Background:

Foreign Trade of Centrally Planned Economies

The first major conference to study the inter- tudes, policies, and practices of Eastern Europe; actions of foreign trade and centrally planned of Communist China; and of the U.S.S.R. Con- economies was held Dec. 30, 1g66-Jan. I, 1967, tributions to the conference will be published in at the University of Southern California, under book form by the University of California Press the joint sponsorship of the Research Institute and in late 1967, under the title Trade and Planning, the Deparunent of Economics and with the assist- edited by Alan A. Brown of USC and Egon Neu- ance of a grant from the American Council of berger of the State University of New York, Stony Learned Societies. Active participants numbered Brook. more than 40 and included representatives of principal American universities, relevant U.S.

We present below excerpts from the editors’ in-

government organizations, and several institutions troduction to the forthcoming volume and from the

abroad. conference papers of the two senior participants, Professors Abram Bergson and Gottfried Haberler

The conference explored the foreign trade atti- of Harvard University.

Introduction Foreign trade of centrally planned economies (CPEs)

has been, until recently, a relatively neglected field of study. Specialists have focused their efforts on market- type economies, where government policies may be de- signed to influence the operation of the market but do not try to supplant it. As a result, international trade experts have made no attempt to develop a theory that would explain the foreign. trade of CPEs, where the level, composition, and direction of trade are regulated by direct government actions, subject to given planning mechanisms, rather than by the market, which performs only an ancillary function. Foreign trade has also been neglected by Marxist economists and by Western stu- dents of CPEs. Thus, as discussed below by Professor Gottfried Haberler, neither the works of Marx nor those of his followers pay much attention to the role of foreign trade in socialist economies. Similarly, the Western economic literature on CPEs has emphasized the domestic sectors. While these studies have produced many valuable theoretical and empirical insights, for- eign trade has been treated over the years as an eco- nomic fifth wheel. Whatever effort has been devoted to foreign trade has failed to address one of the most im- portant and complex issues, the interrelationships be- tween the domestic and foreign trade sectors of the economy. The relatively small dependence on foreign trade of the Soviet Union, the only CPE for over a gen- eration, has undoubtedly been a major reason for this de-emphasis.

During the past decade and a half, however, follow- ing the adoption of Soviet-type central planning in Eastern Europe and in the Far East, interest in centrally planned foreign trade has steadily increased. Because of the relatively important role of foreign trade in their countries’ economic life, the economists of the smaller Eastern European CPEs were the first to turn their at- tention to foreign trade questions. During the 1950’s it became evident that most economic problems in these

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countries were closely connected with foreign trade. The naive confidence in the “socialist world market,” which Stalin expressed early in that decade, has given way to soul-searching and doubt as to the compatibility of the traditional mechanisms of coordination and control and the requirements of foreign trade. It is now openly stated even in the orthodox Party newspapers that %e existing system of economic management has become outdated,“’ and it is acknowledged that “one of the most serious shortcomings is the strict separation of produc- tion from foreign markets, due to lack of coordination between foreign and domestic markets.“’

In an attempt to attain a greater degree of economic rationality without abandoning the control exercised by the system’s directors over crucial economic de- cisions, numerous economic reforms have been insti- tuted; and, at least in Eastern Europe, foreign trade has played an explicit role in most of these reforms. Foreign trade problems have nevertheless remained particularly acute.

The Chronic Balance of Payments Pressures in CPEs Problems of foreign trade have not confined them-

selves to Eastern Europe. The steadily increasing de- mand for imports, coupled with difficulties over aug- menting exports, has given rise to pressures in the bal- ance of payments not only in the smaller CPEs but also in China, and finally even in the Soviet Union. In recent years, the recurrent balance of payments crises in the CPEs have received widespread attention in the West, but serious study of the underlying causes of ex- ternal disequilibria, as well as of adjustment mechan- isms, has been hampered by the unavailability of data. The balance of payments accounts of CPEs are still tightly kept state secrets, and no Communist country

IRude Pravo, Oct. 17, 1964 as cited in Communist Affairs, III/I, Jaa-Feb. 1965, p. 7.

‘Ibid., p. 14.

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except Yugoslavia has published comprehensive balance of payments statements. This is not, however, an in- surmountable barrier. Considerable foreign trade in- formation is available, and specialists dealing with CPEs have proved over the years that with patience and skill valid conclusions may be drawn from even sporadic data.

In analyzing the chronic balance of payments pres- sures in CPEs, one distinguishes two aspects of the prob- lem. First, the lessons of less developed countries are applicable to the experience of CPEs, since in both cases a relationship exists between rapid industrialization and chronic balance of payments difficulties. Second, there are complex interactions-not yet fully examined in the literaturfbetween the institutional mechanisms of central planning and the pattern of foreign trade. The functional relationships between the planning sys- tem and foreign trade, which are of special interest to students of CPE, are of increasing importance to the international trade specialist, in view of the growing significance of centrally planned foreign trade in the world economy. They also shed light on problems faced in market-type economies, where a plethora of govem- ment policies influences the conduct of foreign trade.

