FOREIGN TRADE IN THE ECONOMIC POLICY OF CZECHOSLOVAKIA

Created: 7/1/1968

OCR scan of the original document, errors are possible

LBJ LIBRARY Mandatory Review Case* Nirocument it (pel* A-

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Memorandum

Foreign Trade in the Economic Policy of Czechoslovakia

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CONFIMrJTlAI No Fo^sMrT Dissem

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence8

INTELLIGENCE MEMORANDUM

Foreign Trade in the Economic Policy of CzechoslovakTa

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 nonmetallic 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 USSRwhich 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.

Thxe memorandum wag produced eolely by CIA. It wae prepared by the Office of Economic Research and aae coordinated with the Office of Current Intelligence.

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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 economic advisers especially Professor Ota Sikwould 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 or. 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 from 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 more 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

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less developed countries of the Free World hasavorite idea even with the Czech conservatives, and possibilities for further expansion certainly existspecially 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 developed 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 currenciesroblem that has proved quite intractable. So long as there are easier protected markets at home 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. Tha prices obtained are so low that trade with the 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 officialsto conclude that large-scale foreign help is essential if Czechoslovakia is to make itself more competitive. 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, France, 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.

Character of Czechoslovakia's Trade

1. Tho changing needsmall industrial nation, the ill effects of past economic policies, and the constraints of barter arrangements are all reflected in Czechoslovakia's foreign trade. The country has longot importer of materialset exporter of manufactures. Since World War II, however, the composition of imports and exports has changed radically. Imports of foodstuffs, non-metallic minerals, and petroleum are several times larger than before the war, mainlyesult of industrial developa*ent 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 machinery olicy 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 (Tha principal import* of raw materials7S art shown in Exports bear the mark of the same policies. Sales of machinery and equi^aent, which came toercent of the totalow amount to almost one-half. At constant prices their value is someimes7 level. But exports of otherhich 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.

2, Shifts in conaaodity composition have been accompaniedweeping geographic reorientation of the 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 'eyen8 the year of the Communist takeoveritt still was onlyercent. Thereafter, trade with the West was deliberately cut until3 it stood at less than one-half8 level. Meanwhile trade with the Communist countriesto rise;3 it stood at more than three-fourths ofotal trade. Since then the share has never been less thanercent.

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way foreign trade has contributed greatly to the economic inefficiency now under attack by the re forme rs,

Sources of Raw Materials

4. Czechoslovakia depends on imports* chiefly from the Communist countries and the 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 nonmetallic 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 amounted toillion, orercent of the total value of imports. The importance of imports of raw materials tois indicated in Table 2*

5. The Communist countries supply most of the foodstuffs, tobacco and beverages, and fats. The main imports from the Free World6 included fish (from Scandinavia andorn (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 tho Communist world are ores and nonmetallic 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, furskins, oilseeds, and textile fibers and

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* Food and live animals;nd tobacco; crude materials; animal and vegetable oils and fats; and mineral fuelsthat is,n the Standard International Trade Classification (SITC). Other significant deficiencies in raw materials are filled by imports of manufactures> which are not included in the above totalint manufactured fertilizers (under classchemicals) and nonferroue metals (underaatured goods classified chiefly by material).

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Dependence of Czechoslovakia on Imports of Raw Materials a/

Total From the USSR

Importsercent of TotalOf Which

a.

From Other gorrjum i.ountri-r

Crude oil

coal

7

ore

ore

. A

ore

a

a

24

0

rubber

rubber

0

n

Barley

a

7

5

1

Including nonferroua metaia.

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.shares of the main groups of trading partners in imports of raw materials are shown in the followinc percentage breakdown {based on

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Percent

From

Communist Countries

From the Free World

Less

Developed Developed Other Countries Countries

USSR

and liveandvegetable

Crude

Mineral

3 2S

8

0 0

raw materials

Czechoslovakia also exports raw materials, mainly to developed Western countries and to Eastern Europe and the USSR. Exports of materials to developed Western countries including 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 expectationszechoslovakia 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. Rumania now gets about as much in the way of materials a3 it delivers, and Czechoslovakia has an export surplus in materials with East Germany. Otherwise Czechoslovakia

'According to recent public statements, uranium ores are Bold toSF at prices higher than the current world market. Even bo, uranium exportsose, for very Ion-grade ores muet be worked to meet the contract uith the USSR.

Commodity Breakdown of Czechoslovakia's Foreign Trade, by Area

US 5

Exports

Countries Free World Countries

Number

0,

Group USSR

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

Less

Other Developed Developed Total

and fats

materials, inedible, except fuels

64

33

10

76

182

fuels, lubricants, and related materials

Machinery and equipment

473

530

70

6, Chemicals; ufactured goods

classified chiefly by material; miscellaneous manufactured articles; commodities and transactions not classified c/

280

243

976

Table 3

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

Million US S

Exports

Communist Countries Free World Countries

Group

end items

Residual d/ Total

Other k/

0

2

I*

Commodity Breakdown of Czechoslovakia's Foreign Trade, by

6

Million US S

Import;

