A COMPARISON OF TWO EASTERN EUROPEAN FOREIGN TRADE SYSTEMS:
Yugoslavia and Poland both adopted a Soviet-type economy after World War II. However, they developed in different directions and adopted different methods of advancing economically. One of the major differences has been the two countries’ divergent foreign trade policy. Poland and Yugoslavia have portrayed certain aspects of foreign trade common to all socialist countries, despite Yugoslavia’s attempts to distance itself from the CMEA nations. Poland remained one of the most important countries involved in the Soviet- dominated CMEA, but Yugoslavia has traveled its own path. Both countries continued to use a centrally planned economic system, but Yugoslavia's enterprises have had much more autonomy in making decisions, to include foreign trade. Overall, Poland and Yugoslavia share some characteristics common to socialist countries, but their political and economic divergence has contributed to a general non-alliance concerning trade.
All foreign trade must fall into the national economic plan of each socialist country. Within the Soviet Bloc, trade remains secondary to the drive for self-sufficiency. Soviet-type economies would prefer to produce everything that they need on their soil before they must import from foreign firms. Also, the Soviets formed the Council of Mutual Economic Assistance (CMEA) in January 1949 to counter the Marshal Plan. The Soviets and Eastern Europeans hoped that the CMEA would provide all necessary imports and exports for each other so that they would never rely on imports from foreign powers. By 1953, four-fifths of total ~exports of individual Communist countries had become transactions within the Soviet Bloc. (1) By 1956, the CMEA had attained a general coordination of production and raw materials supplies. Besides the drive for self-sufficiency, trade represented a general breakdown of the central plan of each socialist country, other than the CMEA system. If the Polish or Yugoslav government realized that they had to import raw materials, products, or technology from foreigners, they viewed those imports as failures to correctly coordinate their own respective economies. However, imports played one additional role. They served as a buffer to combat those planning errors.
Both Poland and Yugoslavia had trouble trading with western free markets, due to the nature of any central planning system. Efficient communist planning depends on precise delivery dates, often difficult or non- customary for western firms, which concern themselves more with quality control. Centrally planned economies refuse to build up surplus and cannot afford an insufficient supply of materials or products, with which they produce final goods. Yugoslavs and Poles were rather meticulous regarding penalties and safeguards on precise delivery times. Communists also tended to insist on painstaking inspections to ensure the quality of capital goods. The Soviet Bloc ~ attempts to build industrial capital also discouraged observance of patents and designs. The fact of government-owned and planned industry has also contributed to a positive aspect of East- West trade. Eastern firms have rarely defaulted on payments because Communist governments would simply subsidize firms that had financial trouble. However, any rare arbitration over disputes always became a non-solvable problem. These situations forced western firms to negotiate with communist governments.
Bilateral trade within CMEA was another common characteristic of East European countries. Each country paid for its imports from certain country by its own exports to the very same country. This was so because no country wanted to accept rubles or any other ‘soft’ (nonconvertible) currency as a payment for its exports. Of course this did not apply when they traded on the Western market, because the Western ‘hard’ currencies were freely convertible one into the other. After 1989 al/the countries within CMEA started to demand payments in hard currencies and that precipitated the dissolution of the CMEA. (2)
Last, centrally planned governments also set national prices and foreign exchange rates, which did not accurately represent the prices of market-based goods and services. Soviet Bloc prices seemed severely undervalued due to those countries’ desires to control inflation. East-west trading prices never accurately portrayed the true value of imports and exports. Although the forces of supply and demand in Western economies tended to determine exchange rates, the International Monetary Fund has linked all Western currencies by institutionally stabilized exchange rates. Countries change the official exchange rates rarely and the IMF regulates these rates.
