ECONOMIC PRESSURE FOR CHANGE IN EASTERN EUROPE

Created: 3/1/1968

OCR scan of the original document, errors are possible

Conttmhtial

lb) LIBRARY Mandatory Review Case*-

Memorandum

Economic Pressure for Change in Eastern Europe

Corjjjd?ntial

ER

8

AUG 0

CENTRAL. INTELLIGENCE AGENCY of

March -rtiv-

INTELLIGENCE-t>

S ternary

Economic pressureajor force for political change in Eastern Europe. Forears and more the Communist regimes have driven their economies, keeping them under close political control and almost entirely insulated from the world market. Until0 the leaders still hoped toand surpass" Western Europe, thus "demonstrating the superiority of socialism." By now everyone, including the leaders, realizaa that Eastern Europe ia not even in the same league with Western Europe. Tho Eastern European countries produce at higher,uch inferior range of goods and services, and in these respects they are not gaining on Western Europe but falling behind.

The threat to the Eastern European regimes is twofold. First, the young are intolerant and impatient of waste and shortagess of oppression and humbugand they have leaders among the new elite, in and out of the Party. Second, the Eastern European states cannot capture the national feeling of their people or secure independence in foreign affairs without becoming competitive in world markets. With second-class economies, they aremore dependent on the USSR, in spite of the yearning of the elite for more independence. The leaders are on the defensive in the face of these challenges.

Note: Thia memorandum uae produced eolelu by CIA. It waa prepared by the Office of Economic fteeearch and coordinated aith the Offioe of Current Intelligence.

Economic Pressure for Chango in Eastern Europe

Economic problems pose an immediate threat only in Czechoslovakia, where the Party in January dropped long-time boss Antonin Novotny, chiefly for not dealing with then effectively. As the people see it, especially the young and the elite, it it the fault of the Party that the econcoy, while growing, has deteriorated so much. When the Communists took overB, Czechoslovakia was better off than West Germany. Now, output per capita is only about two-thirds and consumption about three-fifths of the West German level aside from major differences in quality and mix of output. In no other country have the Communists thrown away such opportunities.

In the other countries, mounting discontent with living conditions and the fear of increased dependence on the USSR have less political impact. The economic problems of East Germany are almost as serious as those of Czechoslovakia. But the division of Germany and the dominant Soviet role in East Germany, handicaps imposed by history, have relieved the East German Communists of much of the responsibility for East German economic problems. Rising econooic pressures on Hungary and Poland probably do not pose an immediate danger, for memorieshough fading, areestraining influence on political action. In the less developed countries, Bulgaria and Rumania, discontent with living conditions is just emergingolitical problem, and the leaders still have time to try to make their economies -competitive, although the outlook is not encouraging.

In response to mounting criticism, all the Eastern European regimes have adopted "economicns, beginning with the East German announcement in Criticism has focused on mistakes in economic policy and the inefficiencies resulting from bureaucratic control. The reforms are intended to correct these weaknesses by giving the planning staffs the training and tools needed to support economic policy and by gradually turning over economic decisions to industrialand replacing the sanctions of planwith those of the marketsupply and demand, profit and loss.

AL

The leaders and tha Party hierarchy have accepted economic raform-with major reservations. Theyeed for developing stronger, more professional planning and manageiaent, but they distrust economists and other experts as politically -independable andstrange as it may seemimpractical of visionary.-Tha reforms are therefore carefully hedged about to assure political control and to prevent economic disruption. The planners have been given moreoice in policy but still do notreat deal of weight. They have not persuaded the leaders tolow pressure" economic policy, to concentrate on "qualitative changes" (in efficiency and product mix) even at the expense of increased output. The leaders still seem to believe in rofonn and rapidolicy that cverdetermines the choices open to planners and management and leaves them to follow tha line of least resistance, which has generally been to increase output as the leaders want. The industrial managers have acquired more authority, but mainly in matters that the central bureaucracies never succeeded in controllingthe precise composition of output, wage payments, and investment in additions plant and equipment.

Yet differences in approach are important, not so much differences in the reform programs as in substantive economic policy. Economic policies differ on such vital questions as how hard to push the economy, how much to reduce the overstaffed economic apparatus, what to do about incompetent Party hacks in planning and management, how much inflation to accept, how fast to close down grossly inefficientnd whether to riskunemployment. Policy on such questions will largely determine the effect of the present reforms.