USC Conference on Trade and Planning

These considerations led to the organization of the Conference on International Trade and Cential Plan- ning, which was held at the University of Southern California, Dec. 30, 1966, through Jan. I, 1967. The Conference was attended by leading Western experts on the economics of central planning and by intema- tional trade specialists, whose major contributions had heretofore fallen outside the field of centrally planned foreign trade.

The central theme of the Conference was the mutual relationships or interactions between central planning and foreign trade in given national economies. The pur- pose was to present an intensive treatment of certain issues directly connected with the theme, rather than a detailed analysis of the trade pattern of particular countries or of the economic relationships among var- ious CPEs (as, for example, within the Council of Mu- tual Economic Assistance). The interrelationships be- tween the planning systems in a CPE (its goals and mechanisms) and its foreign trade sector include two major effects: the primary or direct effects of the do- mestic sector (or domestic planning system) on foreign trade, and the feedback effects of foreign trade on the domestic economy. Although there was an attempt to investigate both sides of this two-way relationship, greater emphasis was given to primary effects, which are generally stronger and easier to identify.

Findings of the Conference

Let us briefly summarize the more significant con- clusions of the Conference:

I. The planners have feared and mistrusted foreign trade, regarding it as a pis aller, and have attempted to treat it as a low-priority sector (i.e., to restrict it).

While this “trade aversion” has been counteracted to some extent by “trade proclivity” (an inclination to overtrade), one could, on the basis of theoretical consid- erations, expect trade aversion and a correspondingly low relative level of trade to prevail in CPEs. Accord- ing to the available evidence, however, trade in CPEs has been growing at a strikingly rapid rate, even relative to total output. This important phenomenon was completely neglected in the economic literature before the Conference. As a distinguished participant, Professor Harry Johnson of the University of Chicago and the London School of Economics, remarked, “our papers and our discussions have disposed of the notion that the trade objectives of the CPEs can be related to some simple notion of autarky.”

2. The planning mechanisms of CPEs are unable to create a favorable environment for efficiency in foreign trade; therefore, the CPEs in their traditional form have been unable to reap maximum possible gains from trade. Various aspects of the system share the respon- sibility for this, particularly its lack of flexibility and its inability to develop entrepreneurial initiative.

3. In spite of the planners’ desire for stability, cen- trally planned foreign trade has been characterized by striking instabilities in the level of aggregate trade, in commodity composition, and in geographical distribu- tion. These acute short-term fluctuations have also been transmitted to the domestic sectors and have adversely affected their performance.

4. The preference of the planners for industry, par- ticularly for machinery production and for industries that serve machine building, has led to an anomaly in foreign trade. As CPEs have become industrially more advanced, they have encountered more difficulties in finding export markets; this in turn has tended to weak- en, rather than strengthen, their position in world trade. Although this outcome is basically a short-run phenom- enon, certain features of CPEs that are not easy to dis- card have prolonged the problem. The relative neglect of agriculture has led to losses of potential exports and to an increased import demand, both directly and indi- rectly.

5. The mechanisms of central planning are not de- signed to guard against the development of balance of payments pressures; neither do they provide for a painless adjustment if imbalances do occur. The plan- ners, to be sure, can correct external disequilibria with- out having to face certain undesirable effects induced elsewhere in the economy, such as those brought about by the multiplier and accelerator. Thus, theoretically, the planners could avoid stop-go policies triggered by balance of payments deficits. Certain other secondary consequences, however, tend to be particularly trouble- some. Since “nonessential)’ (low-priority) imports con- stitute a small proportion of total imports, and since the foreign trade reserves are inadequate, balance of pay- ments pressures periodically force the planners to cut imports of raw materials and capital equipment, giving rise to recurrent supply bottlenecks.

6. Once principles of Soviet-type central planning become firmly established in a country, it is exceedingly

4 coMMuNIsT AFFAIES

difficult to abandon their specific features and to remove their direct ‘and indirect deleterious effects on foreign

‘old and the new (we suppose future). Under the new

trade. Thus, an evaluation of trade and planning inter- form there often hides the old content, so that, objec-

relationships must take into account the legacies that a tidy regarded, that which is old in the present system

Soviet-type CPE is likely to bequeath to its successor is more than dominant [emphasis added].“8 This is a sobering assessment after 15 years of reforms.

system. Perhaps the most eloquent testimonies to the difficulties of attaining a new, more rational equilibrium are the statements of Yugoslav economists who still complain that “ . . . our whole economic system is un- finished, so that one should regard it more as a transi- tional category which contains in itself elements of the

-Alan A. Br&.& and Egon Neuberger

*Drag0 Gorupic and Ivo Perisin, “Prosirena reprodukcija i njenq financiranje,” Ekonomski Pregled, No. a-3, 1965; as quoted by Egon Neuberger, “Central Planning and Its Legacies,” A. A. Brown and E. Neuberger, eds., Trade and Planning (Berkeley: University of California Press, 1967).

