ORR CONTRIBUTION TO NIE 12-57 ECONOMIC FACTORS IN THE STABILITY AND COHESION OF THE SOVIET SATELLITE STRUCTURES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01012A009200010017-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 100
• Document Creation Date: December 23, 2016
• Document Release Date: November 18, 2013
• Sequence Number: 17
• Publication Date: December 14, 1956
• Content Type: REPORT

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NOFORN/CONTINUED CONTROL
ORE CONTRIBUTION TO NIE 12-57
ECONOMIC FACTORS IN THE STABILITY AND COHESION
OF THE SOVIET SATELLITE STRUCTURE
CIA/RR IP-491
(ORE Project 10.1644)
14 DECEMBER 1550
WARNING
THIS DOCUMENT CONTAINS INFORMATION AtikECTING-THE
NATIONAL DEFENSE OF THE UNITED STATES, WITHIN THE
MEANING OF TIM 18, SECTIONS 793 AND 794 OF THE
U.S. CODE, AS AMENDED. ITS TRANSMISSION OR REVE-
LATION OF ITS CONTENTS TO OR RECEIPT BY AN UNAU-
THORIZED PERSON IS PROHIBITED BY LAW.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
NOFORN/CONTINUED CONTROL
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EWNOMIC FACTORS IN STABILITY AND COHESION
OF THE SOVIET SATELLITE STRUCTURE
CONTENTS
Summary and Conclusions ..... . . . 0
I. Policy Conflict between the USSR and Its European Satellites
Page
1
10
A.
Recent Soviet Policy toward the European Satellites . ? ?
10
B.
Satellite Reaction to Soviet Policy . . . . 0 0 ? 0,0
12
C.
Soviet Reaction to Changes in the Satellites . ? ? 0 0 ? ?
14
II.
Economic Factors in Prospects for Stability and Cohesion . . ?
19
A.
Economic Growth and Improvement of Living Standards . ? ?
19
1. Projected Growth in Gross National Product, 1956-60. .
20
2. Implications of new Five Year Plan goals . . .
22
B.
Problems of Economic Development . . .. .. .
28
III.
The Impact of Living Standards upon Internal Stability . ? e
36
A.
General Situation in the Satellites 0 .... . . ?
36
B. Poland . 0 0 0 ?? 0 0 0 0 0 0 0 0 0 0 0 0 0 ??? 0
37
1. Food Supply and Food Prices ..... . ? 0 ? ? . . ?
37
2. Consumer Goods Program
38
3. Foreign Trade in Consumer Goods
39
4. Housing . 0 . . . 0000?00000000?
39
5. Social Services
40
C.
Czechoslovakia . . 0 0 0 0 ? ? 00? ? ? ? o'7.000?00
41
1. Food Supply and Food Prices
41
2. Consumer Goods Program
41
3. Level of Living . 0 . . . ..... . ? ? . ? 0 ? . 0
41
4. Foreign Trade in Consumer Goods . . . . . 6 ? 0 ? ? 0
41
5. Housing ...... . ......... . . . . . . 0
42
6. Social Services . 0 0 0 ....... 0 ..... 0 0
42
D.
East Germany . . . . . . ........... . . ? . ? .
43
I. Food Supply and Food Prices . ''..'.;
43
2. Level of Living ?00 ....... 0 000?00OO
44
3. Foreign Trade in Consumer Goods
44
4. Housing . .. 0 . . ? .. .
44
5. Social Services
45
E. Hungary ? ? ?000 00000000080000
45
1. Food Supply and Food Prices 0 ..... 0 0 0 0 ?? 0
45
2. Consumer Goods Program
45
3. Foreign Trade in Consumer Goods . ...... . ?0 0
46
4. Housing
46
5. Social Services
47
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Page
F.
Bulgaria . . 0 0 0 0 ? 0 ? 0 0 ? 0 0 0 0 0
0
0 0 0
47
1. Level of Living and Consumer Goods Supply
2. Foreign Trade in Consumer Goods ....?.?
3. Housing ..? 0 ..0 ? 0 0 0000o0000o0?o
48
4. Social Services . . . . 0 ? 0 ? 0 0 ? 0 4 0 0
0
0 0 0
48
Rumania 0000ar000000 0 00000 ? 0 0 0
0
000
49
1. Level of Living and Consumer Gods Supply . 0
.
. 0 .
2.[
2. Housing 0..0 . 000? e ?000000k000500
49
3. Social Services 0 ? 0 0 0 0 ? 0 0 0 0 0 0 0 0
0
0 0 0
49
IV.
Aspects of Economic Coordination and Integration 0 ? 0
0
0 0 0
51
A. Organizational Aspects 0 0 Ooo0o0?0000?000
51
1. The Council for Economic Mutual Assistance 0 ?
0
0 0 0
51
2, The System of Soviet Advisers . . 0 0 0 0 0 0
0
? 0 0
52
B.
Bloc-wide Division of Labor and Specialization . 0
0
0 0 0
52
C0
Economic Coordination and Satellite Political Equality .
54
1. Effect on the individual Satellite Concerned ,
0
a 0 ?
54
2. Effect on Other Satellites .00. . . . . 0.
.
0 ..
59
3. Effect on Bloc Coordination and Integration ,
0
0 0 0
60
V.
Aspects of Foreign Trade Relating to Stability and Cohesion. 0
EP
VI.
Economic Reforms 0 0 0 0 0 ?Go 0 0 0 0 0 0 0 0 0
0
0 0 0
71
A.
Decentralization . 0 0 0 0 0 0 0 0 0 0 0 0 BOO
0
0 0 0
71
B.
Labor Reforms .0 . 000 0000000005 0 0
0
...
73
Appendixes
Page
A. Recent Soviet Policy Statements Concerning Soviet Satellite
,
Economic Relationships-0?.0? ?00? 0 0 0 0
?
76
B. The Discussion of Reform in the Polish Economy . . . . . . 0?0
82
C. Survey of Economic Developments in the European Satellites
Under the First Long-Term Plans 0?000p000p0000
0
95
D. Source References .00 . ? 0 0 009 ? 000000 0 0
0
96
Tables
Estimated Gross National Products of the European Satellites,
1950. and 1955 0 ? 0 0 0 0 0 ?? 00 0 0 0 0 0 ? 0 0 0 0
Page
II-20 Planned and Actual Increases in'National Product in the
European Satellites under First Long-Term Plans aril Current
Five Year Plans 000000?0?000000 ?0000 ? ? 0 0 24
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Page
11-3. Approximate Planned Increases in Investment and Real Wages
in the European Satellites during the Current Five Year
Plans, 1956-60 . ? . . ? 0 0 0 0 0? 0 0 0 27
114.0 Planned and Actual Increases in Industrial and Agricultural
Production in the European Satellites under First Long-Term
Plans and Current Five Year Plans 0 .. .. a? ? ? ? ? ? ? ,29-30
III-1. Per Capita Diet Estimates for the European Satellites . ? . 38
IV-1. Specialization of Production by Industry in the European
Satellites 0000000000000000?0000000 55-57
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Summary and Conclusions
Underlying the present general crisis in the European Satellites is
an economic crisis which aggravates discontent and which limits the
capabilities of the regimes to placate public opinion. Economic condi-
tions alone are not so severe as to create open expression of unrest but
would tend to reinforce unrest once it found expression. If the Soviet
Union is to introduce economic stability 'as well as political stability,
to the Satellites, it must revise the assumptions and the economic pro-
grams which formed the basis of the 1956-60 plans of the European
Satellites.
Since the war, the structure and orientation of the Satellite econo-
mies has been profoundly altered by the Soviet-enforced concentration on
heavy industry. This reorientation lead to chronic economic problems,
because the Satellites lack sufficient raw materials, experience, or
skills to develop and operate heavy industry except at high cost. At tha
the same time, the neglect of their fopmer export industries, agriculture,
and consumer goods, greatly reduced their capabilities to trade with the
West on favorable terms. The Satellite economies became dependent upon
Ath an insulated Soviet Bloc economic system in which their bargaining posi-
tion was very weak. By 1954-55, continuation of economic growth at the
rate desired by the various countries became dependent upon an extensive
program of economic readjustment, of which the New Course was only the
first phase. In early 1956; the Soviet Union assumed that the necessary
readjustment would be assured the Satellites by a program of Bloc-wide
economic coordination which was to become increasingly effective during
1956-60, by a coordinated trade program involving Satellite trade with
the underdeveloped countries, and by a series of economic reforms designed
to increase the efficiency of operation of the Satellite economies.
Meanwhile, the internal economic crisis within each of the Satellite
economies had assumed proportions not fully realized by the Soviet Union.
The Satellites required raw materials and advanced equipment which could
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not be supplied by the Soviet Union and which were not assured by their
present trading relationships. Inefficiency in the administration of
the economic system increased strains and stresses; some plants had
unused capacity; others were overworked; the collectivization campaigns
had aroused peasant resentment and gains in agricultural production
were inadequate; and in Poland and Hungary, the collection system failed
to move sufficient food from the farm to the city. Depressed by the
economic burdens of Soviet exploitation of the economies, by an increas-
ing defense effort, and by the great investment cost of the development
of heavy industry upon an inadequate resource base, improvement in the
living standards within the European Satellites was retarded until 1954.
The failure of the New Course to introduce the promised improvement in
consumption levels permitted consumer resentment to smolder. In Rumania
and in East Germany, some food rationing continues; in no Satellite has
there been satisfactory improvement in urban housing conditions; and in
all Satellites, the cost of living virtually compels each urban family
to have at least two wage-earners to maintain adequate family living
standards. Even in Poland, which has relatively high food consumption
levels, the Poznan riots illustrated that food shortages were sufficiently
tangible to reinforce the expression of discontent.
By mid-1956, each Satellite had followed the Soviet pattern in intro-
ducing economic reforms meant to increase efficiency in the administra-
tion of the economy and to heighten worker satisfaction and. incentive.
Measures were undertaken to reduce the work week, to raise the wages of
selected worker groups, to liberalize the social security system, and
to adjust the controls on labor discipline. In addition, measures were
undertaken to decentralize the planning responsibility within the economy,
to improve the trade system, and to introduce management reforms. In
Poland and Hungary, these economic reforms became associated with a
larger context of political and social reform labelled "liberalization"
and became a movement which went far beyond the Soviet intent.
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Events in Poland and Hungary will have impact, possibly deep, upon
the economic plans of the other Satellites. For example, the Hungarian
economy will now be unable to fulfill trade commitments with the other
Satellites and will have to receive assistance from them if it is to be
reconstructed. Changes in the Polish economic program will require Poland
to alter the planned pattern of exports and imports with the other Satel-
lites. In addition, it is possible that the Satellites other than Poland
and Hungary may have to revise their own domestic plans to prevent overt
expression of unrest within their own boundaries. Finally, plans may
be revised as the result of possible changes in the general structure and
nature of Soviet-Satellite relationships. The general crisis in the
European Satellites has erupted at just the moment when CEMA (Council
for Economic Mutual Assistance) has begun to effect extensive inter-
linking of the trade, production, and investment plans of all of the
European Satellites; an extensive change in the economic plans of any
Satellite is likely to require some revision in the economic plans of
other Satellites.
For the time being, the Soviet Union is accepting a national Commu-
nist regime in Poland. Since Gomulka has not clearly transgressed the
Soviet policy line, as it has begrudgingly evolved in recent months, he
may succeed in establishing a new relation with the Soviet Union which
is more acceptable to Polish national interests. To do this, he must
carefully manipulate his popular support and Poland's strategic position.
The risk element is involved in the fact that he has certainly trans-
gressed the intent of Soviet policy toward Poland and must be viewed with
suspicion by the Soviet leadership. Subsequent conclusions are based on
the operating assumption that Soviet military action is not undertaken.
It remains to be seen what autonomy Poland will receive in the
economic sphere. At any rate, Poland's economic ties to the Bloc are
many and Polish planners must attach a high degree of importance to
Soviet and Soviet Bloc economic interests. Domestically, economic reforms
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now being proposed show initiative and imagination; their success or
failure may have repercussions throughout the Satellite area. Poland is
pressing to adopt a modified version of the Worker's Council to provide
worker participation in factory management (except for investment and
price policy, which remain under centralized control). The control of
the State Planning Committee over the economy is being reduced. The
Sejm (Parliament) is moving toward greater weight in the formulation of
economic policy. The emphasis upon collectivization of agriculture is
being reduced in an effort to recruit the productive cooperation of the
Polish peasantry. In addition, moves are being taken to redevelop Polish
handicraft industries as a means of increasing the availability of
consumer goods.
In the realm of economic policy, Poland will continue to press its
trade drive in the underdeveloped countries, exchanging Polish manufac-
tures for needed raw materials. Western industrial nations will be
approached for advanced equipment and for data on technological advances
which will benefit Poland's economic position. Success in this respect
will be limited by Poland's difficulty in marketing goods to the indus-
trial West. Coal, which is presenting production difficulties, will
continue to be a major earner of Western currencies. In addition,
Poland intends to further her shipbuilding program and to earn foreign
exchange from shipping services.
If public discontent with living standards so requires, Poland may
find it necessary to import consumer goods from the West as the most
rapid means of obtaining immediate improvement. On the other hand,
public confidence in the new regime may permit the Gomulka government
to undertake,an economic policy designed to correct the long-term
balance of payment difficulties. In either case, Western aid may be
required as a short-term measure, or as a longer-term measure if the
industrialization program is not modified.
At the present time (December 1956), it appears that stability can
be returned to Hungary only through concessions which the Soviet Union
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is not now willing to permit, or through a costly Soviet occupation.
For the foreseeable future, Hungary will be a drain upon the Soviet Bloc
economy. The Hungarian economy was in parlous condition before the
revolution. The present economic crisis, aggravated by revolution,
and possibly by future passive resistence, cannot be alleviated without
extensive outside aid from the Soviet Bloc, even if the Soviet Union
somehow resolves the political crisis.
In the other Satellites,the present regimes are less concerned
with obtaining equality of economic relations with the Soviet Union than
with stabilizing the domestic situation. On the other hand) economic
problems) discontent with the level of living, and interest in the ex-
amples established by Poland and by Yugoslavia create the raw materials
for general reform, should popular feeling crystallize about a new
leadership.
In East Germany, there is latent discontent. Basically, the Socialist
Unity Party (SED) has supported Soviet Bloc integration; the more so since
Party members feel that reunification of Germany would be to the detri-
ment of the Party and to the economy as presently structured. Despite
the presence of Soviet troops, if the Party and the Government maintain
too inflexible a line regarding concessions to the workers, the produck:
tivity of the workers may not rise as fast as planned. In addition,
East Germany is frankly concerned over the economic impact of events in
Hungary and Poland. Polish coal and coke are of great importance to
East German industry, for example.
Czechoslovakia has quietly conducted a program of extensive reform
in its economic life. The regime has taken pains, however, to prevent
these reforms from becoming identified with a liberalization program
including political and social reform. This, plus the Absence of an
opposition leadership, has tended to keep domestic affairs under control.
In addition, Czechoslovakia has a relatively high standard of living in,
comparison with the other Satellites. Events in Poland will have
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repercussions upon Czechoslovak economic life, nevertheless, since the
two countries had begun extensive bilateral economic collaboration,
especially in the development of the Ostrava coal basin. This collabora-
tion has been of mutual benefit and was to some degree stimulated by
mutual distrust of Germany.
Rumania and Bulgaria have both made only slight progress in improving
living standards. Since both countries are rural in character, however,
discontent has not been expressed as dramatically as in industrial centers.
The Rumanian government has already approached the Soviet Union for further
economic assistance in order that it may maintain internal stability, but
has not been given significant assistance. The Bulgarian government may
follow suit in asking the Soviet Union for additional aid.
As presently formulated, the 1956-60 Five Year Plans of the European
Satellites provide for rates of economic growth below those of the pre-
ceding five year period. Prospective plans call for somewhat less dis-
parity between the growth rates of heavy industry and for light industry,
including consumer durables and processed foods. Although greater rela-
tive gains are scheduled in investments than in real wages for the pro-
spective five year period, the basic downward trend in real wages that
began in the middle of the last five year plans (but was partially
reversed by the New Course) is to be counteracted. Even if planned
growth rates are discounted, it appears that provision exists in the new
plans for modest annual gains in real income, albeit more in industrial
products than in agricultural commodities and in housing.
If the presently planned prospect for consumers is more favorable
than the plevious.planning period, however, achievement of, these gains,
together with overall growth,-depends more upon increases in labor pro-
ductivity than additions to overall manpower or transfers from agriculture
to industry. A large part of the planned increase in labor productivity
is premised on heightened labor efficiency rather than increases in
capital equipment'available to labor. In order to achieve this in-
crease in labor efficiency, the cooperation of the workers is necessary.
In the past, coercive methods have failed to elicit this cooperation.
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sOn the other hand, the economic reforms necessary to provide effective
incentives to the workers, would require a significant adjustment in
plans, probably including lower goals for investment and heavy industry.
An approach to the problem of agumenting worker incentives through
greater individual freedom, decentralization of economic decision making,
and other administrative reforms, might initiate a chain of events
similar to those in Poland and Hungary.
Since recent Sovieteditorials have completely reversed the true
roles and have portrayed Hungary as having been the guilty party for
attempting to industrialize too rapidly, it is possible that the Soviet
Union will accept a downward revision of industrialization plans in
other Satellites. After such revisions are made, and the secondary
effects of events in Poland and Hungary are reflected in overall Soviet
Bloc planning, it is likely that the production targets of the Satel-
lites for 1960 will be more modest than the earlier targets.. After the
good Soviet harvest of 1956, and poor harvests in such Satellites as
Rumania, the Soviet Union may be able to give the Satellites supplementary
aid in agricultural products. There is little indication, however, that
the Soviet Union will be able to give extensive supplementary assistance
in capital goods, consumer goods, or in raw materials; without scaling
down its own economic plans. Unless the Soviet Union feels that its
political and military objectives in the Satellites are seriously
threatened, it is unlikely that it would give economic assistance which
would impair its awn development. A more likely alternative would be to
permit a downward revisian of Satellite economic plans.
Despite potential changes in the economic relations among the Satel-
lites and the Soviet Union, it is probable that the Satellites will
continue to press their expansion of trade with the underdeveloped
countries. This program serves both the political and the economic
interests of the Satellites. If left to the determination of the indi-
vidual Satellites, there is some reason to believe that the countries
selected for maximum penetration effort may not be identical with Soviet
target preferences. Currently, the Soviet Union has demonstrated prefer-
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ence for penetration of the Near East, whereas Poland, for example, may
have greater interest in India, South America, and areas other than the
Bear East. A high degree of Bloc-wide coordination of the penetration
efforts had been achieved in early 1956, judging by the small number of
trade conflicts reported to have occurred among the Bloc countries;
greater autonomy of economic policy on the part of countries such as
Poland would tend to increase the number of minor trade conflicts, yet
partnership in the penetration effort would, likely be considered econa-,
ically desirable and possibly would be dependent upon following the
Soviet version of the "rules of the game".
