‘Ikchnalogy in Society, Vol. 13, pp. 189-205,199l Printed in the USA. All rights reserved.

0160-79lXI91$3.00 + .OO Copyright 0 1991 Pergamon Press plc

Technology - A Special Case for Catch-Up

Margaret Sharp

ABSTRACT This paper focusses on the technological “time warp” in which Eastern Europe and the USSR seem to have been caught since the 195Os, and which has been exposed by perestroika. As a result, much of the industrial fabric of these countries is now of little value, and a policy of scrap and rebuild, importing technology from the West and Japan, is the best policy. Such a situation is most closely paralleled by that of Western Europe in the aftermath of World War II. The Marshall Plan at that time not only provided the hard currency necessary for the purchase of equipment and expertise, but also encouraged self-help and a firm timetable for dismantling controls and protection. The paper argues that a similar plan is urgently needed for Eastern Europe. The market is not always a good provider of technology and, if a strong technology base is to be established, a gradualist approach is preferable to quick moves to a market system.

Introduction

It could be argued that technology was (and is) one of the most important factors underlying perestroika; for it was the realization that the gap between East and West was becoming ever wider that undermined both the credibility of the Soviet military effort and promises to deliver higher living standards. Those of us who were not experts on the Soviet bloc, misled by achievements in space and weapons technology, failed to appreciate quite how big the gap was becoming. With perestroika it is now clear that, as far as civilian technology was concerned, the USSR and the countries under its influence in Eastern Europe were caught in a sort of technological time-warp, aptly illustrated by the lines of Trabant cars queuing to cross the East German borders in autumn I989 - 1950s technology seeking to compete in the 1990s.

This paper is an attempt to explore this phenomenon. How big is the technology gap? Why should it have arisen? And what can best be done to close it? It suggests that the most apt comparison is with the situation

Margaret Sharp is Senior Research Fellow, Science Policy Research Unit, University of Sussex.

189

190 M. Sharp

in which Western Europe found itself in the aftermath of the Second World War, when wholesale renewal of the economic and social infras- tructure was required. It further suggests that Eastern Europe could benefit from the Marshall Plan approach, which combines direct assis- tance in the form of hard currency gifts to enable new equipment, machinery, and expertise to be bought, with self-help in setting up and running the’new factories and plants, and imposing external constraints and targets which required a gradual dismantling of protectionist barri- ers. In this context it argues that while institutional reform - the pri- vate ownership of property and the creation of market driven economies - is a necessary first step in this direction, the market is not always a good provider of technology, and that a gradualist approach, which pro- vides for a longer “weaning” period from command to capitalist system, might be more appropriate.

How Big a Technology Gap?

The size of the technology gap between East and West is well illustrated by a recent newspaper report about personal computers:

While there are more than 30 million personal computers in use in the US, estimates put the number in the Soviet Union at between 100,000 and 300,000. Most are imported “clones,” although the Soviets are trying to build their own production to meet the increasing demand.

The Soviet version of an “XT” class IBM personal computer does not look much like the desktop personal computers seen in the US or Europe. It is housed in a crude metal box about twice the size of most personal computers. Inside are five large circuit boards, each containing dozens of Soviet “clones” of US-designed semiconductor devices crudely soldered, apparently by hand. Two of the boards are populated with Soviet made 64k bit D-Barn chips.

In contrast, US and Asian built IBM-compatible personal computers usually contain a single, small circuit board and 1M bit D-Rams that can hold 16 times as much data.

Although it looks like an antique, the Soviet PC was built in late 19y9 and represents the state-of-the-art in Soviet personal computer manufacturing.

The story is revealing in a number of respects. First, in spite of the fact that electronics has been in the forefront of military technology and an area where the Soviet Union has concentrated some of its best brains (and, in spite of Cocom, subject to much “leakage” from the West) the “state-of-the-art” in civilian technology is reverse engineered 64k D- Rams - at best, 1978 vintage technology in the West. The Soviets have

Technology -A Special Case for Catch-Up 191

certainly had access to the current one-Megabit and four-Megabit chips; what is clear is that they lack the capability to “reverse engineer” any- thing of this sophistication. Secondly, the stacked circuit boards with hand soldering of devices goes back even further - to the late 195Os! However, one cannot but admire the ingenuity of it. As the American expert who captured this PC remarked; ‘You have got to give them cred- it. They produced this machine without the benefit of component manu- als and in a very crude manufacturing situation.“2

