FOREIGN TRADE IN THE ECONOMIC POLICY OF CZECHOSLOVAKIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010032-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 32
• Publication Date: July 1, 1968
• Content Type: IM

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QIR OcfcIt/1- bw - x
25X1
Confidential
io/ 5.E R
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Foreign Trade in the Economic Policy
of Czechoslovakia
Confidential
ER IM 68-82
July 1968
Copy N2
56
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Excluded from automatic
downgrading and
de louificatlon
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CENTRAL INTELLIGENCE AGENCY
Directorate of intelligence
July 1968
Foreign Trade in the Economic
Policy of Czechoslovakia
Summary
0
Czechoslovakia depends heavily on imports of raw
materials, including nearly all the crude oil it
uses; much of the ores, rubber, and textile fibers;
and part of the nonmetallic minerals and foodstuffs.
Imports of raw materials amounted to US $1.2 billion
in 1966, or 45 percent of total imports. Raw
materials come largely from the USSR and other Com-
munist countries and from less developed countries
in the West. Czechoslovakia pays for them with
manufactures, chiefly machinery, that can be sold in
the developed Western countries only in small
quantities and at large discounts.
Economic dependence on the USSR -- which alone
furnishes more than 40 percent of raw materials
imports -- has not stopped the new leadership from
going ahead with major political reforms. Soviet
deliveries to Czechoslovakia have continued despite
Soviet concern about the reforms. A reported delay
in wheat shipments this spring -- if it did indeed
occur -- was not regarded as a serious threat by
Czechoslovakia. The USSR seems to be relying
primarily on military gestures and political pressure,
rather than economic pressure, to keep the new
leadership within acceptable bounds.
Note: This memorandum was produced soZeZy by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
InteZZigence.
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Economic dependence on the USSR and other Com-
munist countries is, however, a major obstacle to
reviving the economy. Over 70 percent of Czech
trade has been with Communist countries. Producing
b- command for guaranteed markets has led to massive
inefficiency and has undermined the competitive
position of Czechoslovakia's exports. Failure to
deal with these weaknesses was a big factor in the
fall of the Novotny regime.
Novotny's successor, Alexander Dubcek, has sworn
to do better. Some of his economic advisers --
especially Professor Ota Sik -- would like to put
the indispensable trade with the USSR and other
Communist countries on a more businesslike basis by
decentralizing decisions on trade and eliminating
the ever-increasing exchange of obsolete and often
substandard manufactures. Czechoslovakia would lose
on balance by such reforms, but the new leadership
might be willing to accept a loss as part of the
cost of reimposing the "discipline of the market"
on its own enterprises.
The outlook for bringing about such changes in
trade among Communist countries, however, is not
encouraging. Domestic opposition in Czechoslovakia
would be strong, especially among workers, for many
plants would have to cut back operations or close
down, and only the strongest firms would benefit.
And it is not very likely that Czechoslovakia could
obtain the necessary support among its main trading
partners. The USSR would benefit economically from
trade reforms. But reforms would face the adamant
opposition of the East German and Polish regimes,
which have strong political as well as economic
grounds for keeping things as they are. Hungary
might be willing to go along, and Yugoslavia would
be enthusiastic, but such support would not count
for much with the other countries.
A possible escape from the built-in inefficiency
of trade with the Communist world is a gradual shift
of Czechoslovakia's trade toward the West, a course
long favored by the more extreme reformers. The
costs and difficulties, however, are no less than
those involved in changing the conduct of trade with
other Communist countries. To shift trade to the
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less developed countries of the Free World has been
a favorite idea even with the Czech conservatives,
and possibilities for further expansion certainly
exist -- especially trade with oil-producing countries.
But in general the trade has been limited by Czechoslo-
vakia's need for the commodities offered, most of which
are not in strong demand on the world market. Where the
less developed countries have alternative cash
markets, Czechoslovakia, too, must pay cash. Thus
trade with these countries leads back to the main
problem in all trade with the West, that of earning
hard currencies -- a problem that has proved quite
intractable. So long as there are easier protected
markets at home and in barter trade, Czech enter-
prises will not make the effort. The best of Czech
goods are hard to sell in competitive markets, even
with great effort. The prices obtained are so low
that trade with the West usually involves a sub-
stantial loss, except in the cases in which purchases
in the ?'est open bottlenecks in supply.
An arnreciation of these difficulties has led
Czech economists -- and many senior officials -- to
conclude that large-scale foreign help is essential
if Czechoslovakia is to make itself more competitive.
Some immediate help would be useful in any case to
allow Czechoslovakia to manage its foreign trade
more efficiently; its existing reserves are much
too small for that. Help is needed to reorganize
and modernize selected export industries. But what
is most critical, if Czechoslovakia is indeed to
undertake sweeping economic reform, is long-term
aid to finance deficits in the balance of payments,
so that it can maintain consumption while restructuring
industry and shifting trade patterns. The USSR
almost certainly will not provide aid enough to meet
these needs. Czechoslovakia therefore must look to
a handful of Western countries -- the United States,
West Germany, France, and possibly others -- and the
World Bank. Czechoslovakia probably will not accept
large-scale Western aid unless it undertakes real
economic reforms to improve the quality and mix of
its products.