The Soviet Union has now admitted that it has abused the principle
of equality in its economic relations with the Satellites and has
affirmed its desire to develop a new set of working relationships. In
addition, the Soviet Union has indicated willingness to reconsider recall
of Soviet advisers (although it is probable that the Soviet Union will
attempt to retain advisers in high-echelon offices such as State Planning
Commissions). In the economic sphere, all the Satellites are still very
much dependent upon the economic policy of the Soviet Union, foreign
and domestic, as constraining limits to their own policy, but Poland has
now obtained greater latitude of action within these limits.
Although the USSR may permit apparent changes in its economic re-
lationships with the European Satellites, there is little evidence that
the, changes will permit the Satellites significant increase in freedom
in the determination of economic policy, except where political necessity
may dictate (as in Poland and, possibly, in Hungary). The Soviet Union
must choose between permitting the Satellites flexibility of action in
resolving their economic problems, which are of greater severity than
the present economic problems of the Soviet Union and require more
drastic immediate measures of reform and adjustment than now being im-
plemented in the Soviet Union, or else adopt a rigid policy which seeks
to control carefully the nature of Satellite economic reforms in order
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to prevent a repetition of events such as occurred recently in Poland
and in Hungary. This is a basic dilemma, for if the Satellites do
not adopt far-reaching economic reforms which will recruit the coopera-
tion of the workers and of the peasants, the economic crisis must
continue, but to obtain such cooperation, overall economic and political
reforms must be undertaken which would potentially shake the present
regimes and weaken Soviet control.
In Poland a situation exists which may be unique among the Satel-
lites. Gomulka has won a begrudging measure of freedom from the Soviet
Union. Within this freedom, and with his support from the Polish popu-
lace, he may attempt economic measures to create a new economic system,
combining central planning; price determination, and direction of the
economy with increased incentives to labor; the peasants; and management,
and an attempt to relate economic decisions to the interplay of market
forces, that is, a more meaningful price system. His economic policy
must have several goals: it must give greater weight to living standards
in determining the basic perspectives of economic policy, recruit popular
support for the regime and support of the new economic program, and
obtain more efficient utilization of Poland's li7r1ted economic resources.
It remains to be seen if a program based upon central planning and
control can so recruit popular support and participation while still
seeking to maximize economic growth. The Polish government must break
new ground in the realm of economic policy, and it must maintain public
support in a time of economic crisis. Difficult as are these tasks,
even without outside interference, they will be the more difficult since
neither the Soviet Union nor the governments of Poland's neighboring
states will be likely to ease the task.
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I. The Policy Conflict between the USSR and Its European Satellites.
A. Recent Soviet Policy towards the European Satellites.
The Soviet Union has misjudged the political and economic sta-
bility of the Satellites and, by its own statement4: must re-examine the
nature of its relationships with them.
At the Twentieth Party Congress of the Communist Party of the
Soviet Union (February-March 1956), it was affirmed that there were many
roads to Socialism.* This statement was intended to support Party tac-
tics in Western countries. There is no evidence to suggest that this
doctrine was meant to apply to the economic development of the European
Satellites. To the contrary, the draft directives on the soviet Sixth
Five Year Plan contained a positive statement concerning the economic
consolidation of the Soviet Bloc. In addition, the Congress welcomed
economic competition between the systems of capitalism and of "socialism."
At the same Congress, A.I. Mikagan, one of the founders of the
Soviet Bloc system of coordinated economic planning, called for consoli-
dation of the world socialist syttem to take advanAage of a world capi-
talist system "in crisis, weak, and losing one position after another."
In the samg speech, however, he stated two theses which were to shake
the Soviet hold on the Satellites. In the first, his attack upon Stalin,
-which preceded that of Khrushchev's, he attacked terrorist methods and
the secret police. In the Satellites, this would be interpreted as a
softening of the Soviet line. In addition, speaking in confident terns
of the ability of the Soviet Bloc to win a struggle of "peaceful" co-
existence, he laid to rest the theory of capitalist encirclement. By
playing down the thesis of immediate threat, he was attacking the roots
of the regimentation of Satellite economic life. This "wartime regimen-
tation" in a time of peace was later attacked by Oskar Lange of Poland
in a speech in July 1956.
* Soviet Statement on Satellite Relations, 30 October 1956.
** A detailed presentation of the Soviet policy statements follows in
Appendix A.
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Still pursuing tactics designed to strengthen the new Popular
Front line in the West, the Soviet Union held further discussions in
Yugoslavia in May and June of 1956. In the Pravda statement concerning
the discussions, the thesis of many roads to socialism was extendOd to
the economic sphere in the pronouncement that various ways and means may
be used in differe# countries to solve the specific problems of social-
ist construction.... This change in the formula was necessary to the
justification of the establishment of closer relations with Yugoslavia.
There is again no indication that the many roads thesis was intended for
the Satellites. Significantly, however, the Pravda statement listed
features of the Yugoslav politico-economic system which were by impli-
capion acceptable to the USSR
1. Unity in the chief fundamental matter of ensuring the victory
of socialism.
2. Public ownership of the basic means of production, in large-
scale and medium industry, transport, the banking system,
wholesale trade, and most of retail trade. (Note the exclu-
sions of small industry, some retail trade, and agriculture).
3. The state system is determined by the fact that the working
class and the peasantry hold the reins of power. (That is,
a Communist Party).
k. Pursuit of a "fitting socialist foreign and domestic policy."
(By implication, not going too blatantly against the Soviet
line).
5. Extension and strengthening of political and economic ties
and cooperation by Yugoslavia with the Soviet Union and
the peopleis democracies.
On 30 October 1956, the Soviet Union issued a statement on its
relations with the Satellites. It admitted that the prinicple of equal-
ity had been violated and indicated willingness to re-examine its econo-
mic and military relationships with the Satellites. By implication, it
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intended to maintain the Warsaw Pact in force, and accordingly, to main-
tain Soviet troops in the Satellites. By explicit statement, the Soviet
Union would be willing to discuss the recall of Soviet advisers. It is
further stated that the Soviet Union is willing to discuss measures in
order to remove any possibility of violating the prindiple of national
sovereignty, mutual advantage, and equality in economic relations. By
implication, the Soviet Bloc joint economic planning for 1956-60 may
be changed in nature and in targets.
This statement does not explicitly extend to Poland or to any
Satellite the same latitude of action as previously accepted in the case
of Yugoslavia. It does not, however, prevent Gomulka from using the
Yugoslav precedent. In addition, the Soviet admission of mistakes and
the specific affirmation of the principle of equality in economic rela-
tions should strengthen the Polish poaition.
B. Satellite Reaction to Soviet Policy.
In most of the Satellites, there is a latent economic basis for
conflict. The advance in levels of living has been slaw; housing accommo-
dations are not satisfactory, and there are food shortages in some
Satellites. Even so, discontent has not erupted in some countries which
have very law levels of living, but it has in one country with a rela-
tively high level of living (Poland). Discontent with levels of living
would likely have the effect of reinforcing discontent arising from
political and social motivations.
There is also a basis for conflict in the latent suspicion of
Soviet motivations concerning the plans for Bloc-wide economic coordina-
tion during 1956-60. While in most cases the various Satellites would
find specialization of production to their own advantage, plans involving
the 1location of resources at what appears to be Soviet direction
introduce the possibility of conflict between Satellite and Soviet
policies. Thus the Soviet Union presses for Polish exports of coal to
the Soviet Union and to the other Satellites; Poland expresses a
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preference to retain more of the coal for domestic consumption and for
sales to the West. When nationalism crystallizes about effective politi-
cal leadership, as in the cases of Yugoslavia and Poland, the principle
of equality in economic and political relationships is zealously pre-
served; common goals with the Soviet Union are recognized, but the
economic relationships must be negotiated and not directed.
Poland tremendously Magnifies the problem for the USSR. Polish
economists, such as Oskar Lange, who has risen to the influential posi-
tion of chairman of the finance committee of the legislature, have been
in a ferment over the inefficiency and arbitrariness inherent in an econ-
omic system that substitutes administrative decisions for a rational
price policy as the means by which economic questions are decided. The,
Lange group is insisting, through Gomulka, both on decentralization of
planning and administration, and also on the use of profitability as
the criterion for economic policy making.
Yugoslavia, long a disturbing element, has become more of one
since its rapprochement with the USSR makes the Yugoslav road to social-
ism a very real alternative to that of the Soviet Union. Now there are
two dangerous precedents for further.Satellite defections from the
politico-economic community which the ?Soviet Union had intended to be
closely knit.
In its own way, Hungary must also be a. dangerous element of
instability in Soviet Bloc relationships. An occupied Hungary must
represent a drain upon Soviet and Satellite. resources. Furthermore, the
???
disturbing weapon of the general strike and of the slowdown has been
effectively used in Hungary. In the economic sphere, passive resistance
can be potentially disasterous to an unpopular regime. At the present
moment (December 1956), East Germany has expressed concern about 'Hungary's
ability to honor its export obligations, not to mention the disruption
of transport through Hungary, the rail link between mid-Europe and the
Balkans.
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Economic conditions in Czechoslovakia, Bulgaria, and Rumania,
while of themselves likely to precipitate a major crisis, would tend
to reinforce unrest once it manifested itself.
East Germany exhibits the stability of force, and of force
alone. The regime has vacillated between offers of concessions and
pronouncement of a hard line. Living standards have aroused discontent,
openly expressed in 1953 and now latent. Nevertheless, the presence of
Soviet troops and the fear of reunification with West Germany have moved
the East German government to adopt a relatively hard line.
Because of the German unification problem, East Germany's posi-
tion is unique. The economy has been artificially developed as one
independent of West Germany. Since much of the metallurgical and fabri-
cating industry must operate at higher cost than the West German counter-
parts, East Germany would be unable to sustain trade competition with
West Germany. In the view of the East German Communist Party (the SED),
continued existence of the Party and of the economy, as presently consti-
tuted, is dependent upon the furtherance of plans for an integrated
Soviet Bloc economy, which would guarantee to East Germany needed mater-
ials (especially coal and iron ore) and needed markets for its products.
On the other hand, East German pride in German technological achievement
is an important stimulus to a German nationalism. On several occasions
in the past, East Germany has demonstrated reluctance to share advanced
technology with other Bloc countries.
C. Soviet Reaction to Changes in the Satellites.
This is a complex subject, which at the moment is best studied
not in terms of generalities, but in terms of the specifics of Soviet
relationships to the individual Satellites. If the Soviet Union should
decide that countermeasures are necessary, a whole haat of counter-
4ao.easures are available in the economic sphere.
Aside from countermeasures, earlier in the year (1956) the Soviet
Union recognized the dilemmas in which the Satellites found themselves
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and offered supplementary aid agreements to Bulgaria, East Germany,
Poland, and Hungary. These programs did not go far in terms of equipment
and consumer goods made available from the Soviet Union and were perhaps
most important for the free currencies" supplied to. the Satellites,
presumably for the purchase of needed goods from the Nest.
It is not likely that the .Soviet Union can go much farther in
expanding its aid programs to the Satellites, for its own requirements
are competitive. The Satellites have acute deficiencies in raw materials,
consumer goods, agricultural products, and specialized equipment just as
does the Soviet Union. The solation is not likely to be found by reducing
the scope of the aid program to the underdeveloped nations, for to a
considerable degree the Soviet Bloc is exporting a different class of
commodity to these countries, -- the more common types of equipment de-
sired by a country just beginning industrialization.
A unique phenomenon of the Soviet Bloc is Soviet control over
the distribution of producer's goods. This control originated from
many causes, -- former Soviet ownership of key enterprises in East Germany,
?
Hungary, and .Rumania; Soviet aid to expansion in producer's goods indus-
tries which was to be repaid in kind by the output of the enterprises
if the ?Soviet Union was not otherwise recompensed; and the artificial
stimulation of industries not economically well-founded, which led those
industries to look to the Soviet Union to find them both sources for
raw materials and markets for finished products. Thus, when the Soviet
Union discontinued reparations from East Germany, East Germany had to
appeal to CEMA (ultimately Soviet-controlled) to find markets for many
categories of equipmpnt.
This factor of control is very important. It put the Soviet
Union in a position to choose from two major alternatives of action
.vis-a-vis its economic relationships With the Satellites. 1) The Soviet
Union could channel these investment goods inside its own borders, and
2) The Soviet Union could undertake a Bloc-wide industrial expansion
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program. The latter program would be particularly attractive if it made
a larger output of goods available to the Soviet Union and accorded with
that country's political interests in theSatellites. There is reason
to believe that the Soviet Union did in fact consider this to be the
case. Adoption of a program involving a high degree of industrial ex-
pansion for the Soviet Bloc as a whole, and characterized by increasingly
extensive division of labor) required one very basic condition, economic
and political reliability within the Satellites. The essential nature
of this condition can be seen upon consideration of what would happen
if one country significantly underfulfilled the output of commodities on
which other countries were dependent for the fulfillment of their own
production programs and ultimately of their Five Year Plans. The Five
Year Plan is the economic program laid on by the Communist Party for the
fulfillment of its policies; thus nonfulfillment of the Plan has serious
implications to the strength and the prestige of the Party. If the Five
Year Plan of any Communist nation is to become dependent upon another
country's fulfillment of its obligations, it becomes a matter of party
survival to be sure of the other country's reliability with respect to
its obligations.
It is now in the realm of reason that the Soviet Union will start
to retreat from alternative (2) (Bloc-wide industrial expansion) to
alternative (1) (primary preference for industrial expansion within its
own borders),unless the "reliability" of the Satellites can be reestab-
lished, Which is not likely even under a Soviet military occupation of
Hungary and possibly of Poland. In this event of policy shift an entire
sequence of events can be forecast,;
1. CEMA could be retained but its activities would be consider-
ably scaled-back and it would begin to look much more like
the old CEMA of 1951, a vehicle for the coordination of trade
During the period 1951-56, all evidence suggests a degree of invest-
ment activity within the Satellites, which was relatively commensurate
with the extent of total Satellite industrial production.
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policy in common interests but not an instrument for the
detailed coordination of industry. Limited detailed coordi-
nation might still develop for a few industrial fields of
common concern, but far short of the program planned for
1956-60.
2. The Soviet Union could permit a scaling-down of the, Satellite,
programs for industrial expansion and would-even show some
reluctance to supply Soviet equipment, raw materials, and
technical assistance, while seeking to maximize Soviet inter-
nal expansion.
3. The Soviet Union could seek to maximize imports of heavy
producer's goods, and of raw materials (such as coal) to the
extent of its considerable economic power. This would sup-
port internal Soviet development and deprive the Satellites
of trade items which the Satellites could otherwise trade
to the West in exchange for needed economic assistance. The
Soviet Union could maintain a net import balance against
write-off of past credits and payment for services.
Implementation of such a revision of the Soviet program would
not ,mecessarily ::require underfulfiliment of the Sixth Five Year Plan.
The Soviet Union would be relieved of some obligation to supply raw
materials and equipment* to the Satellites and could direct these re--
sources to its own development. The major impact of such shifts would
be in terns of lower Bloc-wide industrial production in 1960, resulting
from dOwnward revision of Satellite production goals.
There would be serious effect upon the Sixth Five Year Plan,
however, if events in the -Satellites have forced the Soviet Union to
stop its demobilization of military manpower numerically short of its
goal for May 1957. This Would deprive the Soviet Union of labor reserves
These resources would be either of Soviet origin or else Satellite
resources directed to Soviet account. This, however, does not
necessarily mean that there were net Soviet exports of goods of
Soviet origin.
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which it likely must have to fulfill its 1960 output goals. If the
situation deteriorates, the Soviet Union may even be compelled not only
to stop demobilization but to initiate partial mobilization. Partial
mobilization would compel extensive rescheduling of the production and
investment programs likely drawing on agriculture and the services
industries (including construction) for manpower and slowing down the
investment program, especially the program for expansion in the Far East
which has a relatively deferred payoff.
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II. Economic Factors in the prospects for the Stability and Cohesion
of the Soviet Satellite Structure.
A. Outlook for Economic Growth and Improvement of Living Standards.
The purpose of this section is to consider briefly the broad
prospects for economic growth in the European Satellites, the extent to
which such growth is likely to be reflected in living standards, and
the general relation of these factors to the internal stability of the
countries. While this approach should contribute to an evaluation of
probable developments in the Satellites during the next several years,
it should be borne in mind that the projections of economic growth are
necessarily crude, that living standards may not be allowed to keep up
with the growth of the economies, hnd that improvement of living standards
is only one of many factors affecting the internal stability of the
countries.
The projections of economic growth which are presented in the
next subsection are based on the assumption that a rapid expansion of
national products will continue to have a high priority in the Satellites.
The effect of this expansion on living standards is more uncertain,
however, since it depends on secondary economic policies which have been
modified in the past in response to internal or external developments
and may be modified in the future for similar reasons. Furthermore,
even if parallel development of national products and living standards
is assumed, the effect on the internal stability of the countries re-
mains rather problematical. This difficulty may be illustrated by the
timing of the riots in East Germany and the later disturbances in Poland
and Hungary. The East German riots in June 1953 followed about five
years of growing pressure to increase production and socialize the
economy and of continuing austerity in living standards. The recent
The estimated increases in Satellite gross national product and in-
dustrial and agricultural production presenteclin this section were
prepared for ORR Project 10.804, which is attached in draft form as
Appendix C. Data relating to plans and plan fulfillment are (with a
few exceptions) from official Satellite sources.
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disturbances in Poland and the revolt in Hungary, on the other hand,
followed about three years of somewhat more liberal economic policies and
an improvement in living standards which probably exceeded in extent
that of the preceding three year period.
1. Projected Growth in Gross National Product, 1956-60.
In the fundamPntal matter of the general growth of the Satel-
lite economies during the period 1956-60, it is estimated that substantial
gains will be achieved but that these gains will be somewhat smaller than
those believed to have been achieved during the preceding five year ,
period. A projection of gross national product to 1960 has not been pre-
pared for each of the Satellites, however. Instead, combined numerical
estimates are presented for Czechoslovakia and East Germany (the most
industrialized Satellites) and for Bulgaria and Rilmania (the least
developed Satellites, excluding Albania), and a qualitative estimate is
offered for Hungary and Poland.