Civilian nuclear power is another technology on which the Soviet Bloc have lavished resources and developed their own independent technolo- gy. Chernobyl was a rude awakening for many to the degree to which their scientists and engineers had allowed standards to slip, not so much in terms of the crudeness of the reactor itself (in both vintage and design it was similar to the UK’s Magnox reactors of the 195Os), but the primi- tiveness of the response - firemen in with hosepipes; no proper protec- tive clothing; no proper safety procedures. It is clear that many of the more recent nuclear power stations built in the Soviet Union and Eastern Europe pose major safety hazards, and it has been suggested that as many as 25 power stations in the USSR need either to be scrapped or radically upgraded if they are to meet Western safety stan- dards.3 In East Germany, the country’s largest nuclear power station, Greifswald, was reported to be “so dangerous it should be closed immedi- ately to avoid a Chernobyl-like disaster”.4

The same tale - of a larger than expected technology gap - is sadly true of almost every sector. In steel, where in the 1950s the Soviets pio- neered the electro-slag process, the story is of the widespread use still of open-hearth furnaces, and surprisingly small use of modern methods of oxygen steel making, continuous casting, or vacuum-induction resmelt- ing. Quality is poor and output is concentrated on heavy sections and thick plate; special steels and precision products have to be imported and hence are generally unavailable. 5 In chemicals, both the Russians and East Germans are major producers of bulk products, the Russians for their home market, the East Germans for export. The Russians have imported a great deal of chemical technology from the West, particularly for petrochemicals, plastics, fertilisers, and artificial fibres, but much of it has been in the form of turnkey plants, where the technology transfer has been almost nonexistent.6

The plight of the Leuna plant in East Germany illustrates only too well the failures of the Soviet-style economic system. Dating from 1916, it was originally part of BASF and boasts 400 miles of pipework on its seven-square-mile complex. But the newest of its equipment dates back 15 years (old by Western chemical industry standards) and one third of its 27,000 workers are engaged on maintenance work. A recent report said, “A drive around the complex reveals near-dereliction, with steam hissing from leaks in pipework, ruined buildings, rusting and obsolete

192 M. Sharp

equipment.“7 Chronic pollution problems mean that the West German chemical companies are wary about reestablishing links, particularly if there is any question about liability from workers and residents for past damage to health and environment. The general conclusion seems to be that so much investment is needed in equipment and cleaning up that the best solution is to close the site and start afresh elsewhere. But somebody still has to pay for the clean-up: and other employment will be needed for the 27,000 workers.

Mass production systems dating from the 1950s; large, unskilled, low paid work forces, working long hours in ramshackle plants with outdated and obsolete equipment; low safety standards and often appalling work- ing conditions resulting in chronic pollution affecting much of the sur- rounding area - it seems the same story everywhere. It is a strange irony that the Marxist system should have brought forth such gross examples of Fordism!

Why the Technology Gap?

Taking a somewhat broader perspective on developments, it would appear that there has been failure on two fronts. In the first place, the command economy failed to incorporate within its workings the incre- mental innovation that accounts for much of the innovation we have experienced in the West during the postwar years. Secondly, it has also failed to cope with the technological discontinuities - the wholesale switch in production methods that electronics and information technolo- gy are bringing to manufacturing and service industries. Neither product nor process has been updated to incorporate new technology - comput- er-aided design and control systems, electronic as distinct from electro- mechanical machinery, and so forth - all of which gives a degree of pre- cision and quality control unheard of forty years ago.

In the Soviet system, the innovation process has been regarded as a linear process linking the science base to industrial production. It is portrayed as follows (see Figure la). First comes the work of the aca- demic scientist, moved by scientific enquiry to “push forwards the fron- tiers of knowledge.” His/her work is long term and has no immediate commercial application. It is, however, the seedcorn from which the applied scientist, working in the industrial research laboratory, develops ideas for new products or processes to be produced or used on the pro- duction line. If these ideas seem to have potential, then they are passed to the production engineer to develop a prototype, and if this is success- ful it will be passed on to the production manager for incorporation within the production line. Each stage in the process is discrete; the movement is one-way - from research towards production and then finally on to sales.