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Character of Czechoslovakia's Trade
1. The changing needs of a small industrial
nation, the ill effects of past economic policies,
and the constraints of barter arrangements are all
reflected in Czechoslovakia's foreign trade. The
country has long been a net importer of materials
and a net exporter of manufactures. Since World War
II, however, the composition of imports and exports
has changed radically. Imports of foodstuffs, non-
metallic minerals, and retroleum are several times
larger than before the war, mainly as a result of
industrial development and technical change. Imports
of ores and metal scrap are also much larger, in
spite of intensive working of domestic resources,
because the regime has pushed steel output and the
production of machinery -- a policy initiated by
the Germans in World War II. On the other hand,
imports of hides, furs, and skins and textile fibers
are no greater than in 1937, because the regime has
attached slight importance to expanding light industry.
(The principal imports of raw materials in 1937 and
1966 are s,?own in Tzb le 1.) Exports bear the mark
of the same policies. Sales of machinery and
equipment, which came to only 5 percent of the total
in 19 37 , now amount to almost one-half. At constant
prices their value is some 20 times the 1937 level.
But exports of other manufactures, which were about
65 percent of the total in 1937, have dropped to
about 30 percent. With the main exception of exports
of .,hemicals and iron and steel products, which have
increased greatly, they are below the prewar level.
2. Shifts in commodity composition have been
accompanied by a sweeping geographic reorientation
of the trade. In 1937, only about one-sixth of
Czechoslovakia's trade was with the USSR and Eastern
Europe. In the early postwar period the share rose
as a result of increased Soviet influence in Central
Europe, but even in 1948 -- the year of the Communist
takeover -- it still was only 40 percent. Thereafter,
trade with the West was deliberately cut until in
1953 it stood at less than one-half the 1948 level.
Meanwhile trade with the Communist countries con-
tinued to rise; by 1953 it stood at more than three-
fourths of Czechoslovakia's total trade. Since then
the share has never been less than 70 percent.
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Table 1
Imports of Selected Ravi Materials by Czechoslovakia
1937 and 1966
Thousand Metric Tons
1937
;966
Grain and fodder
172
2,097
Meat and meat products
15
80
Fish and fish products
24
47
Bituminous coal
1,443
4,030
Iron ore
1,945
9,333
Crude oil and petroleum products
485
7,141
Cotton
113
113
Wool
28
20
Jute
42
15
Sawn timber a/
271
163
Hides, furs, and skins
42
44
Natural rubber
18
46
a. In thousand cubic meters.
3. Nearly one-half of Czechoslovakia's trade
with the Free World, moreover, has been with the less
developed countries. Much of it can fairly be de-
scribed as barter trade, like trade with the Communist
world. Thus most of Czechoslovakia's trade is con-
ducted outside the open market. By relying on barter
trade, Czechoslovakia has been able to minimize
adjustments to changes in demand, at the price of
becoming less and less competitive in the open market
and of having to accept a mix of imports much less
satisfactory than it could otherwise obtain. In this
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way foreign trade has contributed greatly to the
economic inefficiency now under attack by the
reformers.
Sources of Raw Materials
4. Czechoslovakia depends on imports, chiefly
from the Communist countries and the less developed
countries, for at least part of its supplies of
most raw materials. It is a net importer of all
major raw materials except uranium and wood. Czech-
oslovakia imports nearly all the crude oil it uses;
part of the hard coal (though it is a net exporter
of coke and brown coal) ; much of the iron ore,
ferroalloys, and nonmetallic minerals; and the greater
part of the texti le fibers and hides, furs, and skins.
Czechoslovakia is also a net importer of foodstuffs,
including grain, meat, and fruits and vegetables. Gross
imports of raw materials* in 1966 amounted to $1.2
billion, or 45 percent of the total value of imports.
The importance of imports of raw materials to Czecho-
slovakia is indicated in Table 2.
5. The Communist countries supply most of the
foodstuffs, tobacco and beverages, and fats. The
main imports from the Free World in 1966 included
fish (from Scandinavia -nd Japan) , corn (from the
United States) , tropical foods (from the less
developed countries) , and tobacco (from Greece and
Tui,cey) . In some years Czechoslovakia also imports
wheat (from Canada and France) on a large scale.
The only crude materials that come preponderantly
from the Communist world are ores and nonmetallic
minerals; the other main source of supply is the
less developed countries, which furnish substantial
amounts of chrome ore, manganese ore, pyrites, and
phosphates as well as some iron ore. The less
developed countries supply the greater part of the
hides, furs, skins, oilseeds, and textile fibers and
't Food and live animals; beverages and tobacco;
crude materials; animal and vegetable oils and
fats; and mineral fuels -- that is, classes 0
through 4 in the Standard International Trade
Classification (SITC). Other significant deficiencies
in raw materials are filled by imports of manufactures,
which are not included in the above total -- in par-
ticular, manufactured fertilizers (under class 5,
chemicals) and nonferrous metals (under class 6, manu-
factured goods classified chiefly by material).
