Foreign Economic Relations

INTRODUCTION

Up to now I have discussed only domestic issues. However, the way in which socialist countries participated in the international division of labour contributed significantly to the failure of the socialist system.

In his Economic Problems of Socialism in the Soviet Union, Stalin (1952) maintained that the Second World War had brought about the ‘disintegration of the single all embracing world market’ and the rise of two parallel world markets which confronted each other. The disintegration was - according to Stalin - a further reason for the general crisis of capitalism. This idea of Stalin’s was primarily the ideological underpinning of his desire to bring the newly established, so-called peoples’ republics into the Soviet economic orbit and use them as a substitute for Western markets, mainly in areas affected by the Western embargo on certain products. To this end, he forced East European countries to scale down dramatically their trade relations with Western countries and orient their economies to Soviet markets.

It was no secret to Stalin and his successors that the Western economies were on a much higher technological level than the socialist camp. They undoubtedly wanted to have access to Western technology, but were not willing to pay the price for it in terms of political concessions. It was also clear to them that the race between the two systems would be decided in the area of productivity growth. The Soviet leaders themselves, alluding to Lenin, repeated countless times that only if the socialist camp was able to achieve higher growth rates of productivity than advanced capitalist countries would it eventually be able to overtake the capitalist countries in terms of per capita production. And growth of productivity depends ceteris paribus on technological progress. The Soviets spared no effort to achieve technological progress in armaments and branches connected with them, but they were not sufficiently concerned about industries in the civilian economy which were not directly important for the military, as if the race for productivity growth would be determined in the military sphere.

In the first years of its existence, CMEA (Council for Mutual Economic Assistance), an institution for the organisation of coopera­tion between socialist countries, was not very active? The Soviets were not interested in its activity; they could achieve their goals more effectively by bilateral dealings with the co-members of the Council. They needed the institution only for political and propaganda reasons. Not until Khrushchev’s administration was CMEA activated. But it never became what it could have been and what some countries wanted it to become.

Stalin and his successors were primarily responsible for the poor performance of CMEA. Had the political leaders been properly concerned with this institution, it could have become, even with the existing constraints, a catalyst for economic growth, efficiency and technological progress. It could have been the basis for a huge market where specialisation and cooperation could have benefited all the members of the Council. It could also have helped weaker members to reach a higher level of development. And, finally, pooling ingenuity and talents could have become an important source of innovation stimulation. In reality, the results of CMEA activities turned out to be at best meagre and, in some respects, negative.

There was no lack of ideas on how to improve cooperation between CMEA countries and many resolutions on expanding cooperation were even adopted, culminating in a decision to turn the participating countries into a united market, but they were not put into effect. CMEA could only be a reflection of the economic mechanisms of the member countries. The Soviets as the dominant member of CMEA were not really interested in far-reaching reforms. Gorbachev’s attempts to reform the system of cooperation between CMEA countries came too late.

THE WORKING OF CMEA

Planning and Organisation

To understand the mechanism of cooperation it is necessary to start with the planning of foreign trade. The point of departure was imports needed in order to fulfil the plan targets. In contrast to capitalist countries, where exports are regarded as an important source of economic growth, they were viewed in socialist countries almost as a necessary evil in order to be able to pay for imports. This approach to foreign trade was also instrumental in CMEA. In a debate about CMEA one Soviet economist expressed the view that the mutual exchange of products between socialist countries was an exchange of ‘leftovers* (The Current Digests of Foreign Press, 1988, no. 2, p. 15).² Perhaps such a characterisation was a slight hyperbole, but still it expressed to a great extent the essence of the exchange. It is also important to stress that, because each country tried to channel all its resources into the fulfilment of its plan targets, which were constrained by the amount of supply which it was able to mobilise rather than by demand, the cooperation could not fulfil the expectations of its members with regard to economic efficiency. In other words the exchange of commodities was not governed by the principle of comparative advantage.

