FOREIGN TRADE IN THE ECONOMIC POLICY OF CZECHOSLOVAKIA

Created: 7/1/1968

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DIRECTORATE OF INTELLIGENCE

Intelligence Memorandum

Foreign Trade in tbe Economic Policy of Czechoslovakia

-Confidential-

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CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence8

INTELLIGENCE MEMORANDUM

Foreign Trade in the Economic Policy of Czechoslovakia

Summary

Czechoslovakia depends heavily on imports of raw materials, including nearly all the crude oil it

uses; much of the ores, rubber, and textile fibers; and part of the nonmetalllc minerals and foodstuffs. Imports of raw materials amounted to USillionrercent of total imports. Raw materials come largely from the USSR and othercountries and from less developed countries in the West. Czechoslovakia pays for them with manufactures, chiefly machinery, that can be sold in the developed Western countries only in small quantities and at large discounts.

Economic dependence on the USSRhich alone furnishes more thanercent of raw materials importshas not stopped the new leadership from going ahead with major political reforms. Soviet deliveries to Czechoslovakia have continued despite Soviet concern about the reforms. eported delay in wheat shipments this springif it did indeed occurwas not regardederious threat by Czechoslovakia. The USSR seems to be relying primarily on military gestures and political pressure, rather than economic pressure, to keep the new leadership within acceptable bounds.

Thia memorandum was produced eolely by CIA.prepared by the Office of Economic Research and aae coordinated with the Office of Current Intelligence.

Economic dependence on the USSR and othercountries is,ajor obstacle to reviving the economy. Overercent of Czech trade has been with Communist countries. Producing by command for guaranteed markets has led to massive inefficiency and has undermined the competitive position of Czechoslovakia's exports. Failure to deal with these weaknessesig factor in the fall of the Novotny regime.

Novotny's successor, Alexander Dubcek, has sworn to do better. Some of his economicspecially Professor Ota Sik would like to put the indispensable trade with the USSR and other Communist countriesore businesslike basis by decentralizing decisions on trade and eliminating the ever-increasing exchange of obsolete and often substandard manufactures. Czechoslovakia would lose on balance by such reforms, but the new leadership might be willing tooss as part of the cost of reimposing the "discipline of the market" on its own enterprises.

The outlook for bringing about such changes in trade among Communist countries, however, is not encouraging. Domestic opposition in Czechoslovakia would be strong, especially among workers, for many plants would have to cut back operations or close down, and only the strongest firms would benefit. And it is not very likely that Czechoslovakia could obtain the necessary support among its main trading partners. The USSR would benefit economically fron trade reforms. But reforms would face the adamant opposition of the East German and Polish regimes, which have strong political as well as economic grounds for keeping things as they are. Hungary might be willing to go along, and Yugoslavia would be enthusiastic, but such support would not count for much with the other countries.

A possible escape from the built-in inefficiency of trade with the Communist worldradual shift of Czechoslovakia's trade toward theourse long favored by the mora extreme reformers. The costs and difficulties, however, are no less than those involved in changing the conduct of trade with other Communist countries. To shift trade to the

less developed countries of the Free World hasavorite idea even with the Czech conservatives, and possibilities for further expansion certainly exist especially trade with oil-producing countries. But in general the trade has been limited byneed for the commodities offered, most of which are not in strong demand on the World market. Where the less dove loped countries have alternative cash markets, Czechoslovakia, too, must pay cash. Thus trade with these countries leads back to the main problem in all trade with the West, that of earning hard currenciesa problem that has proved quite intractable. So long as there are easier protected markets at hone and in barter trade, Czechwill not make the effort. The best of Czech goods are hard to sell in competitive markets, even with great effort. The prices obtained are so low that trade with tho West usually involves aloss, except in the cases in which purchases in the West open bottlenecks in supply.