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Dependence of Czechoslovakia on Imports of Raw Materials a/
Of Which
Total
From the USSR
From Other
Communist Countries
Crude oil
97
95
0
Hard coal
14
7
7
Iron ore
81
66
0
Manganese ore
76
40
12
Chrome ore
100
26
30
Copper
74
59
N.A.
Zinc
92
37
24
Lead
67
47
4
Magnesium
100
100
0
Pyrites
25
10
4
Sulfur
47
7
24
Phosphates
51
33
0
Natural rubber
100
0
0
Synthetic rubber
86
33
0
Wool
91
17
0
Cotton
100
54
N.A.
Wheat
31
31
0
Barley
8
7
0
Corn
37
0
5
Meat
12
5
4
a. Including nonferrous metals.
almost all the natural rubber. Developed countries
deliver substantial amounts only of textile fibers.
Finally, practically all of the crude oil and
petroleum products imported by Czechoslovakia come
from the Communist world, chiefly from the USSR.
6. The USSR is the largest single exporter of
raw materials to Czechoslovakia, furnishing more
than 40 percent of Czechoslovakia's gross imports of
raw materials. Other Communist countries and the
less developed countries furnish most of the rest.
The shares of the rain groups of trading partners in
imports of raw mat trials are shown in the following
percentage breakdown (based on Table 3) :
Imports as a Percent of Total Supply
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Food and live animals
beverages and
tobacco, and animal
and vegetable oils
and fats
Crude materials
Mineral fuels
Total raw
materials
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From
Communist Countries From the Free World
Less
Developed Developed
USSR Other Countries Countries
7. Czechoslovakia also exports raw materials,
mainly to developed Western countries and to Eastern
Europe and the USSR. Exports of materials to
developed Western countries -- including malt and
hops, other foodstuffs, coal, wood, and angora rabbit
hair -- are in fact slightly larger than imports.
The exchange of materials with Western countries
serves to improve the mix of Czech materials, especially
in cases where Soviet deliveries fall below expectations.
Czechoslovakia exports raw materials to Eastern Europe
(especially coal and coke) and the USSR (mainly uranium
ore) as a partial offset to their deliveries.* All
the countries insist on such offsets. Rumania now
gets about as much in the way of materials as it
delivers, and Czechoslovakia has an export surplus
in materials with East Germany. Otherwise Czechoslovakia
According to recent public statements, uranium
ores are sold to the USSR at prices higher than
the current world market. Even so, uranium exports
involve a Zoss, for very Zow-grade ores must
be worked to meet the contract with the USSR.
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Commodity Breakdown of Czechoslovakia's Foreign Trade, by Area a/
1966
Million US $
EQx orts
To To
Communist Countries Free World Countries
SITC
Number Commodity Group USSR
Food and live animals;
beverages and tobacco
animal and vegetable
oils and fats 11
Crude materials,
inedible, except
fuels
5, 6,
8, 9
Mineral fuels,
lubricants, and
related materials
Machinery and
equipment
Chemicals; man-
ufactured goods
classified chiefly
by material;
miscellaneous
manufactured
articles;
commodities and
transactions not
classified c/
Less
Other Developed Developed Total
21 12
33 10
81 Negl.
530 193
1,266
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Commodity Breakdown of Czechoslovakia's Foreign Trade, by Area a/
1966
Million US $
Exports
To To
Communist Countries Free World Countries
SITC Less
Number Commodity Group USSR Other Developed Developed Total b/
Q 951 Military end items 93 0 0 0 93
z
I
Residual d/ -1 2 0 0 1
tTI Total 920 1,008 326 491 2,745
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Commodity Breakdown of Czechoslovakia's Foreign Trade, by Area a/
1966
Million US $
Imports
From
From
Communist Countries Free World Countries
SITC
Number Commodity Group
USSR
Less
Other
D
l
-
eve
oped Developed
Total /
0, 1
4
Food and live
animals; beverages
and tobacco; animal
and vegetable oils
and fats
178
87
69
482
2
Crude materials,
inedible, except
fuels
63
141
103
504
3
Mineral fuels,
lubricants, and
related materials
153
53
3
0
209
7
Machinery and
equipment
150
419-
3
183
754
5, 6. Chemicals; man-
8, 9 ufactured goods
classified
chiefly by
material; mis-
cellaneous man-
ufactured articles;
commodities and
transactions not
classified c/
266 17 206 661
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Commodity Breakdown of Czechoslovakia's Foreign Trade, by Area a/
1966
Million US $
Imports
From From
Communist Countries Free World Countries
SITC Less
Number Commodity Group USSR Other Developed Developed Total b/
951 Military end items 96 30 0 0 126
Residual 0 0 0 0 0
Total 915 1,009 251 561 2,736
a. The totals for Czech trade with the Communist world and the Free World in the
major commodity groups are from Czech trade statistics. The breakdowns between
the USSR and other Communist countries and between the less d3veZoped and the
deve loped countries of the Free World are estimated, large Zy from other Czech
statistics. The principal trade in military end items, which is here estimated
separately, is included under machinery in the original Czech statistics.
b. Because of rounding, components may not add to the totals shrwvn.
c. Excluding military end items.
d. The residual is the combined effect of inconsistencies in the original
Czech statistics and of rounding.