Entrepreneurship and Foreign Trade Bu.reaucratic planners and managers of public enter-

prises, both in the mixed economies in the West and in fully socialized, centralized or decentralized economies in the East, are much more averse to engage in interna- tional business transactions, more conscious of national interests and constrained by national boundaries than the private, profit-seeking businessman. “Private en- terprise, as such, is normally non-patriotic, while gov- ernment is automatically patriotic,” as Viner puts it.l

There can be hardly a doubt that despite real or alleged monopolies, oligopolies and other deviations from perfect competition, and despite the disregard of real or imagined externalities, the “invisible hand” of often im- perfect competition, impeded though it is by tariffs and other government restrictions of trade, has managed to integrate the Western economies to a much greater ex- tent than the centrally planned economies of the East have been integrated by their planners. Or to express it differently, market forces, although impeded and fall- ing short of the ideal of perfect competition, have brought the Western economies much closer to the ideal international division of labor along the lines of com- parative cost, as pictured both by the free trade clas- sical and neoclassical theorists and by the theorists of competitive socialism, than the centrally planned or decentralized socialist economies of the East have been brought by their methods of central or competitive planning.

lack of Foreign Trade Integration of CPEs

There are three reasons for that. The first is political and sociological in nature. Nationalism has proved to be an extremely hardy plant. The state has not withered away and planners in the Soviet countries are probably more nationalistic than their counterparts in the West, i.e., those responsible for public policies and public en- terprises in most Western countries. At any rate, na- tional bias is largely absent from private business, which still is responsible for most of Western trade.

lJacob Viner, “International Relations between State-Controlled National Economies,” American Economic Review, Vol. 34, Sup- plement, March lg+t,. Reprinted in Readings in the Theory of I~~tional Trade (Philadelphia: Blakiston, Q&, p. @q. Viner disc~s~es several real and apparent exceptions to that rule.

Second, Eastern planners have been severely handi- capped by their upbringing in Marxian dogmas. Marx- ist economic theory is not only useless, it is a positive impediment for the efficient management of socialist economies. It inculcates a complete disdain and dis- regard of market forces, price mechanism and competi- tion. This attitude is all-pervasive, but has been espe- cially damaging for the efficient resource allocation in the area of investment and international trade. The refusal to use interest rates systematically and explicitly prevents efficient use of resources. True, time prefer- ence and capital cost cannot possibly be disregarded completely without courting famine and catastrophe. But failure to allow for it systematically and explicitly must cause serious inefficiencies and losses.2 Similarly, in the field of international relations ignorance of the theory of international division of labor is a handicap. The Eastern planners have been taught that the doctrine of comparative cost in its old or modern form is bourgeois economics; that it is irrelevant or worse.* True, as in the case of resource allocation over time, even the most doctrinaire Marxist planner cannot do without some international division of labor. Literal autarky would be suicidal for the smaller socialist coun- tries and extremely costly even for the U.S.S.R. What is lacking is systematic allowance for trading opportuni-

ZSee Abram Bergson, The Economics of Soviet Planning (New Haven: Yale University Press, 1964).

~Wilcxynski quotes the following description of the theoq of comparative cost by some Soviet economists: “. . . a pseud~scien- tific, reactionary foreign trade theory disseminated by bourgeois economists . . . to serve as a theoretical basis for the Western discriminatory foreign trade policies towards Socialist countries.” A. Frumkin, ‘Nesosioyatelnost burzhuaznoi teorii vneshnei tor- govli (Bankruptcy of Bourgeois Foreign Trade Theory),” Foprosy Ekonomiki, Vol. 75, No. 297, December 1959, pp. 1aqria5, as cited by J. Wilcxynski, “The Theory of Comparative Costs and Centrally Planned Economies,” Economic Journal, March 1965, p. 66.

The fact that the theory of comparative cost was originally based on the labor theory of value has not endeared it to the Marxists. It is true, however, that in actual, practical planning, literal interpretation in terms of labor costs (neglecting capital cost, land and other resource cost) would lead to very costly misallocations of resources. Western attempts at verifying the theory have been vitiated by exclusive regard to comparative labor cost. See, e.g., Donald MacDougall’s well-lmown papers on the subject

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