Communist Countries

From

Free World Countries

Number

Commodity Group USSB

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

147

Less

87

69

482

other Developed Developed Total by

178

Mineral fuels, lubricants, and related materials

63

53

141

103

0

504

209

and

> Chemicals; 9 ufactured

17

206

661

*

Table 3

Breakdown of Czechoslovakia's

Trade, by Area a/

Million US S

Imports

Corwuniet -Countries Free World Countries

Less

Other Developed Dove loped Total b/

Commodity Group USSR

|6

Military end items Residual

SITC Numbnr

Total

PIS

561

951

Id in thehe nech txmated

statistics shown.

a. Thetotal* for Czech trad* with th* Communist world and tne Fret Uor major commodity groups ar* from Cssch trad* Th* breakdowns th* USSR and other Communist countries and between th* teee developed an developed aountriee of the Free Vorld are estimated, largely from other C The principal trade in mititary end items, which i* here ee separately# is included under machinery in the original Because of rounding, components may not add to the totals o. Excluding military end iteme*

d* The residual is the oombined effeot of inconsistencies in the original Csech statistics and of rounding.

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still runs import surpluses in materials with the Communist countries.

8. When exports of materials are subtracted from imports/ it is clear that Czechoslovakiamost heavily on the USSR, whichercent.of Czechoslovakia's net imports of materials. Other Communist countries furnishercent and the less developed countries anotherercent.* That is to say, Czechoslovakia depends in the last instance principally on two factors to guarantee its supplies of raw materials. The first is the willingess of the USSR to export much larger amounts of materials than it importsas in its trade with East Germany and,maller scale, with Hungary and Polandin order to help maintain Soviet influence in Eastern Europe. The second is the fact that most Communist countries and less developed countries are still willing to takemanufactures in payment for raw materials

Direction of Machinery Exports

9. Czechoslovakia's exports of machinery are about equal to its imports of raw materials and go largely to the very areas from which the rawcome. The demand by the USSR and the Eastern European countries for Czech machinery has slackened, as their competing industries have developed and their interest in acquiring Western machinery has grown. Soviet and Eastern European negotiators have held down the growth of net imports of machinery from Czechoslovakia through stepping up counter-deliveries of their own machinery and by expanding their imports of other Czech manufactures,consumer goods. Net Czech deliveries of machinery to Eastern Europe have dropped in recent years. Net deliveries to the USSR, however,inued to grow rapidly* and are still equal to about three-fourths of net Soviet deliveries

The percentages add to morsn this case because thereegative import (that is, export) balanceercent with the developed countries.

*A The 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 ofarge net importer of machinery from developed Western countries.

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

Million US S

Raw

33

78

1

0

2 2

ee

Materials^ Balance

USSR a/

Eastern Europe b/ Other Communist countries Less developed countries Developed countries Total c/

=. ezporta are indicatedlug $ign; net

xmportBinue eign. b. Including Yugoslavia.

o. Because of, rounding, components do not add to the totalt thoun- .

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 exports in these groups include iron and steel rocs, bars, shapes, and sections; pharmaceuticals ceramics and pottery; textiles and clothing; shoes; furniture; and musical instrunents. The chief imports are steel sheet, nonferrouside variety of chemical compounds, dyestuffs, fertilizers, and plastics.

12. Host of the trade in those manufactures is with other industrial countries, both Communist and Western, although there are also substantial sales to the less developed 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.

Price and Quality

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 the market and their product lines are not designed to meet current 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, tha 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

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the Communist world, Czechoslovakiadifferent problems. Trade quotas aregood part for political reasons, to keepgoing and growing. Exporters mustwith competition; the leasttend to get crowded out. But sincelevel of exports is usually increasedto 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.

in trade among Communistnegotiated on the basis of quotations offrom the Free World. The Communistalmost completely dependent on thesenegotiating prices. As one Czech spokesman

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 fordifferentials. 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 obtainsnd paysin those markets when it deals directly with non-Communist countries.

price cleavage must be anfor the Czech leadership. Awith the developed West is obviouslyspite 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 market have been 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 drawnS 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.

The leadership has not discussed publicly its position in hard currency and gold. An analysis of balance of payments data8 to date,suggests that Czechoslovakia has not accumulated adequate reserves to mar.age even its present hard currency tradewith exports and imports both running on the order0 million annuallyet alone any expansion of trade.

Czech policy in recent years has been to avoid all risks in trade with developed countries. The object 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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The Question of Soviet Pressure

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The people of Czechoslovakia realize that the economy is heavily dependent on the USSR and have watched anxiously to see whether Sovietof political developments in Czechoslovakia would affect deliveries of vital raw materials. So far that has not happened, but the anxiety remains-.

In April the Czech radio broadcast some reassuring remarks from CEMA representative (and former Foreign Trade Minister) Frantisek Hamouz, who said that Soviet crude oil (practically the entire supply of Czechoslovakia) had been coming in on time, that hard winter weatherhortage of trucks had somewhat delayed iron ore shipments (two-thirds of Czechnd that the USSR had offered anons of cotton to make up forIn Egyptian deliveries.