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still runs import surpluses in materials with the
Communist countries.
8. When exports of materials are subtracted
from imports, it is clear that Czechoslovakia de-
pends most heavily on the USSR, which alone fur-
nishes 54 percent of Czechoslovakia's net imports
of materials. Other Communist countries furnish 20
percent and the less developed countries another 27
percent.* That is to say, Czechoslovakia depends
in the last instance principally on two factors to
guarantee its supplies of raw materials. The first
is the willingess of the USSR to export much larger
amounts of materials than it imports -- as in its
trade with East Germany and, on a smaller scale,
with Hungary and Poland -- in order to help maintain
Soviet influence in Eastern Europe. The second is
the fact that most Communist countries and less
developed countries are still willing to take Czech-
oslovakia's manufactures in payment for raw materials.
Direction of Machinery Exports
9. Czechoslovakia's exports of machinery are
about equal to its imports of raw materials and go
largely to the very areas from which the raw mate-
rials come. The demand by the USSR and the Eastern
European countries for Czech machinery has slackened,
as their competing industries have developed and
their interest in acquiring Western machinery has
grown. Soviet and Eastern European negotiators ha%e
held down the growth of net imports of machinery
from Czechoslovakia through stepping up counter-
deliveries of their own machinery and by expanding
their imports of other Czech manufactures, particu-
larly consumer goods. Net Czech deliveries of
machinery to Eastern Europe have dropped in recent
years. Net deliveries to the USSR, however, con-
tinued to grow rapidly until 1966** and are still
equal to about three-fourths of net Soviet deliveries
* The percentages add to more than 100 in this
case because there is a negative import (that is,
export) balance of 1 percent with the developed
countries.
** The drop in the value of net deliveries in 1966
resulted in part from price reductions.
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of materials to Czechoslovakia. The Asian Com-
munist countries have been willing to accept mainly
machinery, together with small amounts of other
manufactures, including some consumer goods. Ma-
chinery makes up more than one-half of deliveries to
the less developed countries; consumer goods and
other manufactures make up most of the remainder.
Czech imports of machinery from the Asian Communist
countries and the less developed countries are
negligible. Czechoslovakia is of course a large
net importer of machinery from developed Western
countries.
10. The overall pattern of Czechoslovakia's net
grade in machinery and raw materials in 1966 is as
follows:
Million US $
Machinery
Raw
Materials
Balance
USSR a/
+323
-422
-99
Eastern Europe b/
+33
-83
-50
Other Communist countries
X78
-77
+1
Less developed countries
+190
-209
-19
Developed countries
-113
+6
-107
Total c/
+512
-786
-?74
a. Net exporte are indicated by -a -plus sign; net
importo by a minus sign.
b. Incluoing Yugoslavia.
c. Because of rounding, components do not add to the
totals shown.
Trade in Other Manufactures
11. In other types of manufactures, Czechoslovakia
exported some $300 million more than it imported in
1966. It had an export surplus of about this amount
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in trade in industrial consumer goods alone. In
most other types of manufactures -- chiefly metal
products, nonmetallic mineral products, and chemi-
cals -- the balances were relatively small. Czech-
oslovakia's exports in these groups include iron and
steel rods, bars, shapes, and sections; pharmaceuticals;
ceramics and pottery; textiles and clothing; shoes;
furniture; and musical instruments. The chief
imports are steel sheet, nonferrous metals, a wide
variety of chemical compounds, dyestuffs, fertilizers,
and plastics.
12. Most of the trade in these manufactures is
with other industrial countries, both Communist and
Western, although there are also substantial sales
to the less developed countries. The main import
surplus with developed Western countries is in
chemicals. Czech products in all the main categories
of manufactures are sold rather widely in Western as
well as in Communist markets, occasionally in quite
substantial amounts -- for example, shoes. But they
are generally not competitive in design and quality,
and there is little advertising or sales promotion.
Price and Quality
13. Any attempt to revive Czechoslovakia's
foreign trade must reckon with the widely differing
conditions facing Czechoslovakia in trade with the
developed countries, the less developed countries,
and the Communist world. In the developed West,
the Czechs are in competition on the open market.
Usually they have difficulty finding customers be-
cause they are not well established in the market
and their product lines are not designed to meet
current demand. The customers that they do find
are rarely willing to be dependent on Communist
sources of supply and often take only small lots.
Finally, the Czech exporter must make major price
concessions to close the deal. On the average the
prices obtained by Czechoslovakia run to only about
one-half those gotten by competing exporters.