lkchnology -A Special Case for Catch-Up 193

Diagram 1 (a) -the one way model

PUW

Research

&piled

Research Development

Ongram 1 (b) - with feedback loops

PUE Applied Developmenl PVJdUCbOn Sales

Research Research

~l-~~_~l_~l_~l

tt t

FIGURE 1. The Linear Model of Innovation and Feedback Loops

In fact in any economic system, the innovation process is not linear, discrete, or one-way, and much innovation, rightly called incremental innovation, comes from the production line, and from pressures for change on the production side from the market place, rather than from the academic scientist. It is perhaps easiest to comprehend by example, and a good example is the motor car. The typical car today, as in 1910, is a box, mounted on a chassis on wheels driven by an internal combustion engine. Since 1910 a succession of improvements have brought a much faster and more comfortable ride, smoother and more powerful gearing systems, better brakes and safety features, heating and ventilation, in- car radios and cassette players, and infinitely better reliability. Even comparing the 1950s cars with those of the 199Os, the same traits are apparent, and most of the improvements have come little by little - syn- chro-mesh gears, safety belts, laminated windscreens, radial tyres, inde- pendent suspension, the five-speed gear box, in-car stereo, fuel injection systems, antilock brakes - all making the modern car faster, safer, more reliable, and more fuel efficient than its predecessors. The stimulus for these improvements has come, not from academic research laboratories, nor from the R&D labs of the firms themselves, nor from specialist gov- ernment-run laboratories such as the Road Research Laboratory in the UK, but from the interaction between customer and production line. Given choice, customers showed that for a given price they preferred faster to slower cars; they preferred quiet to noisy cars; more reliable to less reliable cars; they liked in-car stereos; and they were prepared to pay a premium for safety. Manufacturers vied with each other to provide these features - salesmen have pushed production managers, produc-

194 M. Sharp

tion managers have turned to their development people, who in turn may have gone to their research laboratories, or sought advice from outside or academic experts. The essence of the process is that it has been steady, gradual, and incremental; yet amounting over time to a very substantial change. And far from being linear, the feedback between different parts of the system has been continuous and vital to the process of innovation. Indeed, in diagrammatic terms the innovation process is better illustrat- ed by Figure lb rather than la.

The problem with the Soviet-style command economy was that it was predicated upon the one-way linear model of innovation - major indus- trial research institutes were set up which were to inject new ideas into the system. There was no feedback mechanism, no link between cus- tomer and producer, or between production manager and development engineer. Nor were there the small specialist firms that have played such an important part in component innovation in Western engineering industries.

Above all there was no incentive for the plant managers to seek to innovate. As with all else in the system, innovation was on command, not demand, and written into the system by the planners. If a proposal for a new item or process - say one that had been developed in the rele- vant industrial research institute - was approved, it was written into the enterprise plan, and, once included, the enterprise was responsible for carrying it out. Often they had little. or no prior contact with the research institute, but would now be required to reorganise production and incorporate new equipment, materials, etc., into the production pro- cess in accordance with plans drawn up by some remote planner. Plans on paper seldom worked as they were supposed to do in practice; new machines that were supposed to be available would be held up in produc- tion; promised new material allocations would not be available. To cap it all, production targets would be reset on the assumption that the new machinery and/or new products had gone smoothly into production with- out account being taken of delays in the system, or of the inevitable costs and problems involved in retooling machines and retraining labour. In other words, the innovating enterprise would be penalised, rather than rewarded. Hardly surprisingly, enterprise managers preferred to keep to the well trodden paths and production methods rather than risk losing not only their own, but also the workers’ bonuses at the end of the year.8

The Soviet system therefore expressly excluded one source of incre- mental innovation - responding to customer preferences - and provid- ed no incentive to the other main source: improvements in production and production techniques that come from “learning by doing” on the production line. Instead, innovation was imposed largely from outside the unit, ignoring the importance of internalising the learning process and its cumulative nature - improvements building upon each other, lit- tle by little.

Tbchnobgy -A Special Case for Catch-Up 195

These failings were not wholly unrecognised. In the late 196Os, disillu- sioned by difficulties and delays in transferring technology from their own research institutes to their enterprises, the Soviet planners had resorted to buying Western technology in the form of turnkey plants. Fiat, for example, helped build the Lada plant; Courtaulds built an arti- ficial fibres plant; ICI built a fertiliser plant. However, this made little difference. There seems to have been little diffusion beyond these show- piece plants, while importing technology seems to have impaired yet fur- ther the Soviet R&D efforts.9 It is, however, depressing that 20 years on, all these plants are still producing the same product, with the same technology, and that the Soviet Union was seriously contemplating, in the mid-1980s, inviting the firms back to update the plants.

