INTELLIGENCE MEMORANDUM ,
t 'c^ECHcfewyAmrs nevv" /
APPROVED FOR RELEASE
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence4
C^.echoslovakia's New Policy In the Soviet Bloc
The former "model satellite" Czechoslovakia Is embarkingolicy of reducing Itssubservience to the USSR. This change isevident in the support Prague gaveafter his ouster, in theraft reform economic program whichbroader use of the market mechanism, and in attempts to improve economic and politicalwith the West.
The change that has come about was anof the domestic liberalization forced on old-time Stalinist leader Novotny by dissident elements in the party, in response topolitical grievancesevere economic crisis. The new Czechoslovak policies, like those already being followed by Poland, Hungary, and Rumania, are basedealistic appraisal of national needs and desires, andurther decline of Soviet influence in Eastern Europe.
The Czechoslovak parly ls embarkingolicy of reducing its longstanding subservience to the USSR. This assertion of national interests ls an inevitable outgrowth of changes inbrought about by pressures from liberals ln the Czech and Slovak parties and by the desire of the public for some improvement in day-to-day life.
The necessity to reduce Czechoslovakia's subservience to Moscow and to assume greaterof action in bloc affairs was bound to emerge as the old-time Stalinist party first secretary, Novotny, acceded4 to pressures bothand outside the partyore objective, rational organization of society andesponsive national leadership. Khrushchev's ouster gave the regime an opportunity to speed up the process, which otherwise would probably have taken place gradually.
Novotny's new stand was illustrated by the presidium and central committee statements supporting Khrushchev, issued in Prague after his ouster, by publicationeform economicjust two days after the ouster, and byrefusal to attendovembercelebrations ln Moscow. These steps have met with enthusiastic support in the central committee and greatly enhanced Novotny's position as anand flexible national leader.
4. Unlike.Rumania, which began to assert its national interests primarily ln reaction tobloc economic policies, Czechoslovakia ls responding to internal political and economic pressures which,omentum of their own, finally confronted Novotny with the choiceabandoning his past hard-line policies or being forced out of office.
Growth of Political and Economic Pressures
5. The roots of the new policy go back to early pressures to de-Stallnlze, which appeared in
Czechoslovakia, as elsewhere in tho bloc, after Stalin's death; Novotny and his party apparatus, however, successfully suppressed them until thes. At thatovement in theprobably centered around the then Interior Minister Rudolfto counter if not eliminate Novotny's hard-line leadership. Novotny purged the would-be renegade Barakut pressures from within the party to do-Stalinize, probably abetted by Moscow, nevertheless cootinucd to grow. of the Third Five Tearn forced by economic failures, was ablow to Novotny's prestige. Byh party congress in liberal elements of the party central committee had gained enough influence to putesolution favoring at least some tentative steps toward de-Stallnization.
During this period Czechoslovakia'sdifficulties became the most severe in the entire Soviet bloc. Gross National Product was barely increasing. The growth of industrialhad slowed drastically, from an average yearly Increase of about nine percento about two percent, and industrial production actually fell Net agricultural production hadownward trend since thes. Capital investment declined both2 and Per capita consumption and real wages remained nearly constant.
The main reasons for the sharp oconomic slowdown were deepseatcd. Reserves of productive capacity in industry and transportation were exhausted and agriculture had been milked dry of competent labor Industries producing finished goods, which account for the great bulk of Czechoslovak exports, became increasingly obsolete because of inadequateprogress and the high concentration ofduring most of the postwar period in industries producing basic aaterials. Foreign and domesticbecamo less willing to accept products of low quality. In agriculture, collectivization led to an
inefficient use of investments.
ne economy was aggravated
eries of unexpected events: the militaryoccasioned by the Berlin crisisad cron and the collapse of trade with Communist China, an unusually severe winter,hortage of electric power
8. 2zechoslovakia could not
zijzz0 achieve 2rate of industrial growth maintain the standard of living of its people and balance its foreign payments. Unable to obt.iS credits from the USSR and burdened with drawings on its own credits of the orderzechoslovakia had to balance its payments by in-reasing exports much faster than imports. The rise thC holdineof imports took placecaPiCal investment andST?ductifn; The rosimo, seriously concerned with rising public dissatisfaction, decided to keep food supplies as stable as possible by increased food import.