The average annual rate of economic growth projected for
Czechoslovakia and East Germany is about 5.5 percent and that for
Bulgaria and Rumania is about 5 percent. In each instance; the projected
rate of economic growth from 1955 to 1960 is considerably lower than the
estimated average rate from 1950 to 1955 (see Table II-1). The indi-
cated slackening in growth rates for East Germany and Rumania is especialn--
arTrbniounced,bEntse-during the 1951-55 period East German industry
made a noteworthy redovery from. the depressed level of 1950 and both
industrial production and agricultural production in Rumania evidently
increased substantially. The estimates of economic growth in East
Germany and Rumania from 1950 to 1955 may be too high; in any event,
such average rates are unlikely to be duplicated or closely approached
in the period through 1960.
The population of Czechoslovakia And East Germany is not
expected to increase very much Mining the 1956-60 period because of
comparatively low rates of natural increase and the assumption of
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SECRET
Table II-1
Estimated Gross National Products
of the European Satellites 2/
1950 and 1955
Gross National Product
(Billion 1955 DB $)
Average Annual
Rate of Growth,
1950 to 1955
(Percent)
1950
1955
Bulgaria
1.19
1.68
7.1
Czechoslovakia
7.93
11.1
7.0
East Germany
10.8
17.3
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9.9
Hungary
2.67
3.62
6.3
Poland
16.7
22.1
5.8
Rumania
2.98
4.48
8.4
Total
42.3
60.3
7.4
a. Excluding Albania.
continuing sizable losses of popillation through emigration from East
Germany. Consequently, the anticipated increase in output per capita
from 1955 to 1960 is not appreciably less than the projected increase
in total output. The more rapidly growing populations of Bulgaria and
Rumania, on the other hand, are likely to reduce the rise in output
per capita to about two-thirds of the projected increase in their
national products. It follows from this that the already large gap
between output per capita in Czechoslovakia and East Germany and in
Bulgaria and Rumania probably will be widened rather than narrowed
during the period under consideration.
A numerical projection of future rates of economic growth
in Hungary and Poland does not i.seem justified at present in view of the
serious disruption of economic activity which has occurred in Hungary
and the prospect that general economic policies and specific production
goals for the next several years may be modified in both countries.
It seems safe to say, however, that whatever the line of economic policy
followed -- whether Stalinist, or an expanded New Course with additional
benefits and concessions for workers and consumers, or something in
between -- the outlook is for average rates of growth in output some-
what lower than those projected for the other Satellites.
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The foregoing projections and judgments are based on limited
available data concerning the growth of the Satellite economies since
the War and on official announcementsofgoals for 1960. Previously
published production goals for 1960 in Hungary and Poland seem likely
to be cut back, and downward revisions which are intended to forestall
repetition of the disturbances in Hungary and Poland or which reflect the
repercussions of these disturbances through foreign trade may also take
place in the other Satellites. The projected growth rates should there-
fore be regarded only as rough indicators of the probable trend in Satel-
lite output.
By their nature, the projections do not take into account
the anticipated plan revisions or the supply difficulties which may
occur in the Satellites if deliveries of key products such as Polish
coal fall below the previously planned levels. In general, the projected
growth rates assume that the increases in industrial production from 1955
to 1960 will be almost as large as those planned. Such gains are not
likely to be achieved unless the USSR stands ready to break any serious
bottlenecks which develop in Satellite raw materiaILsupplies. Failure
of the Satellites to carry out joint development projects as scheduled
may also affect growth rates significantly.
The agricultural element in the projections of gross national
product is based on independent estimates of the outputs of selected
agricultural commodit4es in 1960. The projected increase of a little
less than 10 percent is comparable to that estimated to have been
attained from 1950 to 1955. Growing difficulty probably will be exper-
ienced by these countries in increasing yields per hectare as average
prewar levels of output are surpassed, but agricultural policies probably
will on the whole be more favorable to the expansion of output than
during the past five year period.
2. Implications of Principal Goals of the Current Five Year Plan.
In addition to offering some basis for projections of economic
growth, the new Five Year Plans announced earlier this par outline major
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_ _ _ _
economic goals for 1960 which have certain implications for the internal
stability of the countries in the intervening period. A brief discus-
sion of these goals seems worthwhile, but the conclusions reached must
be considered as tentative since revisions of these plans are in pros-
pect in at least two of the Satellites.
The first question concerns the general level of the major
production goals and the degree of strain on the economy which the effort
to fulfill these goals is likely to entail. The planned increases in
national income fall within a comparatively narrow range -- 40 to 50
percent for the period 1956-60 (1953-57 for Bulgaria). These objectives
are in most cases somewhat lower than the original goals of the first
series of long-term plans and considerably lower than the upward revi-
sions of these goals in 1950-51 (see Table 11-2). These targets un-
doubtedly are more realistic than the revised goals of the preceding
plans, but it is questionable whether they are much more feasible than
the original goals of those plans (which in several countries are esti-
mated to have been far from fulfilled).
Considering the pressure on supplies of raw materials and
labor which have already been encountered in the area and the substan-
tial rise in investment expenditures and improvements in planning,
management, and labor skills needed to achieve the planned increases in
labor productivity, it is believed that the growth in national income
will be appreciably less than the rates now scheduled. It seems reason-
able to assume, moreover, that the attempts of the regimes to accomplish
what appear to be reasonably ambitious objectives will militate against
any marked reduction in the degree of state control over the economy.
Past efforts to get more and more output from the workers do doubt will
continue, but with less reliance on pressures and more use of incentives.
Restrictions upon private enterprise and indiviftal initiative, campaigns
for increased labor productivity, and the tendency toward increased work
norms have, of course, been important sources of discontent among the
people.
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Table 11-2
Planned and Actual Increases in National Product in the European Satellites
under First Long-Term Plans and Current Five Year Plans
Increases in Percent
Bulgaria
Czechoslovakia
East Germany
liungary
Poland
Rumania
Period
_ First Long-Term Plans
Planned Increase during Period a/ Announced EstiMated
Revisions Actual Actual Planned
Original of 1950-51 Increase 2/ Increase 13/ Increase 2/
Current Five Year
Plans (1956-b0)
1949-52 (4 years) E./ 63 a/ N.A. 67 20 50 e/
1949-53 (5,years)) 48 70 59 46 48
1951-55 (5 years) 60 6o 62 6o 45
1950-54 (5 years) 63 130 50 49 4o
1950-55 (6 years) 70-80 112 86.1/ 51 50
1951-55 (5 years) 100 N.A. 90 50 50
Data refer to national income, which as defined in Communist countries) excludes provision for depreciation and the
value of services not connected directly with material production.
b. Data refer to estimates of the total output of goods and services, or gross national product.
c. Period of the plan as completed. The plan originally covered the five year period 1949-53.
d. A calculated goal for the fourth year of the plan (1952), based on the assumption that a steady rate of growth throughout
the five years of the original period was planned. The planned increase for the original Five Year Plan was 85 percent.
e. Planned increase for 1953-57, the period of Bulgaria's current Five Year Plan.
f. Provisional estimate by the Economic Commission for Europe.
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The rates of economic growth achieved in the Satellites
will reflect in large part their success in fulfilling their goals for
industrial production. This in turn, depends on the realization of
the comparatively large planned increases in the productivity of indus-
trial workers shown in the following tabulation:
Planned Percent Increase in Labor
Productivity in Industry,
19 to 19
Bulgaria 35 (1953 to 1957)
Czechoslovakia about 44
East Germany 50 (socialist industry only)
Hungary 36 (state industry only)
Poland 35 (state industry only)
Rumania 45-50
AcIdevement of such rises in productivity will require a very careful
allocation of resources, since it depends not only on high levels of
investment (to provideincreasing amounts of capital equipment per
worker) but also on the morale of workers (and thus in large part on
working conditions and living standards)., To a certain extent, the one
can be favored only at the expense of the other. It seems doubtful
whether any pattern of resource allocation will permit rises in labor
productivity to the full extent presently planned, although substantial
gains are expected and. are subsumed in the projected rates of economic
growth presented above.
Although the regimes can hardly do much about popular dis-
satisfaction with the Institutional characteristics: of their Soviet-type
planned economies, achievement of even two-thirds of the planned increases
in national income would offer opportunities for a significant (though
necessarily gradual) rise in living standards. It seems probable,
however, that the average annual gains would not be as large as those
of the last three years.
Some impression of the planned distribution of the national
products during the 1956-60 period is afforded by the goals for invest-
ment and real wages. Real wages are scheduled to increase from 25 to
4o percent in the various countries, compared with the goals of 40 to
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50 percent for national income. The lower rates for real wages (which
maybe regarded as a rough indicator of the planned increases in con-
-Imp.daaa) permit planned increases in investment Which in several cases
substantially exceed the national income targets (see Table 11-3). Even
if the national incomes of the Satellites rise only about 30 percent,
and investment increases by twice that percentage from 1955 to 1960,
average annual increases of 2 to 3 percent in the consumption element
of national income should be possible. Gains of this size are compara-
ble to the long-term averages in the industrialized countries of the West.
Even if the expected improvement in living standards is
realized, it probably would be a neutral rather than a positive factor
in promoting the internal stability of the countries. That is to say,
the improvement in living standards probably would not in itself promote
any widespread acceptance of the regimes. On the other hand, if per-
ceptihle gains are made over a period of several years, living conditions
in themselves probably would not be a serious source of disaffection or
instability among the population.
Additional impressions of the nature of Satellite economic
development through 1960 are provided by the plan goals for the expan-
sion of industrial and agricultural output. The cutback from the pre-
vious long-term plans in the size of the planned increases in. gross
industrial production is somewhat greater than in the case of national
income. Except in Czechoslovakia (and Bulgaria, where the current
plan ends three years before the others), the planned increases do
not exceed about two-thirds of the increases originally planned for the
final years of the preceding plans and are of course still smaller in
relation to the revised goals of 1950-51 (see Table 11-4). Even so,
it is considered unlikely that net industrial production (as diStinguished
from gross industrial production, the customary Satellite measurement)
See footnote 12/ in Table 11-3 for qualifications concerning compari-
sons of the goals for investment and real wages and footnote f/ for a
possible explanation of the small increase scheduled for investment
in Hungary.
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Table 11-3
Approximate Planned Increases in Investment and Real Wages
in the European Satellites during the Current Five Year Plans
1956-60 2,/
Percent
Investment Li Real Wages 2/
Bulgaria 100 sl./ 40 2/
Czechoslovakia 62 33
East Germany 100 30
Hungary 15 E/ 25 g/
Poland 45 30
Rumania 67,75 30
a. Except in Bulgaria, where the period of current Five Year Plan is
1953-57.
b. Unless indicated otherwise, the percentages indicate the planned
increases in average annual investment from the period 1951-55 to
the period 1956-60. Since it has not been determined in every
case that the increase shown is derived from the same component
of investment expressed in comparable prices for the two periods,
the figures shoulaibe regarded as tentative. These goals are
only roughly comparable with those of real wages and national'
income, since the latter indicate the scheduled increases from
1955* to 1960.
c. Unless indicated otherwise, the percentages indicate the planned
increases from 1955 to 1960.
d. Planned increase from the four year total for 1949-52 to the five
year total for 1953-57.
e. Planned increase from 1952 to 1957.
f. Planned increase over the period of the First Five Year Plan
(1950-5)--). Because of the declines in investment in 1954 and 1955,
a comparison of the goal for 1960 with actual investment in 1954
or 1955 probably would show a much larger planned increase.
g. Planned increase in personal consumption.
will increase to the full extent planned for gross production. For the
four Satellites other than Poland and Hungary, an increase in net indus-
trial production of 45 to 50 percent in anticipated, compared with the
planned increases of about 50 to 65 percent in gross production in the
various countries.
Each Satellite has planned larger percentage increases for
producer goods than for consumer goods, but the divergence between the
goals is in general somewhat smaller than in the earlier plans and is
considerably smaller than the differences between the officially announced
increases in output in these two sectors of industry during the preceding
plans. Assuming no marked shift toward exports of consumer goods, these
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goals indicate an intention to give the improvement of living standards
more attention than it received under the earlier plans and seem generally
consistent with the goals given in Table 11-3 for increases in real wages.
In the previous plan periods, there was an evident large
discrepancy between the goals for agricultural production and the results
claimed (or estimated) to have been achieved (see Table 11-4). Sizable
gains in agricultural output are once again scheduled, and it is still
very questionable whether they will be realized, in view of past perform-
ance, and the general difficulty of increasing yields per hectare sub-
stantially over a'period of a few years. Assuming average weather condi-
tions for the 1960 crop, an increase of 8 to 10 percent in production
seems probable over the five year period. Since the population of the
area is expected to rise by over 5 percent during the period, only a
small increase in food supplies per capita is indicated unless imports
are increased appreciably. The conclusion seems justified, therefore,
that the food component of personal consumption will continue to be a
weak ppot in the effort of the Satellite regimes to gain wider support
among the people of the area and that the anticipated gradual rise in
living standards will take the form primarily of manufactured consumer
goods, particularly metal products.
B. Problems of Economic Development in the European Satellites.
The rapid industrialization of the European Satellites during
the last five years was achieved by means of extensive regimentation
of the economy. Speaking of this period, Oskar Lange wrote in July 1956
the following words, "We directed the economy through methods which
are characteristic of a 'wartime economy', i.e., through methods based
on appeals of a moral and political character as well as on orders of
a legal and administrative character, in other words, through methods
based on various means of extra-economic compulsion and not on economic
incentives." 1/ A multitude of factors, such as the lessening of the
rule by terror in the Soviet Union and the accompanying lessening of
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Table II-4
Planned and Actual Increases-in-Industrial and Agricultural Production in the European Satellites
under First Long-Term Plans and Current Five Year Plans
0.
itn
RrJ
IC)
I t=i
11-3
Increases in Percent
Bulgaria
Industry
Heavy industry or producer goods
Light industry or consumer goods
r\D Agriculture
o -
iCzechoslovnkla
Industry-
Heavy industry or producer goods
Light industry or consumer goods
Agriculture
East Germany
Industry
Heavy-industry or producer goods
Light industry or consumer goods
Agriculture
Hungary
Industry
Heavy industry or producergoods
Light industry or consumer goods
Agriculture
First Long-Term Plans
Current Five Year
Plans (1956-60)
Period
T.Planned-Increase
during Period 2,/

Announced
Actual
Increase
Estimated
Actual
Increase 12/
Planned
Increase a/
1t.,1
IC!)
Ij3
Itt
1,!3
Original
Revisions
of 1950-51
1949-52 (4 years) c/
1949-53 (5 years)
1951-55 (5 years)
1950-54 (5 years)
87 2/
154 1/
56 2/
43 I/
57
66-
50
37
go
93
86
N.A.
86
104
73
42
N.A.
N.A.
LA.
98
133
73
71'
92
loo
81
57
210
280
145
54
130'
200
100
8
102
119
80
14
go
94
84
44
155
188
127
12
65
215
25
-4
54
66
33
25
84
98
54
9
84
98
56
10
60e/
78J
48 2/
66 e/
50
57
4o
30
55
60
14.0
22
47-5o
58-6o
38-40
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Table 11-4
Planned and Actual Increases in Industrial and Agricultural Production in the European Satellites
under First Long-Term Plans and Current Five Year Plans
(continued)
Increases in Percent
Poland
Industry
Heavy industry
Io Light industry
I Agriculture
la w Rumania
Oid Industry
Heavy industry
IW
Light industry
1113 Agriculture
or producer goods
or consumer goods
or producer goods
or consumer goods
First Long-Term Plans
Period,
1950-55 (6 years)
1951-55 (5 years)
P2anned Increase/
? during Period 2i
Revisions
Original of 1950-51
90 136
154
111
36 50
144 LA.
LA. NOJL
LA. LA.
88 LA.
_
. ,
Lanolin-bed: -
Actual
Increase 2/
170 r_85
196 g/
171 g/
19
Estimated
Actual
Increase
85
107
51
18
? 78
101
51
48
Current Five Year
Plans (195b-60)
Planned
Increase 2/
53-57
53-61
54
25
60-65
70-75
50-55
a. Data refer to gross production, which includes raw materials and intermediate products as well as all final products. Changes
in the degree of such double-counting during a period result in percentage changes in gross production which differ from the
changes in net production. The increases shown for industry and its components are those announced at the end of the long-
term plans. In some instances, cumulation of officially announced annual increases during the period produces a somewhat
different total.
b. Data refer in general to net production. Estimated actual increases in production during the first -term plans differ
from the announced actual increases because of one or (more likely) a,combination of the following: changes in the degree
Of double-counting in the official measurements of gross production, (2) inaccuracies in official calculations of these ag-
gregates or falsification in their publication, and (3) inaccuracies in the calculation of increases in net production as a
result of the nnrepresentativeness of the sample of products used or deficiencies in the basic data, including estimates of
production in physical terms and prices and other data used for weighting purposes. ,
C. Period of the plan as completed. The plan origina covered the five year period 1949-53.
d calculated . A calcated goal for the fourth year of the plan (1 52), based on the assumption that a steady rate of growth throughout
the five yeamsof the original period was planned. This adjustment permits a more valid comparison of planned and actual
increases in production.
e. Planned increase for 1953-57, the period of Bulgaria's current Five Year Plan.
f. Planned increase over average output during the First Five Year Plan (1950-54).
g. Socialist industry only.?
h. Provisional estimate by the Economic Commission for Europe.
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Soviet authority in the Satellites, the reduction of international
tensions, and popular discontent with Satellite regimes, have compelled
each Government to become more concerned with the problem of stimulating
economic incentives to production. In some respects this is a continua-
tion of the New Course begun in 1953, in other respects it goes far
beyond. The goals of the New Course were mostly based upon increasing
the supply of foodstuffs and other consumer goods, but in 1956, in
Poland and Hungary in partiaular? the drive for economic reform became
interlinked with social and political reform movements.
The current economic problems faced by the Satellites tend to
reinforce the political and social forces demanding that the welfare
of the individual be given greater consideration in the determination
of national domestic policy. Continuation of a high rate of economic
growth, and the satisfaction of the concomitant necessity to increase
exports and to reduce agricultural imports, all depend upon raising
productivity in both industry and agriculture. Moreover, limitations
of raw materials and of investment resources signify that achievement
?
of these pi.oduction and trade goals will depend increasingly upon the
cooperation and the morale of the individual worker and peasant.
In all the Satellites, the high rate of gross capital investment
and defense expenditures from 1951 through the first half of 1953, either
restrained or depressed living standards. AccordAng to a Polish Sejm
Committee, in November of 1956, non-consumption expenditures were a
dangerously high percentage in 1953, moreover "The proportion of accumu-
lation in the national income...rose to 47.7 percent of the national
income in 1953, and in 1954 and 1955 it amoun-bad-toimze than 45 percent.