If the Soviet system failed to cope with incremental innovation, a for- tiori it failed to cope with the major changes that micro-electronics and information technology are stimulating. In some respects one might have expected the Soviet system to cope better with these changes than the incremental changes, because, initially at least, the linear model of inno- vations holds true. The big discontinuities of economic history - the industrial revolution itself, and the “second industrial revolution” at the end of the nineteenth century - were marked by major changes in basic underlying technologies, with concomitant effect on work patterns and lifestyles. With the industrial revolution, the change came with the har- nessing of fossil fuel energy through steam-power, the development in the iron, metal working, and textile industries, and the growth of urbani- sation and the factory system. At the end of the nineteenth century, the equivalent change came with the development of electricity, and the breakthroughs in the chemical and precision engineering industries, which underlay the emergence of the major process and mass production industries in which size and economy of scale were all important1o This industrial system was to dominate most of the twentieth century and is epitomised by the car industry and the whole range of electro-mechanical domestic consumer durables that have had a marked effect upon western lifestyles. It was, of course, this model of industrialisation, minus its cap- italist and materialist trappings, that Stalin imported into the Soviet Union in the 1930s.

Many view current developments in micro-electronics as heralding yet another major switch in technological systems: from the mass production paradigm to one of “flexible-specialisation,” in which big is no longer nec- essarily beautiful, but where advantage lies in flexibility and adaptabili- ty.ll It is a world in which the assembly line jobs of the electro-mechani- cal era will gradually disappear as automation takes over; in which hard- ware (production equipment) and software (control systems) are increas- ingly merged, and the demarcation between manufacturing and services disappears. These changes were prematurely heralded with the advent of the computer in the 195Os, but did not become feasible, in either tech-

196 M. Sharp

nical or economic terms, until the micro-chip of the 1970s brought size and costs tumbling. The Soviet system had just about been able to keep up with developments in computers in the 1960s - witness its feats in controlling spacecraft. The rapid developments in micro-electronics in the 1970s and 198Os, which have accelerated with the challenge from Japanese firms to US supremacy in this area, has left Soviet efforts far behind, as the story of the Soviet PC quoted earlier in this chapter illus- trates so graphically.

‘lb be fair, these rapid developments also left many Western European firms far behind.12 However, unlike the Soviets, Western European firms were able to import both the chips and the technology. Hence, for exam- ple, Siemens, Philips, and SGS-Thomson (Western Europe’s three main semiconductor firms), have all been able to pull themselves back into mainstream manufacture of D-Ram chips by buying in help and technol- ogy from US and Japanese firms. 13 They maintain that without this knowledge, it is difficult to design state-of-the-art products incorporating the latest micro-chips. Moreover, Western European usage, for example, in telecommunications or consumer electronics, does not depend upon capability to manufacture. Users have been able to import and use state- of-the-art equipment from the US or Japan.

The Soviet system has been prevented from importing technology or products in the same way. The Cocom restrictions on the export from the West of products judged to be of strategic military importance, although far from perfect, made mass exports of such goods difficult. In general the Soviets relied on a sufficient number getting through to enable reverse engineering to be undertaken - as indeed happened with the IBM PC. As long as the technology was a matter of adaptation from existing technologies, this worked reasonably well. It was the sea-change in technology that came with the micro-chip that they could not handle. They had not got, nor could they create, the capabilities to copy, let alone manufacture, the new generations of micro-chips. If they cannot manu- facture or import, diffusion is an academic question.

We do not therefore have to look very far when we ask why the Soviet- style economies were caught in this technological time-warp. Stalin imported 1930s style mass-production and it was updated in the 1960s to 1950s technology. But inertia was built into the system. Change was imposed from above and resisted on the production floor and in the enterprise. Research and technology were disembodied, undertaken as distinct and separate activities from production. Technology transfer mechanisms were poor, feedback nonexistent, and the whole institutional framework hostile to innovation. The system had no built-in mechanism for updating and improvement. It could copy incremental change coming from abroad, but it had no internal mechanisms for encouraging indige- nous incremental adaptation, and was totally thrown by the radical changes coming with micro-electronics. -

Technology -A Special Case for Catch-Up 197

How Best to Close the Technology Gap

Does the technology gap matter? The answer is ‘Yes, very much,” for it is not just a question of out-of-date technology. In most instances there has been no systematic renewal or updating of equipment for the last 20 years. Much capital equipment is worn out and working inefficiently. It is, in addition, frequently an environmental hazard, polluting air, land, and water in its vicinity. Health and safety standards seem more or less nonexistent. As many West German firms with newly established links to East German enterprises are finding to their cost, there may be little alternative but to scrap and rebuild. But unless the industrial structures of these countries are updated so that people’s aspirations to higher liv- ing standards are met, the revolutions of 1989 may yet dissolve into anarchy and autocracy.