The Political Crisis3
policy was publicly questioned. This was inevitably accompaniedreakdown in party The liberals began to exercise meaningful influence in party affairs, stimulated to greater efforts in part by the worsening economicurthor contributing factor was growing ferment among the intellectuals, reminiscent56 in Poland and Hungary.
hvwaa neatly strengthened by the bold Slovak drive to regain some degree of
D5Ja1 injustices againstby Prague. By and large tho demands ofSlovak party liberals coincided, callingchanges In administrative, legal,and economic procedures, for redressStalinist excesses, and for the removal offrom the
11 The political and economic disarray was accompanied by increased public discontent prompted by S or economic situation and the breakdown in party discipline. Czech-Slovak
re-emergedrucial problem, adding to the insta hility.
12. Novotny reluctantly and clumsily began to de-Stallnize and to liberalize economic policy. Demands on him increased, however, until he was forced to purge several leadingSlovaks unpopular inhe himself was In danger of being toppled in The Soviets intervened, despatching Brezhnev to Prague to resolve whatto be an imminent leadership crisis in eriod of retrenchment followed, during which Novotny remained in the background while many of the liberal changes were codifiedegree of order was restorederies of compromises favoring the liberals. The struggles within the party from then on focused on solution of domestic economicas Novotny fully associated himself with plans for economic reform. By virtue of thesewhich helped ensure Khrushchev's continuedNovotny was able to reconsolldato his power by the summer of
13. The Czechoslovak leadership in Octoberraft program for liberalization of the economic system which goes beyond reform proposals anywhere else in the Soviet bloc. Until the latter partovotny had advocated tighter economic controls and blamed the partial decentralizationor some of the reglne's economic difficulties. As earlyowever, his liberal critics claimed that the decentralization had failed because it had not gone far enough. 4 criticism had become morearge number of leading Czechoslovak economists were urging replacement of the Soviet-type command economyorm of market socialism. These economists argued that the Soviet-typeffective in mobilizing resources, but was inefficient and inflexible In the detailed allocation of resources. An advanced economy like Czechoslovakia's, which had exhausted its reserves, could no longer function efficiently under this system.
14. Kith the announcement of the reforms the liberals hadartial victory. The steps actually
taken up to that time to improve the economy had beenby comparison with many other blocfor the abandonment of taut planning in favorore flexible and realistic approach. The new program, however, contains the general outlines for future reforms which reflect many of the views of the liberals, while at the same time providing forof whatever controls the regime may consider necessary. The program provides for:
a "scientific" approach to economicand management, using mathematical methods and procedures borrowed from Western corporations;
a delegation of authority over most short-range planning and currentto enterprises and trusts;
the basing of enterprise incentives on current Income instead of onof plan assignments;
increased flexibility and greater rationality of prices; and
a partial substitution of financial regulations for direct orders asof state control.
Investment and foreign trade policy are to bo governed by more careful evaluation of economicthan in the past, and less by political or ideological considerations.
Relations with the West
15. In response to liberal demands and tonecessity, Prague for moreear has been seeking improved relations with the West. Although the party has not always been unified on this policy, the regime has increasingly taken measures to improve its image abroad and expandsocial and cultural as well asthe West. Prague hasumber of specific measures to liberalize entry regulations, to guarantee the safety of Czech-born US citizens traveling in Czechoslovakia, and to raise the level of diplomatic relations with numerous countries. It has tried to broaden cultural-educational
exchanges with Western Europe and the US and hasbeen moro cooperative in official contacts wit|
Despite these positive changes, there have been and will probably continue to be sone isolated lapses, probably due to tho influence of regime members particularly in tho securityremain opposed to rapprochement. The Foreign Ministry has found itself embarrassed by police actions on twoattack on the US Embassy inover US policy in the Congo, and the arrestS citizen on espionagehave conflicted with the regime's professions of good will. however, tho regime continues to support the Foreign Ministry in its general policy toward tho West,
In need of Western curroncy and desirous of more favorable trade relations with the West, the Czechs have sought realistically to settle outstanding economicclaimsEuropean countries and the US. In some cases they have met with success and moved on to culturalor negotiations for improved trade relations. Other steps aimod at broadening economic relations with the West include measures taken last year toWestern tourists; the provision of some special incentives to exporters;reater stress oncriteria rather than political expediency in elaborating foreign trade plans.
interest in broader economicthe West has not yet had much practicalwith non-Communist countries3 It came to onlyercent oftrade, as compared to aboutercentand Rumania and aboutercent insuch as those describedoflead to some increase in theWestern trade over the unusually low levels ofyears. Nonetheless these steps will notprincipal obstacle to expanded trade with thelow quality of most Czechoslovak manufacturedsharp contrast to Rumania, Czechoslovakia canraw materials and foods for export. Consequently
It relies predominantly on exports of machinery and manufactured consumer goods, many of which are no longer competitive in the West.