Czechoslovakia and Hungaryontrast in economic policy, even though their reformare much alikeoth look to eventual reliance on "market forces" to police economic decisions. Czechoslovakia has been less than (reformer Ota Sik'e word) in support of the first cautious steps toward reform. Insistence on rapid increases in output, plus the dead weight

of tho old bureaucracy, has made thenoperative and is likely to lead to renewed conomic difficulties, although the recent "changes* in the leadership nay help to avoid critical difficulties. Hungary, on tho other hand, has carefully controlled the pressure for increased output and has prepared the way for reform bymanagement and cutting back the central economic bureaucracy byoercent. Thus Hungary, moving with all deliberate speed, may accomplish something through economic reform. The; other countries have followed the East German model, which emphasizes the development, not of "market forces'* but of highly professional planning and management. Reform in these countriesual purpose: on the one hand, to raise efficiency and adapt output to the market, and on the other, to increase effective central control* The East Germans have carried out this program with characteristic energy and considerable success, although their obsession with rapid growth is likely to land them in trouble. The German drive is lacking in Bulgaria, Poland, and Rumania. Bulgaria, which has not yet put its reform program into full operation, and Poland and Rumania, which are still experimenting, probably will not have much to show for their efforts at economic reformnor are they likely to run into serious economic trouble in the near future.

Under present policies, the chronic economic problems of Eastern Europe will persist* In some countries they may become acute in the next two or three yearsrobably in Czechoslovakia, unless the new leadership imposes more realistic policies, and possibly in East Germany. The leaders have even less room for maneuver in economic than in political matters, and reform will add to Eastern European frustrations and internal political tensions. As economic pressures increase, some of the Eastern European countries may seek closer political relations with the West, especially with Western Europe,ay out of their economic difficulties, only with political backing and large-scale economic support from the West can any Eastern European country carry out basic changes in policies and institutions.

- 4

CONI^^NTIAL

The Symptoms of Economic Inferiority

X. The symptoms of deep economic problems in Eastern Europe are of two kinds: f resources and unsuitable characteristicsoutput of goods and services. Inefficiency has; great political impact; people can see (and feel) it as workers and consumers. Deficiencies in the quality and mix of goods and services are also obvious to everyone, and equally offensive. These deficienciesasic weakness of the Eastern European economiesa major cause of continued inefficiency in using resources (the wrong goods arc fed back into the system) as wellajor reason for popular dissatisfaction and the weak position of Eastern European goods on foreign markets. The Eastern Europeans themselves have come to admitndeed emphasizethe seriousness of these problems. They realize that the problems are built into plant and equipment, the habits of management and workers, and the very institutions of the command economy.

2. The inefficiency of the Eastern European economies relative to Western Europe appears clearly in the low productivity of investment. During the postwar-period the productivity of investment (annual increment of output per unit ofas been lower in the Eastern European countries than in Western European countries that were also subject to the ravages of World War II.* In thes the productivity of investment in Eastern Europe rose to the Western European level, largely because of the one-time increase in efficiency flowing from the great rise in Soviet material deliveries to Eastern Europe, which did away with the acute shortages of the earlier years. But ins the productivity of investment has dropped to only two-thirds of the Western European level. If data for the two countries moat affected by cyclical movements, Czechoslovakia and West Germany, are eliminated from.the comparison (or adjusted to dampen the cyclicalhis relationship has been quite stable since thes. That is to say, if Eastern Europe is not

"Postwar Economic Growth in Eastern Europeomparieon with Westerny Hourtot_ Ernet/ttew Directions in the Soviet Economy, Joini Economic Committee of Congress, Waahtngtont

(:oNFinjiffnAL

falling further behind, neither is it gaining. And, although thereonsiderable range in the productivity of investment in both Eastern and Western Europe, there is little-overlap between the ranges for the two areas. Ifnd West Germany are left out of .the. comparisoit (or the fluctuations in their datanvestment costs in every Eastern European country are consistently higher than the average' for" Western Europe*

costs have also run higherEurope, more than double the Western In Western Europe, annual increasesaverageercent of GNPaverages rangeercent)-* Europe, after allowing for differencesaccounting, the average is abouter-- of GNP (varying from year to year between

3ercent). Moreover, the share of inven^ tories in GNP has been rising in Eastern Europe but not in Western Europe. As with the productivity of investment, there is little overlap between the ranges for the two areas.

because of higher investmentcosts, economic growth has*been muchto Eastern than to Western Europe. has achieved about the same rates of growth

as Western Europe bymaller share of GNP to consumption. In Western Europe overercent of GNP (at market prices) goes to consumption; in Eastern Europe, only aboutercent of GNP (valued at the same prices).