14. Czech analysis of UN trade statistics, for
example, shows the following comparison of average
unit prices received by various exporting countries
for machinery exports to Western Europe in 1964:
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Price per Kilogram
United States
$4.37
CEMA countries
51.04
Western Europe
$1.92
Czechoslovakia
$0.95
The Czechs estimate that the composition of machinery
exports does not much affect the comparison. It is
influenced, of course, by the fact that equipment
produced in Czechoslovakia, as in other Communist
countries, is generally heavier -- because of inferior
materials and obsolete design -- than similar Western
equipment. The wide price range for machinery products
reflects a strong preference for new and improved
products, few of which Czechoslovakia can offer. The
Czech competitive position also suffers from slow
deliveries and poor parts supply and service and from
reluctance to offer credit, although Czech sales in-
volve to an exceptional extent products normally sold
on credit in Western markets.
15. The Czechs also face problems when they buy
in the West. They often operate from hand to mouth,
cannot specify in detail their requirements, and do
not have authority to sign contracts without high-
level clearance. For these reasons, the Czechs
usually pay more than other customers -- by their
own calculations close to twice as much. Nothing
can be more conclusive on these points than what has
appeared in the Czech press. A translation of one
article is given in the Appendix.
16. In the less developed countries, Czechoslovakia
is still in direct competition with Western businessmen,
but the situation is quite different. It is less
important to these countries whether the Czech prod-
ucts are the best on the market. Moreover, for
political reasons the Czechs have often extended
long-term credits to ease the problem of repayment.
Finally, Czechoslovakia is more or less prepared to
take in exchangN. raw materials that are not in strong
demand on the world market. In some cases -- cocoa
beans from Ghana, i,)r example -- Czechoslovakia has
accepted goods that it must in turn dispose of at a
loss through switch trading. Even under these cir-
cumstances, however, Czechoslovakia usually has to
sell at substantial discounts below prices of Western
competitors in order to get the business. On the
other hand, the prices which Czechoslovakia pays for
imports are generally at -- not above -- the world
price level.
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17. In the Communist world, Czechoslovakia faces
still different problems. Trade quotas are established
in good part for political reasons, to keep all the
economies going and growing. Exporters must still
reckon with competition; the least competitive
articles tend to get crowded out. But since the
overall level of exports is usually increased from
year to year as a matter of policy, the effect on
most exporters is small. The Communist market has
another great advantage from the point of view of
the exporting enterprise -- the amounts of goods
involved are usually relatively large, representing
a major part of sales for many enterprises. Finally,
the prices received are almost always much better
than can be gotten on other markets.
18. Prices in trade among Communist countries
are negotiated on the basis of quotations of various
kinds from the Free World. The Communist countries
are almost completely dependent on these quotations
for negotiating prices. As one Czech spokesman said
recently:
I am of the opinion, even though
this might seem an exaggeration, that
if capitalism were to disappear at
this moment with its world market,
the CEMA countries would probably
not have any prices at which they
could trade with one another... .
The bargaining over prices involves increasingly
sophisticated analysis of varying conditions on
Western markets and differences in technical
specifications as well as adjustments for trans-
portation differentials. Nevertheless it is fair
to say that prices in trade with other Communist
countries are roughly similar to those prevailing
in the leading world markets and hence much more
advantageous to Czechoslovakia than those it actually
obtains -- and pays -- in those markets when it
deals directly with non-Communist countries.
19. This price cleavage must be an enormous
consideration for the Czech leadership. A small
trade with the developed West is obviously valuable
in spite of the disadvantageous terms of trade.
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Czechoslovakia, like other Communist countries, has
used the world market to make up shortages of grain
and metals as well as to buy supplementary raw
materials. However, trade with the developed West
is clearly large enough already to fulfill this
purpose. Further shifts to the Western market have
been justified as needed to acquire new technology.
It is assumed, rather than demonstrable, however,
that the payoff on new technology is great enough
to offset the disadvantageous terms of trade.
Balance of Payments and Reserves
2J. The financial situation of Czechoslovakia
offers another reason for a cautious approach to any
reorientation of trade. The government has recently
been quite frank about the situation. According to
Oldrich Cernik, the new Premier (and formerly the
head of the State Planning Commission) , Czechoslovakia
is a creditor, with substantial balances on clearing
account both with the Communist world and with the
less developed countries. In hard currencies, on
the other hand, Czechoslovakia owes about $400 million,
much of it on "short-term credits." The Czechs have
drawn about $175 million (net of repayments) on
government-guaranteed loans, mainly from Western
Europe. Indebtedness on credits running for a year
or less probably does not run over $50 million. The
remainder apparently represents private nonguaranteed
supplier credits held by Western banks, mostly running
from 1 to 3 years.
21. The leadership has not discussed publicly
its position in hard currency and gold. An analysis
of balance of payments data from 1948 to date, how-
ever, suggests that Czechoslovakia has not accumulated
adequate reserves to manage even its present hard
currency trade -- with exports and imports both
running on the order of $400 million annually -- let
alone any expansion of trade.
22. Czech policy in recent years has been to avoid
all risks in trade with developed countries. The
object has been to expand Czech exports by as much
as possible and to hold down imports, preferably to
reduce them. This conservative course merely represents
tightened central control and business as usual. It
does nothing to solve the underlying problems.