The consequences of this were felt in the living standards." 2/
Poland and Hungary have both expressed concern with the impact
of a high rate of investment relative to national income and have taken
steps to keep the increase in investments during the 1956-60 period
relatively small. For the period 1956-60 relative to 1951-55, Hungary
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has planned a 15 percent increase in investment; Poland, an increase of
45 percent, or possibly less. East Germany, however, has planned to
double investments, Rumania has planned an increase of approximately
70 percent, and Czechoslovakia an increase of 62 percent.
On the other hand, the expansion of the Satellite,economies is
limited by raw materialt shortages, which can be remedied only by
increased *ports of raw materials or by intensive capital investment.
By way of illustration, Poland expects by 1960 to more than double the
import of liquid fuels compared with 1955, to increase the import of
metallurgical raw materials by 87 percents of raw materials for light
industry by more than 30 percent, and of raw materials for the chemical
industry by 33 percent. PolanTs ability to increase the necessary im-
ports is limited greatly by inability to increase exports. Coal exports
during 1956-60 will be reduced by 20 million tans comlared with the
total for 1951-55, in consequence of increased domestic demands. Poland
does not expect to be able to increase the export of machines and equip-
ment as much as hoped. Reluctantly, despite Poland's desire to trade,
it anticipates the necessity of an expensive development of domestic
sources for imported materials (such as iron ores)..3/This limits Poland's
ability to reduce the burden of the investment program upon the rest
of the economy. A possible solution would consist of accepting a
modest rate of economic growth. In rather similar circumstances,
Yugoslavia refused to accept this solution, Observing that the plants
to become productive in the future would produce the very products that
could be exported to cover the imports needed by the economy.
During the last five years, the heart of industrial development
in the European Satellites has been the development of heavy industry,
in turn based upon the metallurgical industries. ,The continued expan-
sion of heavy industry can be limited by the following material factors:
1. The supply of iron ore. In 1955, an estimated 60 percent
of the iron ore consumed in the Satellites was imported.
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Some 45 percent of the total consumption was imported from
the USSR.
2. The supply of coal and power. In the European Satellites,
coal is the basis both of metallurgy and of electric power
production, since the potential for hydroelectric development
is limited. During the next five years, however, Poland
must reduce its level of exports to the other Satellites
since its ability to increase coal production is limited
by investment and productivity problems, since the quality
of the coal extracted is declining, and since its domestic
requirements are rising. The Soviet Union, which imports
coal from Poland, is currently encountering a coal shortage,
and can only assist the Satellites to a limited extent. In
the European Satellites, shortages of coking coal will tend
to limit the expansion of metallurgy. Shortages of coal
will further tend to limit the expansion of electric power
production and will create additional pressure for the
development of the hydroelectric potential of the Danube.
Parenthetically; it should be noted that the key project
of the Danubian development, the Iron Gate project, would
require the participation of Yugoslavia. East Germany may
be expected to continue its expensive program for the
development of brown coaltresources.
3. The supply of capital equipment. As the more industrialized
Satellites (Poland, Czechoslovakia, East Germany, 'and Hungary)
expand their metallurgical production and their production
of the more basic types of capital equipment, their require-
ments for investment goods will change. Increasingly, in-
vestment goods representing advanced technology will be
required as the Satellites turn to the manufacture of more
specialized and more advanced engineering items. Satellite
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production of such advanced capital goods is limited, and
the Soviet Union is a net importer of this class of equip-
ment; therefore the Satellites must turn to the West for
satisfaction of their requirements.
The more industrialized Satellites are finding themselves in the
position of Great Britain in the Hineteenth century; they have become
manufacturing nations to a large degree dependent upon imported raw
materials. Their trading relationships are of primary importance to
the economy. In this context, they must pay increased attention to the
quality of the goods which are produced so that they are acceptable to
foreign markets. In a real sense, they must be concerned with the skills
and the productivity of the industrial laborer. In addition, if they
are to compete in foreign markets, they must be receptive to teohnolOgi-
cal advances and if possible, develop their own advanced technology.
Problems to those faced by heavy industry are encountered
in light industry. The are severe limitations of raw materials; un-
satisfactory expansion of agricultural production in the Satellites
limits expansion of the food industry and of those important components
of light industry which are based upon agricultural products. The
Satellites are increasingly dependent upon imports for expansion in this
field; imports of grain, fertilizers, fibers, leather, cellulose, and
similar commodities assume varying importance in the plans of the indi-
vidual Satellites. Again, if domestic production is to be increased,
and especially, if the imports of agricultural commodities are to be
reduced, productivity must increase in both light industry and in agri
culture.
The twin keys to andIncreased improvement in the level of living
continue to be increased agricultural production and accelerated housing
program. In view of the general adequacy of agricultural manpower and
ambitious plans for capital investment, the main barriers to expanded
agricultural production are the compelling restraints of land and a
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agricultural incentive. Little can be done to increase the area of sown
land in the European Satellites, but much can be done to improve incen-
tives. All of the Satellites except Hungary and Poland, however, intend
to push the collectivization campaign, which may be politically desirable
in their eyes but is economically costly. It is estimated that per capita
food consumption (caloric value) will rise only slightly in each Satellite,
except in East Germany, which will experience an improvement because of
probable further losses of population': It should be noted that in the
present state of affairs, no great reliability should be attached to
production estimates for 1960, either in agriculture or in industry. It
islhowever, extremely unlikely that any Satellite will experience a great
improvement in its per capita food supply.
**
The housing program has been considered elsewhere in this survey.
A sizeable construction effort has been planned for the 1956-60 period,
but urban growth and replacement requirements will absorb most of the
new housing; leaving little chance of significant improvement in the
housing situation, as measured in space per capita. A large-scale housing
program is competitive with industrial construction for materials and
labor force; as a result, ambitious industrialization plans limit ability
to undertake an adequate program in housing. Poland, recognizing this,
is now reconsidering its priorities and considering the possibility of
restricting industrial construction so that a more adequate housing
program might be undertaken.
* See Table III-1.
**' See Section III.
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III. The Impact of Living Standards upon Internal Stability.
A. General Situation in the Satellites. 1/
In mid-1956, Satellite discontent erupted with the bread riots
in Poznan, Poland. From subsequent events, it was seen that more than
the food shortage was involved in the pervasive discontent. Food short-
ages, urban overcrowding, shoddy goods, and limited selections of con-
sumer goods were tangible evidence to the masses of the price paid for
regimentation of their way of life) a regimentation that could no longer
be justified either by Marxist dogma or by the threat of capitalist
encirclement. Similar discontent was prevalent in mid-1953 in many
Satellites, but the much-publicized New Course promised to redeem the
situation. By 1956) in most of the Satellites it was evident that the
New Course either did not go far enough or else that the progress achieved
was not nearly that promised.
Discontent with the level of living has already been expressed
, in Poland and Hungary. A high degree of discontent exists in East
Germany but can not be openly expressed. The Czechoslovakian regime is
assisted by the fact that the level of living there is quite high rela-
tive to most of the other Satellites; but little is being done to increase
the material comforts of life. Rumania and Bulgaria both suffer from
very low levels of living, but some improvement has been tangible, and
discontent does not appear to have crystallized.
Early in 1956, the Satellites individually announced their inten-
tion to follow the Soviet lead and to implement a reduction in the work
week by the end of 1960. In East Germany, the work wek in 1957 is to
be reduced to 45 hours and the Czechoslovakian work week has been reduced
to 46 hours. Generally, a 48 hour work week has been in effect within
the various Satellites. In those cases where workers are unable to in-
crease productivity per hour commensurate with the decline in the working
time of the work week, some reduction in real wages is to be expected.
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In most of the Satellites, a prevalent aspect of life is the
necessity for women to work in order to furnish a second wage-earner
in the family, to ensure the desired level of living. Thus, in East
Germany, more than Wo percent of the workers are women.
In the following pages some official claims as to increases in
the level of living and in real wages will be cited; in order to illus-
trate the fact that even official data indicate a noteworthy failure of
idprovement, or else underfulfillment of plans. Such data tend to over-
state the improvement however. Improvement in the food supply has been
far less satisfactory than might be inferred from such indexes. Thus
a particular effort is made in the following pages to indicate conditions
in the food supply for individual countries. Mich of the improvement in
the consumer goods supply is quantitative and ignores such important
factors in consumer dissatisfaction as poor quality, limited assortment,
and inadequate distribttion which leads to local shortages. Despite
official data which show average wage increases, important segments of
the labor force in the various countries have had little or no improve-
ment in real wages. In most countries) urban dissatisfaction is more
prevalent than might be thought from the official data; the haOing
problem is most severe in the overcrowded cities, and in countries such
as Poland? the food collection system has been inadequate and has led
to decreases in the urban per capita food supply and increases in the
rural food supply.
B. Poland.
1, Food Supply and Food Prices.
In 1956, food prices were so high that a family of four
whose head worked in industry would probably have to have a second
wage-earner in order to insure adequate diet.** There has been only
4. Mat is,cdbuntries with large urban populations, and with a relatively
small collectivized sector.
** 53.7 percent of all workers in socialist enterprises earn less than
2;000 zlotys a month, the minimum cost of food for a family of four.
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slight relief in food prices following the 1953 high point pricewise.
In 1955, various urban areas had serious shor-Wes of bread, flour,
meat, butter and eggs. In early 1956, meat and potatoes were in short
supply in Warsaw.
Poland is plagued by an inadequate food distribution system.
In addition) rural consumption of food has risen sharply, as state
collections of food have failed to properly channel foodstuffs to the
cities. Thus, the supply of food in urban centers is often unsatis-
factory, despite the fact that the average per capita availability of
food for domestic consumption is above that of any other Satellite and
7 percent above Poland's own prewar average.
Table III-1
Per Capita Diet EstiMates for the European Satellites 2/
Caloric Value
Albania
Bulgaria
Czechoslovakia
East Germany
Hungary
Poland
Rumania
Prewar
1955/56
-1960 a/
1,757 2/
2,424 2/
.21514 2/
2,813 2/
2,633 2/
2,775 1./
2,608 2/
1,893 (87 percent bulk) 12/
2,632 (88 percent bulk)
2,563 (60 percent bulk)
2,431 (55 percent bulk)
2,638
2,9,67(65 percent bulk)
2,501 (80 percent bulk)
2,200
2,700
'2,600
2,800
2,700
3,000
2,500
a. Estimate based upon announced agricultural plans, estimated fulfill-
ment, estimated 1960 population, and estimated foreign trade pattern
in 1960.
b. Bulk diet defined as grains and potatoes.
c. 1933-1937 average.
d. 1934-1938 average.
e. 1935-1938 average.
2. Consumer Goods Program.
The planned increases in level of living leave been underful-
filled repeatedly, including the 1949 goals and more recently, the 1955
goals. This has aroused public discontent.
It was planned that by 1949 the average per capita consump-
tion level would be restored to prewar levels, especially for basic
articles of food and clothing. According to State Department estimates,
the actual 1949 real value of wages was 13 percent below the 1938 level
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and the average worker consumed 20 percent less food and bought 45 per-
cent less clothing than in 1938.
The 1955 goals of the Sixth Five Year Plan (1950-55) for
improvement in level of living were not fulfilled, despite the special
consumer program undertaken during 1953-55. According to official claims
which do not fully portray the situation, the average real wage per
worker was only 28 percent above the 1949 level rather than the 40 per-
cent promised. Important segments of the labor force (transport, commu-
nications, and consumer goods manufacture) actually suffered a reduction
of real wages relative to 1950.
3. Foreign Trade in Consumer Goods.
The export of meat and meat products, chiefly pork, consti-
tutes Poland's most important class of export after coal. Coal exports
are nearly half of total POlish exports and make possible raw material
imports essential to the industrial program, including the manufacture
of consumer goods. On the other hand, when coal production plans are
not fulfilled, as has been the case recently, maintenance of export obli-
gations tends to put household fuel in short supply on the domestic
market. This was the case in October 1956. Exports of other consumer
goods include cotton fabrics (13 percent of the 1954 production), wool
fabrics (10 percent of 1954 production), leather and rubber products,
sugar products, porcelain items, and industrial consumPr goods.
In 1955, Poland imported 64 percent of the necessary raw
materials for the leather industry, 75 percent of the wool, nearly 100
percent of cotton requirements, and 60 percent of the cellulose needed
for rayon. Imports of finished nonfood consumer goods have been planned
to fall from 4.3 percent of total imports in 1955 to 3.9 percent in 1956
and to be an absolute decline.
4. Housing.
During 1956-60, urban housing is to be built at the rate of
240,000 rooms a year, as compared with an annual average of 139,000
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during 1951-55. Polish officials admit, however, that even successful
implementation of these plans would at best result in a negligible
improvement in the critical urban housing shortage.
The great damage suffered during World War II, the high birth
rate, and migration into the cities have all prevented any alleviation
of the urban housing shortage. Annual average construction during 1951-55
was more than 100,000 rooms short of the level needed to maintain 1950
housing levels. Despite the great official emphasis upon the new housing
program as a major component of the new consumer program, achievement
of the 1956-60 targets could at best only partially recover ground lost
during 1951-55 and likely will result in little improvement at all. It
is estimated by ORR that the program would barely satisfy the requirements
of anticipated population increases. In addition, extensive replacement
will be required for antiquated and substandard. housing.
5. Social Services.
Social insurance coverage has been broadened but inflation
has made many benefit payments inadequate to prevent hardship.
Health statistics show great improvement relative to 1938
but mortality rates are still high. Hospitals are overcrowded and the
number of physicians per 10,000 people is lower than in any other European
Satellite. Rural health service is completely inadequate, -- barely one-
sixteenth of the total number of physicians serve more than half of
Poland's population.
The drive to eliminate illiteracy and to improve basic educa-
tion has progressed far. In prewar Poland, only 43 percent of the
children attended school through the 7th grade and in 1955 close to 90
percent were completing the 7th grade. Enrollment in institutions of
higher learning in 1954-55 was nearly triple the prewar figure. On the
debit side, construction of school facilities has not kept pace with
the increase in school enrollment. Many classes are overcrowded, and
some children have been unable to attend schooLbecause of lack-of space.
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2
C. Czechoslovakia.
1. Food Supply and Food Prices.
Immediately after the war, food-and living costs were 6 to.
7 times 1937 levels, but food prices declined some from 1946 through
1950, then rose during ,1951-53 (period during which rationing was ended).
Since then prices have been reduced some.13 percent for Tbod,
more for clothing .expenditures, and yet more for consuner durable items.
During 1956 the food supply has improved. The large urban
areas are better supplied than Other urban areas, 'Nevertheless,.
queues are characteristic of the sale of meat (especially pork) and of
butter.
2. Consumer Goods Program.
There has been notable improvement in the supply of nonfood
cbnsumption goods during the last two years, despite a serious failure
to upet the excessively ambitious goals for the output of textiles.
Per capita consumption of consumer durables (washing machines, refrigera-
tors, and the like) is higher than in any other Satellite.
3. Level of Living.
Real wages dropped below prewar levels during 1951-53 though
by 1956 they apparently exceeded the prewar level. This rise in real
wages and real income has probably served to reduce popular discontent.
These increases in purchasing power have been accompanied by a rise
in the domestic availability of consumer goods. These goods, however,
are of poor quality, and their improvement is a major problem for the
1956-60 plans.
4, Foreign Trade in Consumer Goods.
The immediate availability of consumer goods has not been
adversely affected by trade policy. Actually, the importance of the
export of light industrial products has declined markedly as these items
have been replaced in export importance by products of the engineering
industry. (I# 19370 light industrial products were 34 percent of total
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exports; in 1948, 27 percent; and in 1956, 10 percent). Presently
mostly luxury items and textiles are exported. Imports are important
to the level of living; foodstuffs are imported, as well as 75 percent
of the fiber requirements and 70 percent of the raw materials needed
by the leather industry.
5. Housing.
At the beginning of its Communist regime, Czechoslovakia
enjoyed better conditions of housing than any other Soviet Satellite
with the possible exception of East Germany. Subsequently, conditions
have worsened. The annual average number of new dwelling units built
from 1949 through 1955 has not been large enough to meet the estimated
net increase in the number of married couples. The Government admits
that replacement of old and defective housing has not been adequate.
Despite concern with the problem, the Czechoslovakian government acknow-
ledges that the problem of overcrowding cannot possibly be solved during
the Second Five Year Plan. Czechoslovakia does not seem as concerned
with the housing problem as other Satellites; in comparison its housing
problem is not as great. While non-attainment of present housing goals
will no doubt affect the prestige of the regime and aggravate present
economic problems associated with housing conditions, it is not anti-
cipated that the housing question in the next five years will lead to
serious problems of worker discipline.
6. Social Services.
Health. Standards of health care are at a higher level than
in any other Satellite (with possible exception of East Germany). They
are below the average for Western Europe.
Education. As is the Satellite pattern, great statistical
progress has been made in the educational program. Classroom facilities
in Slovakia are still notably inadequate, however. Czechoslovakia has
had unique disappointments in its program of hi'gher learning. The number
of advanced students per 10,000 htudentshtis(decreasedsince the early
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postwar period and is lower than in any of the other Satellites, follow-
ing the Communist "purges" of the "bourgeois" element in the colleges
and universities.
D. East Germany.
1. Food Supply and Food Prices.
The pattern of price reductions on consumer items has been
spotty. The most significant price cutb occurred in 1951 and have been
followed by many subsequent cuts, most of which would have only slight
impact on reducing the cost of living. Nation-wide rationing is still
in effect for meat, fats, and sugar. Winter potatoes are also rationed
each year. In the event of local shortages, local or regional rationing
is permitted, as was the case for various food products at times in 1955
and 1956. The existence of food shortages so severe as to necessitate
rationing has dampened morale. The end of food rationing had been
promised for as early as 1953. In March of 1956, Ulbricht and Grotewohl
indicated that food rationing would have to continue because of the in-
adequate food supply and said that prices would sky-rocket if rationing
was ended now. Since then, probably as the result of pressure from the
populace, the regime has conditionally promised the end of rationing
for 1957, possibly April.
Opinions differ as to the severity of the retail food short-
age in 1956. The supply of essential foodstuffs is far short of demand
and the distribution system is poor. The ration system, however, enables
each family to obtain at least a minimum subsistence amount at the law
ration prices. In March 1956, the US Mission in Berlin stated that
"everything connected with the food situation irritates the population."
The comment is still appropriate. Quality is poor, prices,are still
too high for the average income, except ration prices, and rationing
continues. East Berlin is in the best position for food supply and
prices. Other areas, such as Dresden, have been burdened with food short-
ages at times. Many East Germans believe that the food situation now is
worse than in 1953 at the beginning of the New Course.
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2. Level of Living.