An appreciation of these difficulties has led Czech economistsnd many senior officials to conclude that large-scale foreign help is essential if Czechoslovakia is to make itself more competitiveP Some immediate help would be useful in any case to allow Czechoslovakia to manage its foreign trade more efficiently; its existing reserves are much too small for that. Help is needed to reorganize and modernize selected export industries. But what is most critical, if Czechoslovakia is indeed to undertake sweeping economic reform, is long-term aid to finance deficits in the balance of payments, so that it can maintain consumption while restructuring industry and shifting trade patterns. The USSR almost certainly will not provide aid enough to meet these needs. Czechoslovakia therefore must lookandful of Western countriesthe United States, West Germany, Prance, and possibly othersand the World Bank. Czechoslovakia probably will not accept large-scale Western aid unless it undertakes real economic reforms to improve the quality and mix of its products.

CONT! AI,

Character of Czechoslovakia's Trade

changing needsmallthe ill effects of past economicthe constraints of barter arrangements arein Czechoslovakia's foreign trade. The

untry has longet importer ofet exporter of manufactures. Since World War II, however, tho composition of imports and exports has changed radically. Imports of foodstuffs, non-metallic minerals, and petroleum are several tines larger than before the war, mainlyesult of industrial development and technical change. Imports of ores and metal scrap are also much larger, in spite of intensive working of domestic resources, because the regime has pushed steel output and the production of machineryolicy initiated by the Germans in World War II. On the other hand, imports of hides, furs, and skins and textile fibers are no greater thanecause the regime has attached slight importance to expanding light industry. (The principal imports of rate material*76 are ehovn in Exports bear the mark of the same policies. Sales of machinery and equipment, which came toercent of the totalow amount to almost one-half. At constant prices their value is someimes7 level. But exports of other manufactures, which were aboutercent of the totalave dropped to aboutercent. With the main exception of exports of chemicals and iron and steel products, which have increased greatly, they are below the prewar level.

in commodity compositionweeping geographicthe trade. nly about one-sixth of

Czechoslovakia's trade was with the USSR and Eastern Europe. In the early postwar period the share roseesult of increased Soviet influence in Central Europe, but evenhe year of the Communist takeoverit still was onlyercent. Thereafter, trade with the West was deliberately cut until3 it stood at lass than one-half8 level. Meanwhile trade with the Communist countriesto rise;3 it stood at more than three-fourths of Czechoslovakia's total trade. Since then the share has never been less thanercent.

t

. 5

Imports of Selected Raw Materials by Czechoslovakia

76

Thousand Metric Tons

and fodder

and meat products

and fish products

coal

ore

oil and petroleum products

timber a/

furs, and skins

rubber

In thousand oubia meters.

3. Nearly one-half of Czechoslovakia's trade with the Free World, moreover, has been with tho less developed countries. Much of it can fairly beas barter trade, like trade with the Communist world. Thus most of Czechoslovakia's trade isoutside the open market. By relying on barter trade, Czechoslovakia has been able to minimize adjustments to changes in demand, at the price of becoming less and less competitive in the open market and of having toix of imports much less satisfactory than it could otherwise obtain. In this

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way foreign trade has contributed greatly to the economic inefficiency now under attack by the reformers.

Czechoslovakia depends on imports, chiefly from the Communist countries and tho less developed countries, for at least part of its supplies of most raw materials. Itet importer of all major raw materials except uranium and wood. imports nearly all the crude oil it uses; part of the hard coal (though itet exporter of coke and brownuch of the iron ore, ferroalloys, and nonroetallic minerals; and the greater part of the textile fibers and hides, furs, and skins. Czechoslovakia iset importer of foodstuffs, including grain, meat, and fruits and vegetables. Gross imports of raw materials*6 amounted2 billion, orercent of the total value of imports. The importance of imports of raw materials tois indicated in Table 2.