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The Question of Soviet Pressure
23. The people of Czechoslovakia realize that
the economy is heavily dependent on the USSR and
have watched anxiously to see whether Soviet dis-
approval of political developments in Czechoslovakia
would affect deliveries of vital raw materials. So
far that has not happened, but the anxiety remains.
24. In April the Czech radio broadcast some
reassuring remarks from CEMA representative (and
former Foreign Trade Minister) Frantisek Hamouz, who
said that Soviet crude oil (practically the entire
supply of Czechoslovakia) had been coming in on time,
that hard winter weather and a shortage of trucks had
somewhat delayed iron ore shipments (two-thirds of
Czech consumption), and that the USSR had offered an
additional 5,000 tons of cotton to make up for short-
falls in Egyptian deliveries.
25. Hamouz did not mention the other major com-
modity delivered by the USSR -- grain. Over the last
three agricultural years (1964/65 through 1966/67),
Soviet deliveries have provided on the average about
three-quarters of Czech grain imports. For a moment
in late April 1968 the question arose whether in fact
Soviet grain deliveries had been slowed down or
stopped. A New York Times correspondent, David
Binder, reported from Prague, on the authority of a
responsible official, that Soviet wheat shipments had
been stopped, at least for the current quarter. The
government of Czechoslovakia promptly called the
report untrue and Binder's source denied that he had
said any such thing. The Czechs reported that some
640,000 tons had been shipped in the first four months
of 1968. The Soviet press followed up with a news
story in late May giving an even higher figure and
saying that grain shipments were ahead of schedule.
The report indicated that the annual quota of 1.3
million tons would be delivered by the end of
August. Whatever delays may have occurred in wheat
deliveries, it is almost certain that Soviet pressure
was not involved. One fairly conclusive indication
that the Czechs were not facing an unexpected short-
fall in supplies is that they had just finished
negotiating the purchase of 110,000 tons of wheat
from Canada, the last contract under a five-year
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agreement, without showing any urgency abo?-+- setting
the wheat or negotiating a new agreement.
26. In all likelihood, the USSR will fulfill
this year's trade commitments to Czechoslovakia and
will agree to some further increases in deliveries
next year. As experience has shown, economic pres-
sure is not effective as a political weapon, even
where one country is so dependent on another as
Czechoslovakia is on the USSR. The reduction or
suspension, selective or comprehensive, of Soviet
deliveries would strengthen anti-Soviet feelings in
the society and would force Czechoslovakia to turn
for help to the West, all without unseating the
leadership, whose position, indeed, would probably
be strengthened by a wave of patriotic support. Even
a country so dependent on trade as Czechoslovakia
could continue to function if its imports were largely
cut off. The economy would soon revert to a 1945
level, with a big cutback in output by the metal-
lurgical industries, most machinery plants, and the
petroleum industry. Unemployment would be substantial.
Emerger;y oil imports would have to be allocated to
essential uses; steam locomotives would be brought
out of retirement. The soft domestic wheat would
be made into flour, and the peasants, who have beer,
feeding this wheat to stock, would have to slaugbtar
much of their herds. But nobody would starve; basic
services would continue; and output would pick up as
Western help began to arrive.
27. The Soviet government seems to have arrived
at the same conclusion, for it decided to use an
implied threat of military intervention, plus con-
tinued political pressure, to bring Czechoslovakia
into line. The USSR will doubtless use economic
leverage in trade negotiations for 1969 and for
1971-75, but more for economic than for political
ends. Even the withholding of economic aid until
political conditions stabilize -- the use of the
carrot rather than the stick -- does not carry great
political weight.
Trade and Reform
28. Foreign trade problems have been of central
importance in Czechoslovakia's long review of
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economic policy, which is approaching the moment of
decision. Difficulties in foreign trade have pro-
vided the most convincing evidence of what is wrong
with the economy. The economic reformers, led by
Professor Ota Silt -- now a Deputy Prime Minister --
have focused on foreign trade as the sector in which
change must begin. Finally, foreign trade invclves
political hazards for the new leadership.
29. The Novotny regime was slow to recognize
massive inefficiency and technical backwardness as
basic problems of the economy, intimately related
to isolation from the world market. In the end, the
growing preference of Communist trading partners for
Western products and the lack of demand for Czech
manufactures on Western markets provided evidence
that the leadership could not ignore. Once it was
recognized how badly the competitive position of
Czechoslovakia had slipped under Communist rule,
demands for sweeping reform were inevitable. The
"recession" of 1962-63 gave these demands political
force.
30. Czech economists, though they of course
differ among themselves on what to do, agree that
major improvements in efficiency depend on returning
the economy to the "discipline of the market." Foreign
trade plays a key role in theiz proposals. Most
branches of manufacturing are involved in the export
market, some quite heavily (see Table 4). Nearly a
fourth of the output of manufacturing (excluding the
food industry) is exported. So long as enterprises
are still protected and constrained by comprehensive
trade agreements with other Communist countries --
and by hardly less restrictive arrangements with the
less developed countries -- a general shift to the
"discipline of the market" is unworkable.
