The Classical Communist System

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The Classical Communist System

• Money
• Price
• Foreign trade
• CMEA

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Money

• Formally Magnetized economy
• Actually Semi-magnetized

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Institutions of Financial System
Banking system - state owned State Budget
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Banking System
Government
Central Bank
Foreign Trade Bank
Savings Bank
Investment Bank
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Functions

• Central Bank emission of money
• credit to SOE
• Investment bank - financing the
• investment
• Savings bank - public deposits
• and loans
• Foreign trade bank

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Money is Earmarked
No free flow of money
Money for wages
Money for materials
MONEY IS NONCONVERTIBLE!!!
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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

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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

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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

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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

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Active Money

• Money plays an active role in private and
  households sector

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Price

• Administrative producer price
• Administrative consumer price
• Market price

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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
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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
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Market Prices (Parallel markets)
Buyer

• Semi-legal and illegal markets

Households/ formal and informal private sector
Seller
Informal private sector
Price market price risk premium

• Legal free markets

formal private sector
Based on agreement
- agricultural market
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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)

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Foreign Trade
Monopoly in its own field
State owned production firm
Foreign trade firm
Foreign country

• 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

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Layers of Insulation

• REASONS
• political considerations
• protect the internal sector from the
  disturbances of the outside world

Domestic production
Foreign trade firm
Mono bank system
Foreign market
Despite the layers of insulation some adaptation
to external markets takes place
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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

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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 reduction
• Propensity to indebtedness
• - to cover foreign trade deficit

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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
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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

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Organizational Structure
Council Session
Executive Committee
Council Committees
Standing Commissions
Secretariat
Interstate conference
Departments
Scientific institutes
International economic organizations
Interstate economic organizations
International economic unions
Joint enterprises
International economic partnerships
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Deficiencies of CMEA

• Very 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

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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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