Prague's Economic Bondage

...The details remain to be worked out, though, and the idea is at present no more than a general concept...

...still holds 18.4 tons of gold, worth about $20 million, which was seized by the Nazis in Czechoslovakia during World War II and later came under U.S...

...Other comecon members resisted this arrangement, and a few years ago the Soviet Union changed its foreign purchase plans, forcing Prague to undertake a costly reorientation of its export structure...

...These huge assets are white elephants...

...To obtain Fund membership, Prague would have to overcome the traditional Communist obsession with secrecy and provide information on reserves, debts, credits and other basic economic data...

...At different levels of the economy the crown is assigned different values in relation to the dollar, further complicating matters...

...It will take 380 million crowns to salvage them, and the State Bank has evidently decided to extend this sum because their output—particularly textiles, glassware and furniture—is needed by exporters...

...But this month reports began to circulate that a loan application would be well received by the World Bank's directors in Washington...

...At present, the U.S...

...last June 12, Czechoslovakia wants to establish "relations based on equal partnership with members of the European Common Market...

...property nationalized by Czechoslovakia partially balances some of these claims...

...In fact, the Czech leaders do not as a rule talk of "reforming," but of establishing "a new system of management...

...In June, after Prague gave assurances of a fair exchange rate, the U.S...

...Even if such goods were available in the debtor countries, Czechoslovakia would have little use for them...

...Meeting some consumer demands might help neutralize inflationary pressures, too...

...But the basic rate, determined quite arbitrarily in 1953, is 7.20 crowns for one dollar...

...Enterprises whose exports can be expected to show a profit would also be allocated some of the new credits to purchase the machinery and technical knowledge they need...

...According to information made public in June by Minister of Foreign Trade Vaclav Vales, Czechoslovakia receives 99.5 per cent of its crude oil imports, 90.7 per cent of its wheat imports, and 83.6 per cent of its iron ore imports from the Soviet Union...

...Yet if the economy is to be revitalized by a restructuring of industry, some 300,000 workers will have to change jobs...

...Each obligation would cost 100,000 crowns and earn 5 per cent interest, 3 per cent of the profits, plus the free use of four beds at any of the tourist farms...

...It cost about 30,000 wholesale crowns to employ one worker in either heavy or light industry...

...hotel chain...

...A second proposal is to place representatives of the State Bank (specifically, of its lending organs) on the boards of directors of Czechoslovak enterprises...

...The reformers realize the importance of their decisions in this area, but their vision is limited by remnants of orthodox dogma and a lack of practical experience with alternatives...

...Although the pressure to reform an outmoded economy contributed heavily to Antonin No-votny's ouster last January, politics rather than economics soon came to preoccupy the new Czech officials...

...corporations are defying the difficulties...

...The boards, to be called workers' councils, would have from 10-30 members, the majority to be elected by employes of the enterprise and the minority (not more than 20 per cent) to be appointed by the government...

...Avisun Corporation of Philadelphia (owned by Amoco Chemicals, a subsidiary of Standard Oil of Indiana) is engaged in a particularly interesting venture: It has sold the license for its polypropylene chemical process to the Slovnaft Enterprise in Slovakia...

...One concrete test of Moscow's intentions toward the new Prague regime, therefore, will be its final reaction to the Czech request made early this year for a badly needed hard-currency loan...

...Given all these problems—an economy tied to the Soviet Union, a heritage of unprofitable production forced on it by comecon planners, huge non-convertible paper assets in other Communist countries, a soggy currency, the threat of unemployment, increasing consumer demands and the consequent danger of inflation—Czechoslovakia will find it extremely difficult to break with other comecon members to achieve a freer society and a more viable economy...

...The introduction of the "involvement of material interest"—the profit motive—is widely accepted as a good thing, but the Czechs are somewhat puzzled as to how the boards of directors are going to function with this as a guiding principle...

...Yet exchanging skilled labor in the form of finished products for raw materials and grain reaches a point of diminishing return if it exhausts the potential for two-way trading of manufactured goods—say, machine tools and consumer items for such things as computers...