31. In order to overcome this difficulty, the
reformers seem to be ready to push changes that would
put trade with the Communist world on a more business-
like basis, even though the changes would work in
the short run to the disadvantage of Czechoslovakia.
Their main desire is to decentralize decisions on
trade. If trade contracts were negotiated directly
between enterprises, exporters would be on their own
in a more competitive situation, more like the one
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Industrial Exports of Czechoslovakia as a Percent of Output
1966
Branch of Industry
Exports as a
Percent of
Output
Fuel mining and processing
12.1
Metallurgy, including ore mining
18.3
Engineering
28.4
Chemicals and rubber
17.1
Building materials
10.4
Glass, porcelain, and ceramics
47.8
WooGworking
26.1
Paper
12.4
Printing
13.2
Textiles
15.1
Clothing
21.6
Leather processing
29.1
Food processing
N.A.
Total industry
18.5
they face in the West. Czechoslovakia would pay a
price -- with the near elimination of tie-in sales,
the volume of trade would drop and the output of
many firms would have to be cut back. To put trade
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with other Communist countries on a more business-
like basis would help greatly in establishing the
"discipline of the market," but at a substantial
Cost. *
32. Much the same holds for the second main
recommendation thzic the reformers have in mind --
to develop close economic relations with the devel-
oped Western countries. As already pointed out, a
shift of trade toward the West is bound to be slow
and costly, as a result of the lack of demand for
Czech products and the extremely unfavorable terms
of trade. If trade with the Communist world is put
on a more businesslike basis, the differences between
selling on Communist and Western markets would be
reduced but would still be substantial. The benefit
of closer association with the Western market is
essentially in acquiring "know-how" -- not only
technology but also experience in management,
marketing, and finance. These benefits, although
expensive, are almost essential to any attempt to
make the economy more competitive.
33. Since both these measures -- the adoption
of more businesslike trading practices with Com-
munist countries and closer association with devel-
oped Western countries -- involve substantial cost,
a key requirement of the reform proposals is to
obtain enough foreign assistance to finance most
of the cost. The reformers have not spelled out in
detail what kind of assistance, or how much, might
be needed -- although the amounts of $400 million
and $500 million have been mentioned. But it is
evident, first, that immediate help is needed to
increase the funds available for conducting hard
currency trade; second, that help is needed in
* It may be noted that Czechoslovakia and Yugo-
slavia have already agreed to begin liberalizing
their trade with each other and are planning
(according to the Yugoslav negotiator) "that this
volume of free trade will be gradually increased
and replace the existing ... already obsolete
and restrictive clearing system of trade . it
Negoti-2tions to the same end have beg.n between
Czechoslovakia and Hungary.
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reorganizing and modernizing the most promising export
industries, on a highly selective basis; and third,
that very long-term credit is needed to finance
deficits in the balance of payments during the intro-
duction of economic reforms, permi -.;ing the regime
to maintain consumption while restructuring industry
and shifting trade patterns.
34. The need for help with financing trade is
obvious, and not only to the reformers. The aid
sought from the USS^ would dol ibtless be ample to
serve this purpose-. A substantial Soviet credit is
likely to be ext-3nded when the Soviet government
is finally satisfied of the ability and, willingness
of the new leadership to keep political opposition
in bounds.
35. Western help in overhauling the Czech export
industries can probably be obtained once the govern-
ment has decided what industries to select for this
treatment. Long-term loans as well as "joint ven-
tures" are likely to be sought for modernizing
export industries and establishing them in the
market. Here the regional interests of Slovakia and
other vested interests could force a substantial
waste of Western help, although the lenders could
help to minimize such waste.
36. The acquisition of long-term capital to
finance balance of payments deficits is likely to
prove the hardest problem. The USSR probably will
not furnish enough aid to cover this requirement.
A few Western governments -- and the World Bank --
are then the only possible sources. The Czechs have
already made approaches to these sources to explore
the problems involved. If the new leadership is
able and willing to adopt a persuasive reform pro-
gram, and to satisfy Western lenders that the money
will be well used, the money probably will become
available. But the leadership faces enormous
difficulties in trying to meet these conditions.
37. The political obstacles are, first, the
workers' fears of the unemployment likely to result
from basic reforms; second, Soviet and Eastern
European unwillingness to cooperate in basic changes
in conduct of foreign trade; and finally, Soviet
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(and East German and Polish) uneasiness over any
rapprochement with the West, especially because of
its bearing on the German question.
38. Taken together, these difficulties seem so
great as almost to rule out the possibility of basic
economic reforms in Czechoslovakia. Professor Sik
is now pushing workers' councils a la Yougoslavie
in the hope of reassuring the rank and file that
their interests will be protected and with a view
to getting the central authorities out of enterprise
management. Party boss Dubcek himself supports some
kind of worker representation. Czech willingness
4-o accept changes in the composition and terms of
trade in favor of the USSR might help to win Soviet
support for more businesslike trade arrangements.
Great caution and tact might enable Czechoslovakia
to secure Western. economic. support without getting
into trouble with the USSR. But as of this moment
(early June 1968) the odds appear to be against
economic reforms as broad as those of Yugoslavia.