Europe is also less efficient inof current inputs. Czech economist Ota Sik,in economic reform, recently indicateduses two to three times as muchfuels as most Western countries use to produce

a given amount of industrial output. He made the following comparison (tons of input0 of industrial output):

* From data for the European countries in OECD (the Organization for Economic Cooperation andhioh includes all the Western European ccuntriee except Finlandt Switzerland, and Spain ae well as the United States and Canada,

Germany

States

Such differences may be increasing. The conversion- -of the Eastern European economies from coal to oil, the retiring of obsolete equipment (which has finally begun innd improvements made in the range of rolled steel products available are examples of developments that could bring Eastern European unit costs down toward the Western European level. But at the same time, Western Europe has moved far ahead in other respocts, as in the use of light metals and of synthetic and plastic materials.

the Eastern European countriesinefficient in the use of labor. Acountries with about the same output perWorld War II would show that, relativeprewar level, labor productivity has grownin Eastern than in Western Europe.* Thegreatest for the more advanced countries. in Eastern Europe nowndercent lower relative toEuropean level than it was before World (It wasoercent below thelevel.) The difference increaseda and was reduced somewhat.

explanation of these persistentefficiency is closely bound up with anotherinefficiency in Eastern Europethemix. Part of the output of goods is of substandard quality. Output of a

good many products is greater than can be sold; other products could be sold in greater amounts than are produced. The range of choice (sizes, qualities, styles) is far narrower than in Western Europe. Finally, the mix does not include many of the newer products available in Western Europe isadvantage almost equally annoying to women looking for this

The growth of labor productivityie about the-same in the two areas because recovery wao slower before 0 in Eastern Europe.

- 7

year's styles In clothes and manufacturersWestern .

8. The inferior mix of goods produced^in Eastern

S?:rnC?CrolbUted hHl'yne -astern European economiesto high investment and inventory costs and the wasteful usl of materials

i^JS"',nferior aerials and equioment (whether of domestic origin or from other Cormunist

me-

r?ghtrgoods" and t0 Produce

hfou" perhapsindefinitely were it not that the inferior mix

of goods and services also meets increasing consumer -

t home mA abro*id-nly Producers are

left holding unusable goods that they have bought and unsaleable goods that they have produced. At the.sarie time they hoard scarce high-grade commodities Trade organizations likewise acquire large ScSS of goods for which there is little or no demand.

scarcity-of desirable consumer goods and services is shown, for example,eveling off of sales of shoes and clothing in the more developed countries, large earnings by private handicraft workers, long waiting lists for buying automobiles and some other consumer durables, excess demand for meat and butterurrogate for other goods, and continued rationing of housing.

Pif rise in savings deposits suggests the general reluctance to buy the goods available.hile personal incomes have increased by anywhere from one-half to one and one-half times, savings deposits have increased between ninefold and morefold. The rise in savings also reflects the scarcity of goods in another way. Large savings deposits are needed for buying housing and automobiles (and in some countries other consumer durables). These goods are so scarce, tradxng organizations canull cash deposit -rom anyone that wants to getaiting list.

The Political consequences of failing to satisfy consumer demand are evident. The older generation in Eastern Europe is willing to put up

CONFIQ^TIAI.

with scarcityit has known worseutising generation is not prepared to, as' the leaders are uneasily aware.

