article7
Karel Svoboda
Introduction

There is one question no historian ever wants to be asked: “Why is your research acute or important for today’s world?” Most of us deal with remote topics, not understandable to the general public. In the worst case, the public “knows” the true picture of your topic “better.” This might be said about the functioning of the socialist economies, too. It was the Soviet Union that dominated the whole inter-bloc trade; what the Soviet Union said, the Soviet bloc did. Today, the Soviet Union no longer exists and, therefore, the contemporary world cannot be compared with the situation before 1989/1991. Furthermore, socialism and planned economies are also a matter of the past, so some people may reach the conclusion that there is no longer a reason to study them. Although I cannot (and do not want to) challenge the fact that the Soviet Union collapsed and that the special trade arrangements between the USSR and its European satellites came to an end, I believe there are reasons to study the period under scrutiny and take lessons from it for the situation today. I will argue that efforts to overcome crises with non-market ‘special arrangements’ only delayed the inevitable and created additional problems.

The Soviet bloc and the Crisis in 1973

The 1970s represented for Czechoslovakia, and the Eastern bloc as a whole, a period of relative growth, especially when they compared their performance with the West. Czechoslovakia’s net material product, although it gives only a partial picture, grew by 5.5 per cent between 1971 and 1975 and 3.7 between 1976 and 1980. However, growth numbers are not always the most important factor. In reality, the countries were losing their ability to compete with the capitalist states. The falling effectiveness of investment, the appalling quality of Soviet-bloc goods that were basically unable to compete with their western counterparts, and the over-dependence on the Soviet Union burdened the socialist economies and occupied the minds of decision-makers within the Bloc.

The socialist societies built their system on the idea of securing member states from the upheavals of world markets. The Soviet Union provided the satellites with relatively cheap resources; they provided the Soviet Union with whatever machinery was necessary. Nevertheless, the system had its weaknesses, and it proved to be unworkable in the conditions of the oil crisis of 1973. The crisis shifted relations within the Bloc substantially, and most of the changes were not in favor of the Central Europeans. The Soviet Union pushed for an increase in prices for its resources while it faced opposition from some of the Council for Mutual Economic Assistance (CMEA) member states.

The pricing system in the Bloc changed several times. The first change occurred as a reaction to the Korean War in the early 1950s, when the world prices commonly used for commodity trade within the CMEA became highly volatile. This caused significant problems for the planners in the member countries. As a result, the prices were frozen at their pre-war level. Nevertheless, this could serve only as a preliminary measure as the losses incurred when exporting fuel (for example, coal from Poland) grew to enormous levels. Therefore, the CMEA regimes had to accommodate the pricing regime to the new conditions. In 1958, in Bucharest, it was agreed that socialist trade prices would follow world prices. The new system was based on the average of the world prices over the previous five-year plan. The system should have secured sufficient flexibility on one side and predictability on the other.

The oil shock in 1973 exposed the weaknesses of the pricing mechanism and consequent disparities in the interests of the individual member states. The prices used in the CMEA for oil became 41 percent lower than world prices in 1974, which was unacceptable for the main supplier of this commodity, the Soviet Union. Consequently, the Soviet Union was particularly interested in a shift towards the world market prices for its oil and gas and initiated negotiations about changing the pricing mechanism. Surprisingly, the Soviet Union proved unable to simply impose a new mechanism on its satellites, and several proposals countering the Soviet demands emerged. The most radical aimed at fully freezing prices within the Bloc, while the more realistic asked for retaining the Bucarest principle with its five-year moving average.

A new pricing system arose from the negotiations. Starting in 1975, the prices were based on a sliding average of world prices. The average was based on the previous five years (the prices for 1978, for example, reflected the average of the 1973-1977 prices). This new arrangement should have wiped out all the imperfections of the previous system. It secured the reflection of world prices growth and, as a consequence, decreased the losses from trade with the Central Europeans for the Soviet Union. As for the European members of the CMEA, through the gradual increase of the prices, it helped them to accommodate to the new conditions. It seemed to be a solution of all the problems that satisfied everybody. However, the mechanism gave lower than world prices to the Central Europeans only in the environment of rising prices. When the world price of oil began to fall in the early 1980s, the prices in the CMEA rose above the world level. The quest for better than market-pricing, therefore, proved to be burdensome for the East Europeans, too.

Machinery supplies

Exports to the capitalist world represented a vital need for the socialist countries as a source of hard currency to finance high-technology imports. Even during deepest Stalinism, the countries could not avoid contact with the West. With the need to modernize their economies and to restore economic growth, they turned to the capitalist countries to an even greater extent. The openness brought a sharp increase in loans to some countries, especially Poland and Hungary, while others, such as Czechoslovakia, remained skeptical. The countries that accepted huge loans from Western banks followed the modernization program with the aim of increasing the competitiveness of their industries. However, even though the initiative to import Western technologies (Fiat cars as a flagship of the program) seemed to be successful at the beginning, it soon turned into a complete disaster.