The Communist countries supply most of the foodstuffs, tobacco and beverages, and fats. The main imports from the Free World6 included fish (from Scandinavia and Japan), com (from the Unitedropical foods (from the less developednd tobacco (from Greece and Turkey). In some years Czechoslovakia also imports wheat (from Canada and France)arge scale. The only crude materials that come preponderantly from the Communist world are ores and nonmotallic minerals; the other main source of supply is the less developed countries, which furnish substantial

^amounts of chrome ore, manganese ore, pyrites, and phosphates as well as some iron ore. The less developed countries supply the greater part of the hides, furs, skins, oilseeds, and textile fibers and

** Food and live animale; beverages and tobacco; orude materials; animal and vegetable oile and fate; and mineral fuelsthat is,n the Standard International Trade Classification (SITC). Other significant deficienoiee in raw materials are filled by imports of manufactures, which are not included in the above totaln par-ticular, manufactured fertilizers (underhemicals) and nonferroue metals (under claeseatured goods classified chiefly by material).

Sources of Raw Materials

Dependence of Czechoslovakia on Imports of Raw Materials a/

From Other

Total From the USSR Communist Countries

orcent of Total Supply

Crude oil

coal

ore

ore

ore

rubber

rubber

Which

a. Including nonferroue metal*.

almost all the natural rubber. Developed countries deliver substantial amounts only of textile fibers. Finally, practically all of the crude oil and petroleum products imported by Czechoslovakia come from the Communist world, chiefly from the USSR.

6. The USSR is the largest single exporter of raw materials to Czechoslovakia, furnishing more thanercent of Czechoslovakia's gross imports of raw materials. Other Communist countries and the less developed countries furnish most of the rest. The shares of tho main groups of trading partners in imports of raw materials are shown in the followingpercentage breakdown (based on Table

Prom

Communist Countries

From the Free World

USSR

Other

Developed Countries

Developed Countries

and live animals, beverages and tobacco, and animal and vegetable oils and fats

Crude materials

Mineral fuels

Total raw materials

9 73

42

3 25

25

8 2

L9

14

14

Czechoslovakia also exports raw materials, mainly to developed Western countries and to Eastern Europe and the USSR. Exports of materials to developed Western countriesincluding malt and hops, other foodstuffs, coal, wood, and angora rabbit hairare in fact slightly larger than imports. The exchange of materials with Western countries serves to improve the mix of Czech materials, especially in cases where Soviet deliveries fall below expectations. Czechoslovakia exports raw materials to Eastern Europe (especially coal and coke) and the USSR (mainly uranium ore)artial offset to their deliveries.* All the countries insist on such offsets. Rumaniaets about as much in the way of materials as itelivers, and Czechoslovakia has an export surplus

in materials with East Germany, otherwise Czechoslovaki*

1 According- "to recent publio etaterr.enie , uranium ores ar* sold to the USSR at price* higher than the current world market. Even eo, uranium export*ose, for very low-grade oree must be worked to meet the contract with the USSR.

Commodity Breakdown of Czechoslovakia's Foreign Trade, by Area a/

Milliy US S

Exports

Countries Free World Countries

N'umber

0, I, 4

Commodity Group USSR

Food and live animalsj beverages and tobacco; animal and vegetable

Other

Dove loped Developed Total

,

11

oils and fats

Crude

Mineral

Machinery

Chemicals;

33

81

530

341

10

111

76

0

243

182

117

976

Table 3

Commodity Breakdown of Czechoslovakia's Foreiqn Trade, by Area a/

Million OS S

Exports

SITC Number

951

Commodity Group Military end items Residual d/

Total

Communist

Less

USSR Total b/

93 0 93

-1 0 1

920

Commodity Breakdown of Czechoslovakia's Foreiqn Trade, by Area a/

s

Communist Countries Free World Countries

Number

0,

Commodity Group USSR

147

Food and live animals; beverages and tobacco; animal and vegetable oils and fats

Less

37

69

482

Other Developed Developed Total bV

178

materials, inedible, except fuels

197

103

504

fuels, lubricants, and related materials

153

5?

209

and equipment

6/ Chemicalsi ufactured goods classified chiefly by material;articles; commodities and transactions not classified c/

172

266

17

206

661

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still runs import surpluses in materials with the Communist countries.

exports of materials areimports, it is clear that Czechoslovakiamost heavily on the USSR, whichercent of Czechoslovakia's netmaterials. Other Communist countries furnishand the less developed countries another That is to say, Czechoslovakiathe last instance principally on two factorsits supplies of raw materials. Thethe willingess of the USSR to export muchof materials than it importsas inwith East Germany and,mallerHungary and Polandin order to helpinfluence in Eastern Europe. The secondfact that most Communist countries andcountries are still willing to takemanufactures in payment for raw materials.