Foreign trade was a state monopoly. Productive enterprises were not allowed to enter into trade relations with their foreign counterparts. This activity was reserved to special state monopoly enterprises which specialised in imports and exports of certain products or groups of products. There were usually special state monopoly enterprises for exports and imports. Enterprises sold their products earmarked for exports to the proper state monopoly at domestic wholesale prices and the latter sold them in foreign markets at whatever prices it could achieve. If a loss came about, the difference was covered from a special government fund; if a profit was made, it was surrendered to the fund.

Negotiations about cooperation among socialist countries were carried on at a state level; bureaucracy had a greater say about interstate trade and cooperation agreements than enterprises, which in the final analysis were obliged to put these agreements into effect.

Price System

As already mentioned, the socialist price system, though the same in all member countries of CMEA in its underlying principles, was nevertheless not suitable for calculations of mutual exchanges, the most important reason being that prices were heavily subsidised and, as a result, countries were reluctant to sell their products at subsidised prices. Therefore they agreed that modified world-market prices would be used. The modification lay in the use of the past five year averages of world market prices for the coming several years, with the reasoning that this would enable the speculative elements to be eliminated from world-market prices and bring them closer to the international market value.³ In addition, for some products, prices used in East-West trade were also applied intra-CMEA trade (Brabant, 1987).

If we take world-market prices as a basis, then prices paid for commodities below world prices can be regarded as subsidised, and prices above can be regarded as ‘overcharged’. One of the two situations, when prices of individual commodities are the object of change, must occur if modified world prices are accepted. As is known, world prices, mainly of fuel and raw materials, fluctuate a lot, and if prices in CMEA changed only once in a long while, a discrepancy between world prices and prices paid in intra-CMEA trade necessarily would develop.

Marrese and Vanous came up with the idea that the subsidies were a compensation for the services East European countries rendered the USSR in international policy and military cooperation. This conten­tion about subsidies and their purpose provoked a debate,⁴ in which principally East European economists criticised Marrese and Vanous’ stand.

In my opinion, the 1973 and 1979 subsidies were certainly not intended; they were the result of the price system which CMEA countries agreed on at the end of the 1950s and of the price increases by OPEC. It would have been politically unwise for the Soviets to push for an instant change in the price formula. In the minds of most East European people, the belief prevailed that CMEA was a Soviet instrument for the exploitation of East European countries and a sudden increase in oil prices would have caused trouble in the economy and strengthened the belief about exploitation. I agree with Holzman (1987, p. 189) that the Soviets could afford to be generous to East European countries because of windfall profits on oil and gold and increased arms sales, and in this way they could help CMEA countries for a while to cope with their economic troubles.⁵ The same view is in essence expressed by Lavigne (1991, p. 252).

In the 1980s, when world prices of oil declined, Soviet prices started to increase due the existing price formula which, according to Lavigne (1991, p.

From the above it is clear that domestic prices had no connection with the prices at which tradable goods were realised, and this was not only true in trade with the non-socialist countries, but also with socialist countries.

In the 42 years of CMEA existence there were several attempts to reform the price system. At the Budapest conference in 1967 there was an effort made to create a ‘socialist’ price; its main proponents were the Soviet Union and Bulgaria. Needless to say, both expected some advantages from such a price. However, this was at a time when Czechoslovakia was engaged in a major reform and Hungary was on the brink of an economic reform, when both countries wanted to give a certain role to the market and therefore could not agree with a price system which ignored market forces entirely. Luckily, other members of CMEA supported Hungary and Czechoslovakia, of course for other than systemic reasons, and so the price system mentioned above remained in force (see Zwass, 1989, pp. 47-8).