The countries became more and more exposed to the upheavals in the Western markets. Furthermore, their indebtedness, although to a great extent used for ‘investment’ and modernization, became a great burden. They faced a need to export even more to repay their debts. However, the oil shock in 1973 brought a great blow to their plans. The prices for oil in the West went up and the capitalist countries entered a long period of stagflation. Western economies had to deal with higher prices for oil, and their economies had to reorient to less energy-consuming technologies. Furthermore, cheaper goods became demanded more than the luxury ones.

The latter change seemed to be advantageous for Eastern Europeans. They still, despite negotiations about changing the oil prices, had cheap resources and, therefore, they could easily compete with their Western competitors. During early 1974, there was an upsurge of their exports to the West, which was intensified further by the growth of the prices in the West and, consequently, by higher yields for the delivered goods. However, the oil shock brought intensification of competition in the Western markets and, consequently, stress on quality of goods and technical sophistication of machinery. The socialists were no longer able to compete, and had to sell their products at a discount. The automobile industry was a case in point. Czechoslovak Skodas, middle-sized cars measured by their size, had to be sold as “minicars” in the West. Even when such an adjustment to the market conditions was applied, Skoda cars were barely marketable. The Skoda cars gained their ‘popularity’ in Great Britain when they became the subject of jokes such as: ‘Why do Skodas have heated rear windscreens? To keep your hands warm while you are pushing it.’ Although Skodas were the most prominent instance of such a reputation, they were by no means alone.

The worsening export market in the West posed a challenge for the export orientation of the socialist countries, while the rising debt payments increased the demand for foreign currency. At the same time, they had to fulfill their obligations to the Soviet Union and meet the needs of their indigenous population. The dilemma was further intensified as the price for Soviet oil rose. Inflation in the West reduced access to imports of Western technology, and cutting back imports meant that high-technology equipment that was imported could be used less effectively.

Reactions of the Czechoslovak leadership

It would be a mistake to think that the problems of the socialist economies were completely ignored. The 1970s differed from Stalinist times in many respects, and experts debated possible solutions to problems such as the low quality of socialist products, their inability to compete with the West, their low reliability, etc. The debate spread even to the daily press, although it was subject to censorship.

Czechoslovak leaders, in contrast to their Polish or Hungarian counterparts, did not amass substantial debts to Western financial institutions. Although this was an unquestionable advantage, the country still faced a weak export market and increased import prices. The solution that the Czechoslovak leadership chose was to restrict imports of Western goods and increase exports to the Soviet Union, but this strategy did not turn out to be very successful. Czechoslovakia had to increase imports from the West in the second half of the 1970s in order to meet its contracts to develop big energy projects in the Soviet Union, such as the Orenburg gas field. Czechoslovakia was supposed to supply these projects with modern equipment, and some of the equipment was not produced in Czechoslovakia, and had to be imported from the West for dollars. Meanwhile, Czechoslovakia’s ability to export machinery to the West was undermined by competition from newly industrializing countries. These countries had a relatively cheap workforce, access to modern technologies, and were able to meet higher standards of quality than Czechoslovakia.

Conclusion

The security of the CMEA member states in the face of the world crises was the main aim of its existence. Nevertheless, the crisis in 1973 showed that it was impossible. The countries could not ignore the events in the outside world. The upheavals in the oil markets caused shifts in the internal trade of the Bloc, too. First and foremost, the prices for oil and natural gas began to grow for the European CMEA member states. The advantage they enjoyed from their preferential trade arrangements with the Soviet Union gradually waned.

As any crisis, the first oil shock of 1973 uncovered problems existing in the Bloc for a long time. The low effectiveness of production, overdependence on raw materials, and the inability to modernize and react to world economic trends proved to be the main obstacles for their growth. However, the biggest problem lay not in these particular problems, but the fundamental premise of socialist trade. The arrangements of the socialist Bloc tried to out-smart the market. They wanted to beat it with extra-market measures that were supposed to create something new, something different. This soon proved to be an impossible task, however, and in the end, the market won.

Dr. Karel Svoboda was Fulbright Fellow at the Skalny Center in the 2012-2013 academic year, where he has been working with archival documents gathered by Professor Randall Stone for his first book, Satellites and Commissars (1996). Dr. Svoboda is assistant professor at the Institute of International Studies, Charles University, Prague, Czech Republic.