Direction of Machinery Exports

exports of machineryequal to its imports of raw materials andto the very areas from which the rawcome. The demand by the USSR and thecountries for Czech machinery hastheir competing industries have developedinterest in acquiring Western machinery Soviet and Eastern European negotiatorsdown the growth of net imports ofCzechoslovakia through stepping upof their own machinery and byimports of other Czech manufactures,consumer goods. Net Czech deliveriesto Eastern Europe have dropped in Net deliveries to the USSR, however,to grow rapidly* and areto about three-fourths of net Soviet deliveries

The percentages add to moren thia oaee beoauae thereegative import (that ie, export) balanceercent with the developed countries.

he drop in the value of net deliveries6 resulted in part from price reductions.

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of materials to Czechoslovakia. The Asiancountries have been willing to accept mainly machinery, together with small amounts of other manufactures, including some consumer goods. makes up more than one-half of deliveries to the less developed countries; consumer goods and other manufactures make up most of the remainder. Czech imports of machinery from the Asian Communist countries and the less developed countries are negligible. Czechoslovakia is ofargo not importer of machinery from developed Western countries.

10. The overall pattern of Czechoslovakia's net trade in machinery and raw materials6 is as follows:

US S

Materials

a/

323

Europe b/

33

Communist countries

78

developed countries

190

countries

0/

$12

Met exports ara indioatedlus sign;inus sign, b. Inoluding Yugoslavia.

ecause of rounding, components do not add to tht totals shown.

Trade in Other Manufactures

11. In other types of manufactures, Czechoslovakia exported0 million more than it imported It had an export surplus of about this amount

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in trade in industrial consumer goods alone. In most other types of manufactureschiefly metal products, nonmetallic mineral products, andthe balances were relatively small. exports in these groups include iron and tefSteel rods, bars, shapes, and sections; pharmaceuticals; ceramics and pottery; textiles and clothing; shoes; furniture; and musical instruments. The chief imports are steel sheet, nonferrouside variety of chemical compounds, dyestuffs, fertilizers, and plastics.

12. Most of the trade in these manufactures is with other industrial countries, both Communist and Western, although there are also substantial sales to the less developed countries. The main import surplus with developed Western countries is in chemicals. Czech products in all the main categories of manufactures are sold rather widely in Western as well as in Communist markets, occasionally in quite substantial amountsfor example, shoes. But they are generally not competitive in design and quality, and there is little advertising or sales promotion.

Pricei ty

13. Any attempt to revive Czechoslovakia's foreign trade must reckon with the widely differing conditions facing Czechoslovakia in trade with the developed countries, the less developed countries, and the Communist world. In the developed West, the Czechs are in competition on the open market. Usually they have difficulty finding customersthey are not well established in thend their product lines are not designed to meet ,demand. The customers that they do find are rarely willing to be dependent on Communist sources of supply and often take only small lots. Finally, the Czech exporter must make major price concessions to close the deal. On the average the prices obtained by Czechoslovakia run to only about one-half those gotten by competing exporters.

14. Czech analysis of UN trade statistics, for example, shows the following comparison of average unit prices received by various exporting countries for machinery exports to Western Europe

Price- per Kilogram

UnitedEMAestern Europe Czechoslovakia

The Czechs estimate that the composition of machinery exports does not much affect the comparison. It is influenced, of course, by the fact that equipment produced in Czechoslovakia, as in other Communist countries, is generally heavierbecause of inferior materials and obsolete design than similar Western equipment. The wide price range for machinery productstrong preference for new and improved products, few of which Czechoslovakia can offer. The Czech competitive position also suffers from slow deliveries and poor parts supply and service and from reluctance to offer credit, although Czech salesto an exceptional extent products normally sold on credit in Western markets.