13. Paralleling this concern is anxiety over export trade. The highly industrialized countries) Czechoslovakia and East Germany, have already run into heavy going in all their export markets. Their customers in the Communist world, on whom they have depended heavily for basic materials, no longer value East German and Czech machinery as they once did. The less developed countries of Eastern Europe are less and less willing to exchange agricultural and industrial materials for Czech and East German machinery. The price of increasing trade with them is to reduce net exports of machinery to them, by delivering less machinery or accepting more, or both. The USSR is obliged to continue its deliveries of materials in order to support the Communist regimes in these two countries. But the USSR is nevertheless insistent that Czechoslovakia and East Germany take more Soviet machinery in order to get Soviet materials and is becoming increasingly choosy about what goods it will accept in return, especially in the case of machinery. The Soviet government is also insisting on price changes in its favor; it is no longer willing to pay Western European prices for inferior Eastern European manufactures.

14. The poor quality and mix of Czech and East German manufactures is an even more serious handicap in trade with Western Europe and generally with the Free World. The market for highly processed Czech and East German manufactures is not large. Most of them can be sold only at prices well below those brought by similar Western European goods. Czech estimates indicate that the average unit prices of exports to the West declined by more than one-third83 and by at least one-fifth3 to the presentwhile prices on Western markets were rising. At present, exports from both Czechoslovakia and East Germany to the European Common Market bring on the average only about one-half the price paid for similar Western goods from outside the Common Market.

15. By accepting these unfavorable prices, Czechoslovakia and East Germany have been able ins to raise the share of highly processed

manufactures in their exports to developedountries. Yet it is still relatively low. hief export, machinery and equipment, representing: more than one-half their total exports to Communist countries, -amounts to less than one-fifth, of their exports to developed Western countries- he re. are signs that highly processed exportsv likely to increase more slowly from now on, partlyesult of more intense competition on Western markets. Deliveries7 rose very little,

.J

other Eastern European countriesprospects in the short run thanEast Germany, but they face the same problems*the longer: run. As yet the Sovietnot have such strong economic reasons toto,bear on themalthough there mayfor political reasons, as Rumaniabecause the weight of highlymanufactures is lower in their exports to USSR and higher in their imports than inof Czechoslovakia and East Germany. They dtiface great resistance to the expansion ofdeliveries, for they buy large amounts

of Soviet machinery. But they too mustthe more competitive market that isthe Communist

CONFI

In trading with the West, Hungary and Poland still have some advantage and Bulgaria andreat advantage in that their exportable surpluses of basic materials aref less rapidly. Most agricultural and industrial materialsarket, and these countries are more concerned with general market conditions, which have hurt sales and pricesfor example, for Polish coaland withon. trade than with their ability toll four of these countries are looking ahead, however, to the time when problems of both supply and demand will cut into their basic materials exports. They are already trying tooothold for their highly processed manufactures, including machinery, in Western markets.

For all the Eastern European countries the stakes are high. To compete in the increasingly integrated market in Western Europeecessity for any Eastern European regime that proposes to maintain or increase its bargaining poweroscowand its political independence.

Criticism and Reforms

In trying to deal with inefficiency and the poor quality and mix of output, the Eastern European regimes are drawingody of critical opinion that has developed out of endless debates over plans and policies and from analysis by economists. Debates on plans and policy take place behind closed doors, coming into the open only when theare deep and become widely known within the apparat, as has happened in Czechoslovakia, East Germany, and Poland. Commentary and analysis by economists have been published since thes, mainly in Czechoslovakia, Hungary, and Poland. These two lines of criticism played an important part in the abortive economic reforms of Polandnd Czechoslovakiand have again become influential ins.

The reforms ofs began with Walter Ulbricht's announcement of the East German "New Economic System of Planning and Management" in The "New Economic System" was designed for Ulbricht by Erich Apel, with very little public discussion. The next reform program, tho "New Economic Model" of Czechoslovakia, was adopted most reluctantly by Party boss Antonin Novotny in January

wide public debate lasting more than In both cases, however, the criticism ofand economists acquired great forceleaders had made bad errors of judgment, overof their economic advisers. Theapproach between Ulbricht and Novotnyhrewd opportunistican inflexible and weary one.