Despite a claimed 40 percent increase in real wages, 1955
over 1952, the level of living of the average middle-income working-
class family is not comparable to that of the prewar era. The improve-
ment in level of living, especially in terms of food supply, has not
been up to the expectations of the popuaation, based upon the goals of
the New Course.
3. Foreign Trade in Consumer Goods.
The East German level of living has become dependent upon
imports. In 1955, foodstuffs and beverages were 15.9 percent of imports
and 1.4 percent of exports. Grains, meats, fats, oils, and fish are
imported. The trend is toward greater dependence upon imports.
Also in 1955, products of light industry were 19 percent
of imports and 9 percent of exports. Textiles, ready-made clothing, and
footwear are imported; high quality consumer goods are exported. East
German light industry is dependent on imports of natural fibers, raw
hides, and Wood.
4. Housing.
By 1950, while overcrowding in East Germany was not serious
by East European standards, the situation had deteriorated considerably
as compared to prewar East German standards of housing. During 1951-55,
the housing program was not itself adequate to improve the situation,
yet improvement did result because of a population decline of 500-800)000
from 1950 to 1955. Nevertheless, housing conditions are still far below
prewar standards and remain one of the "critical and chronic problems"
of the country. The housing program scheduled for 1956-60, if accomp-
lished, would result in significant improvement but still would not reti
store prewar housing standards. The housing problem, while severe
enough to intensify popular discontent, probably is not in itself enough
to lead to serious problems of worker discipline.
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? ? ? ?
5. Social Services.
East Germany has an extensive social insurance system, as
does each of the other Satellites. Its health facilities appear to be
reasonably good, with a few deficiencies, the most serious being a grow-
ing shortage of doctors. The educational system is superior to the
systems of the other Satellites. In large part as the result of the
exodus from the country, the schools are not over-crowded.
E. Hungary.
1. Food Supply and Food Prices.
There has been substantial improvement, at least until
October 1956, in the food supply after the law point of 1952-53. Care-
ful planning of menus and careful buying is necessary to stretch the
food budget of the average family. Some problems are created by inade-
quacy of retail store facilities in some regions and by poor(distrtbu-
tion planning on the part of the retail network.
At the beginning of 1953, food prices were more than double
?the level of June 1950. Following mid-1953, there has been a gradual
reduction of food prices. The prices of non-food consumer goods have
not been reduced as much as food prices, partially as the result of the
attempt during 1953 and 1954 to distribute non-food consumer goods faster
than they were produced.
2. Consumer Goods Program.
The promises of the Communist Party concerning the level of
living to be obtained in 1955 were drastically underfulfilled. The
average real wage per worker was only 6 percent above the 1949 level,
and probably slightly below the 1938 level, despite the efforts of the
regime to achieve 1955 real wages some 50 percent above the 1949 level.
After serious reductions in the level of living which occurred in 1952
and early 1953, there was some improvement in 1954 as the result of the
short-term expedient of reducing investment expenditures and releasing
consumption goods from state reserves. Furthermore, large groups of
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workers and employees in the low-wage categories received little or no
increase in real wages during 1950-54. Although average family income
had shown Some improvement by 1956, this was the result of more members
of the family working rather thikn of more earnings per hour of work. In
1956 new measures were undertaken to increase wages, cut some prices,
and abolish the peace-loan subscription. Official indexes show that
increases between 1949 and 1955 in the real income of the peasants have
been well above those of urban workers and employees. In recent years
the production of consumer goods has increased sharply, but increases in
the export of consumer goods have prevented the domestic retail sales
from rising accordingly. In 1956, until October, there had been a sub-
stantial increase in retail sales compared with 1955; especially in
non-food consumer goods.
3. Foreign Trade in Consumer Goods.
Exports of consumer goods assume increasing importance in
Hungarian trade. Hungary now exports textiles, footwear, ready-made
clothing, sewing machines, bicycles, radios, and furniture. In 1945,
70 percent of the exports were of agricultural products but the shift to
the export of manufactured items has reduced agricultural exports to
about one-third of the total. Imports of consumer goods in the past
have not been of great significance to the Hungarian level of living.
Today, Hungary is in serious trade difficulties which will make it
difficult to reduce the export of consumer goods in those cases where
the goods earn needed foreign exchange. Hungary is dependent upon the
import of bread grains and of raw materials in support of the consumer
goods industries, such as raw cotton, leather, and other items essential
to the production of textiles, footwear, paper, and wooden articles.
4. Housing.
The statistics indicate that urban overcrowding received no
relief during the last five or six years. The long-term plans for
1956-60, unless revised, can achieve no more than to prevent a worsening
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of the situation. The Government admits great concern with the problem
but has been unable to promise immediate relief. The houting conditions
tend to aggravate worker discontent with the entire failure of the
Communist regime to achieve the promised increases in level of living.
5. Social Services.
Hungary has achieved noteworthy gains in social insurance,
education, and health compared with prewar circumstances. The rural
areas, still of major importance in Hungary, have not gained as much
in these respects as the urban areas. Progress in education has been
retarded in the last two years by a growing shortage of teachers and of
classroom facilities. An interesting development in recent years has
been increased emphasis upon the academic competence of students rather
than upon their political past or class origin. In addition, Hungarian
communism has been depicted as anCindigenous, Mingarian movement rather
than as a "gift of the Soviet Union."
F. Bulgaria.
1. Level of Living and Consumer Goods Supply.
Bulgaria's level of living is not high in comparison to the
more industrialized Satellites, yet some progress has been made. Further-
more, the regime has not failed to live up to promises as obviously as
the regimes in some other Satellites.
Bulgaria does not have a large working class, -- workers are
less than 10 percent of the total labor forde; therefore trends in
real income's among the farm population are of key significance, and are
the most difficult to uncover based upon the scanty information. There
seems to have been some improvement in rural real income, following the
peasant uprisings of 1952. Agricultural statistics indicate that food
consumption per capita in 1955/56 was 9 percent above the prewar level
and 20 percent above 1952/53.
The New Course affected Bulgarian light industry only to a
limited degree, most of the emphasis being upon improving agricultural
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and livestock production. In 1955, the supply of consumer durables was
law but probably sufficient to satisfy the effective demand for such
items. Bulgarian consumer goods are also notorious among the Satellites
for poor quality and lack of variety. The retail trade network is ineffi-
cient and poorly administered.
2. Foreign Trade in Consumer Goods.
Bulgaria.tis reliance upon imports of raw materials for the
consumer goods industry has been declining in recent years, until in 1956
the cotton textile industry had to import only 22 percent of its require-
ments (prewar - 68 percent), and the wool industry 26 percent (prewar -
63 percent). Imports of materials for the paper and leather industries
are of major importance; Bulgaria is highly dependent upon imports of
consumer durables. In 1956, exports of cotton cloth, wool and silk
fabric are to increase over the 1955 level, despite the fact that domes-
tic consumption of fabrics is at a very law level.
3. Housing.
Bulgaria suffers from severe overcrowding in the urban areas,
especially in Sofia, but the impact is lessened by the relatively small
_ share of the population which is urban. If these conditions affected
a larger part of the population, the situation would be much more serious
in the view of the government. As it is, the 1956-60 plans for construc-
tion of urban housing appear inadequate to improve the situation.
4. Social Services.
Bulgaria has improved social services compared to prewar
standards. Rapid growth in school attendance, however, has created
severe problems of school overcrowding, even in Sofia (this is not the
pattern in other Satellites, where the capitals usually enjoy better
conditions than the smaller towns and rural areas). Although health
conditions remain poor, achievements in public health have been consider-
able. The number of doctors per 10,000 of population has more than
doubled, relative to 1939. Rural medical facilities have shown great
improvement.
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G. Rumania.
1. Level of Living and Consumer Goods Supply.
Rumania is largely rural and agriculture plays a predominant
role in the level of living of the people. In 1956, the harvest has
been poor, delivery quotas have been high, and food has not been plenti-
ful. Wheat and bread are rationed, vegetables and potatoes are scarce
and high-priced. The DS Legation has noted a "general feeling of uneasi-
ness on the part of the people and government alike." An inadequate
distribution system has aggravated the shortages on a local basis.
Rumania has had a long succession of food shortages; in 1946, 1949, 1951,
/953, and 1954. In consequence, food prices have been under great in-
flationary pressure and extensive rationing of both food and clothing
remained in effect until December of 1954 (after which stand-by authority
was retained for food rationing). Since more than 25 percent of food
retail sales are made in the countryside, farmer to consumer, the ration-
ing system was not altogether effective. After 1954; there has been a
slight reduction of food and non-food goods prices.
Food shortages and failure of the consumer goods program
initiated in 1953-54 have led to discontent. The average caloric food
consumption per capita in 1955/56 of 2,500 calories, was Slightly less
than prewar and also less than in 1951/52. This typifies the lack of
progress which has stirred resentment aMong the population.
2. Housing.
The urban areas are sufferin:s from acute overcrowding
which is getting progressively worse. Present plans for 1956-60 do not
schedule enough housing construction to improve conditions. On the
other hand, there has been some improvement in rural areas, where the
construction results from peasant initiative.
3. Social Services.
The infant and general mortality rates of prewar Rumania
were the highest in Europe. The general mortality rate has been cut
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from. 19 per thousand to less than 10; the infant mortality rate from 18
to 8. Health conditions in the rural and mountainous areas are much less
adequate than those in Bucharest. The hospital construction program has
brought progress; Rumania has more hospital beds per 10,000 people than
does either Bulgaria or Poland.
As in the other Satellites) Rumania has developed programs
for medical assistance, hospitalization assistance, old-age pensions,
and other benefit programs. The emphasis during 1956-60 is to be upon
developing institutions for the care of old people and invalids.
Despite progress in recent years) the Rumanian educational
system lags behind those of the other Satellites. Approximately 10
percent of the population under the age of 55 cannot read or write.
School attendance is compulsory in the first four grades; only 62 percent
of these graduates continue their studies through the seventh year.
Attendance beyond the eighth grade is dependent upon determination of
the satisfactory class origin of the applicant or of the political reli-
ability of the parents. Enrollment in institutions of higher learning
was 75,000 in the year 1955/56, as compared to 29,000 in 1938.
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sr? omi?
IV. Aspects of Economic Coordination and Integration Among the Satellites.
A, Organizational Aspects of Bloc Coordination and Integration.
l. The Council for Economic Mutual Assistance (CEMA).
The Council for Economic Mutual Assistance has clearly emerged
as the vehicle of the Soviet Union for ensuring coordination of Satellite
economic planning with the plans and goals of the USSR, Although CEMA
meets as a body composed of representatives of the Soviet Union and of
each of the Satellites, Soviet control is assured both through organization-
al features and through the preponderanre of Soviet economic strength re-
lative to any Satellite. The Secretariat of CEMA is directed by a Russian
Secretary-General. In addition the economic plans developed in CEMA
negotiations are integrated with Soviet domestic plans; in recent meetings
of CEMA in East Berlin, a Deputy Chairman of the USSR's Gosekonomkomissiya
assumed a leading role. 1/ Officials of Gosplan and the Gosekonomkomissiya
have, on occasion, assisted Satellite planners in drafting their annual
and Five Year Plans, which then have to receive final approval from CEMA.
It has been the intent of the Soviet Union that CEMA become
increasingly concerned with the coordination of the annual and Five Year
Plans of the Satellites with one another and with the USSR, within a
context of the development of specialization of production. This has
involved the coordination of trade planning (including Bloc trade with
the West) and of investment planning.
In a sense, the main task of CEMA is to reconcile policy con-
flicts between the Soviet Union and the Satellites. This can. be done on
a power basis, or on the basis of negotiation and of mutual interest. The
Polish and Hungarian statements of recent months, and the Soviet admissions
of the violation of the principle of equality in economic relations, provide
strong evidence that unilateral Soviet determination of economic policy
has played to strong a role in CEMA negotiations, although discussion
has played an increased role in more recent decision making.
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2. The System of Soviet Advisers.
Until 1954, the Soviet Union maintained relatively direct
control over the development of Satellite economies by a complex system
of techniques involving Soviet ownership of major industries (in. East
Germany, Rumania, and Hungry) and the placement of Soviet "advisers"
in key positions within the industrial and governmental apparatus. Follow-
ing 1954, the Soviet Union modified this system, abandoning direct
ownership participation in Satellite industry (with llmited exceptions)
and reducing the visible influence of Soviet advisers. Parallel to these
changes, CEMA assumed snore important role in Bloc planning,
? In East Germany, Albania, and Hungary, and to a lesser extent
in Bulgaria and Poland, the activities of the advisers are now concentrat-
ed in the non-production ministries, such as Internal Affairs Defense,
and the State Planning Commission. At this level, the advisers are less
apparent to the public but are still in a position to influence the form-
ulation of economic policy.
In the policy statement on Soviet-Satellite relations of 30
October 1956 the Soviet Union expressed willingness to discuss the recall
of advisers. It is probable that the visible role of advisers will be
further reduced* but it is far less certain that the Soviet Union will
willingly abandon the system of advisers at the higher echelons.
B. Bloc-wide Division of Labor and Specialization of Production.
Soviet leaders recognize the economic advantages inherent in pro-
duction specialization according to the principle of comparative advantage.
They have declared their intention to move toward an economically coordin-
ated and integrated Communist Bloc chiefly by having each country special-
ize for the benefit of all the Satellites, in those commodities for which
it is best suited. Specialization, in practice, has been most often car-
ried out where either a natural resource base or a developed industry
* That is, advisers at the industrial level and observers in plants may
be. recalled.
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)
exists. Examples include coal in Poland petroleum in Rumania, and
chemicals in East Germany. Specialization of this type may be termed
nundirectedn in that the countries involved might be assumed to continue
developing these specialties as a matter of course even without direction
from Moscow.
Central assignment by MoseOw of specific production tasks to
each Satellite may not be a major, cause of Satellite discontent -- par-
ticularly if the commodity in question is one which the specific country
itself desires to produce. It is probable that there is more agreement
than not among Soviet and Satellite leaders concerning designated Satellite
production tasks.
The natural concomitant to centralized investment planning for the
Satellites is centralized allocation of both raw materials and finished
products. These two sides of coordinated Bloc planning have been Soviet
goals since 1949. It is precisely the central allocation (from Moscow)
of goods to which the Satellite leaders seem most to object. It was not
the assignment by CEMA for Poland to specialize in producing coal and coke
which Polish leaders apparently resented, but rather the unfavorable trade
terms to which Polish coal was subjected. Furthermore, Polish leaders
were forced to export more coal than they thought was economically wise.
The weakest link in. economic coordination of the SOviet Bloc,
then, may be the process of central allocation of Satellite commodities
toward which the Soviet leaders have been striving these past few years.
Consequently, central allocation might be considered a major force behind
recent Satellite unrest and might have been a positive contributing factor
in the Polish and Hungarian developments; thus Poland preferred greater
autonomy in determining the trade pattern for export of Polish coal.
Apart from these broader approaches to specialization of production,
considerable progress had been achieved in establishing a number of central
production and allocation. assignments by mid-1956. In heavy industry, all
countries have been developing at least a rudimentary base, simultaneously.
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Czechoslovakia, Poland, and East Germany, for example, have given special
emphasis to heavy machinery. East Germany is specializing in heavy tractors
and Poland in medium tractors (see Table IV-1).
C. Economic Coordination and Satellite Political Equality.
Future cohesion of the Satellite system may be significantly weak-
ened if one or more of these countries gains greater political and econom-
ic independence from the USSR. Assuming greater economic independence for
one or more Satellites, several considerations are in order. First) a
determination will have to be made as to what effect greater independence
for a Satellite will have on its internal economic planning* The second
problem relates to the impact of such independence cm the part of one
Satellite will have on the economy of others. Finally, consideration must
be given the effect of these developments on. the over-all economic coordin-
ation of the entire Bloc as such coordination has been directed and super-
vised by the Soviet Union.
1. Effect on the Individual Satellite Concerned.
Greater economic independence for a Satellite would no doubt
result in a more rational allocation of its own investments, and perhaps
the creation of new annual and Five Year Plans. Some evidence points to
unwise investments and trade commitments for some Satellites which are
economically inefficient, yet which have been forced upon the particular
countries in order to round out the scheme of division of labor and'produc-
tion specialization. CEMA ordered Poland for example, to invest in
developing her own oil production, despite a previous finding by the
Polish State Planning Commission that such an investment would be less
economical than Polish investments in the Rumanian oil industry. 2/
Assignments for a Rumanian factory to produce tractors for Czechoslovakia
and a Hungarian factory to produce heavy construction machinery for
Czechoslovakia were also considered by the producing countries to be
basically uneconomical. 2/
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Table IV -1
Specialization of Production by Industry
in the European Satellites*
Product
Coal
Hard coal X X
Coke X X
Brown coal X
East
Czechoslovakia Hungary Germany Poland Rumania Bulgaria Albania
Chemicals
Chemical fertilizers X X X X X X
ICI Industrial CheMidals X X X X X Im
Rim A Coal chemicals X .X X 1
1m
I) vl Synthetic organic chemicals X X X X X1
10
vi Synthetic fibers and plastics X X X .X 1
Izi
1
1m i Synthetic rubber X X 1m
1 t
It-3 11-2
Ferrous metallurgy
Iron ores .X
Manganese ore X
Chrome ore
.Rolled steel products X X X .X
Pipes . X
Alloy steel X
Non-ferrous metallurgy
Alumina. and'aIuminum X X
Bauxite X
Zinc and lead
Pyrites
Miscellaneous ores and concentrates
X
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}J)
I
Li
a
1J
J
Table IV-l.
Specialization of Production by IpduStry
in the European Satellites'
(continued)
Product
Petroleum
Oil and oil derivatives
Bitumen
Agriculture
Grain
Medicinal plants
Tobacco
Heavy industry
Heavy machinery - genera/
Heavy construction .machinery
Machine tool's
Metal cutting machine tools.
Metal forming machinery
East
Czechoslovakia Hungary Germany Poland Rumania Bulgaria Albania
?????.???????????????
X
Transport vehicles and. equipment
Heavy -trucks. X
Buses
Diesel locomotives X
Electric locomotives X
Passenger oars X
Freight cars X
Heavy tractors
Medium tractors
Tractor and truck spare parts
X
X
X
X
X
X
0
(D
0
(1)
(1)
(D
-0
-0
Es)
(D
n.)
>
0
0
0
0
0
0
0
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Table IV-l.
Specialization of Production by Industry
in the European Satellites
:"-
(continued)
East
Product Czechoslovalc, a Hungary Germany Poland Rumania Bulgaria Albania
Agricultural machinery
Grain combines ..X X
Corn harvesting. combines X X
Potato harvesting combines X
All-purpose cultivating ftractors X
?