...Representative Vaclav Cerveny has suggested in Parliament that the bank should be split into a reserve or central bank, and a commercial bank...

...The new leadership cannot concentrate exclusively on increasing exports, however, without irritating the mass of Czechs who are demanding more housing, automobiles and other consumer items presently in such short supply that they are rationed...

...Recent reforms have been aimed at improving the situation, but it is still far from favorable to the Czechs...

...On May 15 Radio Prague discussed a suggestion that the district of Krkonose (a popular mountain resort) undertake to build tourist farms financed by the sale of "recreational obligations" to production enterprises and other economic or social organizations (individuals would not be eligible...

...other special purpose credits granted to the Soviet Union, Poland and East Germany amount to almost one billion dollars...

...In addition, Czechoslovakia has about $50 million on account with the Soviet Union from a favorable balance of trade over a number of years, and over $200 million with other soft-currency countries...

...Illegal in the United States, this practice is common in Western Europe (where, however, it is viewed with alarm by many Socialists...

...custody...

...Membership would also require that Czechoslovakia renounce the practice of dumping...

...This threat can be minimized by generous unemployment benefits and an "education campaign," but Communist teachings, which do not recognize the existence of unemployment in Socialist countries, provide no guidelines for solving the problem...

...In recent years, Congress has had a negative attitude toward all East European countries that assist North Vietnam...

...This would provide the State Bank with cash reserves in hard currencies and enable it to maintain a balance of payments during the difficult transition period when the export of goods selling abroad for less than they cost to produce is reduced, and the export of profitable goods is increased...

...was unable to carry out the agreement...

...Congress objected and the U.S...

...property, minus $9 million for the undelivered rolling mill, minus one million dollars for the frozen assets...

...The notion of a board of directors for every Czech enterprise released from the command economic structure and required to fend for itself in both domestic and foreign markets, is generally accepted...

...The experiment, if it is actually carried out, should be very interesting...

...If this new system of management is established ?and that depends to a large extent, as we have seen, on getting a substantial hard-currency loan—it can start Czechoslovakia on the road to becoming a modern nation...

...Czechoslovakia has granted the Soviet Union a credit of over $500 million for development of crude oil production...

...This is what a Czech artist gets when he brings home dollars earned in the United States...

...Seen in a broader context, the agreement could well have been one of Prague's sacrificial offerings to Moscow, but this is not likely to be the view taken in Congress...

...Inflation has been kept in check mainly by maintaining wages at very low levels, but this has become increasingly difficult as workers use their new freedom to insist on more money...

...Pan American Airways, which has been flying to Prague for some time, has now opened an office there...

...In return, the Soviet Union receives 65 per cent of Czechoslovakia's exports of machinery and equipment, 20 per cent of its exports of consumer goods, and 15 per cent of its exports of raw materials and other commodities...

...Similar prospects are being explored by Holiday Inn and another U.S...

...Regardless of their label, the ideas already put forward are extremely promising...

...Czech money managers now talk about "internal convertibility," followed by "external convertibility," and eventually "free convertibility," based on a true value of the crown in terms of gold...

...In other words, investing in the manufacture of consumer goods was 3.8 times less unprofitable than investing in the manufacture of capital goods...

...Another acute challenge facing the reformers is the possibility of mass unemployment...

...Primarily through resource allocation, emphasis was shifted from heavy industry to the manufacture of consumer goods...

...Polypropylene is a recently developed plastic with multiple uses...

...Some observers consider this the critical "second round" in the liberalization struggle, for Czechoslovakia is in virtual economic bondage to the Soviet Union...

...While awaiting Moscow's answer, Prague has approached Switzerland, West Germany, Britain, Italy and France for hard-currency loans, and the prospects are believed to be good...

...As noted above, there are a variety of ratios for domestic use...

...Another statistic provides a more dramatic illustration...

...The statistics wam of the distance that separates present reality from Cernik's hope for the future...

...Nevertheless, the Czechs are making plans for a future economy that will be less shaky and less dependent on the whims of comecon bureaucrats...

