Wall Street Journal Europe

January 25, 1987.

Bartering Across East Bloc Borders

by James Bovard

Socialism makes bad neighbors. This past summer, a Czech border guard stopped a Polish family leaving Czechloslovakia and ordered a Polish kid to take off his new Czech shoes "because taking children's shoes out of the country is prohibited." The Polish border guard watched passively - and then stopped a Czech car coming from Warsaw - and ordered its new Polish tires stripped from the car, claiming that they had been illegally purchased in Poland.

Western trade wars are love fests compared to East Bloc tradefights. COMECON - the Council for Mutual Economic Cooperation - has been called the "council for mutual exchange of inefficiency." COMECON is the foreign trade organization of a group of nations that instictively hate foreign trade. In Budapest, the saying is "We deliver grain to the Czechs and they in turn deliver machinery to the Poles. The Poles then ship chemicals to the Soviet Union and as a final payment, we get a Russian folk dance ensemble in return." But, in actuality, it is much worse.

Foreign trade is a perpetual war in the East Bloc because no one can agree on prices. The nation's currencies are not convertible - and the Transferable Ruble - the official COMECON currency - is about as transferable as a wooden nickel. Each socialist government sets its national prices according to its own fancies, usually with little or no attention to world prices. As Ed Hewett of the Brookings Instiution notes, prices "are administratively determined, with complete disregard for important economic considerations such as costs or the level of demand."

Trade agreements among East Bloc countries are usually based on primitive barter arrangements - often simply on the gross poundage of objects to be traded - with no consideration or reward for quality.

Several years ago, Czechloslovakia and Poland agreed to cooperate in producing tractor parts. But, they were incapable of agreeing on a price - so they simply swapped one kilogram of Czech tractor parts for one kilogram of Polish tractor parts. Both sides thought they were being shafted, so even this primitive agreement soon collapsed. As Indiana University eastern Europe expert Paul Marer observes, "The inability to have accurate cost-price calculations makes the specialization in production of parts and components nearly impossible."

Since trade agreements are based on physical quantities, countries have a strong incentive not to improve the quality of the goods - and to maximize the weight of their machinery and products. Eastern European manufacturers use up to three times as many raw materials per unit of output as do western manufacturers. But, virtues in COMECON trading have proven to be fatal vices in trading with the West. As the Director of the Hungarian National Planning Office recently complained, "Comecon is difficult to buy from, and the West is difficult to sell to."

East European leaders distrust foreign trade almost as much as some American congressmen do. Since each socialist government is obsessed with planning its own economy, each country tries on principle to minimize foreign influence. Trade as a percentage of GNP is far lower in eastern countries than in western countries.

This distrust is well-justified- partly because COMECON members are notorious for "slack delivery discipline," as the latest socialist euphemism terms it. The Soviets no longer export their highest quality cotton to their Warsaw Pact allies - and this in turn has crippled Eastern Europe's ability to export clothing to the West. The Soviets also provide electricity to its neighbors - but the poor quality of Soviet electrical grids has led to increasing number of blackouts and brownouts, causing serious harm to Hungarian industry.

The usual socialist disregard of the consumer reaches pathological extremes when the consumer is a foreigner - or at least a foreigner who is not paying with hard currency. It is extremely difficult to get spare parts for goods produced in other socialist countries. Hungary has had to import spare parts for its East German cars from Latin America.

While in the West most countries strive for a trade surplus, in the East Bloc each country prefers to have a deficit - to import more than it exports. The interest rate on outstanding trade debts is only 2% - and there is not a whole lot you can do with surplus "Transferable Rubles," except paper the walls and wipe off the floors. But, most countries are very careful not to achieve a surplus, so trade among the small East European countries is far more balanced than it is among western countries.

Not only do countries try to balance trade with each other every year - they also aim to strictly balance trade in each commodity group with each country each year. When Hungary invented the Rubik's cube, many Russians would have loved to acquire the world's most fashionable toy of the year. But, Hungary could not have increased its Cube exports to the Soviets without decreasing its toy piggy bank sales to the Soviets. So, it made little effort to satisfy Russian demand.

The combination of widely-differing shortages and subsidies among socialist nations creates a huge incentive for individual arbitrage. East Germany has practically shut its borders to Poles - and Romania refuses to allow Poles to carry anything into Romania without making a deposit in western currency for each item. East German border guards routinely take away East German shoes from other socialist visitors leaving the country, and Hungarian border guards are forever seizing salami from people leaving Hungary. On crackdown days, trains are sometimes stopped and torn apart - including tearing out the seams in suitcases. Romania is notorious for its day-long backups at the border.

As Jan Vanous, Czech emigre and research director of PlanEcon consultants in Washington, DC, ironically observes, "They are heading a situation where they will weigh you when you go out of the country and they will weigh you with your luggage when you come back. You can eat - or you can throw something away and bring something in. But you can't bring anything new in."

Though COMECON's problems are obvious, they cannot be solved without destroying COMECON. Free trade and socialism are as irreconcilable as politics and honesty. If currencies were made convertible - then nobody's national plan would be safe, because foreign individuals and businesses could come in and buy what they chose. As long as governments are committed to central planning, foreign influences must be minimized and strictly

COMECON is helping turn eastern Europe into the world's newest economic ghetto. As they ask in Poland, "Have we reached real communism yet, or is it going to get worse?"

TAGLINE: Bovard is a Washington writer who recently traveled in East Germany and Hungary.