Ica Electro-technical equipment jm
I ti-,1 1 Electric power plants X X lill
to vl Electric motors. .X X X X If
Precision
1
iw Precision instruments and optical devices X X lid
I ?.1
II. IV
1
11-2 Armaments.. - H
'
Heavy armaments x
Small arms and ammunition X
Combat aircraft X X
Shipbuilding
Large ships X X
Sma11 craft (mainly fishing)
Light in4uStry
Footwear, glass,and porcelain X
Textiles X X
Refers to identified CEM A approVed specialties rather than production as such.
** Primarily tingle purpose universal machine tools.
*** Including emphasis on automatic lines,
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The new Polish Government evidently intends to reassess its
entire economic plan. On October 20, 1956 Gomulka stated that heavy
industrial construction would be somewhat demphasized in favor of
raising the level of consumer goods investments.II/ Later, the Polish
Communist Party paper stated that Poland is prepared to abandon its
current Five Year Plan, possibly in favor of a short-range Two Year Pian./
Even if the present long-term plan is continued, however, in all probabil-
ity the 1957 investment plan will be altered to grant more immediate con-
sideration to consumer goods. 6/ The path Poland will have to follow to
reorient its economic system toward a more equal balance of investment,
according to some members of the Polish Society of Economists, is for
Poland immediately to abandon its plans for large-scale industrial develop-
ment, concentrate on consumer and light industry, and alter the general
balance of Polish foreign trade. 1/
Any such realignment in Polish trade will no doubt first
apply to hard coal. Under assignment by CEVIA, Poland has been the main
provider of hard coal to the other Satellites and has even exported this
fuel to the USSR. Poland has long Objected to exporting her coal in
excessive amounts. Under CEMA, Polish agreements with East Germany-and
Hungary provided for shipments of coal to these latter two countries,
probably in return for open credits to purchase certain machinery and
equipment. 2i/ Another source of disagreement in the past has been USSR
purchases of Polish coal at a preferential rate below world market prices.
In this framework, shipments to the USSR constitute 34 percent of total
Polish coal exports. 2/
Since the political developments of October and November 1956,
Polish officials are apparently going to review and possibly reallocate
their exports of certain commodities. 10/ Persistent reports state that
Poland has informed the East German Government that hard coal would no
longer be shipped to that country, 11/ although by the first of December,
1956, there was no noticeable reduction of the number of coal trains from
Poland to East Germany.
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In response to their paucity of coal, the East Germans appeal-
ed to the USSR for assistance. 12/ The USSR, reportedly, has agreed to
begin Shipping hard coal to East Germany as of 1 December 1956. 13/
It can be assumed that Pdland's economic plans will undergo
alteration -- particularly with respect to major investments and trade
policies with other Satellites-. It is apparent that the USSR will ease
its demands on the Polish ebonomy -- especially with reference to Polish
investments and exports. In fact, Gomulka has recently stated that all
Polish-Soviet relations are to be re-examined as parts of the "economic
whole." .322/
2. Effect on Other Satellites.
Greater political independence of one Satellite will have
significant economic -ramifications not only for that country, but for other
members of the Soviet Bloc. Rather Close coordination of the economic plans
of all CEMA members (except the USSR) has been achieved as of mid-1956
Obviously, any unilateral alteration of a single member's annual and
Five Year Plans will force an inevitable readjustment of economic plans
in at least several other CEMA countries. If the Satellite which first
changes its plans is an important cog in the division of labor, then
planning, production, and trade within the entire Bloc will face necessary
alteration.
In response to the anticipation of cancellation or reduction
of Polish coal shipments to East Germany, apparently several plants have
severely restricted their operation. 12/ One result of this cutback in
coal shipments, reportedly is that the East German State Planning Com-
mission is considering curtailing rail traffic and may even suspend
virtually all production in the chemical industry, or cut back light
Industry. 16/ Several large East German industrial enterprises supposedly
will attempt to meet the hard coal shortages by using brown coal for the
next three months. 17/
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In countries other thAD East Germany, any reduction of coal
Imports from Poland night have a similar effect. When Poland suffered
reduced output in its coal industry earlier in 1956, both Hungary and
Czechoslovakia felt the pinch, and in Hungary, the reduced imports result-
ed in a temporary shutdown of some transport. 1,?/ In Czechoslovakia, re-
duced imports of Polish coal would:affect that country's exports of
machinery (for which Polish coal was traded).* 19/
Serious disruption of Hungarian industry will have long-last,
Ing effects on the industries of all other CEMA members. A statement
reputed to be from Ulbricht of East Germany noted the deplorable state
of trade between his country and Hungary, following the outbreaks. He
stated that the Hungarians could no longer deliver anything and, in fact,
East Germany had to deliver commodities to Hungary. 22/
AbandopmPnt by one or more Satellites of the closely-coordinat-
ed division of production specialization may not, however, adversely affect
every member of CMA. Some of the countries may use this disruption of
their trade plans from the outside as a welcome excuse on their part to
increase trade with the West (East Germany seeking hard coal, for example).
Finally, the comparative advantage of specialized production and its result-
ant economic efficiency, may deter a Satellite from rash abandonoment of
its part in the Bloc-wide division of labor.
3. Effect on. Bloc Coordination and Integration.
Certain conclusions can be made concerning developments which
would stem from greater Satellite independence And at least a partial break-
down of mutually coordinated planning. Ulbricht as the extreme view point
has stated that if each Satellite desired economic independence and a
equal status, the Blae?s mutual economic plans would collapse. 21/ Even
a partial collapse of the coordination system would probably mark the death
* In a recent year, Poland exported 8 million metric tons of coal and over
1 million metric tons of coke to the rest of the Bloc, not including the
USSR.
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of any future plans for extensive economic integration of the East Europ-
ean Satellites. CEMA would certainly lose much of the influence and
control which it has assumed. since 1949. The accompanying structure of
a Bloc-wide division of labor RN production specialization on which
each country has been concentrating in recent years would be seriously
and perhaps irrevocably retarded, Even if a Satellite desired to remain
Within CEMA and to be more or less loyal to the USSR, reduced imports
from other CEMA members would force her to de-specialize some of her
industry at least for the forseeable future. The trend followed in
recent years in. which each CEMA, member began to adopt common industrial
and managerial standsrds (usually Soviet ones), would have to be temporar-
ily reversed if not eventually abandoned. Finally, a weakening of economi
coordination might well force most of the Satellites measurably to increase
their trade with the West arta with the underdeveloped nations in par-
ticular.
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V. Aspects of.Foreign Trade Relating to _Stability and Cohesion
In a basic sense, this study is concerned with the relationships of
the European Satellites with the Soviet Union. The significance of the
Satellites to the Soviet Union is manifold, and tp a substantial extent
the trading policy of the Soviet Union reflects the prevailing Soviet
view of the role of the Satellites. This is not the place to study all
the permutations of Soviet policy relative to the Satellites, but it ,
may be observed that they can play the following roles, in different
Combination and with varyg emphasis:
1. Buffer against the West (that-is ,there is a very important
geographic consideration involved in Soviet control).
2. Example of the advantages of Communism (in support of expan-
sionist policies)
3. An advanced logistic base for military operations.
4. A source of special natural resources (Poland- coal, East
Germany- chemical ores, Hungary- bauxite, Rumania- petroleum
and salt, East Germany, Czechoslovakia, Bulgaria, - uranium).
5. A source of advanced technology in the case of East Germany.
6. A source of skilled industrial manpower, in the case of East
Germany and Czechoslovakia, and to some extent in Poland and
Hungary.
Immediately after the war, the Soviet Union exploited the
Satellites, individually and collectively, and accumulated an import
balance of immense proportions (when reparations are included as part
of the picture). After 1949-50, the Soviet Union began to support the
reconstruction of the Satellite economies by supplying raw materials
and investment goods in return for machinery, equipment, and such
resources as coal and petroleum. During 1951-52, the Satellites
undertook, under Soviet instigation, a large buildup of their
armaments industry. A, Bloc-wide economic adjustment occurred in
1953-54, and in 1955-56 the: Soviet Bloc undertook more extensive
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coordination of investment and production planning. In 1955, at least
two-thirds of the foreign trade of each Satellite occurred with other
Bloc countries, and in every case trade with the USSR was greater than
trade with the entire Free World.
In 1954, the Saiiiet economy was more than twice the size of the
combined economies of the European Satellites, Total Soviet trade
turnover with the European Satellites was approximately 18 billion trade
rubles (probably more than 35 billion rubles at domestic prices). Soviet
exports or imports to the Satellites were therefore about 4 percent of the
value of Soviet net industrial production but equal to more than 8 percent
of the Satellite industrial production. For this reason, the Soviet Unicnts
participation in real economic cooperation with the Satellites is only mar-
ginal. Where the Soviet Union undertakes obligations to supply the Satell-
ites with raw materials or machinery, these obligations are minimal for
her and do not have great impact on the national economic plan. On the ,
other hand, such supplies are very important to every Satellite because
they decisively influence Satellite economic development. .Basically, the
Soviet economy is also independent of the Satellite economies, which on
the other hand are very much dependent upon the economy of the USSR and
upon each other.
In 1954, the Soviet Union was a net importer of machinery and equip-
ment from the European Satellites and China to the extent of approximately
900 million trade rub1es4! Since the -Soviet Union is a net exporter
of these items to China, net imports of machinery and equipment from
the European Satellites are probably more than 1 billion trade rubles.
Total Soviet exports of machinery and equipment to the Satellites and
China are approximately 2.6 billion trade rubles and total imports --
In 1954, total trade turnover of the USSR was 25 billion rubles. Im-
ports and exports are assumed to be balanced, as in the Soviet litera-
ture, since the USSR is a net importer from the European Satellites and
a net exporter to China. According to the Soviet statistical yearbook
for 1956 1/, machinery and equipment comprise 32.6 percent of Soviet
imports and 21.5 percent of exports. According to Western sources,
Western imports of these items from the USSR total $12 million (48
million rubles) and exports total $145 million (580 million rubles.) 2/
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3.5 billion trade rubles. Imports of machine tools, chemical equipment,
and electrical equipment are of special importance to the Soviet Union.
Eastern Europe is poorly endowed with raw materials necessary to an
industrial society and in addition, after diverting productive resources
from agriculture to industry, has become dependent on outside sources
for mucla of its agricultural as well as industrial raw material supplies.
These requirements have in largest part been filled by the Soviet Union.
Ferrous and non-ferrous metals, fuels,amiC.fihers have all been prepon-
derantly supplied to Eastern Europe from Bloc sources, primarily the
USSR. In 1955, estimated Soviet exports of iron ore to the European
Satellites were more than 8 million tons (12 percent of the Soviet total
extraction, or more than 45 percent of the estimated Satellite consump-
tion of imported and domestic iron ore). In a very real sense,
Satellite dependency upon Soviet iron ore gives the Soviet Union control
over the development of heavy industry in the patellites.
In their first long term economic plans (circa 1950-55), the Sat-
ellites undertook rapid industrialization on the basis of the develop-
ment of heavy industry (and of ferrous metallurgy). The motives were
complex, military, economic, political, and nationalistic, but the
result was that many Satellites acquired heavy industry which was based
on imported iron ore and coal and which was high-cost relative to the
world market. This industry could exist under such conditions only
within an insulated and isolated Soviet Bloc economic system and tended
to facilitate Soviet exploitation. Nevertheless, it became apparent
that maximum economic growth of the entire Soviet Bloc would be better
achieved if less autarky prevailed in Satellite economic development
and if the further expansion of industry were undertaken on the basis
of greater coordination of investment and trade planning. Furthermore,
by the end of the period (1950-55) the basic autarkic buildup of heavy
industry had served its major political and military purposes.
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By 1955, the industrialization programs of the European Satel-
lites had achieved a high level of output for key items, such as coal
and steel, but the domestic needs of the producing countries had
increased to a larger extent than had been planned. As a result, for
example, Poland, which was to have been a supplier of coal for the
entire Bloc, was unable to satisfy the import needs of other' Bloc
countries.
Agricultural development lagged behind plan in all the Satellites;
this aggravated a deficit of consumer goods on the market. Poland was
unable to export grain and actually had to import it. The USSR itself
had to cancel several obligations concerning deliveries of grain and
food products and in 1954-55 advised the Satellites to buy grain in
the West.
The Satellites became plagued with problems of excess capacity in
several industries which had been simultaneously overdeveloped in each
Satellite during the frantic industrialization years before 1954. Sev-
eral countries, for example, had excess stocks of textiles and excess
textile producing capacity. To use such capacity, markets had to be
cultivated outside of the Soviet Bloc.
Capital investment funds were tied up in idle equipment and in-
completed factories, the relics of the excessive, overdiversified,
Industrialization policy followed in all Satellites. Furthermore, the
armaments buildup in the Satellites during 1951-52 had delayed many
plants. Other Satellites, deprived of the imports which were to have
been supplied by these plants, built their own plants; this in turn
removed the justification for several incompleted plants which were
left unfinished.
Current Soviet Bloc trade policy, as envisaged in early 1956, is to
concentrate on the following points:21/
1. Investment planning should be thrifty and selective; costs
should be minimized to reduce the burden of investments to the
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economy; idle equipment and capacity should be utilized.
2. Bilateral or multilateral cooperation in specific industries
should produce more rational utilization of resources.
3. Excess capacity should be utilized by promoting trade with the
updgrdeveloped-natiOns..
At the meeting of CEMA at Budapest in December 1955, the chairman,
Anastas Mikoyan of the USSR, reportedly setioeh the following views: 2/
1. Capital investment should favor modernization of plants rather
than the construction of new ones.
2. The Satellites are too servile in following Soviet techniques
and should avail themselves of Western technology.
3. The Satellites should perform their Obligations under the joint
planning. Mut at this point, conflict arose with the Polish
delegate who explained the Polish problems with coal and grain.
Actually the surpluses and import requirements of the various
Satellites do not dovetail as well as the Soviet Union would
like).
4. The Satellites should not expect any deliveries of agricultural
products from the USSR in the near future (superseded by agree-
ments made following the bumper Soviet crops of 1956).
5. Satellite trade policy toward the underdeveloped nations would
have to be strictly coordinated. The delivery obligations
would have to be fulfilled at any price, although if one country
should be unable to deliver, another country could assume its
obligation. Finally, the Satellite nations should avoid compe-
tition among themselves.
6. In planning their trade and production with consideration of
trade with the underdeveloped nations, the Satellites should
not count on wider possibilities of credit within the Saviet Bloc
and each country -would have to count upon its awn resources4:
The Soviet Union fears shortages of raw materials and capital equip-
ment which might be generated by its own plans for 1956-60. It could
maintain an export deficit with the Satellites against past services
and credits.
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7. Finally, the context of Mikoyan's statements concerning trade
with the underdeveloped nations indicated that the main effort
would now be directed toward the Arabic countries while the
achievements in India, Burma, and Afghanistan were consolidated.
Although there is now evidence that the Satellites have real fear
of the increased economic control centered at Moscow inherent in the
plans developed during 1955 and early 1956 for Bloc-wide economic coor-
dination, there is much economic justification for some form of economic
cooperation among the Satellite countries. Specialization for a Bloc-
wide market would help to make Satellite production more efficient, and
to make their exports more competitive in the total work market, 'and.
thus to facilitate the coming-of-age of the infant industries. Increased
economic coordination makes passible a more orderly planning of trade
patterns which is very important to a planned economy such as any of the
European Satellites. Each Satellite, however, is possessed of its own
OnnPdiate economic problem and has occasionally sought to solve them in
competition with another Satellite for a given contract or source of
supply. Evidence of such inter-Satellite competition, especially in
intra-Bloc trade, has grown more scarce and in mid-1956 was largely
confined to the chronic complaints about delivery delays or unfilled
quotas. To the extent that Satellites such as Poland and Hungary pursue
an independent economic policy, there is likelihood that frictions will
increase both in intra-Bloc trade and in the internal planning of other
Bloc countries such as East Germany. This would generate pressures from
all the other trading partners to negotiate economic coordination at
least on the level of common interest.
Trade with the underdeveloped countries, although promoted by the
Soviet Union for purposes largely political, offers the prospect of long-
run economic gains. In exchanging their own industrial products for the
agricultural and other raw material exports of the underdeveloped countries,
the Satellites are alleviating their own chronic material shortages,
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employing productive capacity which night lie idle; and are moreover
lessening the pressure on the Soviet Union's resource endowment. There
is even the possibility of circumventing some of the Soviet control
over the Satellite economies through the importation of iron ore from
India, Liberia, and Brazil instead of from. the USSR. The benefits to
the Satellites from such exchanges have been felt only partly, for many
of the exports from the Satellites have involved an extension of credit,
and thus the return flow of raw materials has not yet been completed.
The amount of benefit which the Satellites have derived and will
derive from an extension of their trade with the underdeveloped countries
depends upon the terms of trade, the prices of their exports as compared
with the prices of their imports. Present information does not yet
permit assessment of the economic gain or loss to the Satellites of the
current programs. To some extent, the Satellites would be willing to
undergo short-term costs in order to develop a long-term market; which
is a normal trade phenomenon.
The development of trade with the underdeveloped countries can pro-
vide greater freedom in the firRpcing of Satellite foreign trade. For
complex reasons bound ultimately with the exploitation of the Satellite
economies, the USSR has in the past never encouraged intra-Bloc multi-
lateral settlements and has encouraged bilateral barter agreements:. The
Satellites have not been satisfied with bilateral balancing, which be-
COMBS very difficult to administer and is not economically advantageous
to them. They have begun to achieve de facto multilaterialiam in the
form of commodity shunting: the impprt of a commodity from one cbtntry
in order to export it to another from which something more necessary can
**
be obtained.
Bilateral trade negotiations permit the USSR to use its full economic
weight against a single country at a-time, should that expedient be
necessary. In addition, multilater1 clearing would tend to prevent
the USSR from maintaining a net import balance from the Satellites
since there would be a tendency for the Satellites collectively to im-
port from the USSR up to the limit of their exports to the USSR.
** In a sense, even China has done this. In 1954, when rubber shipments
to China were embargoed but were legal to the USSR, China procured
rubber and shipped it to the USSR.
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Extended participation of the Satellites in Free World Markets has
broadened their opportunities for such de facto multilateralism. On
the one hand, certain of their non-Bloc trading partners (such as Ceylon)
have objected to the restrictions of bilateralism with the result that
pressure for some form of intra-Bloc clearing of accounts has come from
outside the Bloc. On the other hand, new opportunities for commodity
shunting and multilateral uses of bilateral clearing accounts have been
developed and utilized by the Satellites.