Hard and Soft Goods

Trade between CMEA countries could be characterised for the most part as an exchange in kind instead of in value. In the trade negotiations, all the partners tried to get what they needed to fulfil their plans and to pay for these products with what they could best afford. The situation was complicated by trade with non-socialist countries, mainly Western countries. There the trade was mostly in dollars and was more demanding on quality and technical parameters. Only a limited portion of the commodities which were ‘traded’ on CMEA markets could be sold on Western markets at world-market prices. On the other hand, socialist countries needed commodities from Western markets which were not available in the East or were only available in a low quality. As a result of these realities, commodities in intra-CMEA trade were soon classified in two groups: ‘hard’ and ‘soft’. Hard goods were goods which could be easily sold on capitalist markets for hard currency, or goods for which hard currency had to be paid on capitalist markets if they could not be bought in CMEA markets in sufficient amounts. Naturally, every country tried to get the maximum amounts of hard commodities and to deliver the minimum of hard commodities. It was only natural that after some time (1970) trade in dollars developed for hard products beyond planned deliveries and for ad hoc deals (see Csaba, 1990, p. 55). Why should countries not be willing to pay more for hard goods which were over the quotas in the agreements adopted with their partners in CMEA, if the alternative was to pay for the same commodities bought in the West in dollars?

Payments

In socialist countries enterprises paid for goods bought by transfers from their account to the account of the supplier. No real money was involved. The accounts of buyers and suppliers were exclusively with the bank branch in their locality. A similar payment system for deliveries was used in trade between CMEA countries; this was a non­cash bilateral clearing system. The payments of one country for the deliveries of another were entries in the accounts of the supplier, and vice versa. In order to have a good survey of the fulfilment of obligations which the countries assumed when they signed trade agreements, each country’s central (or foreign trade) bank had a single account for trade with each country of CMEA where credits and debits were entered. The payments between two countries were supposed to be balanced within a year (Rusmich, 1972).

Soon CMEA countries realised that this system hampered the expansion of trade, and therefore it was decided in 1964 to introduce a transferable ruble along with the establishment of an International Bank for Economic Cooperation. The idea behind these provisions was that all deliveries would be calculated in rubles, and surpluses on bilateral accounts could be used for buying goods in whatever country was chosen. In addition, the International Bank had to extend credit to countries with a deficit in the balance of payments. It was assumed that the new measures would be an important step in the introduction of multilateral trade (Brabant, 1980, pp. 201-2). Even the Comprehensive Programme, adopted in 1971, which put greater stress on multilateral trade, did not bring about and could not bring about a substantial change. In a situation when strict central planning prevailed in most countries, it was difficult to satisfy the demand for goods which were not planned (more about this later).

Supranational Authority

The smaller countries of CMEA were formally independent; however, in reality they were obliged to follow for a long time more or less Soviet economic, social and foreign policy. A similar situation existed in CMEA. When the Council was established it was not equipped with supranational powers; it had only advisory and consultative functions and decisions could only be valid if all the countries agreed; yet the USSR had a dominant position in it. During Stalin’s life the Soviets did not need and did not want for political reasons an institution with supranational powers. At that time in the West politicians started to discuss the possibility of various kinds of integration. The Soviets regarded these endeavours as an anti-Soviet action and launched an extensive campaign against integration. It was branded as an anti- patriotic and imperialistic movement designed to deprive small nations of their sovereignty. Under such conditions it would have been politically damaging to call for an integration of socialist economies.

In the beginning of the 1960s, when efforts were made to expand the activities of CMEA, Khrushchev came up with a plan to establish a supranational authority. Compared to the period of Stalin’s life when the leaders of smaller countries regarded Stalin’s hints as orders, the relationship between the Soviet Union and the smaller countries under Khrushchev’s leadership was less a relationship between a boss and his subordinates. Some smaller countries dared to voice opposition to changes which they disliked, and Khrushchev’s proposal did not gain the backing of all the members and therefore it was dropped (Marer and Montias, 1981, p. 161).

Evening out of Differences

CMEA was made up of countries at different levels of economic development. On the one hand, there were Bulgaria and Rumania, developing countries, and on the other East Germany and Czechoslo­vakia, developed. The difference becomes even more pronounced if non-European countries arc considered (such as Mongolia and Vietnam). Needless to say, specialisation between countries at the same level of economic development is more efficient. In the beginning, technological and scientific cooperation was to mitigate the differences in development. It was accepted as a rule that more developed countries would help the less developed to produce sophisticated products, among other things machines, by giving them the necessary blueprints and documentation without charge. This was an idealistic approach which was contrary to national interests and therefore in practice was of no great help. The documentation which less developed countries received was mostly out of date for the more developed countries.