Table 1 sums up the results of the system. GDP per capita ranges from 35% to 50% of the OECD average; growth throughout the latter part of the 1980s has in most countries of Eastern Europe been roughly half that enjoyed by OECD, but incremental capital output ratios are very low; the agricultural labour force in most countries is still substantial; car ownership is low by western standards (and the cars themselves well below the quality of those used in the West); telephones per 1000 inhabi- tants are well below western standards, and the systems often date from prewar days. All are analogue; no digital systems yet exist.

In fact, the situation found in Eastern Europe and the Soviet Union is, with one exception, not dissimilar to the situation in Western Europe immediately after the Second World War, when the industrial structures

TABLE 1. Some Indicators of Living Standards in Eastern EuroDe

GDP per Average Gross % workforce Cars per Telephones

capita GDP. Domestic in 1000 per 1000

1988 $ growth Investment agriculture inhabitants inhabitants

1986-88 as % GDP

Column No (1) Soviet Union 5,552

Bulgaria 5,633

Czechoslovakia 7,603

E Germany 9,361

Hungary 6,491

Poland 5,453

Romania 4,117

OECD 14,637

(2) (3) (4) (5) (6)

2.3 33.2 21.7 50 124

1.9 32.7 19.5 127 248

1.5 24.7 12.1 182 246

1.7 29.2 10.2 206 233

1.5 28.5 18.4 153 152

1.0 36.5 28.2 74 122

0.1 37.1 28.5 11 111

3.5 20.6 8.0 385 542

Source: OECD (1990)

198 M. Sharp

of Germany, France, and the Benelux countries had been largely destroyed by war, and what remained was run down and dilapidated from years of use without repairs or maintenance. Even in Britain, which had not suffered occupation, the industrial fabric was worn out as a result of wartime exigencies and neglect through the prewar Depression. Then, as in Eastern Europe today, there was desperate need to rebuild as rapidly as possible, with the same “chicken and egg” situa- tion of no foreign currency with which to pay for imports of equipment and no obvious means of earning foreign currency until the new equip- ment was in place. The dollar crisis was not solved by Marshall Aid in 1948, but the aid forthcoming at that point unblocked the supply bottle- necks and enabled the countries of Western Europe to rebuild their basic industrial structures far more quickly than if they had been left to fend for themselves.

The exception noted in the previous paragraphs is, however, important. It relates to capital productivity. Column 3 of Table 1 gives average investment ratios. In Eastern Europe these ratios, and savings ratios, have been far higher than in Western Europe, but growth has been lower. A good part of these resources have, admittedly, been used to sup- port the substantial military sector. It is clear from numerous studies, however, that there has been gross waste of capital in many of these countries, and that even when a modern plant is installed, manning ratios are high, productivity is poor, and far too frequently projects are left unfinished and unused. 14 Although productivity levels in Western Europe in the aftermath of the Second World War were low in compari- son with those of the US (in the UK, for example, there were a series of sector productivity commissions set up to study best practice in the US and to recommend ways in which the UK could improve its perfor- mance), the potential for improvement was there; indeed much of the growth experienced in the early postwar years reflected the narrowing of the productivity gap.

There are lessons to be learned from the administration of Marshall Aid that may also be apposite today to the problems facing Eastern Europe. First, the Marshall Plan was primarily a plan to help the (Western) Europeans help themselves. The US government set aside $12 billion - 2% of its GDP at that time - to buy food to prevent the populations from starving until the agricultural sector could recover, and to buy capital goods to get essential industries moving again. The aid was not uncondi- tional, but administered by an international grouping of the 14 recipient countries themselves. (Later, with the US and Canada, this grouping was to form the OEEC (Organisation for European Economic Co-operation) and subsequently OECD (Organisation for European Co-operation and Development).) US experts were on hand to advise, but not to run the scheme. Each country was required to draw up its “shopping list” of requirements, which were to be part of a long-term recovery programme,

Technology -A Special Case for Catch-Up 199

and each shopping list had to be negotiated centrally through a commit- tee of experts (i.e., it had to be justified within the context of the long- term programme). It was this process that began the moves towards inte- gration in the Western European economies, which culminated in the foundation of the European Economic Community in 1958.