The Czechs also face problems when they buy in the West. They often operate from hand to mouth, cannot specify in detail their requirements, and do not have authority to sign contracts without high-level clearance. For these reasons, the'Czechs usually pay more than other customersby their own calculations close to twice aa much. Nothing can be more conclusive on these points than what has appeared in the Czech press. ranslation of one article is given in the Appendix.

In tho less developed countries, Czechoslovakia is still in direct competition with Western businessmen, but the situation is quite different. It is less

* "fmportant to these countries whether the Czechare the best on the market. Moreover, for political reasons the Czechs have often extended long-term credits to ease the problem of repayment. Finally, Czechoslovakia is more or less prepared to take in exchange raw materials that are not in strong demand on the world market. In some casescocoa beans from Ghana, for exampleCzechoslovakia has accepted goods that it must in turn dispose ofoss through switch trading. Even under thesehowever, Czechoslovakia usually haa to sell at substantial discounts below prices of Western competitors in order to get the business. On the other hand, the prices which Czechoslovakia paysimports are generally atot abovehe world price level.

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17. In the Communist world, Czechoslovakia faces still different problems. Trade quotas are established in good part for political reasons, to keep all the economies going and growing. Exporters must still reckon with competition; the least competitive ^ytides tend to get crowded out. But since the overall level of exports is usually increased from year to yearatter of policy, the effect on most exporters is small. The Communist market has another great advantage from the point of view of the exporting enterprisethe amounts of goods involved are usually relatively large,ajor part of sales for many enterprises. Finally, the prices received are almost always much better than can be gotten on other markets.

18. Prices in trade among Communist countries are negotiated on the basis of quotations of various kinds from the Free World. The Communist countries are almost completely dependent on these quotations for negotiating prices. As one Czech spokesman said recently:

I am of the opinion, even though this might seem an exaggeration, that if capitalism were to disappear at this moment with its world market, the CEMA countries would probably not have any prices at which they could trade with one another... .

The bargaining over prices involves increasingly sophisticated analysis of varying conditions on Western markets and differences in technical specifications as well as adjustments for trana-apmktation differentials. Nevertheless it is fair to say that prices in trade with other Communist countries are roughly similar to those prevailing in the leading world markets and hence much more advantageous to Czechoslovakia than those it actually obtainsand paysin those markets when it deals directly with non-Communist countries.

19. This price cleavage must be an enormous consideration for the Czech leadership. mall trade with the developed West is obviously valuable in spite of the disadvantageous terms of trade.

Czechoslovakia, like other Communist countries, has used the world market to make up shortages of grain and metals as well as to buy supplementary raw materials. However, trade with the developed West is clearly large enough already to fulfill this purpose. Further shifts to the Western marketeen justified as needed to acquire new technology. It is assumed, rather than demonstrable, however, that the payoff on new technology is great enough to offset the disadvantageous terms of trade.

Balance of Payments and Reserves

20. The financial situation of Czechoslovakia offers another reasonautious approach to any reorientation of trade. The government has recently been quite frank about the situation. According to Oldrich Cernik, the new Premier (and formerly the head of the State Planningzechoslovakiareditor, with substantial balances on clearing account both with the Communist world and with the less developed countries. In hard currencies, on the other hand, Czechoslovakia owes0 million, much of it on "short-term credits." The Czechs have drawn5 million (net of repayments) on government-guaranteed loans, mainly from Western Europe. Indebtedness on credits runningear or less probably does not runillion. The remainder apparently represents private nonguaranteed supplier credits held by Western banks, mostly runningears.

leadership has not discussedposition in hard currency and gold. Anbalance of payments data8 to date,suggests that Czechoslovakia has not accumulated

inadequate reserves to manage even its present hard currency tradewith exports and imports both running on tho order0 million annuallyet alone any expansion of trade.

policy in recent years has been torisks in trade with developed countries. has been to expand Czech exports by as much

as possible and to hold down imports, preferably to reduce them. This conservative course merely represents tightened central control and business as usual. It does nothing to solve the underlying problems.