Only later did Soviet leaders come up with the idea of evening out the differences between countries. However, not much has happened in this regard.

CHANGES IN CMEA

During CMEA’s existence several programmes and resolutions were adopted for the sake of expanding, deepening and improving the cooperation between the members of the institution. Here I will mention only the most important ones.

Comprehensive Programme

No doubt, the 1971 Comprehensive Programme for the Extension and Improvement of Collaboration and the Development of Socialist Economic Integration of the CMEA Countries was one of the important programmes. Its importance is clear from the fact that for the first time a document from the CMEA session used the word ‘integration’ as an objective of cooperation. The programme also called for the adoption of the principle that integration projects could go ahead even if not all the countries agreed and participated. This was an important departure from the previous practice requiring consensus, a situation which enabled one country to scuttle a programme which it did not like.

The Comprehensive Programme called for an improvement in coordination of economic plans, which was already agreed upon in the middle of the 1950s. To this end consultations about coordination of plans were to start three years before the end of the five-year plan. 15- to 20-year forecasts of demand and supply were also agreed in order to put the planning of production, investment, consumption and trade on a more realistic basis. The coordination of planning had to be focused on the joint planning of certain selected branches and products (Brabant 1980, p. 232).

The latter meant a further shift of stress from trade to production, more precisely an extension of specialisation and cooperation, which had been, since the second half of the 1950s, the most important objective of CMEA. Specialisation was to focus on high-quality machinery construction for important industrial branches, nuclear power plants, mining, steel foundries, electronics, etc., and on important products in short supply.

The document also stressed the importance of the continuation of joint investment activity, primarily in extractive branches and energy. In the latter, it meant the construction of a huge pipeline for the transport of oil to Eastern and Western Europe, and, in the second half of the 1970s, a gas pipeline from the South Urals to the western border of the Soviet Union and a high voltage power line from the Ukraine to Hungary (Zwass, 1989, p. 83; Lavigne, 1991, p. 89). The vast majority of the investment projects was on Soviet territory since it was rich in raw materials and energy. The importers (this meant mostly the small countries) had to contribute to the financing of the investment projects in the form of so-called long-term investment credits, and their contribution was repaid in the form of deliveries of raw materials. The more the importers contributed, the greater deliveries they received. However they did not have a claim to a share in the ownership of the newly established plants by their financial contribution. Production capacities created by joint investment projects belonged to the country on whose territory they were located.

The need for investment credits was justified by the capital-intensive character of the projects. Though capital was scarce in the small countries, they (mainly Czechoslovakia and East Germany) entered into joint investment projects with the Soviet Union because they were short of raw materials and fuels and they did not have the hard currency to get them from outside CMEA (Csaba, 1990, pp. 104-6). The deals had a silver lining in that the prices charged for the deliveries of raw materials were below world prices.⁷ Besides the multilateral plans of cooperation there were also bilateral plans.

In order to create a more reliable foundation for the joint investment policy, the member countries agreed on so-called Concerted plans for multilateral integration in 1975. New investment projects were to be undertaken in the framework of these plans and the member states were obliged to reserve investment funds for these projects in their plans. The Concerted plans were only an interim provision till long­term target programmes were in place, which came about several years later. The objective of the latter was focused on some long-term selected activities; initially they were supposed to cover 10 years, but later their time horizon was extended to 20 years. The activities covered included the improvement of specialisation in engineering branches, the supply of energy and raw materials, the supply of quality basic food and industrial consumer goods and the introduction of an integrated transportation system (Csaba, 1990, pp. 108-9; Lavigne, 1991, pp. 88­9; Brabant, 1980, pp. 240-1).

