning, nor strict regulations of the war-economy in the West. In connection with planning, however, considerable parts of the economy were nationalized in May 1946. (Energy sector, part of banking, insurance, Air France and Renault.)6 The planning ambition of the French government made the monetary stabilization more difficult.
Already in the fall of 1944 a “liberation loan” was issued to sterilize the monetary overhang and in summer 1946 the notes were exchanged. Inflation, nevertheless, continued all the time because o f permanent and considerable budget deficits. These were attributed to the investment-programs of the “Monnet-Plan” which had to be financed primarily out of the state budget while budget deficit, again, was financed by credits o f the Banque de France. A retardation of inflation was reached only in the fifties.7
Germany was the last country to reduce its monetary base. This was due to political circumstances. After the war Germany stood under the control o f the four occupation forces in their respective zones. Although in the first years after 1945 there remained certain common economic instruments, as, for instance, the currency (Reichsmark), each occupation force pursued its own economic policy. All o f them accrued, in one form or another, reparations. To the extent that the reparations were realized by the dismantling of German factories, it limited the possibility to increase output.8
Only in June 1948, when the Western powers resolved to separate their occupa- tion zones from the Soviet zone, (after they had economically united them to the BI- zone in 1947) the internal devaluation was perfected by the introduction o f the D-Mark. This devaluation was accompanied by the removal o f central economic plan- ning.
This meant the replacement of central planning by the market as the system o f eco- nomie coordination, but it meant in no way, that all prices became free. Some impor- tant foodstuffs, basic industries, like coal, steel and electricity as well as housing and
5 A. Hagelheimer, Wirtschaftslenkung und Preisinter\׳ention. Berlin, 1969. p. 218.
6 C. Fohlen, "Frankreich 1920-1970" ln: E. Aerts, A.S. Milward (eds.). Economic Planning in the Post- 1945 Period, Leuven, 1990. p. 116.
7 Ibid. p. 122.
8 K. Hardach, “Deutschland 1914-1970.” ln: C.M. Cipolla. K. Borchardt (eds.). Die europäischen Volks- wirtschaften im 20. Jahrhundert, Stuttgart: G. Fischer, 1980. p. 65.
Austria ’s Transformation to Market Economy 59
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the capital market remained under control, especially because a continued inflatio- nary pressure until the end of 1948, which alarmed the population.9
In spite of the frequently used arguments, the German “Währungsreform” was neither unique, nor early, nor complete. Compared with the performance in other European countries, no fundamental difference could be seen, except that it accom- plished a bit more. This certainly does not pertain to Austria, whose transformation policy took a very specific approach.
Graph 1 : Consumer Prices in Austria, France and West Germany
In Austria, some early steps were taken towards monetary equilibrium in 1945 when bank accounts were closed and the Shilling introduced as legal tender instead of Reichsmark, combined with an internal devaluation. Nevertheless this activity did not bring the economy any nearer to internal equilibrium, because during this entire period government financed a considerable budget deficit, which it ascribed to allied occupation costs, by central bank loans.
Although hardly any additional steps towards a market-economy were taken at this time - the growth of a black market cannot be regarded as such - one event should be stressed. In July 1946 nearly all basic industries and banking were nationalized.
Energy production followed in 1947. No party understood these steps as a road towards a planned economy. Their main goal was to prevent the Soviet Union from taking possession of the so called “German Property”. But it was also conceived as an additional policy instrument, and above all, it became a central factor of postwar Austrian economy. Roughly 20% of manufacturing industry’s turnover fell upon na- tionalized enterprises.
9 Ch. Buchheim. “ Attempts at Controlling the Capitalist Economy in Western Germany (1945-1961).”
In: E. Aerts. A.S. Mil ward (eds.), Op.cit. p. 26.
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When in 1947, in spite of price regulation, inflation accelerated, it was not govern- ment but the social partners who started an initiative to stop this development. A com- mission (Wirtschaftskommission) was established, whose members were drawn from employers’ and workers’ organizations as well as from agriculture, and, lastly, govern- ment. All changes of wages and prices would be unanimously settled within this com- mission. Although price regulation remained in force, it was expected that wages and prices should be stable first of all because members of the labor market organizations were disciplined. This assumption proved to be correct virtually throughout the post- war period.
The economic policy pursued by the commission was to keep nominal wages and prices constant at the inmediate postwar level and let production grow up to this level.
Workers should not participate in the increase of productivity until the internal equi- librium was reached. Politicians, o f course, were aware o f the necessity to adjust price structures as well as to modify taxes or social insurance contributions. Only these corrections should be recognized as a reason for wage increases. The entire system was introduced as a “general collective agreement.”
