The Classical Communist System

Money

Price

Foreign trade

CMEA

Money

Formally: Magnetized economy

Actually: Semi-magnetized

Institutions of Financial

System

Banking system - state owned

State Budget

Banking System

Central Bank

Investment Bank

Savings Bank

Foreign Trade Bank

Government

Functions

Central Bank: emission of money

credit to SOE

Investment bank - financing the

investment

Savings bank - public deposits

and loans

Foreign trade bank

Money is ‘Earmarked’

Money for materials

Money for wages

No free flow of money

MONEY IS NONCONVERTIBLE!!!

Spheres of Classical Communist System

With soft budget constraint and

passive money

- SOE

With hard budget constraint and active

money

- formal and informal private sector

- households

State Owned Enterprises Soft budget constraint - a firm receives regular

external assistance when it is in trouble - money is always available

greater importance of quantitative targets

weak interest in costs and profits

weak income responsiveness

weak price responsiveness

low efficiency

Passive Money

Money fails to operate as the general medium of exchange and plays a passive, supplementary, secondary role when SOEs conduct financial transactions with each other, the banking system and the state budget

Private Sector& Households

Hard budget constraint - the bureaucracy does not assist them in financial trouble

- availability of the product desired...?

- availability of the purchase money…?

stronger profit motive

stronger responsiveness to income

stronger responsiveness to price

higher efficiency

Active Money

Money plays an active role in private and households sector

Price

Administrative producer price

Administrative consumer price

Market price

Producer Prices(administrative prices)

Seller and buyer - sectors in public

ownership

principles for price setting: must reflect socially necessary costs should encourage producers to perform specific tasks ought to be stable

Deficiencies: complex system of fiscal redistribution contradictory principles prices carry no useful information fails to create equilibrium

Are set centrally

Consumer Prices(administrative prices)

Seller: public sector

Buyer: households

Principles (additional) must influence the demand of the population (realistic) should be used for the purpose of income redistribution

Deficiencies:prices lowered artificially unordinary growth in demand

chronic shortage, since supply can not keep pace

Are set centrally

Market Prices (Parallel markets)

Informal private sector

Households/ formal and informal private sector

Seller

Buyer

Price = market price + risk premium

formal private sector

Based on agreement

• Semi-legal and illegal markets

• Legal free markets

- agricultural market

External Economic Relations

Political considerations are the prime criterion

for controlling the external economic relations

Economic considerations are subordinated to them

economic, scientific and cultural isolation

from the capitalist world

expansion of foreign trade within the bloc

(the Soviet Union and its allies)

Foreign Trade

State owned production firm

Foreign trade firm

Domestic price = import/export price:

• absence of a uniform rate of exchange between domestic and foreign currencies

- different exchange-rate multipliers

- different positive or negative taxes

Foreign country

Monopoly in its own field

Layers of Insulation

Domestic production

Mono bank system

Foreign trade firm

Foreign market

REASONS:

• political considerations

• protect the internal sector from the disturbances of the outside world

Despite the layers of insulation some adaptation to external markets takes place

Deficiencies

More attention is paid to bargaining within the bureaucracy than with the foreign buyer, seller or bank inflexible foreign trade and credit activities

It is more important to win the approval of the superior organizations than to leave a foreign customer satisfied or to make the maximum financial profit

The production sector is not obliged to adjust flexibly and speedily to the situation on foreign markets

Foreign trade/financial relations with capitalist countries

Import hunger - import as much as possible

- hunger for top-quality machines and

equipment

- chronic shortage Export aversion

- can not compete on the foreign market in

terms of quality, modernity or reliable delivery

price reductionPropensity to indebtedness

- to cover foreign trade deficit

Foreign trade with socialist countries

Import/export- import hunger for the hard goods (good

quality)

- import aversion to the soft goods

- no aversion on the export side (no force

exporting)

Tendency : zero trade balance

Bilateral relations

CMEA(1949 - 1991)

Council of Mutual Economic assistance(CMEA or COMECON)

Members: (1990) - Soviet Union, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, Cuba, Mongolia, and Vietnam. Yugoslavia was a ‘limited participant’

Mission: to increase the trade among the socialist countries, namely within the CMEA, based mainly on bilateral negotiations

Organizational Structure

Council Session

Executive Committee

Council Committees

SecretariatStanding Commissions

Scientific institutesDepartments

Interstate economic organizations

International economic organizations

International economic unions

Joint enterprises

International economic partnerships

Interstate conference

Deficiencies of CMEAVery little happened to promote a planned

development of the international division of

labor within the CMEA

There was hardly any joint investment and

no flow of capital between member

countries

Currency of member countries never

became convertible

Foreign trade was not measured in terms of

money or profits increase rigidity

Conclusion

Money and Price- play passive role in sector with public

ownership

- play active role in sector without

bureaucratic coordination

Foreign trade - higher proportion among

socialist countries based on bilateral relations

CMEA - inefficient

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