An investment bank (called The International Investment Bank) was established in 1971 to serve the intensified joint-investment activity. Before 1971 short-term bilateral credits could be extended within trade operations. The new bank was authorised to extend long- and medium­term credit for investment projects in which more members were interested (Rusmich, 1972).

Judging on the basis of its outline, the Comprehensive Programme aimed at introducing a certain degree of monetisation into the organisation. Quasi exchange rates of currencies of CMEA countries, which also set the exchange rate vis-a-vis the transferable ruble, were established and a methodology for evaluating joint investments was set (Csaba, 1990, p. 32). It was hoped, as already mentioned, that, with the establishment of the Investment Bank, the role of the transferable ruble would increase. However, the notion that the transferable ruble would pave the way to multilateral payments did not materialise. It was used rather as a unit of settlement (Kornai, 1992, p. 359).

Programme for Scientific and Technological Progress

Another important programme was the Programme for Scientific and Technological Progress until 2000, which was approved in 1985 at a meeting in Moscow, already under the Gorbachev administration. It was an extension of a programme which was approved in 1984, at a time when the USSR was still under the leadership of K. Chernenko. The programme was largely the result of Soviet recognition of the urgent need of a turnaround in the growing gap in technological progress vis-a-vis the West, which also found its way into the objectives of the Soviet 12th five-year plan.

The long-term programme designated five priority areas for scientific and technological cooperation: computerisation with the purpose of establishing modern communication and information systems; atomic energy; automation; discovery of new cost-saving materials; and biotechnology. The five areas of cooperation included 93 sub-areas of cooperation. It was not expected that small European countries, far less non-European CMEA member countries, would take part in all the programmes. The latter were promised aid which would contribute to their growth. The Soviets promised that their research institutes would be at the head of the effort for implementing of the programmes and appealed to the small countries to do the same (Csaba, 1990, p. 334; Zwass, 1989, pp. 164-5).

According to the long-term programme, enterprises and associations of individual countries were supposed to play a crucial role in the implementation of the new tasks. In the past cooperation was determined by bureaucrats, this time enterprises were to be allowed to enter into direct cooperation with their partners in other countries. This provision was welcomed mainly by countries which had fought for the reform of CMEA for some time, such as Hungary, Poland and also Czechoslovakia. The reaction of the Czechoslovak deputy prime minister, responsible for CMEA, is a testimony to it:

The analysis of the unsatisfactory state of direct cooperation in production with other members of CMEA shows that a big obstacle was the centre’s excessive meticulousness and its mediating role with regard to such activity on the level of enterprises. The whole system of issuing licences for foreign business activity, the limited number of enterprises which were allowed to enter into direct relations and the low efficiency of such cooperation, deterred international coopera­tion (HN, 1986, no. 23).

The direct links were not supposed to be limited to scientific and technological cooperation. However, to judge from the Czechoslovak regulations, the direct inter-enterprise links were of quite a limited nature. In the case of scientific and technological cooperation, enterprises were allowed direct links - with few exceptions - only within the framework of achieved bilateral or multilateral agreements. Direct links in trade relations were not allowed to expand beyond enterprises which had in any case the permission to enter into trade relations with enterprises in other countries. In the case of coordination of economic plans enterprises could participate in the bilateral negotiations (Supplement to NH, 1992, no. 38). Some countries (Rumania, East Germany) did not even go so far (Csaba, 1990, p. 357).

According to Zwass (1990, p. 161) Gorbachev explained to the prime ministers of CMEA member states the objective of the long-term programme in this way: ‘The Comprehensive programme just adopted was designed to make the community independent of Western technology and also to make it invulnerable to pressure and blackmail from the forces of imperialism.’ Assuming that Zwass’ information about Gorbachev’s statement was correct, one can pose the question : could the CMEA countries have got on without imports of technology from the West? Did the CMEA have the scientific and technical expertise and organisational sophistication to be able to produce the necessary technology and to diffuse it?

It is generally known that the European CMEA member countries were behind the West in their level of technology and therefore they imported a considerable amount of modern technology from the West. If the West had not imposed export restrictions on strategy goods as they were set by the COCOM (Coordinating Committee for Multi­lateral Export Controls) list, an institution established by American initiative in 1949, the imports of technology from the West would have been even larger.