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ATIThe Question of Soviet Pressure

on tne USSR and have watched anxiously to see whether Soviet dis-

val of political developments in Czechoslovakia would affect deliveries of vital raw materials. So far that has not happened, but the anxiety- remains.

April the Czech radio broadcastremarks from CEMA representativeForeign Trade Minister) Frantisek Hamouz,that Soviet crude oil (practically theof Czechoslovakia) had been coming in onhard winter weatherhortage of trucksdelayed iron ore shipmentsnd that the USSR hadons of cotton to make up forin Egyptian deliveries.

did not mention the other majordelivered by the USSRrain. Over theagricultural5 throughdeliveries have provided on the averageof Czech grain imports. For alate8 the question arose whether ingrain deliveries had been slowed down av lork Timoe correspondent,reported from Prague, on the authority ofofficial, that Soviet wheat shipmentsstopped, at least for the current quarter. of Czechoslovakia promptly calleduntrue and Binder's source denied that heany such thing. The Czechs reported thattons had been shipped in the first The Soviet press followed up with ain late May giving an even higher figurethat grain shipments were ahead ofreport indicated that the annual quota oftons would be delivered by the end Whatever delays may have occurred init is almost certain that Sovietnot involved. One fairly conclusivethe Czechs were not facing an unexpectedin supplies is that they had justthe purchaseons ofCanada, the last contractive-year

agreement, without showing any urgency about getting the wheat orew agreement.

26. In ail likelihood, the USSR will fulfill this year's trade commitments to Czechoslovakia and will agree to some further increases in year. As experience has shown, economicis not effectiveolitical weapon, even where one country is so dependent on another as Czechoslovakia is on the USSR. The reduction or suspension, selective or comprehensive, of Soviet deliveries would strengthen anti-Soviet feelings in the society and would force Czechoslovakia to turn for help to the West, all without unseating the leadership, whose position, indeed, would probably be strengthenedave of patriotic support. ountry so dependent on trade as Czechoslovakia could continue to function if its imports were largely cut off. The economy would soon revert5 level,ig cutback in output by theindustries, most machinery plants, and the petroleum industry. Unemployment would be substantial Emergency oil imports would have to be allocated to essential uses; steam locomotives would be brought out of retirement. The soft domestic wheat would be made into flour, and the peasants, who have been feeding this wheat to stock, would have to slaughter much of their herds. But nobody would starve; basic services would continue; and output would pick up as Western help began to arrive.

27. The Soviet government seems to have arrived at the same conclusion, for it decided to use an implied threat of military intervention, pluspolitical pressure, to bring Czechoslovakiainto line. The USSR will doubtless use economic ^lfverage in trade negotiations9 and, but more for economic than for political onds. Even the withholding of economic aid until political conditions stabilizethe use of the carrot rather than the stickdoes not carry great political weight.

Trade and Reform

28. Foreign trade problems have been of central importance in Czechoslovakia's long review of

economic policy, which is approaching the moment of decision. Difficulties in foreign trade havethe most convincing evidence of what is wrong with the economy* Tho economic reformers, led by Professor Otaeputy Prime Ministerfocused on foreign trade as the sector in which ge must begin. Finally, foreign trade involves political hazards for the new leadership.

Novotny regime was slow toinefficiency and technical backwardnessproblems of the economy, intimately related

to isolation from the world market. In the end, the growing preference of Communist trading partners for Western products and the lack of demand for Czech manufactures on Western markets provided evidence that the leadership could not ignore. Once it was recognized how badly the competitive position of Czechoslovakia had slipped under Communist rule, demands for sweeping reform were inevitable. The "recession"ave these demands political force.

economists, though they ofamong themselves on what to do, agreeimprovements in efficiency depend oneconomy to the "discipline of the market," ey role in their proposals. of manufacturing are involved in the3ome quite heavily (see Nearlyof the output of manufacturing (excludingindustry) is exported. So long asstill protected and constrained byagreements with other Communist countries

and by hardly less restrictive arrangements with the less, developed countriesa general shift to the "mfcipline of the market" is unworkable.

