cold war commerce--5/20/25

20 May 2025

cold war commerce--5/20/25

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Today's selection-- from The Soviet Economy by Morris Bornstein. Explaining the expansion of East-West Economic Relations in the Early 1970s

“For political reasons on both sides, East-West economic relations were severely limited during the Cold War that soon followed the period of military cooperation of the USSR with the United States, Canada, and Great Britain during World War II. From 1948 to the mid-1950s, the United States and its allies sought to restrain the growth of Soviet (and East European) economic and military potential by controls on the exports of 'strategic' goods, restrictions on credits, and other obstacles to economic relations. In turn, the USSR undertook to form an economic bloc by linking the East European economies to it through a network of bilateral trade agreements. Although the CMEA (Council for Mutual Economic Assistance) was formally established in 1949, it was not a vehicle for either multilateralism or regionwide integration.

“However, by the mid-1950s a gradual ‘thaw’ in this Cold War situation started and East-West trade continued to grow steadily, if quietly, during the 1960s as a result of new attitudes on each side.

“In the East, by the late 1950s or early 1960s (depending upon the country), rates of growth of industrial production, national product, and labor and capital productivity had begun to fall from the impressive figures achieved during the preceding decade. A common (and politically acceptable) diagnosis of economists and policymakers was that these economies were moving from the ‘extensive’ to the ‘intensive’ phase of economic development.

Former USSR Comecon headquarters in Moscow.

“In the former phase, according to this analysis, it had been necessary to alter the structure of the economy drastically and rapidly, through industrialization, urbanization, and changes in the content and geographical orientation of foreign trade. The methods chosen for these tasks were socialization of the means of production, comprehensive and detailed central planning, rapid expansion of the industrial labor force (through increased participation of women and transfers from agriculture), and a sharp increase in the rate of investment.

“In contrast, in the new ‘intensive’ phase the emphasis of economic policy was no longer primarily on politically determined rapid structural change, as much as on smaller, more economically based changes in the composition of output and methods of producing it. Because neither the labor force nor the capital stock could be increased at the former high rates, greater efficiency in the use of limited inputs was essential. Furthermore, in the consumer sector, for certain goods (including some clothing, footwear, and simpler consumer durables), a shift was occurring from a sellers' to a buyers' market, as a result of the rise in living standards and the availability of stocks.

“This diagnosis led initially to the prescription that reform of the domestic economic system could improve economic performance from available resources—through one or both of two kinds of decentralization. On the one hand, the ‘administrative decentralization’ approach involved partial devolution of authority over selected decisions from higher to lower tiers within the administrative hierarchy—for instance, from the ministry to an intermediate ‘association’ level supervising the producing enterprise. The idea was that lower administrative agencies could make more sensible and more timely decisions on some aspects of the composition of output and production methods—though subject to constraints in the form of centrally set global output assignments and input authorizations.

“In contrast, the ‘economic decentralization’ approach envisioned a greater role for domestic and foreign market forces in determining the composition of output, the allocation of resources, and even the distribution of income. Enterprise activities would be coordinated through ‘horizontal’ market links rather than a ‘vertical’ administrative command chain. Supply and demand forces, expressed through more flexible domestic prices (in turn related to world market prices), would guide decisions on outputs and inputs by profit-seeking firms.

“However, fearing a loss of control over the economy and society, most CMEA regimes proved in practice unwilling to accept much of either type of decentralization. Thus, economic reforms either were not undertaken or did not survive long-except in Hungary, where a reform of the economic decentralization type (the New Economic Mechanism) was implemented to a significant, though incomplete, extent.

“With genuine systemic reform widely rejected as too risky, Eastern regimes paid greater attention to the potential contribution of more extensive trade and investment relations with Western-developed capitalist market economics to solving the Eastern countries' problems of sagging growth rates and popular dissatisfaction with the rate of improvement in Iiving standards. East-West economic relations offer Eastern countries three means of enhancing economic performance. One is sophisticated up-to-date machinery and equipment not available in the CMEA region. The second is advanced technology, including not only production processes covered by licenses but also entire turnkey plants constructed by foreign firms. The third is credit to cover two types of ‘gaps.’ One type is a ‘foreign exchange gap’ in the form of a shortage of hard currency to pay for such imports from the West. The other type is a ‘domestic saving gap’ that exists because the strained Eastern countries lack the capital and labor resources for these additional investment projects (even if they had the technical know-how to carry them out).

“All the Eastern countries found that the benefits just mentioned justified an expansion of their economic relations with the West. However, only Poland went so far as to adopt an economic strategy based primarily on modernizing the economy with massive imports of Western technology, equipment, and industrial materials, financed by large credits, which it hoped to repay by future exports to the West of competitive industrial goods produced in the new plants.' Other Eastern countries assigned East-West economic relations a more modest, though important, role in their development plans.

A further impetus for Soviet interest in expanding its own and Eastern Europe's economic relations with the West was the USSR's recognition that during the 1960s its trade with Eastern Europe had become economically less advantageous for the USSR. Because changes in world market prices were reflected incompletely and with a lag in intra-CMEA trade, the USSR was supplying Eastern Europe with raw materials and fuels in return for outdated machinery and poor quality manufactures. Instead, the USSR could sell its primary products to the West for higher prices and payment in convertible currency that could be used to buy advanced Western machinery and technology and, in bad harvest years, grain.

“On the Western side, business firms and banks responded to the further opening of the Eastern market with lively competition in goods, technology, and credit. The active participation of U.S. firms and financial institutions in East-West trade received a political imprimatur and stimulus in U.S.-Soviet efforts at rapprochement and detente culminating in SALT I and other agreements reached at a summit meeting in Moscow in May 1972 and subsequent U.S.-Soviet agreements in October 1972 about trade, shipping, and credit. The implementation of these agreements was subsequently curtailed by disputes over Soviet emigration policies and other issues, but U.S. trade with the USSR continued to grow, financed by private credits and Soviet hard-currency earnings.

“Thus, during the early 1970s Eastern imports from the West increased much faster than Eastern exports to the West, leading to large trade deficits which (in the absence of significant surpluses on other current account transactions) were financed by substantial Western credits and the accumulation of significant net indebtedness to the West. For example, the trade deficits of the USSR with the West during 1971-73 totaled $2.3 billion, while the combined cumulative deficit of the six East European countries as a group with the West during the same period was $4.6 billion. As a result, according to representative estimates, the net hard-currency debt of the six East European countries grew from $4.6 billion at the end of 1970 to $8.5 billion at the end of 1973, and for the USSR the corresponding increase was from $1.9 billion to about $4.0 billion.”