The Classical Communist System

MoneyPriceForeign tradeCMEA

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 ownershipprinciples for price setting: must reflect socially necessary costs should encourage producers to perform specific tasks ought to be stableDeficiencies: 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 sectorBuyer: householdsPrinciples (additional) must influence the demand of the population (realistic) should be used for the purpose of income redistributionDeficiencies: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 criterionfor controlling the external economic relationsEconomic considerations are subordinated to them

economic, scientific and cultural isolationfrom the capitalist worldexpansion 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 planneddevelopment of the international division oflabor within the CMEAThere was hardly any joint investment andno flow of capital between membercountriesCurrency of member countries neverbecame convertibleForeign trade was not measured in terms ofmoney or profits increase rigidity

ConclusionMoney and Price

- play passive role in sector with public ownership

- play active role in sector without bureaucratic coordinationForeign trade - higher proportion amongsocialist countries based on bilateral relationsCMEA - inefficient

Thank You!