the other countries, asajor factor in getting the regimesreforms. To be sure, the decision ofleadership torogram qF its ownwaa influenced by the favorable attitudenew Soviet leadership. (The full-scalebased on Khrushchev's experiments,in) Without doubtexample likewise helped toeneral economic reform of its own in

in these countries, and evenin Hungary and Rumania,6espectively, themainly reacting to the mounting volume offrom key officials and experts supported

by arguments from the other Eastern European countriei

-

COM-rU^TIAL

- 'ft J

22. The first general feature of thehich has received relatively little attentionis the effort to convert the economic planning-stafffrom bureaucracies mainly concerned with allocations and priorities into economic advisoryapable of giving continuous guidance on policy. The eaders and the Party hierarchy* although jealous of their prerogatives in setting policy, have acknowledged the needuch higher level *of professional competence and for developing modern information systems to serve policyas well as operating needs * ubstantial investment is being made in training economists in Western analytical techniques, in standardizing statistical systems, and in buildingomputer network. Besides emphasizing better day-to-day control over the economy, the programs call for better forecasting techniques and for experiments with systems analysis and operations research.

23. The second main feature of the reforms is the attempt to develop responsible industrialwhich can make its own decisions on what to produce and how to produce it. Management responsibilities are concentrated in superenterprises calledndustrialnd.the like. These are large enough to permit some economies of scale. Their average employment runs from more0 people in Bulgaria, East Germany, and Poland0 int the same time the superenterprises are few enough to be overseen from the capital (Poland,uperenterprises in industry alone, has the largest number). They are nevertheless small and numerous enough not to have much chance of influencing policy. Only Hungary has omitted this feature in its economic reforms. The Hungarian reform is basedather extensive consolidation of enterprises,

butouple of superenterprises have been established.

24. The superenterprises are intended to operatebusinesslike" fashion somewhat like subsidiaries of large Western corporations, with ample authority over day-to-day decisions, direction of applied research, access to foreign customers, opportunity to investubstantial scale on their own

up

-

ietuTnia'B induatrial centers have not yet b

confil^Wtial

account (from retained profits and banknd some control over prices (mainly of high-grade clothing and other "luxuries"). The obligatory quotas are to be relatively few and general, for the most part not interfering with the judgment of management on exactly what to produce. In Hungary, management can lay off workers, subject to review by the labor union. In return for added responsibility, management it being offered substantial incentives for getting results. Hungary, which has gone the furthest,onus to the manager of up to BO percent of the basic salary when profits are large but threatens to take away up toercent of the basic salary if the enterpriseoss.

25. In agreeing to these reforms, the leaders have left in the hands of the central bureaucracies practically all of their effective control over the economy, giving up only authority over matters that they have never really controlledhiefly the detailed mix of output, the scheduling of production, and the like. Among other things, the central bureaucracies still appoint managers, impose legally binding quotas for aggregate output and exports and for the production of key products, establish prices (or price limits) for all essential products, ration scarce commodities, allocate foreign exchange,the volume of bank credit, and restrictin hiring and firing.

he leader* have generally'been reluctant tp .'recognize that theeconomic'reform depends heavily-on their-'villi irgnaia to follow through with major reforms 'in the'economic bureaucracy and the role of the Party and with-basic changes in economic policy, in short, they accept even modest reforms with grave reservations, which appear when vested interests and established policy are involved.

Reform in**1

-

27. Public speeches and political reporting* give some idea of the political attitudes affecting economic reformthe characteristic activist approach of the East Germans* the halfheartedness (to use Ota Sik's word) of the leadership in Ctechoslbvakia, the cautious eclecticism of the Hungarian'nd the playing down of reform in thecountries. Such evidence suggests that-only the

-

Hungarian and East .German reforms may be expectedmuchin their quite differentimpression is partly borne out by comparingregimes have done to disturb the status quoreduce the economic bureaucracy, replace .

unqualified executives, close downndise in unemployment.

* *

is the only country that hascut down the economic bureaucracy. for the economic reforms ofreduced employment in theoercent and abolished thebetween the ministries and enterprises. Thecountries (except Poland) have beenin central administration, butand the reductions have been moreby staffing the superenterprises andlocal administration. Polandcentral administration besides beefing

up .the.-superenterprises . Thus reform would seem to involve.little reduction in "petty tutelage" except in Hungary. To reduce the central bureaucracy is one of the main problems facing the newin Czechoslovakia.