The first pact proved to be a full success. After the negotiated increase of prices and wages, inflation came to a halt, especially since the policy was reinforced by another internal devaluation o f the Schilling (W ährungsschutzgesetz) at the end of 1947.
Nevertheless, the social partners and Government initiated a second agreement in September 1948, which again contained some price and tax corrections and the corresponding wage increases. The second agreement was also successful insofar as after the negotiated increases, prices remained stable. In 1949 internal monetary equilibrium had finally been achieved and GDP regained the prewar level. The black market disappeared and the director o f the Austrian Institute of Economic Research, Professor Nemschak, admonished the politicians to return to the market system. The parties continued their activity within this system, because it seemed to be very con- venient for all o f them to settle social and political problems centrally. They continued to bargain for additional agreements: a third in 1949, and a fourth in 1950, which caused some political turmoil. Nevertheless they concluded a fifth one in 1951, which totally failed and inflation accelerated again.10
The permanent use o f the instrument o f Sozialpartnerschaft that had been estab- lished to fight inflation, had changed its genuine character. It became at last the cause for inflation itself. Inflationary expectations came up as a consequence of the regular sequence o f wage and price accords, led to a “political inflation” 1 more so since mo- netary policy never counteracted because of the fear o f dampening investment.
Final stabilization, however, came about also - at least partly - through the activity o f social partners. When it became clear after the fifth price-wage agreement that inflation could no longer be stopped by this way, the social partners agreed upon a
“Price-Reduction Program” (Preissenkungsaktion), by which entrepreneurs obliged themselves to lower their prices. The trade-unions promised not to claim wage in- creases for one-and-half years. This agreement was backed by monetary and fiscal
10 F. Butschek, Op.cit. p. 99.
11 M. Bronfenbrenner, F.D. Holzman, “A Survey of Inflation Theory.” In: Surveys o f Economic Theory, Vol. I. London: St.M artin’s, 1966. p. 71.
61 Austria's Transformation to Market Economy
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policy - and inflation suddenly stopped, because the change o f the “regime” seemed trustworthy.12
Graph 2: Contractual Wages, Income and Index o f Consumer Prices, (1946-1952)
INDEX ОГ CONSUMER PRICKS __ CONTRACTUAL WAGES OF WORKERS
INCOME OP WORKERS (Vienn•) BOO
О
оr
фш
ж
<Х а .
During this entire period the regulation o f the economy was gradually loosened.
Rationing o f wine was abolished in 1947, fruits, vegetables and wood followed in 1948, eggs, potatoes, bread in 1949, and at the beginning of 1950 all foodstuffs regu- lations were abolished.13 Similarly state regulations of production, distribution, prices and subsidies were also gradually removed.
With the “Price Reduction Programme” the system o f the “Price-Wage-Agree- ment” and the period of postwar planning ended. Parallel to this action, Minister of Finance Kamitz initiated a classic stabilization policy with a reduction of budgetary deficit, and the National Bank increased interest-rates and limited the volume o f mo- ney in circulation. This did not mean, that all economic regulations were abolished.
Many remained in force: in the first place in agriculture (up to now), and in foreign trade and international financial transactions. But fundamentally market became the main coordinator o f economic activities.
This policy led to a transitory stabilization crisis, which halted economic growth in 1952 and raised the unemployment rate to 8.7% in 1953. But this was only a short
12 T.J. Sargent, The Ends o f Four Big Inflations. NBER, Conference Paper, Nr. 90. Cambridge, Mass.
1981. p. 2.
13 P. MeihsI, “Die Landwirtschaft im Wandel der politischen und ökonomischen Faktoren." ln: W. Weber (ed.), Österreichs Wirtschaftsstruktur gestem-heute-morgen, Berlin, 1961. p. 570.
interruption o f the growth-path. In the following years Austria entered the period of the “economic miracle”, which lasted until 1962.14
How should the Austrian performance be assessed? Austria had more than doubled its GDP-level of 1945 during this period. But as has been pointed out, all Western countries found their way from war-time regulations to a market economy, and most did this earlier than Austria. In fact all countries which suffered grave destruction were able to reconstruct their economies in this period more or less to the same extent.
Inflation remained basically under control.
One could argue, that considerable economic growth was reached in Austria in spite of quite unfavorable conditions. The country was occupied by the Allied Forces until 1955 and the situation in the Soviet zone was very difficult. Besides the conduct o f the occupation forces, most o f the industrial enterprises as “German property”
One could argue, that considerable economic growth was reached in Austria in spite of quite unfavorable conditions. The country was occupied by the Allied Forces until 1955 and the situation in the Soviet zone was very difficult. Besides the conduct o f the occupation forces, most o f the industrial enterprises as “German property”