There are disagreements about the extent of the technological gap, which to a certain degree depended on the methodology used to calculate the role of technology in the pace of economic growth. It can also be stated with some degree of certainty that the gap in technology was primarily in industrial consumer goods and was the smallest in military equipment. It is known that the Soviets, and the same is true of the small countries, were much behind in the use of personal computers (Lavigne, 1991, pp. 195—201). The gap in technology was in indirect relationship to the importance which the Soviets attached to individual areas.

The Soviets applied the same differentiated approach to technology in cooperation with CMEA countries. In this respect the experience of a Hungarian high official is very interesting. He approached his counterpart in the Soviet government with a concern about the lack of modern technology. When he explained to the Soviet official what he actually had in mind, the latter promised that Soviet technicians would do their best to develop the machine the Hungarians needed, and, in fact, they did so in a relatively short time. The Soviet official shrugged his shoulders when the dialogue turned to the development of gadgets for consumers. This apparently was not a top priority for the Soviets.

According to Sobcll, whom Lavigne quotes (1991, p. 224), in 1980 90 per cent of equipment in CMEA intra-trade consisted of traditional products with low R and D content. The figure seems very high, and it is not clear whether the author considered it to be more or less typical of the whole period or only of 1980. There is no doubt that cooperation between the member countries did not exhaust the potential for joint technological advancement. The approved long-term programme did not bring about a noticeable change in this regard. This was not surprising under conditions when many problems, affecting the working of CMEA, were not solved and the differences in the economic mechanism among member countries were quite large and, in the course of time, increased. Poland and Hungary increasingly expanded the role of the market in the coordination of the economy. On the other hand, other small countries stuck more or less to the old system. Even the Soviet 1987 reform could not change much in the general picture. Perhaps another reason for the meagre results of the long-term programme was that the member countries’ trust in the effectiveness of CMEA had diminished considerably, after many disappointments with the various programmes. If the Soviet Union had manifested greater interest in joint efforts to advance technology in the 1960s» perhaps even in the first half of the 1970s, when it was still believed that CMEA could be turned into an effective instrument of technological progress, the Programme could have been more successful. (See also Chapter 2.)

Of course, there was indigenous technological progress in the Soviet Union as well as in the countries under review; it was, however, not sufficient considering that economic growth was increasingly dependent on such progress as the extensive growth factors had been more and more exhausted. Under such conditions Gorbachev’s objective to make CMEA independent of Western technology was not very realistic. Maybe he did not even mean it seriously; it was, rather, a pep-talk.

When in Poland and Hungary the communist rule was broken it was clear that this would have a significant change in CMEA. In 1990-1 the Soviets pushed through a shift to dollar-accounted trade and world­market prices, an idea which had already been urged by Hungary. Trade in dollars was not entirely a new idea; it started to be practised in the 1970s. As already mentioned, it was usually applied for deliveries of ‘hard’ goods above the agreed quotas and in ad hoc deals. This time it was to affect all trade, and meant an improvement in the terms of trade for the Soviets and, naturally, a worsening for the smaller countries of CMEA. The Soviets did not feel that they should subsidise countries which no longer regarded themselves as allies of the USSR (K6ves, 1992, p. 63).

The change to a dollar trade and genuine world-market prices accelerated the process of disintegration of CMEA, which was dying out anyhow as a result of the collapse of the socialist system in the member countries. Very soon the parties agreed to liquidate CMEA, which happened in 1991.

FOREIGN TRADE

Before the Second World War the smaller countries of CMEA had minimal trade relations with the Soviet Union. Even trade between smaller countries was not very extensive. Only after World War II did mutual trade relations start to expand. After the seizure of power by the communists, this trend intensified dramatically. In 1948 Czecho­slovak trade with the USSR amounted to 16.1 per cent, and with the later CMEA countries to 32.5 per cent. At the same time trade with advanced capitalist countries was 45.5 per cent of the total trade. In 1952 there was a clear reversal: trade with the USSR jumped to 34.8 per cent and with CMEA countries as a whole to 71.4 per cent. On the other hand, trade with advanced capitalist countries suffered a dramatic decline: it plummeted to 20.5 per cent (Historickd statistickd rocenka, 1985, p. 320). A similar situation occurred in Poland and Hungary.