“In contrast to the West, official exchange rates de not enter into central planners’ decisions on the size, composition and direction of foreign trade in the Bloc countries. Although most Bloc currencies are defined in gold~ this has no practical significance as no Socialist currency, not even the Soviet ruble, is convertible. East- West trade is conducted in Western currencies, and the Socialist official exchange rates are in fact of no relevance to this trade on either side. The official commercial exchange rates are generally fixed at unrealistically low levels whereby the value of the Socialist currency in terms of the convertible Western currencies is grossly overstated There appear to be two main reasons for this: prestige considerations and a means of providing the State with ‘accumulation~ “(3)
In 1948, Tito broke Yugoslavia from the Soviet Bloc. Yugoslavia observed a short relationship with the Soviet Bloc during 1955 and 1956, but it has remained alone for most of its communist history. Yugoslavia centrally planned its economy only through broad annual plans and laws to implement them. Although the Yugoslav government continued to own factories and other enterprises, day-to-day operations rested in the hands of those enterprises as long as they remained within the decreed plan. Some of the larger factories even imported their own requirements, though import permits limited inputs to production requirements. Firms obtained non-recurring imports through one of the nationally recognized import trading organizations. Those organizations had no power to place business unless they had received an order from a domestic enterprise. They signed contracts on behalf of domestic “clients.” Exports worked in a similar fashion. When Tito abolished import and export licenses, the Yugoslavs enacted ‘~coefficients,” which equated to import taxes and export subsidies. The government designed these to: conceal differences in prices, discourage imports of inessentials, and protect certain home industries. (4) Similar to other Soviet-bloc countries, markets for most goods already produced in Yugoslavia either remained closed or limited to western firms.
After Tito broke from the Soviet Bloc, the US extended Most Favored Nation Status to Yugoslavia for several decades. This compensated for much of the lack of trade in the CMEA and provided a basis for long-term, stable trade relations. The US has been particularly active in supplying transport and passenger aircraft for the Yugoslav National Carrier and has been a major purchaser of Yugoslav processed agricultural products. In the 1980’s, Yugoslavia lost its status under the US Generalized System of Preferences, but those losses remained limited (5)
Contrary to Yugoslavia, Poland stayed among its CMEA neighbors until its recent revolution. However, it depended on non-communist foreign trade to export its agricultural products. The Soviet bloc emphasized exporting agricultural products in exchange for capital goods to increase its industrial base. Poland also exported a great deal of coal to its CMEA allies. The CMEA ‘s material, trade, and industrial coordination enabled Poland to make its comparative advantage active in mining and agriculture. Poland received much of its industrial capital from the Soviet Union and other Eastern Bloc nations. However, the Soviet Union received most of the important benefits of Poland’s western trade. The USSR benefited through the influx of western technology and capital. As with the other Eastern European nations, Poland’s prices did not reflect full world-market prices. Foreign trade officials opposed any extended freedom for enterprises to enter into direct commercial contracts with trading partners abroad The Poles made any surplus goods available to the West, but only after fulfilling Soviet Bloc requirements. Surpluses were also rare due to the likelihood of further investment in the Polish economy. Different from Yugoslavia, westerners presented a general reluctance to accept some goods offered by Poland due to the lack of Most Favored Nation Status, inconsistency of reciprocity, and poor quality of goods. Westerners also regarded trade with Poland and the other CMEA countries as “trading with the enemy, “and strategic controls and trade embargoes on some goods ensued Indebtedness greatly concerned westerners, who found Poland weary of divesting cash, but happy to accept imports on credit. The Poles did not account for the role of credits and the necessity to pay those credits back in their Five-year plans.
Poland and Yugoslavia shared some similar characteristics due to the origin of both economic systems, but politics had a greater impact on the role of foreign trade. Poland’s vast resources became a tool for the Soviet Bloc. Yugoslavia isolated itself: but it also played on western hopes to convert Eastern Europe back to free market. Although Yugoslavia opened its borders more to foreign trade, the Poles benefited more by their inclusion in the Trade Sphere known as the Soviet Bloc.
(1 )Desmond Donnely and Alec Nove, TRADE WITH COMMUNIST COUNTRIES, p. 109.
(2)Oldrich Kyn, 29 November 1994.
(3)JozefWilczynski, THE economics AND POLITICS OF EAST-WEST TRADE, p. 97.
(4)Desmond Donnely and Alec Nove, TRADE WITH COMMUNIST COUNTRIES, p. 156.
(5)”Doing Business in Easi Europe,” Business International, Oct. 1987.
I. “Doing Business in East Europe.” BUSINESS INTERNATIONAL. October, 1987.
2. Donnely, Desmond and Nove, Alec. TRADE WITH COMMUNIST COUNTRIES. The Macmillan Company, Great Britain, 1960.
3. Wilczynski, Jozef THE economics AND POLITICS OF EAST-WEST TRADE. Frederick A. Praeger Publishers, New York, 1969.