WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

The economic history of Eastern Europe is full of white spots. To see this, one does not need to be an expert in the field – a brief look at the time series from the Maddison database is enough to capture the degree of the problem. Filling the gaps is a challenging task, which requires exchange of knowledge, advancement of the statistical instruments, and financial support. For two days, Regensburg became a host for a conference with the leading scholars in economic history that brought their collective efforts to summarize our knowledge about economic development of Eastern Europe from the early modern period until now. Sandor Richter represented wiiw at the event, sharing the insights about trade within COMECON, which was an important issue for four decades (1949-1991) and belongs to history now.

Twilight of the Gods

The end of the WWII put an end to the war but not to the confrontation of the states. The council for mutual economic assistance, which later became known as COMECON, was born in 1949 when the Cold war was in its full rights. The Soviet Union and the U.S. ran a race for the world domination where both military and economic capacities played a role.

Within the Soviet bloc trade itself was considered to be dangerous, as a greater autarky guaranteed higher chances to survive in a case of the next big war. Naturally, trade with the West was an evil and the Marshall plan could rapidly spread the evil (together with the political influence) in Eastern Europe. Therefore, the role of COMECON was twofold: to outweigh any possible effects of the Marshall Plan in the Soviet zone of influence and to redirect the economic links of Eastern Europe from the West to the East building a second level of autarky over the national economies.

Ideology versus Practice

Linking trade relationships within COMECON, however, confronted a fundamental problem of exchange – namely the way how one should settle the prices for the goods. Should one sell goods among the member states according to the production costs or world prices? And if the latter, then which one exactly: a price of a specific year, average of a period or current prices? Ideology won over pragmatism in the very end: trading prices were fixed according to average world market prices of a preceding five-year period, transferable rouble became a common exchange currency for the COMECON members, and trade in convertible currencies was limited with the extra-COMECON countries only.

Sandor Richter, wiiw Economist

The planning approach had its benefits: enterprises could be sure that contracts and prices remain stable until the next planning cycle. But the stability came at a cost. First, one had to define the prices long in advance before the five-year plans were put into action. Incomplete information with regard to future demand led to inappropriate decisions even with the best intentions of the trading parties. Second, once the production plans were fixed, the parties almost could not renegotiate the terms of contracts. The final drawback was the property of the transferable rouble – countries could not spend it for any other purposes other than COMECON trade, and even there only in the bilateral relation concerned and in the year under negotiation. The arising surpluses were therefore useless, and countries tried to keep the trade strictly bilaterally balanced. Moreover, countries that were able to export the so-called hard goods (e.g. raw materials) were in a better positions compared to the economies that were specializing mostly on the soft goods (machinery, durable consumer goods) as they could try to avoid the trade within COMECON and sell it for a “hard” i.e. convertible currency on the extra-COMECON markets.

1973 – 1991: The Struggle and Fall of COMECON

The changes of the economic environment on the West had an impact on the socialist economies despite their officially proclaimed economic independence from the world. Hiking oil prices in 1973 predictably sharpened the existing contradictions between the “hard” and “soft” exporting countries, which were already severe. To diminish the adverse effects of the world price changes, COMECON switched to the five-year moving average price values for the interim trade.

The contradictions led to a widespread practice of trade deals which are not characteristic for the developed market economies such as barter arrangements, counter-purchases (a combination of the payments by goods and cash), and ‘buy-back’ (the establishment of a plant is paid by the production of the plant). Another way to mediate the imbalances was to involve a third party from the western country and to use (semi-secretly) foreign currency as a mean of exchange (e.g. the share of the convertible-currency deals of Hungary with the COMECON countries accounted for about 10% of its COMECON trade turnover).

This medicine, however, could not solve the source of the disease – adverse behavior of the enterprises. Whereas in the West, the change in the world prices stimulated a technological shift and structural change towards more efficient and energy saving technologies through the rising costs of the traditional energy sources, the planned economies of the East tried to use administrative instruments and fiscal stimulus to stimulate productivity, which appeared to be highly inefficient. The structure of the economies changed slowly, technologies mostly stayed behind those of the Western economies, and old problems worsened.

In the end, the Soviet bloc was not ready to the pendulum swing of the oil prices, which hit the economies in the middle of the eighties. Following the political earthquake in 1989/1990 the Soviet Union lost its capacity to keep Eastern European countries under control and there was no need for COMECON anymore. The dissolution of the organization in 1991 was a pure formality, which brought an end to the operations with the transferable rouble, specific trade arrangements and five-year moving average prices.

Suggested readings

Csaba, L. (1992) The Rise and Fall of the Council of Mutual Economic Assistance. In J. Iivonen, Y. (Eds.), The Changing Soviet Union in the New Europe (pp.189-210). Aldershot, England: Edward Elgar Publ Co.

Richter, S. (1980). Hungary's foreign trade with CMEA partners in convertible currency. Acta Oeconomica, 323-335.

Jeffries, I. (2002). Socialist economies and the transition to the market: a guide. Routledge.

Gaidar, Y. (2010). Collapse of an empire: lessons for modern Russia. Brookings Institution Press.