...In the final phase, free convertibility, the receiving and granting of hard-currency credits would be based purely on profit-oriented considerations...

...The various economic reforms under discussion in Prague lead in different directions but have an underlying orientation in common: They are all reforms of management...

...A particular danger to economic reform is presented by political appointees holding useless jobs in the bureaucracy...

...Athree-stage reform is envisaged...

...The United States has already taken one step, and is considering others, to help Czechoslovakia achieve this end...

...The goods produced by the worker in heavy industry brought 4,500 foreign exchange crowns when sold on the world market, while the goods produced by the worker in light industry brought 20,000...

...With the variety of exchange rates and the haphazard yardsticks for measuring production costs, it would be difficult to sort out the pertinent facts...

...In 1961, the U.S...

...They cannot be converted, brought home, or put to any practical use because of the various clearing restrictions of the East European Council for Mutual Economic Assistance (comecon)—among them the requirement that earnings from the export of certain goods must be spent on importing goods of the same category...

...A law governing the establishment and functioning of the councils is to be drafted by the end of the year...

...Then, too, the terms of the trade, including prices, are tailored to suit the USSR...

...This has inspired the current discussions on the future role of the State Bank...

...The Czechs still do not accept the idea of private investment in businesses, but they are experimenting with "socialist" ownership of shares...

...It now costs Czechoslovakia an average of almost two dollars in marketing and production expenses to earn one dollar on the free world market...

...Czechoslovakia has sent aid to Hanoi since the beginning of the war and on June 17, 1968, a new aid agreement was signed by Prague and Hanoi...

...The contract includes two Japanese firms, Chisso and C. Itoh, who will provide the machinery and technicians...

...Since that time, though, Paris may have had second thoughts in the light of its own domestic difficulties...

...Now that some sort of accord has been reached with the Russians and their followers, reducing for the moment at least the threat of military intervention, attention is focusing more on economic problems...

...By forcing Czechoslovakia to concentrate on the least profitable sector of its economy, the comecon planners caused the present mess...

...This would enable it to build up cash reserves and purchase the equipment its lagging industries must have to compete on world markets...

...If the Fund, or a consortium of Western banks (or the Soviet government, for that matter) were to extend hard-currency credits to Czechoslovakia, Prague would be required to present plans detailing how the loan would be used and eventually repaid...

...This idea would unquestionably have far-reaching consequences if it were accepted...

...For these enterprises to meet Western standards, an estimated $250 million investment would be required...

...Current commitments, moreover, are so vast and long-range (the agreement on imports of Soviet crude oil, for example, runs to 1984) that Czechoslovakia cannot look for other sources and markets offering better deals and the chance to become less dependent on the USSR...

...Some U.S...

...There is also the matter of a rolling mill the Czechs bought here for $16 million that was not delivered after the Communist take-over, as well as frozen assets and bank accounts amounting to about one million dollars...

...A new hotel is being built in the Czech capital under a joint agreement between the Inter-Continental Hotel Corporation, which will reportedly invest $6 million in it, and the Czechoslovak travel agency, Cedok...

...unfroze $5 million in Social Security, railroad retirement, veteran's and other annuity payments owed residents of Czechoslovakia...

...The currency is another source of concern...

...THE SEARCH FOR HARD CURRENCY Prague's Economic Bondage By Jan J. R. Lorenc The meetings between Prague's leaders and their Soviet camp counterparts, held earlier this month at Cierna and Bratislava, have brought Czechoslovakia's liberalization full circle...

...Most importantly, they are trying to achieve free convertibility between the crown and the dollar at a sound and steady rate...

...and Czechoslovak governments agreed on a package deal under which Prague would get the 18.4 million tons of gold in return for $2 million ($12 million compensation for nationalized U.S...

...These low and medium grade apparatchiks represent the grassroots of conservative opposition to liberalization, and they can be expected to make trouble if asked to perform more useful work...

...At first glance these figures might seem advantageous to Prague...