In 1967 the percentage of trade with the Soviet Union was almost the same in all three countries, around 35 per cent. However, the three countries already differed in trade with capitalist countries: Czecho­slovakia’s was the lowest- 18.9 per cent whereas Hungary’s was 24.1 per cent and Poland’s 27.5 per cent {Economic Developments in countries of Eastern Europe, 1970, pp. 546-9).⁸ This trend continued in the years following.

In 1973 Czechoslovak imports from Western Europe increased to 20.5 per cent, Hungarian to 25.1 per cent and Polish to 35.1 per cent. In 1975 Polish imports increased to 39.6 per cent. The three most important commodity groups in imports were machinery, manufac­tures and chemicals. In 1975 in Poland the first two groups made up 73.4 per cent of all imports. It is clear that all three countries, but Poland in particular, tried to modernise their productive apparatus (Wolf, 1977, pp. 1048 and 1050).

In the 1980s Czechoslovakia, unlike the other two countries, increased its trade with CMEA countries because of a substantial increase in trade with the USSR. In 1985 total trade with CMEA countries increased to 74 per cent and trade with the USSR to 44.8 per cent. On the other hand trade with capitalist countries declined substantially. In 1985 it made up only 15.5 per cent (SR, 1987, p. 445). (See Chapter 8 for the reasons.)

In the 1980s the Polish and Hungarian trade with advanced capitalist countries was more than double that of Czechoslovakia. In 1985 Hungarian imports from capitalist countries made up 38.5 per cent of total imports and exports 30.8 per cent of total exports. In the same year the Polish figures were 34.9 per cent and 34.7 per cent respectively (SE 1986, p. 208; and RS 1988, p. 356).

Trade with advanced capitalist countries was of course expanded at the expense of trade with CMEA. In the 1980s Polish and Hungarian trade with CMEA countries was almost 20 per cent lower than Czechoslovak trade with the same countries. Trade with the Soviet Union did not suffer as much as trade with other members of CMEA.

From the foregoing it is clear that in the 1980s Poland and Hungary were well integrated into world trade which was dominated by the developed capitalist countries. This had no doubt an advantage; it enabled the two countries to take advantage of Western technological progress to some degree. It should not, however, be forgotten that access to Western technology was limited by the regulations of COCOM (see p. 82). The mentioned expansion of trade was often combined with a deficit in the balance of trade but, even when the two countries managed to achieve a surplus, the surplus was not sufficient to service the debt. In both cases it meant that foreign indebtedness increased.⁹ Furthermore, the two countries were much more exposed than Czechoslovakia to Western business cycles, which had of course a negative impact on the economic development of Poland and Hungary.

As will be shown in Chapter 8, Czechoslovakia curbed its trade relations with Western countries for economic and political reasons.

CONCLUDING REMARKS

In its more than 40 years of existence, CMEA went through many changes which were intended to make it an instrument of economic integration. It would be wrong not to see that it achieved some positive results, but it is also true that it remained far behind its objectives. There were several factors which hindered the realisation of these objectives. I disregard here the initial period when, on the Soviet side, there was no interest in establishing a genuine multilateral economic cooperation.

The cooperation of CMEA countries necessarily reflected the internal systemic arrangement of individual countries. The economic relations among the socialist countries could not deviate much from the principles on which the working of domestic economies was based. Detailed planning from the centre in CMEA countries set the framework within which the cooperation could move; such a system did not allow market relations among them - anyway the leaders were against them for political and ideological reasons. After all, the countries were pursuing a socialist cooperation. Even in the 1960s when major reforms in Hungary and Czechoslovakia came about (reforms in which the market mechanism played a role) no great changes in the CMEA working could occur because the USSR was not interested. When under Gorbachev the Soviets were prepared to overhaul CMEA, it was already too late. Most of the smaller countries, which in the meantime had started to abandon socialism, were no longer interested in CMEA.