M
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Appendix
Prices in Czechoslovakia's Trade
with the EEC*
The following are some of the results attained
from a comparison of prices obtained by Czechoslovakia
in export and import with EEC countries and prices
obtained by other countries. In the category of
machinery, 10 items were selected for comparison:
sewing machines, sorting and crushing machinery,
extraction machinery and excavators, pumps for
liquid fuels, electric motors and generators,
tractors, metalworking machines, bearings, motor
vehicles, and looms and preparatory textile machines.
The analysis shows that all except the looms and
preparatory textile machinery brought lower prices
for Czechoslovakia than those obtained by the
advanced capitalist countries. The prices obtained
by Czechoslovakia fog sewing machines, sorting and
crushing machines, extraction machines and excavators,
liquid fuel pumps, electric motors, and generators
were only 20 to 40 percent of the prices attained
by the capitalist countries, and the prices of
tractors, metalworking machines, bearings, and motor
vehicles were only 40 to 60 percent of the prices
attained by the capitalist countries.
It should be explained that customs discrimination
is not one of the main reasons for the low sales
prices of Czech machines on EEC markets. The duties
range from 0 to 10 percent, except for motor vehicles,
and the advanced capitalist countries which are not
EEC members have to pay them too. On the other
hand, Czech import prices not only exceed the Czech
sales prices but are also higher than the purchase
prices of the capitalist countries studied in the
survey. For example, in 1960-64, with only one ex-
ception, Czech sales prices ranged between 20 and
64 percent of the sales prices obtained by EFTA
countries, while comparable figures for Belgium were
60 to 100 percent, Austria 70 to 80 percent, and
Sweden about 100 percent. Also in 1960-64, Czech
Foreign Press Digest, 28 September 1967 (Prague,
Politicka Ekonomie, No. 7-8, July-August 1967,
pp. 613-629.
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CONI'!!)I:N'I'IA1,
purchase prices ranged between 90 and 260 percent
of the purchase prices obtained by EFTA countries,
while comparable figures for Belgium were 90 per-
cent, Austria 100 to 120 percent, and Sweden about
100 percent.
These considerable differences cannot be
explained merely by the different composition of
the assortment within the items studied, since these
were relatively homogeneous.
The following tabulation shows sales prices
obtained and purchase prices paid by Czechoslovakia
for the same category of items in 1964. (All values
represent percent of EFTA price, unless otherwise
indicated.)
.L Lem
Czech
Sales Price
Czech
Purchase Pri
ce
5;awing machines
44.4
193.6
Sorting and crushing machines
32.2
159.8
Excavation machinery and excavators
G
40.4
259.3
enerators and electric motors
B
38.2
,182.6
earings
P
59.2
96.5
assenger automobiles
49.0
84.8
Tractors (1960 figures)
62.4
132
Metalworking machines
43.7
119.4
This situation can be expected to some extent
because of the low quality of Czech products and
services and because of Czechoslovakia's need to
import the types of higher 'evel machinery which it
does not produce itself. The sales prices of Czech
rolled goods at a low levei of processing range be-
tween 60 and 100 percent of the EFTA prices, but fall
as low as 30 percent for products with a high level
of processing. The purchase prices paid by Czechoslo-
vakia in trade with the EEC countries are up to twice
as much as the EFTA purchase prices.
Czech sales prices for raw materials and semi-
finished goods in trade with the EEC countries are
relatively high, ranging between 70 and 100 percent
of the EFTA prices. However, even in this case, the
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pricoo! aro nf'vor Iliflhor than those oht;tin"fI by
other countri os , and tho purchase' l~ri.co:' p. i.cl by
Czecho:.llov;lk l nl for the !;illllf! I_ t.f~lll!; arf, the Il F.g11el;t
of all this giant- ri.f"r . 1.n .1.'9( 1, Czocho!; Io-Inki a paid
Lw.icc3 to Lh recv Lime; the purchase 1 n i cf.~!~ po i.d by
acivancocl clap i t.a l i n t coun tr i o!; f:or new!;l_ r i. n t_ and
pottery clay.
There has been a tendency, among the advanced
capitalist coon tr. i cr; , to qr. adua l ly balixnce their
sales and purchase price relations, but this is not
true of Czechoslovakia.
There is considerable variation i' the relations
of Czech sale!; prices to EFTA prices :'or light industry
products. For example, the price of glass tableware
is very close to the El TA level, but in only one-half
and even lcwer than the price obtained by Sweden.
Sales prices of medicines are the lowest of all,
representing only 8 percent of the purchase price
for the same item. Czech sales prices of glassware
are one-fourth to one-fifth those obtained by Austria.
Czechoslovakia's sales prices of cotton fabrics were
lower than those of any of the other countri.es studied,
and the purchase prices paid by Czechoslovakia were
substantially higher than those paid by the other
countries.
The results of the survey show a decline in
effectiveness of Czech foreign trade. The relative,
and in some cases the absolute, movements of the
prices and their relationships arc in most cases
unfavorable to Czechoslovakia. This is true even
in cases where the advanced capitalist countries
have improved their price positions.
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