19. Any substantial increase in the competitive-ness of Czechoslovak manufactures In the West will take sustained efforts for many years in adapting theof production, making planning and management aore flexible, and improving marketing and servicing abroad. Changes along these lines are implicit, and in somo cases explicit, in the regime's broad program for tho allocation of resources and for economic reform. It Is likely in particular that large Czechoslovak producers will be allowed more direct contacts with foreignthat bonuses in the production of goods for ox-port will be based at least partly on earnings incurrency; and that the structure of domestic price: will be brought closer to the structure of prices on the world market. Even if implemented vigorously, such reforms will not necessarilyubstantialof Czechoslovak trace, but they are likely to increase its flexibility considerably by broadening the alternatives to trade with the bloc.
20. The regime now is seeking some sign ofsupport for its more independent policy toward Moscow. Novotny needs this to impress the Soviets as well as his own party. Even moro importantly, he needs increased trade with the West, foreign currency and long-term credits to gain andore secure economic position. With the example of Rumanianin mind, Prague Is vigorously pursuing this goal in France, Britain and the US.
Relations with the Bloc
21. Prague's Increased interest in economicwith the West does not appear to have weakened its trade ties with tha USSR. The USSR accounts for nearlyercent of Czechoslovak trade (as compared to about the samo for Rumania and around one-third each for Poland and for Hungary). Thisigher shareew years ago, and accountsarge part of the materials needed by Czechoslovakia. Plans are bein draftedubstantial increase in trade with the USSR, and technical cooperation is closer than ever. Nevertheless, there is probably widespread resentment at the failure of the USSR to extend credits during the economic crisis, and there is implied criticism of the USSR in the complaints about inefficient Industries, many of which were built to process Soviet raw material or to meet Soviet specifications.
aleo has been one of the principalof closer intra-bloc cooperation under CEMAis disappointed with the slow progress in Like most other Eastern EuropeanCzechoslovakia probably is unwilling tocontrol over its economy to supranationala highly developed country, It has beenCEMA mainlyeans of promoting its exportsIn return for which it imports neededand foods. This approach to cooperation was
a major cause of the recurrent frictions with Rumania over the past several years, inasmuch as Rumania's main desire was to develop now manufacturing branches.
For many years, Czechoslovakia has had no real alternativeredominant economic dependence on the Soviet bloc. The original reason was political, but with the development of the Soviet-type economic system in Czechoslovakia andtructure oftailored to meet bloc needs, economic reasons wore added. Largely cut off from world markets, Prague came to regard exports to the bloc, -any of which were of low quality, as vital for the support of Its In recent years, bloc customers havemore discriminating, and the Rumanians have evon turned down Czechoslovak machinery on the ground that It did not meet world standards. Thus trends in the bloc as well as domestic difficulties and theof Western technology have pushedoward important changes in its economic structure and Its economic system.
Czechoslovakia now is fastegree of autonomy in the bloc comparable to Poland and Hungary, and has taken to the policy of realistic economic planning adopted by these two countries Both of those countries and East Germany are ahead of Czechoslovakia in actual economic reform, but thoir programs for future reforms are clearly intended to Increase the efficiency of the command economy, while tho Czechoslovak programreat doal more stress on the use of the market mechanism.
The changing atmosphere in Czechoslovakia wrought about changes in Prague's relations with other Eastern European countries permitting an exchange of ideas which have had further effect on Czech policy. In his efforts to demonstrate his flexibility andto de-Stalinize, Novotny began some time ago
to woo Yugoslavia and toesire to emulate certain Yugoslav practices. Evenreat deal of this was purely for the sake of improving his image, closer relations did In fact develop. Now thesystea--politlcal andbeing discussed in Prague as the model for changes in Czechoslovakia.