...Much wastefulness continued in both areas, but the overall picture brightened somewhat, as the following figures indicate: From 1955-65 an average of 6.5 "wholesale" Czech crowns had to be invested in machinery production to earn one "foreign exchange" crown from machinery exports...

...While the Vietnam war continues, Congress will probably oppose efforts to build bridges to the East by extending the Most Favored Nation clause to Czechoslovakia?thus permitting the Export-Import Bank to underwrite exports there ?or by removing some of the obstacles businessmen must overcome to deal with the Czechs...

...Holland also earns 2.5 times more per item in capitalist markets than Czechoslovakia receives in Communist markets...

...The half-billion dollar hard-currency loan would help...

...Presumably, the hard currency earned would be used to modernize production and marketing facilities, in turn resulting in greater exports...

...If the reform is carried out as presently contemplated, domestic and foreign price levels could be equalized and the crown turned into a hard currency within five to seven years...

...Washington is said to have concluded that an offer of a loan now might do Czechoslovakia more harm than good politically, but a more modest step, the unfreezing of Czechoslovak gold held in this country, is being contemplated...

...The exchange rate between crowns and dollars is as malleable as Silly Putty, with Czech economists generally agreeing that a rate of 16 crowns to one dollar would reflect the actual relation of values more precisely than any of the official ratios...

...Communist party leader Alexander Dub-cek warned a conference of Czechoslovak trade unionists in June that "lack of restraint and the chance creation of conflicts are the greatest danger for the whole new policy of the country...

...According to Czechoslovakia's leading economic reformist, Deputy Premier Ota Sik, the primary purpose of the loans is to refinance the country's short-term debts, estimated as high as $400 million, into a long-term commitment...

...During the internal convertibility phase, individual enterprises would be encouraged to export to hard-currency areas and would be allowed to keep an increasing share of ALEXANDER DUBCEK their earnings to use as they see fit...

...Later, during the external convertibility phase, foreign governments, banks, corporations and individuals would be allowed to buy crowns and use them to invest in joint ventures in Czechoslovakia...

...The black market price for a dollar is 42 crowns...

...In a May 15 broadcast, Radio Prague reported that the French government had resolved in principle to grant a loan to Czechoslovakia "provided the Soviet Union would not consider this interference in Czechoslovak-Soviet relations...

...In some cases, the cost is as high as five dollars...

...There has been considerable discussion, though, as to how these boards of directors should be set up and who should serve on them...

...Even though Czechoslovak light industry has been treated favorably in recent years, some enterprises in this sector have been allowed to reach a stage aptly described as havarijni, a term usually applied to a car or truck about to fall apart...

...Requests for higher wages and pensions, and the government's inability to grant them except at the cost of a ruinous inflation, have headed the economy for a nasty "antagonistic contradiction...

...In an interview broadcast recently by Radio Prague, the director of the Foreign Trade Research Institute, Robert Smelc, compared capital goods exports from Holland (population 12.5 million) and Czechoslovakia (population 14 million) . He noted that the quantity of machinery exported per worker employed in heavy industry is three times higher from Holland than from Czechoslovakia...

...If he is allowed to buy dollars in Czechoslovakia for travel abroad, he must pay 36 crowns for each...

...A council would advertise to fill the position of managing director of the enterprise and offer a six-year contract...

...The unprofitable ratio is the result of 20 years of over-investing in heavy industry at the insistence of the Soviet Union...

...To cope with the more subtle threat of economic strangulation, Prague is seeking hard-currency loans amounting to a half-billion dollars from both Moscow and Western European countries...

...During the same period, an investment of only 1.7 wholesale crowns in consumer goods production earned one foreign exchange crown...

...In the process, Czechoslovakia would return to full membership in the International Monetary Fund and the World Bank...

...Ultimately, as Premier Oldrich said Jan J. R. Lorenc, a new contributor, is a free-lance writer specializing in East European and Soviet affairs...

...A loan from the World Bank is predicated on membership in the International Monetary Fund, for which Prague is probably not yet ready—politically or economically...

...It would also decide basic investment and profit-sharing policies, according to a recommendation issued by the government on June 30...