Hamouz did not mention the other majordelivered by the USSRgrain. Over the last three agricultural5oviet deliveries have provided on the average about three-quarters of Czech grain imports. oment in late8 the question arose whether in fact Soviet grain deliveries had been slowed down or stopped. etJ York Timeo correspondent, David Binder, reported from Prague, on the authorityesponsible official, that Soviet wheat shipments had been stopped, at least for the current quarter. The government of Czechoslovakia promptly called the report untrue and Binder's source denied that he had said any such thing. The Czechs reported thatons had been shipped in the first four months The Soviet press followed upews story in late May giving an even higher figure and saying that grain shipments were ahead of schedule. The report indicated that the annual quotaillion tons would be delivered by the end of August. Whatever delays may have occurred in wheat deliveries, it is almost certain that Soviet pressure was not involved. One fairly conclusive indication that the Czechs were not facing an unexpectedin supplies is that they had just finished negotiating the purchaseons of wheat from Canada, the last contractive-year

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

Sven

26. In ail likelihood, the USSR will fulfill this year's trade commitments to Czechoslovakia and will agree to some further increases in deliveries next 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 revert9evel,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 Czechoslovakia into line. The USSR will doubtless use economic leverage in trade negotiations9 and/ but store for economic than for political ends. 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

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

29, The Novotny regime was slow to recognize massive inefficiency and technical backwardness as basic problems 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.

30* ch economists, though they of course differ among themselves on what to do, agree that major improvements in efficiency depend on returning the economy to the "discipline of the market,." Foreign tradeey role in their proposals* Most branches of manufacturing are involved in the export market, some quite heavily (see ourth of the output of manufacturing (excluding the food industry) is exported- So long as enterprises are still protected and constrained by comprehensive trade agreements with other Communist countries and by hardly less restrictive arrangements with the less developed countriesa general shift to the "discipline of the market" is unworkable.

m In ordej: to overcome, this difficulty, the reformers seem to be ready to push changes that would put trade 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 onttheir ownore competitive situation, more like the one

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Table 4

Industrial Exports of Czechoslovakiaercent of

6

as a

of

of Industry

mining and processing

including ore mining

and rubber

materials

porcelain, and ceramics

processing

processing

industry

S

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

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

cost.*.

32. 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 Cxech 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 acquiring "know-how"not 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.

33. Since both these measuresthe adoption of more businesslike trading practices withcountries and closer association withWestern countriasinvolve 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 whatf 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 currency trade; second, that help is needed in

It may be .noted that Czechoslovakia andave already agreed to begin liberalizing their trade with each other and are planning (according to the Yugoslav negotiator) "that this volume of free trade will be gradually increased and replace thelready obsolete and restrictive clearing system of egotiations to ths same snd have begun between Czechoslovakia and Hungary,

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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 cf payments during theof economic reforms, permitting the regime to maintain consumption while restructuring industry and shifting trade patterns.

34. The need for help with financing trade is obvious, and not only to the reformers. The aid sought from the USSR would doubtless be ample to serve this purpose. ubstantial Soviet credit is likely to be extended when the Soviet government is finally satisfied of the ability and willingness the new leadership to keep political opposition bounds.

help in overhauling the Czechcan probably be obtained once thehas decided what industries to select for Long-term loans as well as "jointare likely to be sought forindustries and establishing them in Here the regional interests of Slovakiavested interests could force aof Western help, although the lendersto minimize such waste.

acquisition of long-term capitalbalance of payments deficits is likelythe hardest problem. The USSR probablyfurnish enough aid to cover thisfew Western governments and the World Bankthen the only possible sources. The Czechsmade approaches to these sources toproblems involved. If the new leadershipand willing toersuasive reformand to satisfy Western lenders that thebe well,used, the money probably will But the leadership facesin trying to meet these conditions.

37. The political obstacles are, first, the workers 1 fears of the unemployment likely to result from basic reforms; second, Soviet and Eastern European unwillingness to cooperate in basic changes in conduct of foreign trade; and finally, Soviet

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

38. Taken together, these difficulties seem so great as almost to rule out the possibility of basic economic 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.

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Appendix

Prices in Czechoslovakia's Trade with the EEC*

The following are some of the results attainedomparison of prices obtained by Czechoslovak! 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 were 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.

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 ofapitalist countries studied in the survey. Fot 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

- Foreign Press Digest,konomie, flo., Julu-Auguet *

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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.)

Sales Price Purchase Pri

machines Sorting and crushing machines Excavation machinery and excavators Generators and electric motors Bearings

Passenger automobiles Tractorsigures) Metalworking machines

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. The sales prices of Czech rolled goodsow levsl of processingercent of the EFTA prices, but fallw as ercent for productsigh level

tha Purchftae prices paid byin trade with the EEC countries are up to twice as much as the EFTA purchase prices.

mt *Cve? 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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are never higher than those obtained by

countries, and the purchase prices paid by

for the same items are the highest

the countries. zechoslovakia paid

to three times the purchase prices paid by

capitalist countries for newsprint and

clay -

There hasendency, among theitalist countries, to gradually balancees and purchase price relations, but this isie of Czechoslovakia.

There is considerable variation in the relationsCzech sales prices to EFTA prices for light industry products. For example, the price cf 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 same 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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