East Germans stand out for theyoung, trained executives to take major When4 the "industrialset upereajor role

to play as superenterprises, new managers were appointed in well-over one-half of thessociations in heavy industry, about two-thirds of the number.esult of these changes, the average age of the managers dropped to aboutears. About one-third had university degrees and nearly one-half had some advanced training, mostly in engineering and economics. On the average, they had more thanears' experience in their special fields. Finally, and perhaps most interesting in the closed society of East Germany, there were only two prewar Communists in the group and only eight identified as having joined the Party On the other hand, the group included at leastormer Nazis, of whom two had been members

like this wholesale appointmentmen has taken place elsewhere in The Hungarian regime has beenmanagers, often even with non-Party men.

The others have not clained significant results. One of the main complaints of the reformers in Czechoslovakia is the incredibly low level of competence in management. After the CommunistB took over, loyal Party men were given most of thejobs, pretty much without reference tocaticnr,. w, nearly one-half, have not completed secondary school and one-third haverimary school education. The educational qualifications of managers are even lower than in Polandanother problem facing the new leadership.

31. Readiness to close down inefficientis most evident in Czechoslovakia andeconomic reform. rogram drafted, Czechoslovakia proposed to close down high-cost mines and many small manufacturing enterprises. ubstantial part of this program has already been carried out. Coal and iron mines employing0 people Btopped production, and blast furnaces associated with some of the iron mines also closed down. mall manufacturing enterprises, chiefly in light industry and engineering, went out of business,0 workers out of their jobs. Host of the displaced workers found jobs quickly in the same line of work or in expanding industries; some went into agriculture. In East Germany the policy has been rather to merge inefficient enterprises with stronger ones or to convert them to new lines of production, and there has probably been little unemployment. In neither Czechoslovakia nor East Germany is the regime likely to close down large enterprises, however unprofitable they may be, although Czechoslovakia has reduced employment in some of the big coal mines. The Hungarian regime is cautious in its public statements, indicating only that unprofitable enterprises will eventually have to go out of business. Hungary likewise is not likely to put large enterprises out of business, although the governmentor the banksmay forcehanges in management and in output. Rumania is planning to close down some of the least efficient oilfields when jobs are found for the employees. Bulgaria and Poland have no immediate intention of closing down enterprises, so far as is known.

32. Both Hungary and Poland seem to envisage the possibility of substantial unemployment, as indicated by plans to send workers to East Germany, where the

-

conf^^Rtial

shortage of labor is most acute. Increasing numbers of Polish workers have been observed in East German-'* industriala. and Hungary and Easteportedly have agreed on the shift ungarian workers, beginning0t is indicativeew attitude that the regimes are willing to forego the services of considerable numbers of workers, especially in the case of Hungary, which does not have large labor reserves. Both countries are actually proposing to cuthe rate of economic growth (fromnd in both cases it is clear that the decisive reason is not the lack of labor but rather the desire to shift from "extensive" to "intensive" growth,

final, acid test of reform is whetherleaders are prepared to reduce the pressureoutput, as their economic As yet no leader has been willing to

go far in that direction. All are intent on increasing output from year to year about as fast as they think they can. As the leaders see it, this question is quite distinct from economic reform. From the point of view of Eastern European economists, on the other hand, and of many planners and managers, the two questions are closely reated. For them, economic reform in its "firstegal and administrative framework for carryinglow pressure" economic policy, in which to make "qualitative" changes (in efficiency and product mix) even at the expense of increased output. Some policy level officials have been won over to this argument, but it has not been generally accepted as policy.

leaders clearly want reform andoverdetermining the choices open to planners management and leaving them to follow theleast resistance, which has generally beenoutput as desired. Within thishowever, there are differencesto country that may proveand economically. These arein the following section.

Policies on Economic Growth

35. The continued pressure by the leadership for economic growth is well indicated byear plans for total output (net material product) for

-

CONFHp^hAL

Differences in pressure axe also indicated. When the revised plans for annual rates of growth in this period are compared with average rates of growthaB shown in thet appears that one country, Czechoslovakia, is planningigher annual rate; that two, Hungary and Poland, are expecting lower rates than; and that Bulgaria, East Germany, and Rumania are projecting about the same rate that they achieved in the previous period. The new Party leadership in Czechoslovakia may cut back existing plansit is still too early to say.

Eastern Europe: Average Annual Rates of Growth of National Incomend

Percent

Official Statistics)

Bulgaria Czechoslovakia East Germany

Hungary

Poland

Rumania

National income, Communiet concept, excludes value added in "nonproductive" services (the services of government and many professional and personal services).