Similarly Czechoslovakia has drawn closer to Poland and Hungary, conscious of Budapest's recent successes in gaining popular support withoutdiscipline or public ordor. Prague hasavoided expanding its relations with Rumania, however, and has refrained froa any public mention of Dej's independent position within the bloc. the Czechs havo been fearful of the Rumanians' boldness, but this may change now that the Czechshaveolder line.
The developments of the past two years within Czechoslovakia have not been well received by Novotny's Stalinist neighbor Ulbricht in East Germany. Nonetheless, the "new, flexible" Novotny has made no attempt to allay Ulbricht's fear, and relations between the two parties have gradually deteriorated.
Steadfastly loyal to the Soviet Uniontrongbelatedly--of Khrushchev's Chinese and Yugoslav policies, Prague has adopted the attitude that loyalty to Moscow does not preclude and must not infringe on Prague's right to make its own decisions. Emphasizing Czechoslovakia's contribution in exchanges of views with Moscow and the value of reciprocity, the joint communique issued after Novotny'secember trip to Moscow stressed the ideas of full equality of socialist nations andnational sovereignty." In the communique the Czechs also subtly dissociated themselves from the full endorsement given by the Soviets tot CPSUattackedto avoid offending the Yugoslavs.
Unlike Rumania, however, there is nothing expressly "anti-Soviet" in Prague's position today, and there is no de-Russification as there has been in Rutania. it is unlikely that the Czechs will engage in an anti-Soviet campaign as long as they candemonstrate their decision-Baking freedomone. Novotny, upon his re-election as president in November, publicly reassured the Soviets that
Czechoslovakiaember of the Warsaw Pact.
Czechoslovakia apparently believes that the Russians--particularlyew regime whose stability is far fromnot or cannot interfere with Prague's assertion of national self-interest .
Internal and foreign policies, therefore, will probably continue in the direction ofand independence. In its bargaining with Moscow, Prague will probably press for somefrom the Soviets, such as credits and generally more favorable trading terns. Czechoslovak and Soviet interests may conflict on the size andof the Czechoslovak aid and penetration program in developing countries, by far the largest such program conducted by any Eastern European country. Frictions over CEMA policies may arise, but there are no reasons for serious differences with the USSR unless the Soviets try to transform CESlA into
a truly supranationalunlikely event because of widespread opposition within Eastern Europe. Concomitantly Prague will continue its efforts to expand trade with the West.
differences over suchcan be amicably negotiated if Moscowenlightened view of Prague's positions,nonetheless now can be expected tothan ever to protect its nationala result, political problems are bound totho two allies. Moreover, Novotny,has staked his political career and prestige
rogram designed to serve Czechoslovakia's national interests, will be little inclined tohis policies to the needs of Moscowonflict of interests arise.
international Communist affairsnow are wedded to the rapprochementwhatever position the Soviets maySino-Soviet dispute is unlikely to becomewith Moscow, unless the USSR changes itstoward China to the detriment of therapprochement with Yugoslovia. Although
Prague will continue to support Moscow's general foreign policy line in bloc and international councils, as tioe goes on it will hold out forits own interests. This of course does not preclude specific anti-Western steps from time to time by Czechoslovakia if Czech relations withmake this tactically advisable.
Looked at from the viewpoint of the Soviet blochole, the new trend indemonstrates anew that the pattern ofbetween the countries of Eastern Europe and the USSR has been radically altered over the past decade. The westward flow of Sovietand control has been tempered by an eastward flow of political pressure. The vast network of Soviet agents, military, and police, and ofEuropean party leaders and functionaries who owed their first loyalties to the USSR and Stalin, has disappeared.
Each Eastern European leader now is free to test the limits of Soviet hegemony and to choose tho course which appears to be the most promising for his own country. In all of these countries except East Germany and Bulgaria, this choice is aore and more likely to reflect national and even European interests rather than those of the USSR and the bloc.
36. While those countries do not yet exorcise the freedomesemblance is Indeed, the entlro process has an air offirst Poland moved, then Hungary, Rumania, and now Czechoslovakia, each in its own way. It would seem that Khrushchev's successors have little choice but to acquiesce as gracefully as possible In the tide of nationalism currently rising in tho Western reaches of their empire.Original document.