order to overcome this difficulty,seem to be ready to push changes thattrade with the Communist worldorebasis, even though the changes would work in

the short run to the disadvantage of Czechoslovakia. Their main desire is to decentralize decisions on trade. If trade contracts were negotiated directly between enterprises, exporters would be on their ownore competitive situation, more like the one

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Table 4

Exports of Czechoslovakia

a Percent of Output

Branch of Industry

Fuel mining and processing

Metallurgy, including ore mining

Engineering

Chemicals and rubber

Building materials

Glass, porcelain, and ceramics

Woodworking

Paper

Printing

Textiles

Clothing

Leather processing jfcod processing Total industry

ercent of Output

N.A.

IB.5

they face in the West. Czechoslovakia wouldricewith the near elimination of tie-in sales, the volume of trade would drop and the output of many firms would have to be cut back. To put trade

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with other Communist countriesorebasis would help greatly in establishing the "discipline of theutubstantial cost.*

Much the same holds for the second main recommendation that the reformers have in mindto develop close economic relations with theWestern countries. As already pointedhift of trade toward the West is bound to be slow and costly,esult of the lack of demand for Czech products and the extremely unfavorable terms of trade. If trade with the Communist world is putore businesslike basis, the differences between selling on Communist and Western markets would be reduced but would still be substantial. The benefit of closer association with the Western market is essentially in acquiringnot only technology but also experience in management, marketing, and finance. These benefits, although expensive, are almost essential to any attempt to make the economy more competitive.

* It may be noted that Czechoslovakia andhave already agreed to begin liberalizing their trade with each other and are planning (aooording to the Yugoelav negotiator) "that thie volume of free trade will be gradually increased and replace thelready obsolete and restrictive olearing eystem of egotiations to the same end have begun between Czechoslovakia and Hungary.

33. Since both these measuresthe adoption of more businesslike trading practices withcountries and closer association withWestern countriesinvolve substantialey requirement of the reform proposals is to obtain enough foreign assistance to finance most of the cost. The reformers have not spelled out in detail what kind of assistance, or how much, might be neededalthough the amounts0 million0 million have been mentioned. But it is evident, first, that immediate help is needed to increase the funds available for conducting hard (SnmtiBncy trade; second, that help is needed in

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reorganizing and modernizing the most promising export industries,ighly selective basis; and third, that very long-term credit is needed to finance deficits in the balance of payments during theof economic reforms, permitting the regime to maintain consumption while restructuringid shifting trade patterns.

need for help with financing tradeand not only to the reformers. Thefrom the USSR would doubtless be amplethis purpose. ubstantial Soviet creditto be extended when the Soviet government

is finally satisfied of the ability and willingness of the new leadership to keep political opposition in bounds.

Western help in overhauling the Czech export industries can probably be obtained once thehas decided what industries to select for this treatment. Long-term loans as well as "jointare likely to be sought for modernizing export industries and establishing them in the market. Here the regional interests of Slovakia and other vested interests couldubstantial waste of Western help, although the lenders could help to minimize such waste.

The acquisition of long-term capital to finance balance of payments deficits is likely to prove the hardest problem. The USSR probably will not furnish enough aid to cover thisew Western governmentsnd the World Bankare then the only possible sources. The Czechs have already made approaches to these sources to explore the problems involved. If the new leadership is

s able and willing toersuasive reform, and to satisfy Western lenders that the money will be well used, the money probably will become available. But the leadership faces enormous difficulties in trying to meet these conditions.

political obstacles are, first,fears of the unemployment likely tobasic reforms; second, Soviet andunwillingness to cooperate in basicconduct of foreign trade; and finally, Soviet

t

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(jnd East German and Polish) uneasiness over any rapprochement with the West, especially because of its bearing on the German question.

38. Taken together, these difficulties seem soat as almost to rule out the possibility of basic ^onomic reforms in Czechoslovakia. Professor Sik is now pushing workers'a Yougoslavie in the hope of reassuring the rank and file that their interests will be protected andiew to getting the central authorities out of enterprise management. Party boss Dubcek himself supports some kind of worker representation. Czech willingness to accept changes in the composition and terms of trade in favor of the USSR might help to win Soviet support for more businesslike trade arrangements. Great caution and tact might enable Czechoslovakia to secure Western economic support without getting into trouble with the USSR. But as of this moment (earlyhe odds appear to be against economic reforms as broad as those of Yugoslavia.