The process of cooperation was determined on the state level. Not only did the governments of individual countries agree on the modes of cooperation, but state officials were instrumental in the implementa­tion of the programmes approved. The concrctisation of the programmes and their implementation became too politicised and bureaucratised, and what was achieved did not further economic efficiency and technological progress significantly.

In specialisation and cooperation, two of the most important objectives of CMEA, only very meagre results were achieved, since progress depended primarily on the agreement of officials and technicians, and in their decision-making political, technical and engineering considerations played a paramount function. Prices and costs which should have been decisive were reduced to a subordinated function. One of the important reasons for this was the absence of a logical connection between the distorted domestic prices and the modified world prices at which trade took place (cf. Nove, 1980, p. 274). In such a situation it was very difficult to make the reliable economic calculations needed for a rational allocation of resources and specialisation.

Specialisation was hampered by the frequent resistance of enterprises to projects which entailed giving up a production line in which they already had experience, or accepting a new production line which required substantial training of workers. Another contributing factor was the lack of a long-term guaranteed market in other countries for the products resulting from specialisation. Finally, there was no mechanism for joint risk taking (Marer and Montias, 1981, p. 157).

Great differences in the level of economic development of the member countries of CMEA was a further obstacle to specialisation. Usually specialisation between countries at the same level of development can be more effective than between countries marked by great differences in the level of economic development, especially if all the countries have the ambition to produce machinery, as was the case with European members of CMEA.

Nationalistic attitudes influenced negatively the process of speciali­sation and the process of integration. This was primarily true until 1971 when the adoption of new programmes depended on the unanimous approval of all members of CMEA. Nationalistic attitudes led some countries to produce products for which they did not have the best preconditions in terms of costs, but did so for prestigious reasons. A good example was the production of automobiles.¹⁰

Another objective of CMEA, to bring about multilateral trade relations, an important precondition for integration, did not materi­alise. There were mainly two reasons for this. All output was planned, and there was usually a shortage of idle capacities which made it very difficult to produce goods, not included in the plan, but instead resulting from a new demand from foreign customers. In other words it was difficult to satisfy demand which went beyond the contingents agreed between individual countries (cf. Marer and Montias, 1981, p. 156-7). The second reason for the lack of multilateral relations was connected with the first in that there was a large lack of convertibility of commodities. The socialist countries were quite inflexible when adjustment of production to demand was needed. The lack of convertibility of commodities was the main reason that the convert­ibility of currency, even within the CMEA, could not really materialise.

Of course, in the final analysis all the programmes resulted in an expansion of trade, mainly between the USSR and other member countries. Trade with the former Soviet Union was a blessing, but also a curse. It was an advantage to have access to a huge market which was not very demanding about quality. However, this very circumstance had another, negative side: enterprises exporting to the USSR were not under sufficient pressure to do their best in terms of technical parameters and quality. Trade with the Soviet Union and the intra­East European trade did not work as a stimulus to technological progress and higher productivity in the way that trade between open economies does. On the contrary, the past intra-socialist trade is one of the main reasons why the smaller countries, as well as the Commonwealth of Independent States, have a hard time nowadays competing in Western markets.

In the more than 40 years of CMEA’s existence various programmes which aimed at bringing the economies of the member countries closer to integration remained far from their goals. This necessarily resulted in a loosening of ties within CMEA and the search for more trade with Western economies. Such a development was characteristic mainly of Poland and Hungary (Safarikova, 1989).

In brief, the centralised system had influenced adversely the socialist countries’ external economic relations, and these in turn aggravated the working of the traditional system. Even the reforms in some countries could not change substantially the underlying principles of the working of CMEA. Perhaps the greatest shortcoming of CMEA was that it did not become an instrument of rapid technological progress.

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