Oil price shock and structural changes in CMEA trade: pouring oil on troubled waters?

• Author: Beckmann, Elisabeth
• Position: Council for Mutual Economic Assistance - Report

1. Introduction

   This paper analyses structural change in Soviet foreign trade with the other member countries of the Council for Mutual Economic Assistance (CMEA). The CMEA was a unique economic confederation, which was the subject for intense and often controversial analyses by both CMEA and Western economists, but also sociologists and historians. We build on this research of the CMEA and study trade in the CMEA over the entire period of its existence using modern econometric methods (panel estimation, tests of structural breaks). Our main focus is on the impact of the oil crisis on the CMEA.

   Although the system of trade in the CMEA was established according to Soviet political targets in its antagonism with the US, this decision had many economic implications. The defining feature of CMEA foreign trade was that it should protect the economies from unpredictable external influences. Through the state monopoly on foreign trade central planners wanted to secure control of the channels of foreign impact. Pursuing autarky and avoiding uncertainty in this way, however, imposed significant costs on central planning, because among other factors it limited the ability to adjust to new conditions.

   The oil crisis of 1973 underscored an emerging structural crisis in the world economy in general which was followed by a radical change from the old technological regime. At the time, Soviet press declared that the oil crisis had not affected the CMEA. However, a change in the general level of world prices, as was the case in 1973, was one of the channels identified which could impact planned economies despite their monopoly on foreign trade. Furthermore, energy played a particular role in CMEA trade as CMEA member states were dependent on the Soviet Union for energy exports. We confirm a structural break in CMEA trade in 1973.

   The next section provides a brief sketch of the history of the CMEA in so far as it is relevant to structural change, i.e. drawing attention to the main phases of development and analyzing internal and external sources of structural change. Section 3 portrays and discusses the particular role of energy in intra-CMEA trade. Section 4 provides the econometric analysis of structural change in Soviet foreign trade with the CMEA countries and leads to the conclusions in the last section.

2. Historical Background

   Until World War II the Soviet Union was the only planned economy and pursued economic success as defined by socialism in the form of modernisation and industrialisation. Trade was a means to meet the overall plan. Imports were the means to accelerate domestic industrialisation, exports the necessary expenditure of domestic resources to obtain these imports (Smith 1993, p. 43). In reality, however, the difference between world market and domestic prices was covered by the state budget: Isolation ultimately created macroeconomic disequilibria.

   After World War II Communist regimes were set up in all Eastern European countries that fell under the Soviet sphere of influence. The central planning system was imposed according to the Soviet model across these states despite great differences in economic preconditions. In addition to refusing Marshall Aid, none of the Eastern European states participated in international economic organisations, established after the War, such as the IMF.

   In early January 1949, an article in Pravda reported the establishment of the CMEA. Its founding members were the Soviet Union, Bulgaria, Czechoslovakia, Hungary, Poland, and Romania. Albania joined in February 1949 and the GDR in September 1950. Three more countries outside Europe joined much later: Mongolia in 1962, Cuba in 1972, and Vietnam in 1978. From 1965 onwards Yugoslavia had associate status. In the announcement of its foundation the CMEA explicitly distanced itself from the Marshall Plan, which it saw as violating national sovereignty. The Pravda article stressed the equality of all CMEA members, and stated the aims of this new organization rather vaguely as an increase in economic cooperation and mutual aid (International Arts and Sciences Pr., 1974).

   In contrast to other economic confederations the CMEA was unique in its structure, consisting as it did of one superpower and several small countries at very diverse levels of economic development. Its member countries had fairly low levels of mutual trade before World War II, so that the CMEA's establishment entailed a considerable redirection of trade flows from the pre-war West-orientation.

   Integration within the CMEA was initially very limited (Kaser, 1969, Wiles, 1969). Joint CMEA activities amounted mainly to the unification of statistical reporting systems, collecting members' plans and recording trade (Smith 1983, p. 174). Member states were encouraged to aim for economic autarky and to pursue economic development according to the Soviet model, i.e. rapid industrialisation with the main emphasis on heavy industry. The Eastern European economies achieved very high annual growth rates--on average 23.5% between 1947 and 1950 (Zwass 1989, p. 24). As in the Soviet Union, relocation of labour from agriculture to industrial production and exploitation of domestic raw materials were the foundation for growth. Owing to this extensive industrialisation a radial pattern of bilateral trade developed with the Soviet Union in the centre as key supplier of energy and raw materials and importer of industrial products. The East European economies were not integrated with each other through this pattern of trade.

   The CMEA only began its active existence after the death of Stalin. Opposition movements and the open protests which erupted then were in part driven by economic grievances. Subsequent discussions on how to reform the economy and measures undertaken could be broadly summarized as an attempted change from extensive industrialisation to intensive development but varied a great deal across countries. In consequence to Eastern European "crises", especially the Polish and Hungarian ones in 1956, the planning systems of the CMEA member states became much more diverse and more difficult to unite in one economic organisation.

   The CMEA from the 1950s onwards also began a reform process designed to intensify intra-CMEA relations. Initial measures--the abolition of reparations and improvement of terms of trade--reduced the share of the economic burden carried by Eastern Europe. Subsequent reforms had the goal of greater integration within the CMEA leading to greater efficiency through the division of labour and specialisation of countries according to natural endowments and ultimately establishing a trading pattern which would genuinely integrate the partners. However, in contrast to market economies the CMEA did not rely on comparative advantage. In the absence of markets, the aims of the CMEA had to be achieved by administrative measures.

   With the CMEA Statutes or Charter of 1959 reform of the rudimentary institutional structure of the CMEA was initiated. (4) Joint production projects were the second major reform effort aimed at integrating the CMEA. For example, the "Basic Principles of the International Socialist Division of Labour" of 1962 saw coordination of national plans as the primary means for achieving the division of labour. The second major joint action programme, the "Comprehensive Programme for the Further Extension and Improvement of Cooperation and the Development of Socialist Economic Integration" adopted in 1971, placed the emphasis on "integration" of the socialist bloc instead of on the division of labour (Zwass 1989).

   Gorbachev's coming to power in 1985 did not mark a sharp turning point in CMEA reforms either. Broadly speaking, reforms of the foreign trade system under Gorbachev were aimed at streamlining administrative and operative mechanisms and improving bureaucratic efficiency. The establishment of joint ventures was permitted and so called "free enterprise zones" established (Smith 1993, p. 127). The connection to the central planning system and the state monopoly on foreign trade were left untouched. Nevertheless, Gorbachev's new foreign policy of pursuing reconciliation with the West was important for CMEA relations. Eastern Europe and with it the CMEA had lost its priority status.

   In summary, none of these reforms, aimed at radical permanent change; rather they were designed as a continuous reform process with far-reaching goals and development plans for up to 20 years and a smooth increase of foreign trade. In particular, they were never designed to end central planning and the state monopoly on foreign trade.

   This fundamental decision to disallow the market to operate as a resource allocator required that the CMEA had to develop its own pricing system. The CMEA based its prices on international free market prices, and converted these into 'transferable roubles'. The transferable rouble was a notional, nonconvertible currency unit which was used only for the settlement of accounts in CMEA trade. Goods were divided into hard and...