Trade with the underdeveloped countries has yet another attraction
for the European Satellites. To an increasing degree the economic devel-
opment of the underdeveloped nations is occurring under some form of
economic planning. Both parties then find it desirable to conclude trade
agreements based upon a planned and frequently medium-term (2-5 years)
exchange of goods, insulated against market fluctuations to the extent
agreeable to both sides. In such cases, both parties are concerned by
sharp movements in Western market prices and are susceptible to fears of
the trade barriers existing in the larger nations of the West; their
trading relationships potentially fulfill common needs.
The expansion of Satellite trade with the underdeveloped countries,
while desirable from the viewpoint of the Satellite economies, would not
solve all the basic trade questions. To the extent that Poland, East
Germany, Czechoslovakia, and Hungary have completed much of their basic
industrial buildup, they have become increasingly interested in advanced
technology and advanced equipment. For these, they have turned increas-
ingly toward the industrialized countries of the West. Rumania submitted
to US Ambassador Thayer an impressive list of equipment which it would
like to obtain from the West. The Soviet Union also desires an impressive
list of such equipment. ?./ The Satellites have been unable to satisfy
their desires in this respect both because of Western Cocom controls and
* Especially those barriers erected during_a decline in business activity.
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because of their limited ability to market goods in such countries as
Great Britain and the United State.
If it should so desire, the Soviet Union possesses significant
ability to limit Satellite trade relations with the industrialized
Nest by channelling to itself those few items which have ready markets
in the West, -- such as Polish coal, chemicals and fertilizers from
several Satellites (especially from East Germany), and foodstuffs. As
the dominant trade partner of each of the Satellites it is in position
to do this, and doubly so as a major creditor.
The Soviet Union can further influence the economic development of
the various Satellites through its re-direction of the basic commodities
received as privileged export shipments from other Satellites. These
shipments of machine tools, chemicals, electrical equipment, synthetic
rubber, and the like, and which are of Satellite origin, are essential
to the development and operation of the industries of all the Satellites.
The USSR received priority claims on exports of these products either by
virtue of past ownership of the producing enterprise (as was the case
with the former Soviet-owned enterprises in East Germany, Hungary, and
Rumania) or in repayment of investment credits granted to all the Satel-
lites. It is in this context that the Polish government sees the import-
ance of the Soviet cancellation of the 2.4 billion ruble credit repayment
obligation due the Soviet Union from Poland;* This debt was in every
sense a Soviet mortgage on the Polish economy.
This debt was cancelled in November 1956 against Polish claims for
compensation arising from Soviet underpricing of Polish coal ship-
ments to the USSR and against Polish reparations claims against East
Germany which were exercised by the USSR.
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VI. Economic Reforms.
A. Decentralization.
One of the economic reforms which has been going on within the
Soviet Bloc deals with limited decentralization in the managerial direc-
tion of the economy. This movement was apparently initiated by the USSR
early in the 1950s. Several Satellites (Czechoslovakia, Poland, Hungary,
and East Germany) have instituted somewhat similar measures.
The Soviet model for decentralization is reflected in organiza-
tional and operational changes in the economic managerial structure
which have been carried out within the past few years. A number of
economic ministries have been partially decentralized, chiefly by
reorganizing some all-union ministries into union-republican and trans-
ferring a number of enterprises from national to regional control. In
planning, the central apparatus of the Soviet Government now restricts
itself to broad target figures, and has granted considerable responsi-
bility to union-republics, ministers, and plant directors to draw up
their annual plans. Planning authority remains strongly centralized,
however. Ministerial reorganizations and the delegation of planning
details have been coupled with a general increase in the economic role
and responsibility of the union-republics. Finally, plant directors
have steadily gained power more commensurate with their earlier
responsibilities.
The Yugoslav model for decentralization has also involved the
delegation of detailed planning to lower level organizations. It has
gone considerably further than the Soviet pattern, however. Since 1950,
Yugoslavia has had a system of workees councils. These councils in the
individual plants constitute one of the main pillars of economic-
managerial decentralization in that country. The councils elect a
management board to run the plant in conjunction with the director. 1/
The legal powers of the worker's councils include the following: E./
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1. Select and dismiss the plant director.
2. Fix wages) prices, and establish certain working conditions.
3. Formulate operating plans and supervise balance sheets.
4. Distribute the income of the plant among wages, amortization,
etc.
Theoretically, at least, the worker's councils control the
management and/ in general/ run the enterprise. In practice, the
councils are not as active in daily management as their legal charter
would imply. The councils appear to follow the suggestions of the
director and the party leaders) the latter frequently working through
the plant union. 3/ This lack of direct control by the council is
further displayed by party control of the list of candidates, who are
later elected to the worker's council by the plant personnel, 4/ In
addition/ a plant is rather strictly supervised by the local branch bank,
and any financial difficulty in which it finds itself subjects it to a
peculiar form of central control, termed "socialist sequestration." 5/
Finally, the plant manager, particularly since he is probably a
communist, has the official right to make final decisions in the plant.
Czechoslovakia has been one of the most advanced Satellites in
introducing decentralization. In this country/ the Soviet model has
been generally followed in such specifics as delegation of planning
detail and the grant of rather extensive powers to plant directors.
In fact, Czechoslovakia has apparently given more powers to plant
directors than have other Satellites or even the USSR. ?,/ Regional and
district authorities have also been strengthened. More state farms, for
example, will in the future be subordinate to national committees. Also,
area administrations of certain ministries have been or will be trans-
ferred to regional national committees. 7/
Poland, like Czechoslovakia, has carried out general reforms in
extending powers of plant directors, such as granting to enterprises the
* The annual plan for 1957 will reportedly contain only four-fifths the
number of target figures compared to the 1956 plan.
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right to formulate their detailed plans on the basis of central targets.
Recently, the Polish Sejm dissolved the State Economic Planning Commission
and replaced it with a smaller planning body having much more limited
powers. This new organization will have no authority to issue "binding
directives" to ministries and people's councils, .Y as apparently its
predecessor had. Ministries and lower-level councils will probably bene-
fit from this development by enjoying more freedom of operation. Some-
what contrary to the Soviet model, however, Poland seems to be following
the Yugoslav pattern of establishing worker's councils in individual
enterprises. These councils appear to have powers and responsibilities
similar to those found in Yugoslavia. .2.V
Eungary has also instituted general administrative improvements
along the Soviet pattern, but like Poland, appears to be following the
Yugoslav model in setting up worker's councils in the enterprises. 12/
In addition, a number of enterprises have been transferred to the juris-
diction of the county and town councils--in seeming agreement with the
Yugoslav system. 11/
East Germany, like Czechoslovakia, follows more the Soviet
rather than the Yugoslav model of decentralization. Thus, planning is
to be simplified and local ministers and plant directors are to receive
additional powers. 12/ However, the East German Communist Party has
felt it necessary to give some deference to the Yugoslav system of
worker's councils. East Germany will probably establish 'worker's
committees" in each enterprise but probably will withhold significant
powers from them. 13/
B. Labor Reforms. 14/
During 1956, the European Satellite regimes took action on an
unprecedented scale to improve the economic welfare and working condi-
tions of the industrial labor force. These actions were motivated in
part by the necessity for devising ways to increase labor productivity
and in part by the need to placate restless populaces. Although the
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particular measures taken differ widely in scope and content among the
countries, the net result in each case is some improvement in the lot
of the industrial worker; the net effect on productivity cannot yet be
determined.
Labor laws and practices in the Satellites are patterned more or
less after those of the USSR. Liberalizing measures in the labor field
taken by the USSR during 1956 for economic motivation undoubtedly stimu-
lated Satellite actions along the same lines. In addition to the Soviet
example,' however, the particular pattern of reform adopted in each
Satellite was also influenced by its reaction to the Soviet repudiation
of Stalin and by its awn complex of events, including the extent of
worker unrest.
Four of the Satellites cut the regularly scheduled workweek from
48 to 46 or fewer hours; in BuIrgaria and Czechoslovakia a general 46
hour workweek was established, while in Hungary and Rumania the reduc-
tions applied only to designated industries. Although East Germany and
Poland did not reduce working hours during 1956, they have indicated an
intention to do so during the current five year plan periods.
Each of the countries took action of some kind to raise wages
of various categories of workers and to adjust work norms. East Germany,
Hungary, Poland, and Rumania made general, across-the-board increases
in basic minimum rates, thus giving substantial wage increases to the
lowest-paid workers. In. Bulgaria wage increases were few and benefited
an insignificant number of workers, whereas in the other countries wage
adjustments had more significant impact. Poland, for example, accorded
wage increases to some 4 million workers, nearly two-thirds of all non-
agricultural employees. Increased work norms in some industries, parti-
cularly in East German industries, negated the benefits of the wage
adjustments to workers 1 total earnings. All countries have plans
for further wage and norm reforms during the next few years.
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Each Satellite has improved its social security system, which
provides temporary disability benefits, family allowances, and pensions.
All of the countries except Hungary have effected substantial increases
in old age, disability, and survivors pensions by establishing higher
minimum pensions for each category. Hungary improved temporary dis-
ability benefits somewhat. A comprehensive revision of the entire
social insurance program is scheduled to become effective in Czechoslovakia
on 1 January 1957, and Poland plans to raise family allowances on that
date.
Most of the Satellites have taken steps to liberalize the existing,
highly.restrictive laws governing absenteeism/ job-transfer, and other
forms of labor discipline, although East Germany and Czechoslovakia have
taken no action in this respect. Rumania repealed laws that had permitted
compulsory transfer of workers on government order and had prohibited
voluntary leaving by the worker. Poland and Hungary abolished criminal
penalties for absenteeism and other infractions of labor discipline.
Several of the countries are engaged in comprehensive revisions of their
criminal and labor codes.
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APPENDIX A
RECENT SOVIET POLICY STATEMENTS CONCERNING
SOVIET-SATELLITE ECONOMIC REIATIONSRIPS
In order to examine the points ofdifference and the points of
common interest in the foreign policies of the Soviet Bloc countries,
several pertinent policy statements will be examined.
1. Soviet Economic Policy. (Twentieth. Party Congress). In February
and March 1956, the Soviet Union once more affirmed the priority of the
policy of maximizing economic growth, with special emphasis upon the
growth of heavy industry, over the policy of consumer satisfaction.
Nevertheless, extensive measures have been undertaken, especially in
agriculture and housing, in order to improve living standards:
."The chief task of the Sixth Five Year Plan for the
development of the national economy consists of insuring
the further mighty growth of all branches of the national
economy, on the basis of preferential development of
heavy industry, uninterrupted technical progress and
increase of the productivity of labor, of realizing an
abrupt increase in agricultural production, and on
this basis, of insuring significant increase in the
material welfare and cultural level of the Soviet
people." 1 /
2. Many Roads to Socialism (Twentieth Party Congress). The Congress
reaffirmed an old Lenin statement, "All nations will come to socialism;
this is inevitable; but they will not all come in in quite the same
way, each will make its own contribution...." The Congress then went
on to say, "It is perfectly logical that the forms of the transition
to socialism will be still more varied in the future." 2/
3. Soviet Bloc Economic Cooperation.
:"The fulfillment of the tasks of the Sixth Five Year
Plan will be a great contribution to the cause of the further
consolidation of the entire socialist camp. The Soviet
Union will expand in every way its cooperation :with the
People's Dem4cracies in the field of the most rational
utilization of the economic resources and production
capacities in common interests, by way of the coordination
of the development of individual branches of the national
economy, by way of specialization and cooperation in
production, and also, by way of exchanging scientific
and technical achievements and advanced production
experience."
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A comparison of this statement with paragraph 2, above, indicates
that the thesis of many roads to Socialism applied to the political
sphere more than to the economic sphere,wAS the intent of the
Twentieth Party. Congress. If rational utilization of economic
resources was to become the Soviet Bloc joint policy, some type of
central decision making body was to become effective, which is now
known to be CEMA (Council for Economic Mutual Assistance) and the
important Soviet organizations linking CEMA planning to Soviet planning.
4. Economic Competition between the Soviet Bloc and the
Capitalist Nations.
'The Twentieth Congress of the CPSU considers that the
Soviet nation now has all the conditions necessary for
accomplishing, by means of peaceful economic competition
and in historically the shortest time, the main economic
task of the USSR -- to overtake and surpass the most
developed capitalist countries as regards per capita
production." 4 /
In retrospect, the speech of A.I. Nikoyan before the Twentieth
Party Congress was one of the most important statements containing the
true goal of Soviet economic relationships with the Satellites.
Strangely enough, the same speech helped to unleash two concepts which
were to shake the Soviet Bloc. The following paragraphs deal with this
topic (paras. 5-7):
5. Consolidate the Bloc and Divide the West.
"The inception, growth, and strengthening of the mighty
camp of socialism is the principal factor in the fundamental
changes in the international situation. A socialist society
has been built in the Soviet Union; great China and the
People's Democracies are marching with rapid steps along the
path of the building of socialism. A world socialist system
has been established and consolidated and is developing,
while the world capitalist system is in a state of crisis;
it has weakened and is losing one position after another." _2_/
Parenthetically, it should be noted that a Marxist discussing the
socialist system and the capitalist system is discussing economic systems
as well as political societies. For this reason, the statement should
be read with paragraph 3 in mind (preceding page of this report).
In addition, it is significant that the statement was made by:Nikoyan,
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6. The Attack on Stalin and the Cult of the Individual.
The sharp remarks contained in Mikoyan's speech ante-dated
Khrushchev's more famous speech upon the same subject. It is not likely
that Mikoyan realized the weakening impact that the attack upon Stalin,
and the campaign against the secret police, would have upon Soviet
authority in its relations with the Satellites.
7. Burial of the Thesis of Capitalist Encirclement.
The time is past when the Soviet layd of socialism was
isolated, when we were an oasis in the capitalist encirclement."
Now the Soviet Union is joined by a system of socialist states
and is no longer alone. In addition, Mikoyan added,
Socialism is already incomparably stronger than capitalism in
the minds of men. "This is why it is not for us to fear a
struggle between the ideas of socialism and those of
capitalism." Naw the struggle can be conducted in terms of
peaceful coexistence. 6 /
In replacing the fear of capitalist encirclement with a call for
competitive peaceful coexistence, the Soviet planners encounter a basic
problem which was graphically illustrated in subsequent events, especially
in Poland. The problem is this, to compete with the Western world, the
Soviet Bloc must continue its program of forced-draft industrialization.
Yet to a high degree, in the past, this rate of economic growth was
achieved only by regimentation within the various states. This
regimentation was facilitated both by fear of Soviet authority and by
fear of capitalist encirclement. Weaken these fears, the regimentation
is then weakened, and the rate of growth suffers, unless incentives to
individual performance can replace the whip of authority. This point
was well recognized by the Polish economist Oskar Lange who wrote in a
Polish periodical in July of 1956, *We directed the economy through
methods which are characteristic of lwartirie economy', i.e., through
methods based on appeals of a moral and political character as well as
on orders of a legal and administrative character, in other words,
through methods based on various means of extra-economic compulsion
and not on economic incentives." 7 / (Underlining added.)
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8. Many Roads to Socialist Construction.
After the Soviet-Yugoslav talks held in May and June of 1956,
the Soviet reaffirmation of the principle of many roads to socialism was
extended to the economic sphere, in what was to become an extremely
important extension. The old Lenin statement (see Para. 2, above)
was hauled out once more, but the following words were added by the
editors of Pravda:
"The historical experience of the Soviet Union and of the
people's democracies shows that, given unity in the chief
fundamental matter of ensuring the victory of socialism,
various ways and means may be used in different countries
to solve the specific problems of socialist construction,
depending upon historical and national features. 8 /
In the same editorial, the following features of the Yugoslav
politico-economic system appeared to be set forth as features acceptable
to the Soviet Communist Party:
1) Unity in the chief fundamental matter of ensuring the victory
of socialism.
2) Public ownership of the basic means of production, in large-scale
and medium industry, transport, the banking system, wholesale trade,
and most of retail trade. (Note the exception of small scale industry
and of some retail trade.)
3) The state system is determined by the fact that the working
class and the peasantry hold the reins of power. (I.e., a Communist party).
4) Pursuit of a "fitting socialist foreign and domestic policy."
5) Extension and strengthening of political and economic ties
and cooperation by Yugoslavia with the Soviet Union and the people's
democracies. 9/
These principles are of extreme importance. At the time, they
were extended to Yugoslavia only, and there is no evidence that the
Soviet Union anticipated extending them to any of the Satellites. Yet
a major precedent had been set. It is further of note, that the reforms
proposed by the new Gomulka government in Poland do not violate these
principles openly, except only by strict interpretation of such a
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clause as 4) which contains the deceptive word 'fitting." On the
other hand, the changes proposed by the Nagy government in Hungary
went far beyond these limits.
9. Soviet Statement on Satellite Relations 30 October 1956. 10 /
This statement was an admission by the Soviet government that
the principle of equality had been violated in relations with the other
_Bloc countries. In addition, the USSR indicated willingness to reexamine,
the subjects of mutual relations in the military and economic spheres.
Nevertheless, the USSR indicated that it would take a rigid position in
defense of its military interests by indicating that withdrawal of
Soviet troops from any country which is a member of the Warsaw Pact
could be only with the consent of all the other signatories. The USSR
would be willing to discuss the recall of Soviet advisers, and the
wording indicated that some concessions would almost certainly be made
along this line.
This statement must have been made under some duress. While
it is not basically a definitive restatement of Soviet policy vis-a-vis
the Satellites, it is a confession of mistakes (a dangerous precedent)
and an admission that there exist basic areas of friction between the
Soviet Union and the Satellites (and apparently not limited to Hungary
and Poland, judging from the context).
The section relating to economic frictions is of particular
interest.
The Soviet government is ready to discuss with the
governments of other socialist states measures insuring the
further development and strengthening of economic ties
between socialist countries, in order to remove any
possibility of violating the principle of national
sovereignty mutual advantage, and e uality in economic
relations. This principle should extend also to advisers.
If this statement is compared with the statement of the Twentieth
Party Congress concerning Soviet Bloc economic cooperation (Para. 3,
above), it becomes evident that the nature of joint planning for the
period 1956-60 may be subject to significant change, and that there
may be revision of the 1960 economic targets in several Satellites.
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Significantly, this statement does not specifically grant Poland
the same latitude of action as previously accepted in the case of
Yugoslavia. Yet Gomulka, by treading the Yugoslav line, has a strong
precedent. In addition, the Soviet admission of mistakes and the
specific affirmation of the validity of the principle of equality in
the sphere of economic relations should serve to strengthen Gomulka's
theoretical position.
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APPENDIX B
THE DISCUSSION OF REFORM IN THE POLISH ECONONY
Statement of Purpose.
Poland is now in a unique position among the countries of the Soviet
Bloc to attempt new approaches to stimulate the interest of the workers
and peasants in their tasks specifically and in the economy generally.