36. The comparison is indicative because all the countries have reason toeclining rate of industrial growth. All suffered through theshortage of materials and thereafterne-time gain from the enormous increase in Soviet deliveries that followed. All now face increasing difficulty in meeting the demands of

- 17

customersTo^Be sure, there are^ in: particular recentthe performance of agriculture;s'of substantial amounts of*and equipment; and technicalthat should dampeni rt,i

None of these factors applies equally to-all Eastern. European countries; On balance, -the negative factors count most heavily against the advanced countries; the positive factors, most heavily in favor of the backward countries. Thus Czechoslovakia and East Germany have the least reason to expect continued growth atate; Bulgaria and Rumania, the most reason. Accordingly, it would appear that while all the countries are indeed pressing to increase output

about as fast as possible,

perhaps East Germany are projecting increases that cannot be obtained at any price.

These judgments seem to correspond with those of the planners themselves, as suggestedomparison of the earliest versions of the plans proposedith the "final" versions adopted6 or Czechoslovakia has raised its goal for the annual growth of national income several times, from the first goalercent (somewhat below the actual level) to the last one, adopted inercent (higher than The East German targets have also been raised Bulgaria, Hungary, and Poland, on the other hand, have made no significant change. Rumania has raised its sights, but chiefly on the basis of improved expectations in agriculture that are more or less justified on the basis of recent experience. The comparisons are shown in the table.

A considerable body of evidence on the development of these plans corroborates these indications of differences in policy from country to country. Conflicts over plans have occurred in all countries, as was to be expected. But these have been prolonged and intense only in Czechoslovakia The disputes in East Germany were also bitter but apparently were resolvedafter the suicide of chief planner Erich Apel in5y splitting the difference between the planners and

-CONFIDENTIAL

the politician!, in all the other countries the evidence suggests that the final plans, represent estimates that the planners believed feasible, even if not advisable.

Economic Pressure and Political Change .

In conclusion, the Eastern European -reglmea have even less room for maneuver in economic than in political matters. Their stability depends ongetting along with the USSR, on not repudiating the record of the lastears, and on not sacrificing the vested interests of the Party and the state bureaucracy. The economic reform movements,are likely to add to rather than reduce Eastern European frustrations and thus create additional problems for the leaders. Major changes in economic policies and institutions probably must await basic political changes, in which shifts in theenvironment are likely to be the decisive factor. Major changes almost certainly involve much closer political relations with Western Europe, for the sake of political security and economic support. Large-scale economic support is essential to help the Eastern European countries to reintegrate into the world market. With their small, inefficient economies, they could benefit greatly, but the costs of making their economies competitive would be enormous and would have to be underwritten by Western governments and businesses.

Many Eastern Europeans would like toay of tapping Western skills and technologyuch greater scale than at present. About one-half of5 billion worth of machinery and equipment imported from the West ins has been bought on credit. Net drawings on Western credit7 amounted to5ignificant addition to domestic resources, especially for Bulgaria and Rumania, which have borrowed the moat. But the outstanding credits, which run from one to two years up to eight yearsoccasionally even longermust be repaid, the greater partuture drawings will barely exceed repayments, for most of the leaders are unwilling to go much further into debt. Thus borrowing from the West will not provide an important source of new financing from

-

conf^Rtial

CONFI^rfriAL

42. reat deal of effort has gone intomoting cooperative arrangements of various("jointith Western businessmenr-marketing Eastern European products in the West. These deals, which sometimes involve technical assistance, provide useful training for Eastern Europeans. But theyegligible share of Eastern European exports to the West, and are not likely toignificant amount of capital to Eastern Europe.

*

43. Probably the only way in which Eastern Europe can get access to Western capitalarge scale is through the growth of much closer political relations, accompanied by the adoption ofeconomic policies. Yugoslavia, which has gone much further in these respects than any of the Easter European countries is likely to go in the near future, has obtained substantial backing from the' Export-Import Bank and some from the World Bank, but even Yugoslavia haB not solved the problem of accommodating Western risk capital. The Eastern European countriesong way to go before theyhance of solving the problem, but it is one of the conditions of their becoming competitive, independent countries with stable governments.

-CONFin#TlAL

Original document.

Comment about this article or add new information about this topic:

CAPTCHA