Secondly, the Marshall Plan demanded that the economies of Western Europe make positive moves away from the highly protectionist economic and industrial policies that had survived (indeed flourished in) the war years and threatened to reestablish themselves as an accepted way of life. As a quid pro quo for immediate assistance, the Americans demanded moves towards the establishment of a more open and competitive trading environment, including a commitment towards participation in the first GATT round and, ultimately, full currency convertibility.

Thirdly, and partly acknowledging the difficulties many European countries faced in meeting these international obligations, the Marshall Plan involved the establishment of the European Payments Union, which enabled the European states to assist each other’s recovery by retaining and spending within Europe the currency they earned from exporting to each other. In effect it created two currency zones - one for soft and the other for hard currencies - which discriminated directly against the United States but encouraged intra-trade amongst European countries. As such it provided a lengthy transition from inconvertibility to total convertibility for the Western European currencies.

It is not suggested that every feature of the Marshall Plan be bor- rowed and superimposed on Eastern Europe. East Germany, for its part, is being subsumed within the new united Germany, and its prob- lems of renewal, reequipment, and restructuring are being handled within that framework. The problems of the Soviet economy are also too great to be dealt with, for the present, within such a structure, although, should the Soviet Union disintegrate into a collection of sepa- rate states, a loose economic grouping of the old Eastern European states could provide an obvious anchor for countries such as Latvia, Estonia, and even the Ukraine. For the present, moreover, the Soviet Union has the benefit of the estimated $5 billion worth of oil and gas exports which it used to provide to Eastern Europe at huge subsidy and is now selling for hard currency. These earnings, plus its reserves of oil, gas, and gold provide it with the means of obtaining foreign currency for renewal and reequipment as and when its economy is ready to move in that direction

For the remaining ex-Comecon countries of Eastern Europe, however, the Marshall Plan requirements of a systematic attempt at self-help, self-discipline, and cooperation, the gradual opening up to competition and a planned period of limited convertibility, could offer substantial advantages. The desperate need is not only foreign exchange with which to buy new equipment, but help and advice on how best to rehabilitate

200 M. Sharp

old industrial structures and bring them up to the environmental and safety standards now required in the West. But the fundamental prob- lem is institutional reform. These countries have got to tackle the funda- mental lack of dynamism within their economic systems and their abysmal record of capital productivity There is no point in loans to buy new equipment unless it is clear that they are going to make better use of it than their Marxist predecessors.

Economists, stressing the need to create market systems in which the incentives of private enterprise and wealth make themselves felt, have put emphasis on privatisation and competition. Jan Winieki argues, for example, that managers will continue to feather their own nests unless their jobs are on the line. “It should be obvious that without markets in which economic agents risk capital, no meaningful improvement in per- formance is going to happen. n15 This reflects the writings of Janos Kornai and his distinction between enterprises with “hard budget con- straints” (HBC) and those with “soft budget constraints” (SBC).ls The HBC enterprise in the long run either has to cover its costs or go out of business. The SBC is an enterprise with some confidence that if things get tight, someone (often the government) will bail them out. As Hanson and Pavitt explain “The SBC lacks one powerful incentive in particular, to introduce new products and processes, which its HBC counterpart will clearly have: the need for initiative and defensive innovation if the firm is to stay in business against innovating competitors. Thus even if Schumpeterian rewards are available as a stimulus for innovators, there would be carrots but no sticks, and Schumpeter’s ‘gale of creative destruction’ would not be allowed to blow anything over.” (Hanson and Pavitt, 1987, p. 9.)

The dilemma facing these economies is how simultaneously to trans- form the economic system and to make good the technological dilapida- tions of 30 years of Communist rule. As the East Germans are finding, the problem with opening the doors to competition is that in the short run it risks sweeping everything away and leaving an insufficient base upon which to rebuild for the future. Above all, it is by no means clear that the private sector will, as it is hoped, provide the capital to update and renew industrial plants. Great hope, for example, is pinned on joint ventures between enterprises, with those from the West contributing capital and technology in return for market entry.