Prices in Czechoslovakia's Tradg with the EEC*

The following are some of tho results attainedomparison of prices obtained by Czechoslovakia in export and import with EEC countries and prices obtained by other countries, in the category of machinery,tems were selected for comparison: sewing machines, sorting and crushing machinery, extraction machinery and excavators, pumps for liquid fuels, electric motors and generators, tractors, metalworking machines, bearings, motor vehicles, and looms and preparatory textile machines. The analysis shows that all except the looms and preparatory textile machinery brought lower prices for Czechoslovakia than those obtained by the advanced capitalist countries. The prices obtained by Czechoslovakia for sewing machines, sorting and crushing machines, extraction machines and excavators, liquid fuel pumps, electric motors, and generators wore onlyoercent of the prices attained by the capitalist countries, and the prices of tractors, metalworking machines, bearings, and motor vehicles were onlyoercent of the prices attained by the capitalist countries.

re^Di9*st'7 (Praau.

It should be explained that customs discrimination is not one of the main reasons for the low sales prices of Czech machines on EEC markets. The duties rangeoercent, except for motor vehicles, _and the advanced capitalist countries which are not ^EEC members have to pay them too. On the other hand, Czech import prices not only exceed the Czech sales prices but are also higher than the purchase prices of the capitalist countries studied in the survey. For example,, with only oneCzech sales prices ranged betweenndercent of the sales prices obtained by EFTA countries, while comparable figures for Belgium wereercent, Austriaoercent, and Swedenercent. Also, Czech

purchase prices ranged betweenercent of the purchase prices obtained by EFTA countries, while comparable figures for Belgiumercent, and Swedenercent.

These considerable differences cannot be explained merely by the different composition of the assortment within the items studied, since these were relatively homogeneous.

The following tabulation shows sales prices obtained and purchase prices paid by Czechoslovakia for the same category of items (All values represent percent of EFTA price, unless otherwise indicated.)

Price Purchase Price

Sewing6

Sorting and crushing

Excavation machinery and

Generators and electric6

Passenger

Metalworking

This situation can be expected to some extent because of the low quality of Czech products and services and because of Czechoslovakia's need to import the types of higher level machinery which it does not produce itself. Tho sales prices of Czech pUed goodsow level of processing rangefenercent of the EFTA prices, but fall as low asercent for productsigh level of processing. The purchase prices paid byin trade with the EEC countries are up to twice as much as the EFTA purchase prices.

Czech sales prices for raw materials andgoods in trade with the EEC countries are relatively high, ranging betweenercent of the EFTA prices. However, even in this case, the

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prices are never higher than those obtained by other countries, and the purchase prices paid by Czechoslovakia for the same items are the highest of all the countries. zechoslovakia paid twice to three times the purchase prices paid by advanced capitalist countries for newsprint and pottery clay.

There hasendency, among the advanced capitalist countries, to gradually balance their sales and purchase price relations, but this is not true of Czechoslovakia.

There is considerable variation in the relations of Czech sales prices to EFTA prices for light industry products * For example, the price of glass tableware is very close to the EFTA level, but is only one-half and even lower than the price obtained by Sweden. Sales prices of medicines are the lowest of all, representingercent of the purchase price for the samo item. Czech sales prices of glassware are one-fourth to one-fifth those obtained by Austria. Czechoslovakia's sales prices of cotton fabrics were lower than those of any of the other countries studied, and the purchase prices paid by Czechoslovakia were substantially higher than those paid by the other countries-

The results of the surveyecline in effectiveness of Czech foreign trade. The relative, and in some cases the absolute, movements of the prices and their relationships are in most cases unfavorable to Czechoslovakia. This is true even in cases where the advanced capitalist countries have improved their price positions.

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Original document.

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