Foreign Trade in the Soviet Economy

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Foreign Trade in the Soviet Economy

• Igor Lukashin
• ECN 365/ IBS 394 Lecture

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Todays Goals Foreign Trade Discussion

• Talk about theoretical benefits
• Describe the relevant Soviet structures
• Understand the limitations imposed by the
  structures and the rest of the Soviet economy
• Look at the composition of Soviet foreign trade
• Address the issue of foreign debt

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Role of Foreign Trade in an Economy

• Welfare-enhancing (specialization)
• Efficiency-improving (international competition
  stimulates domestic producers)
• Access to goods/services not available on the
  domestic market (advanced technology/peculiar
  domestic costs)

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Soviet Foreign Trade Structure

• Ministry of Foreign Trade (subordinate to
  Gosplan)
• Foreign Trade Organizations (FTOs)
• Sectoral/product organization
• Handle exports, imports or both
• Sometimes specialized by country/region (WHY???)
• AmTorg
• Financing through VneshTorgBank

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Planning of Foreign Trade

• Avoiding heavy reliance
• Trade objectives
• import-export plan
• support materials and services for foreign
  projects
• balance of payments plan
• COMECON - Soviet bloc coordinating organization
• Detailed plans distribution by region, tasks of
  each organization involved, schedule of deliveries

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Planning of Foreign Trade Continued

• Accounting two types of currencies
• Convertible (hard) currency
• Transferable (valuta) ruble
• Little relation to the domestic ruble
• Integration into domestic plan
• no clear relationship to domestic prices
• FTO - intermediary
• Generated profits (surplus) for the State. How?

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Trade Policies Trade Aversion

• Ideological rejection of basic economic laws
• Western markets viewed as chaotic
• Hostile capitalist encirclement
• Negative features of world market
• Inflation
• Unemployment gt attempt to insulate
• Low information flows FTO as information barrier

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Internal Barriers to Foreign Trade

• Inability to understand compete effectively in
  foreign markets
• Lack of understanding??? Explain
• Exports limited gt imports limited
• Why?
• Export raw materials Import machinery (Table
  9.1)
• Ruble non-convertible currency
• Arbitrary Price-Setting Mechanisms no relation
  to relative scarcities

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Internal Barriers to Foreign Trade Continued

• No common scale to assess advantages of a trade
  decision
• Ignoring potential specialization gains
• Much of Trade in Barter
• Cumbersome Slow
• Foreign Trade Efficiency Coefficients
• Explain. 1 Bonus Point if within 30 sec
• Financial arrangement design
• Balanced trade against each partner
• Gold, convertible currency, arranged credits

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Problems of Economic Integration

• 1949 COMECON - Soviet bloc trade
• Limited Integration (Table 9.2)
• Focus on own development and diversification
  (strategic sufficiency)
• COMECON - not a supranational power
• No integration of planning, no convertible
  currency
• Bank for International Cooperation
• Transferable ruble trade
• Difficult to see winners and losers

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Trade with the West

• Significant increase after WWII
• 50b mid-1980s
• Exports Oil, Gas, Military Hardware
• Imports Agriculture (1/3), machinery, chemicals.
  COCOM
• LDC Trade 11 of Soviet FT
• Asia (India)
• Africa
• Latin America (Argentina)

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Balance of payments issues the West

• Plan gt could balance convertible currency
  receipts w/expenditures
• Exports binding constraints on imports
• 1970s West Europe provided credit
• Debt Service problems
• Marketing difficulties
• Non-competitive products
• discrimination against soviet-made goods

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Soviet Foreign Debt

• Imports
• Industrial goods services
• Grain fertilizer
• Receipts fall short of expenditures
• 12.5B -75 38B-mid-80s 48-1989
• Burden of debt
• Debt-service ratiopayments to total hard
  currency earnings 10-25-23
• gross hard currency debt to hard currency
  earnings 73-115

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Direct Foreign Investment

• Tsarist economy - finance industrialization
• No direct investment in soviet economy
• no equity rights for foreigners
• complex counter-trade arrangements
• shares in productioin
• Unability to attract foreign capital - a major
  weakness

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Summary

• Foreign trade, specialization- important
• Soviet arrangement FTO
• Insulated domestic market
• Planned
• No convertible currency, no meaningful prices
• Barter
• Exports limiting imports

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Group Assignment

• Remember the country you picked
• Identify beginning of transition
• Dates
• method (peaceful/revolt)
• players political parties, etc.
• Describe original economic reform package
• How did the prior developments (report 1)
  affected the sequence (and problems) of reform
  policies and their success?