This unusual opportunity afforded Gomulka and his economic advisors,
including Oskar Lange, is furnished by the popular support on which the
new regime rests, and without which it must fall, and by Soviet accept-
ance of the new regime, however reluctant. If a high degree of interest
on the part of the workers and peasants is aroused and maintained, the
Polish experiment may become increasingly tempting to other peoples of
the Soviet Bloc and may lead to a reduction in the pervasive role of
authority in other Communist states.
Although the present opportunity to experiment is new, the ecoAonic
crisis, rooted in shortages of raw materials and advanced capital equip-
ment and in the growing apathy of the workers and peasants, is not novel.
As a result, for several months preceding the Gomulka regime, Polish
journals were deeply involved in develoiAng the concepts of a new economic
program. The issues raisedsin this continuing discussibn are examined
in the following pages.
In addition to drastic revisions which have been and are still being
made in the order of priority tasks originally set by Poland's Five Year
Plan, various reforms in making and implementing economic policy have
been provisionally adopted in the hope of curing certain basic economic
ills: the low productivity of socialized industry and agriculture, the
uneconomic use of the resources Poland has available, and in general a
high cost of production, to which is attributed the necessity of subsi-
dizing many industrial enterprises and most cooperative farms. This
section proposes to discuss the possible consequences of such reforms,
or of the failure to carry them out, in a period of expected transition
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from a system in which compulsion has played the major role to one
based on a freer interplay of economic forces.
There has been a growing disposition over the past six months to
assign the above maladies a dual basis: centralism in administering
the economy and lack of adequate incentives to produce. Insofar as
the solutions proposed for them may be reduced to a single denominator)
however, decentralization is their frame of reference.
1. Reorganization at the Apex* of the Political Economy.
The desire of Polish economists to simplify and streamline the
running of their economy was dramatically symbolized by the liquidation
of the State Economic Planning Commission, which took place November 15,
1956, and the reorientation of its functions within a Planning Committee
attached to the Council of Ministers which was established in its place.
Potentially the most significant change that occurred in this transfer
of functions was the abolition of the SEPC's power to administer
indirectly all units of the economy by issuing binding directives to
the various ministries on operational questions. As a result of this
shift, the manpower of the former SEPC has been reduced from 1700 to
1000, and the original 4o departments within the SEPC have been cut to
29.
As the Planning Committee assumed a subordinate and advisory
role, the power of the ministries was correspondingly strengthened,
and the Council of Ministers has taken on the operative function lost
by the SEPC. The Council has been reorganized into three sections, one
for industrial production, construction, and transportation, one for
agriculture, and one for welfare and services. The Planning Committee,
on the other hand, submits proposals regarding the supply of food and
consumer goods, problems of prices and wages, economic incentives, and
investment and foreign trade policy.
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The importance of the Sejm? too, has been heightened with regard
to planning. From a short-range point of view this has come about acci-
dentally, arising from the nature of Gomulka's strongest weapon against
Soviet control over the direction of Poland's economic growth, his
popular support. The Sejm has as a consequence taken on the aspect of
a debating chamber after the Western model, a sounding board for the
multitude of suggestions regarding industrial management and planning
which have been advanced by worker delegations. Proposal and counter-
proposal on possible changes in the Five Year Plan have been permitted,
perhaps in part with the hope that the best way out of Poland's economic
difficulties will be discovered by this means. Efforts which are being
made to legalize and perpetuate this de facto situation apparently stem
from the fact that the country's economic needs require a more flexible
National Economic Plan, and that this can best be achieved by continuous
supervision of plans and performance by the Se-jm and its committees. It
is held that the latter should work out future long-term plans in con-
junction with the various ministries, and the Sejm as a whole should be
given the power to confirm plans on an annual basis.
Formal recognition has thus been extended to the traditional
distinction between planning and decision-making. This appears to be an
important step toward economic decentralization because it has taken
place on the highest level. It should be kept in mind, however, that in
practice the line between these functions becomes blurred at that level
under conditions of forced growth. Rapid growth has not been repudiated,
and it is probable that its rate has only temporarily subsided. At the
moment it may be not only desirable but quite possible to separate the
executive from the legislative functions, but once the breathing spell
ends, the same forces which produced an SEPC combining both functions
may again reassert themselves and the trend toward unification of both
these kinds of power in a single body may reappear.
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Nonetheless, these changes are significant in the short-term
in that they attest to the regime's present intentions to relax the
grip over the economy which has been maintained-by the mechanism of
administrative decision making. More interaction among alternative
"decisions", an opportunity for which has been given by the Planning
Connission's reorganization, will inevitably color the results of
planning with some degree of unpredictability. Further, the Sejm's
new watchdog role will have a restraining effect on the tendency,
characteristic of an administered economy, for decisions which look
well on paper to be carried through arbitrarily regardless of their
harmful economic and political consequences. AS long as it is the
regime's desire to obviate that possibility, greater scope may be
permitted to nationally responsible discussion of broad alternative
policies, just as is intended, on a more restricted scale, within the
Council of Ministers.
2. Territorial Decentralization.
In the area where decentralization of planning merges with that
of management, some ch-nges have been confirmed which parallel those
adopted in the USSRsince the Twentieth Party Congress. More power to
make short-range plans and operational decisions has been given the
Central Boards (analogous to the 'Soviet "chief administrations"),within
the ministries. In addition, a wider role than hitherto has been
assigned to the lower territorial subdivisions of the State, adminis-
tered by the People's Councils. Responsibility for local light
industries, for locally derived building materials such as quarries,
brick kilns and the like, for food processing, and for the entire retail
network, has devolved upon the provincial, county:- and parish People's
Councils. Revenue for conducting these activities is to be drawn not
from the central budget, as formerly, but from all the forms of tax
levied on enterprises subordinate to the People's Councils, taxes which
are no longer, therefore, :channelled into the State Treasury. On the
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basis of these sources of revenue the Councils may now adopt
their own budgets.
This reform appears to be designed to simplify the central govern-
ment's problem of supervising economic activity; it is not calculated to
be a stimulus to local self-determination, however much it savors of
democratization. The local People's Councils are in charge, for instance,
of the restoration by local craftsmen of their workshops, fallen into
disrepair as the craftsmen were forced out of business over the past
decade. They are in charge of the carrying out of policy, in other words.
Similarly, they are permitted to invest at their own discretion only
within the framework of the gross quantities allotted specifically for
these purposes by the national plan. And, to make this limitation all
the more binding, although these local bodies can make changes in their
planned investments, they can only do so if no expenditure of money or
material is required beyond that approved by the plan. Lastly, the
national plan defines for the economy salordinate to the Peopl&s Coun-
cils all economic tasks of national significance. This can be a rather
.flexile criterion.,
The over-all pattern of reforms under consideration was set
forth in the report to the Seim on November 7 of Lange's budgetary and
finance committee. Besides urging the decentralization and simplification
of planning (such as a reduction in the number of indexes centrally deter-
mined) and an enlarged role for the People's Councils, the committee
advocated greater autonomy for socialist enterprises, a greater scope
for worker self-government and a rise in material incentives to stimulate
the worker's interest in the results of his labor. Such a general solu-
tion to Poland's ills has been under discussion over a relatively long
period of time -- even before the Gomulka regime -- and whatever action
is taken will undoubtedly fall within its framework.
Thus, Worker a' Councils within industrial enterprises have been
recognized and encouraged to put forward whatever changes they deem
desirable in the policies or the running of such concerns. Official
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sanction has been given to the implicit assumption that the entire range
of industrial management and labor relations is within the province of
low-level discussion and even action, in that delegations presenting,
programs based on such wide perspectives have obtained sympathetic
hearings in the press and within the government.
3. The Prerogatives of WorkerS Councils.
Among the powers these councils have been granted are the right,
in principle, to, approve the detailed production plans, both in physical
and financial terms, which are annually handed down by the Central -
Boards within economic ministries, and the right unilaterally to intro-
duce changes in production methods without changing the entire plan.
In the fo4pground of demands preoccupying the workers but not
yet sanctioned by the government are the following:
a. Power to control the wage 'fund and to set norms and wage
differentials.
b. The right of advising as to the distribution of all
profits, both planned and unplanned. A typical recom-
mendation runs as follows: of total profits from the
former category, 70 percent is to be ttrned-_over to the '
State, 10 percent is to be directed into the works fund
(analogous to the Soviet "director's fund"), and 20 per-
cent to the wage fund. Of profits on excess production,
50 percent would go to the State, 10 percent to the works
fund and 40 percent into wages.
c. Final authority in the selection of a director for the
enterprise and residual control ever his decisions,
including the right of demanding his recall.
In addition to the above ideas, there is a group of recommenda-
tions of even more vital concern to the principle of planning than those
which have to do with the wage fund and profit sharing. They include:
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,a. Greater freedom for the enterprise in determining the
scope and placement of its investments. Some degree of
control by the national plan is conceded,
b. Control over price policy. The reform envisioned here
is to make the sales price more realistic in terms of
the factory price, i.e., to narrow the msrgin created
by turnover tax and profit. It is difficult to discern
if this reform is meant to apply to producer goods or
consumer goods or to both.
c. The privilege of making non-planned deliveries to both
Socialized and private concerns, and, beyond this, the
right of selecting the plant's own sAppliers and customers.
14. Improvement Efficient Use of ReOeurces.
It is noteworthy that a rise in labor productivity, usually very
much in evidence in similar Soviet programs, figures at best only as one,
implication of the final proposal. This can be traced to Oskar Lange's
conviction that reforms should be directed not primarily to a quantita-
tive increase in overall production but to an improvement in quality, a
decrease in plant production costs, and in particular the husbanding of
raw material resources and a reduction in the costs of producing or
obtaining them. Gomulka laid heavy stress in his October 20 speech to
the Eighth Plenum on the dearth of industrial raw materials which puts
Poland at a disadvantage in trade with the West, and called attention to
the necessity, for regular production, of building up adequate reserves
in these basic resources.
It is hoped that several of the reforms in decentralizing respon-
sibility will help correct this deficiency. Cutting the red tape that
discouraged initiative in originating and carrying out improvements in
production methods should lead to savings in materials and their fuller
utilization, where this is possible. In the realm of incentives, it is
planned to provide premiums out of the works fund for savings in raw
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materials. Worker motivation toward this end would be heightened by a
liberalized basis for profit sharing, such as that mentioned above. In
general, greater responsibility by the workers, engineers) technicians,
and ePonomists representing the enterprise on the Workers' Council over
the setting up of the original production targets would afford an oppor-
tunity of forestalling the uneconomic use of materials. The proposal,
not yet approved, to allow a plant unplanned disposal of the revenue on
30740 percent of the year's output would also be conducive to the most
efficient utilitation of resources, since the plant would try to maximize
profits) and would have the further advantage of helping to eliminate ,,)n
bottlenecks in production elsewhere, or, in the case of consumer goods,
in the distribution system. Two objectives are involved, thrrefore in
liquidating the problem of taterial,scarcity, one being cost considerations,
the other stockpiling to in Sure rhythmic production. Decentralization, a
greater stake in profits for the plant, and Something less than total
allocation of output or the revenue thereof, all help to solve that problem.
These solutions, however, call into play certain economic forces, which,
once released) are to a certain degree uncontrollable, and may react
unfavorably on other problems the eConomy is facing.
One such problem is unemployment. According to a report in the
June 10 issue of Po Prostu, there were then 300,000 unemployed workers,
of which two-thirds were women. At the same time it was estimated that
worker "superfluity", or underemployment, athounted to two million.
Granting to this estimate a large measure of exaggeration to buttress a
point, it still is undoubtedly true that a considerable number of workers,
in particular women, are unproductive most of the time, though on the pay
roll. One major Cause of this is the necessity in many families for all
adult members, including the aged and the women, to hold jobs in order
that the family maintain a Minimum standard of living. Measures to
raise pensions and minimum wage levels, and to afford some tax relief,
will have the effect of removing a few workers from the labor force,
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Basically, however, the need is to use the labor force more efficiently,
not to reduce it. A more constructive measure to curb underemployment
follows from the decision to reverse the previous policy of centralizing
industrial production in PolandIS large urban centers. That policy had
led to the liquidation of such small-scale, local enterprises as quarries,
sawmills, breweries, and handicrafts such as textile workshops, causing
in the process local labormrpluses. The concept of regionalization
behind it, in their words, the "equal distribution of production" between
city and. country, is now unfavorably contrasted to a "rational distribu-
tion of production", which is designed to encourage local industry and
private handicrafts, thus absorbing local surpluses when they exist and,
presumably, creating small vacuums to be filled by underemployed personnel
in socialized industries. A step designed to stimulate a resurgence of
handicrafts is a two-year tax exemption for any shop employing no more
than one hired laborer. In order further to encourage the development
of thecaptcity of these localities to absorb labor, the government has
made available to them investment money to the extent of 100 million
zlotys in 1956 (most of which has by now been allocated), and 200 million
zlotys in 1957. These policies will make for a geographic decentraliza-
tion of the economy parallel to that envisaged in the sphere of decision
making.
5. Some Basic Economic Problems.
There are many obstacles to the solution of the underemployment
problem, including some created by the policy of decentralization. In
the first place, the materials situation will probably remain static,
or improve only slowly, despite the savings effected by greater efficiency.
In order to obtain a steady flows in quantity, of her materials require-
ments, Poland must export in quantity and thereby stabilize her balance
of payments. The only product she can handle this way which is in great
demand throughout Europe is coal, and the likelihood is that exports of
this commodity will continue to diminish for some time.
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a. a. aa a. aa aa
Secondly, it may be assumed that in order to economize on resources
as much as possible) the opportunity afforded by quasi-autonomy on the
production unit level will be utilized to make wiser choices between
alternative solutions to investment and production problems. Hence high
production costs, a salient target of Polandls new economic policy, will
be lowered. This measure may reduce employment in some plants.
Thirdly, the reduction of high production costs through efficiency
will be meaningless unless some stable, predictable relationship is
established between these costs and the sales price. This applies espe-
cially to consumer goods industries, where political consequences tread
more closely on the heels of economic policies than in the producer goods
area. Since at the plant level the emphasis of this new policy is on
profitability) rather than on a continuance of quantitative overfulfill-
ment of plans, an effort will probably be made to cut down the number
of subsidized?unprofitable?plants. Lange has underlined the need to
hold industrial enterprises accountable for the amounts invested in them.
In the discussion over policy it has even been advocated that'an interest
rate be charged on funds allocated for capital investment.
These policies are intended to raise labor productivity. The
supply of raw materials, however, will not be adequate to meet the subse-
q4ent heightened capacity of Polish industry to absorb materials, despite
the possible reduction in the total number of production units through
the elimination of those which are now subsidized. Unless the newly
resuscitated private and handicraft sectors can provide for the surplus
labor resulting ultimately from the attempt to conserve materials, raise
quality, and reduce costs through decentralization and enterprise autonomy,
there is likely to be an unemployment problem after 1960, when the total
labor increment will amount to more than 500,000 in subsequent five year
periods.
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mob
6. Special Economic Problems of a Planned EcOnomy.
The specifically economic theme running through all these changes,
both adopted and proposed is increased profitability in all sectors of
the economy. It is most obvious in agriculture, where the situation calls
for the most drastic measures. Gomulka and his advisors have taken their
stand on the abolition of subsidization of cooperative farms. If their
number decreases in the short run, that is not a vital set-back, they
maintain. What is essential is that the most economic means of produc-
tion be found. Of course, there is an important limitation on this
policy, for it is not intended to threaten the "social" goals of communism.
But from a short-term viewpoint, higher productivity, with the goal of
greater efficiency, is seen as having a close relation to profitability.
This idea is carried over into industry.
Now if the market place is to be the test for this the price
system must be altered to allow competitive pricing among industrial
enterprises. The possibility of this occurring is doubtful, for it brings
the threat of "monopolist exploitation" of the market. The principle of
centrally manipulating the price system is still adhered to in Poland,
but the regime does intend to adjust prices to cost, for it recognizes
the necessity of finding out how much has been expended or saved in the
production process in order to determine where savings may best be
effected. Real production costs are determined by the "change of prices
in goods turnover between enterprises", Gomulka stated in his October
speech, referred to above. The guarantee that such changes will not
be "fictitious", he went on to say, is the enjoyment of full economic
accountability by the individual economic units.
If this assertion is to be taken at its face value, it brings
the problem full circle again. Fluctuations in the demand for a plantls
products are of course first felt by that plant, Carrying this premise
to its logical conclusion, Polish economists admit that to make the
proper and timely adjustments in output or in assortment an enterprise
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should be in close touch with its customers, "not only with another state
enterprise, another organization receiving its products, but with the
actual consumers", as the president of the Polish Economists Society
recently said. This implies contractual freedom by an enterprise in
obtaining supplies and in disposing of its products. This freedom can
only operate efficiently within a framework of equilibrium prices, i.e.,
prices which equate supply and demand and are responsive to changes in
supply and demand. There has been no indication in Polish discussions
to date of an intent to achieve this kind of price equilibrium. In
addition, it is questionable that this could be achieved by central
planning, even if attempted* In sum, while political imperatives
militate for the immediate satisfaction of demand, the Soviet-style
quest for rapid economic growth creates pressures in favor of an
administered economy.
A satisfactory solution to the perennial problem of reconciling
centralized authority in policy making with delegated authority in
carrying it out is thus being sought more intensely and on a wider scale
than heretofore in Poland. This is taking place at present on two broad
fronts, the industrial and the administrative, and is based on a general
conviction among the proponents of GoMulkats policies that to encourage
the anti-centralist, and indeed syndicalist, tendencies which are so
patently obvious throughout the country, is both economically desirable
as a means of reducing inefficiency and increasing the profitability of
socialist enterprises of all descriptions, and politically mandatory as
a means of retaining support for the regime. It is on the first of
these fronts that the desire for widespread democratization has taken
a clear-cut, programmatic, and specifically economic form in the Workerst
Councils which have sprung up in most Polish plants.
The Workers t Council movement promises two positive gains for
the regime; first, it fosters the political support by the workers upon
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which the Gomulka regime depends.; second, it should enlist the more
enthusiastic participation of the workers in production, on which depends
the hope of the regime for an increase in labor productivity. On the
other hand, the degree and scope of authority and power which the Worktrs'
Councils have been demanding are incompatible with the managerial effi-
ciency which the Gomulka regime is urgently seeking Therein lies
Gomulkes dilemma.
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NOFORN/CONTINUED CONTROL
APPENDIX C
SURVEY OF ECONOMIC DEVELOPMENTS IN THE EUROPEAN SATELLITES
UNDER THE FIRST LONG-TERM PLANS
(Draft of ORR Project 10.80)-i.)
14- DECEMBER 1956
(Two copies of draft
submitted to ONE
only as ApPENDIX C)
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