Such hopes could prove a delusion. Given the current uncertain state of many Eastern European economies, Western businesses are wary of long term involvement. How far they will be willing to make real efforts to transfer technology and skills is doubtful; many will be more concerned with taking quick profits by exploiting obvious shortages, or to establish predatory positions in important sectors (e.g., telecoms) which will effec- tively destroy opportunities for indigenous firms attempting subsequent- ly to enter such markets.

Technology-A Special Case for Catch-Up 201

The advantage of a Marshall Plan approach would be that while allowing time for transition, it would require systematic reform of the economic system with a target timetable for moves toward full convert- ibility and free (or reasonably free) trade with the other countries of Western Europe. There is on many sides inevitable resistance to notions of planning. But in present circumstances it is not feasible to leave things to a free-for-all. The need to move forward simultaneously on two fronts requires careful, coordinated planning, with a clear timetable of targets that, over time, initiate wholesale institutional reform.

France provides an example of an economy whose “weaning” from wartime rationing to a full market system was slower. In 1947 the French economy was in a state not unlike that of Poland today - largely agricultural with its industrial fabric, never that strong, in tat- ters after the German occupation and the Allied advance. It was the state, not the market, that took the lead in mobilising resources and planning a recovery, which took France during the period 1945-65 from being a substantial agricultural economy to a modern industrial econo- my. The succession of French Plans, which began with the first (Monnet) plan drawn up as part of the Marshall Aid requirements, laid the foundations of this transformation, with the state frequently acting as banker, risk taker, and the source of technology. Indeed, it could be argued that it was not until the 1980s that French industry matured to full independence. l7 Similarly, Italian experience could well have some lessons for the Mediterranean economies of Bulgaria and Romania, in particular in the encouragement given to the rise of small scale indus- trial workshops. 18

In the longer run these economies will perforce have to stand on their own. Self-sustained development is very different from self-sufficiency. In the modern world no economy is self-sufficient in either resource or technological terms, and it would be foolish to suggest they should aim to be technologically independent. Rather, Eastern Europe might do well to model themselves on countries such as Austria or Sweden, which enjoy high standards of living but rely largely on imported technology, and use it extensively to manufacture goods and equipment both for home use and for export to others.

There are five prerequisites if these countries are to measure up to such models.

1. Raising the productivity of capital: It cannot be stressed too often that the key achievement must be to improve resource usage. New equip- ment and better skills should help to achieve this, but as we know from Western experience, “x” efficiency is only achieved when firms and man- agers are kept on their toes by competition or the threat of competition. Institutional reform that removes the perennial soft-budget constraint is a sine qua non to longer term success.

202 AL Sharp

2. Maintaining the supply of capital: Table 1 showed current invest- ment and savings ratios to be very high by OECD standards. The prob- lem is that to date savings ratios have been high involuntarily, because there have been no consumer goods on which to spend them. Once such shortages are made good, the supply of domestic savings may not be so readily available. As in Western European countries, the choice may be between raising interest rates to lure savings away from current con- sumption expenditures towards commitments for the longer term, or looking to the state to generate savings via taxation and a budget sur- plus. Experience in Western Europe should caution against too facile a rejection of the state as banker or entrepreneur.

3. Higher skill levels: Even Sweden finds that imported technology has to be adapted to fit the institutions and working practices common to that country. The key to successful adaptation lies in high skill levels and a high level of managerial competence. The emphasis in all Eastern European countries must therefore be on upgrading education and skill levels. At present, although some of the workforce are in fact educated to high levels and will provide an important resource in the transition phase, a surprisingly high proportion of the population still have no sec- ondary education. Priority must therefore lie in upgrading education and skill training facilities.

4. Mechanisms for technology diffusion: The Soviet model, as suggest- ed earlier, was epitomised by the “disembodied technology” syndrome - the development of technology in research institutes which have no proper linkage with the system and no feedback from users. Ergas, in looking at the technology systems of OECD countries, distinguished between the “mission-oriented” systems of the UK, France, and the US (dominated by “big project technology”) and the diffusion-oriented economies of W. Germany and Sweden, with their combination of high skill levels and broadly based institutional support for enterprises, such as the Fraunhofer Societies in West Germany, which are geared to helping small and medium sized enterprises pick up and use new tech- nologies of relevance to their interests.lg To make innovation a way of life means weaving such institutions into the fabric of industrial soci- ety, and this is what the countries of Eastern Europe need to try to achieve.

5. System linkages: The shortcomings of the Eastern European system was its failure to exploit the system linkages between consumers and producers, between component supplier and assembler, between scientist and engineer. Sometimes such linkages can be internalised, sometimes they are perforce external linkages and operate via the market system. There are now a plethora of models to choose from. Only one thing is cer- tain: Exploiting such linkages is an essential part of the innovation sys- tem. But each sector is different and it is impossible to dictate the type of linkage that best suits the circumstance.

!I’echnology -A Special Case for Catch-Up 203

Conclusion

It is ironic that an economic system that set such store on the harnessing of technology for the benefit of humankind should have failed so dismally in its attempts to harness innovation within its own system. In this essay we have suggested that this failure was partly the result of too simplistic a model of the innovation process - those in power too readily assumed that disembodied “science” and “technology” could be incorpo- rated into the production system, forgetting the vital linkages and feed- backs necessary if this is to be the case - and partly the result of the inertia in a system that cannot accommodate radical change. Perestroika opens up new opportunities. In particular it opens up the chance of catching up by importing technologies that have, until now, been exclud- ed by the Cocom arrangements. It is argued that the countries of Eastern Europe have little choice but to import technology if they wish to rebuild their industrial base and give their populations a reasonable standard of living. But it warns that to benefit institutional reform, an opening up of the economies to competition is essential, and that this cannot be achieved overnight. Market systems cannot be switched on to order, and while joint ventures may bring the desired combination of capital and technology, they do not necessarily provide for the longer term; or, where they do, they risk locking the ill-prepared recipient into disadvantageous commitments.

The route favoured by this paper is for East and West to adopt a plan similar to the Marshall Plan for Western Europe in 1948, which unblocks the foreign exchange bottleneck by providing, in the short term, generous grants and expert help for the purchase and setting up of new plant and equipment, but maintains continuing external disciplines and controls in planning the restructuring of the Eastern economies. It makes clear that improving the productivity of capital - the ‘x’ efficiency factor - is the key achievement, which cannot be achieved without radical institutional reform!

The resource flow implications of this proposal are enormous. The Marshall Plan involved commitments totalling 2% of US GDP at that time. Two percent of European Community GDP would amount to approximately $100 billion. To date commitments are nowhere near this level. Indeed OECD is pessimistic as to whether current aid proposals would even be enough to compensate for the $5 billion a year loss of cheap oil and gas from Moscow. 2o The leap in generosity required is, however more apparent than real. As the US found in 1948, aid given was recycled in orders for new plant and equipment from American fac- tories; Marshall Aid proved, in fact, a major pump priming exercise. Western Europe can and should play its part in consolidating the 1989 democratic revolutions in Eastern Europe. Without economic help to rebuild their industrial base there is clear danger of their slipping into

204 M. Sharp

economic and political anarchy. What is required is an act of political leadership and statesmanship which to date has not been apparent: a Monnet . . . or a Marshall.

Notes

1. Quoted from an article by Louise Eehoe ?‘he new frontier for Western chips.” Financial rimes,,

JefI?ey of the Valley firm Chips and Technologies article cited in Note 1 above.

3. ‘EC and Moscow work together nuclear safety programme” Quentin

experts from East and West Germany. failing of the pressure

averted reequipping “Experts demand of E. German N-plant,” (15 May, 1990).

5. This with George Bay’s study comparing (1984). See also the discussion evidence of technological

(1987). 6. This is detailed Born&in See also Hanson’s earlier

Western chemical technology. His conclusion

manning levels were 50% to 70% higher in the Soviet Union. 7. “All the elements

describe the wholly rational response of Soviet managers targets with which they were often confronted.

produce what you were expected produce with least See Nove

9. Hanson (1981, Chap. 10. 11) how little diffusion took place from these Imported technology wfs not used as models to be modified, and developed for domestic

Instead, repeat purchases of particular technologies or their successors observed in chemical buying. See also coverage Bomstein

10. See (1989) on the Third Eondratieff. Freeman and Perez (1988) and Piore and Sabel(1985)

(1989). 13. The travails Western European semiconductor industry are detailed (1990). 14. See in particular Hanson (1981) and Pavitt and Hanson (1987). 15. “No capitalism minus capitalists” Jan Winieki, Financial rimes (20 June, 1990). 16. See especially Homai (1980) and (1985). 17. This thought is explored in Sharp and Holmes (1989), p. 220. 18. See Duchene and Shepherd (19861, Chap. 5. 19. See Ergas (1987). 20. OECD (1990).

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