FINAL REPORT T O NATIONAL COUNCIL FOR SOVIET AND EAST EUROPEAN RESEARC H

TITLE : PATTERNS OF ECONOMI C DEVELOPMENT UNDE R SOCIALIS M

AUTHOR : Professor Marvin R . Jackso n Department of Economic s Arizona State Universit y

CONTRACTOR : Arizona State Universit y

PRINCIPAL INVESTIGATOR : Professor Marvin R . Jackso n

COUNCIL CONTRACT NUMBER : 800-1 2

DATE : April 198 9

The work leading to this report was supported by funds provided b y the National Council for Soviet and East European Research . Th e analysis and interpretations contained in the report are those o f the author .

EXECUTIVE SUMMARY

A . Introductio n

The research in this project has sought answers to three questions :

1) In the time period 1950 to 1985, have patterns of economic developmen t in the communist-ruled countries of Eastern Europe differed from those i n capitalist countries ?

2) Have the patterns of two less developed communist-ruled countries , Bulgaria and Romania, differed from the common experience of that group ?

3) Have Bulgaria and Romania exhibited any significant variations tha t might suggest the limits to policy under the common institutiona l framework of communist political arrangements and socialist economi c institutions ?

The research findings are compiled in a 400 page manuscript now bein g edited for publication . This final report includes the introductory chapte r and summaries of the nine substantive chapters of the manuscript . The chapte r titles are :

II. Bulgaria and Romania : Past and Politics . III. Growth Patterns of National Product . IV. The Sources of Growth . V. Investments and Capital Accumulation . VI. Labor Force and Consumption . VII. Industrialization Patterns . VIII. The Contributions of Agriculture . IX. Foreign Trade and The CMEA . X. Challenges of World Markets .

B . Some Concepts and Theory .

The designation, "communist-ruled countries" has been chosen in place o f "socialist countries" because it is really communist rule that determines an d restricts choices of institutions and policy . What is more important is tha t the inquiry, mostly concerned with facts and their meanings, be directe d according to the existing body of theoretical-conceptual literature on th e expected economic effects of communist rule . These are discussed in Chapter I (enclosed) and again at the beginning of each chapter of the report .

There is also a question of whether there are theoretical grounds fo r expecting the impact of communist rule to be different in Bulgaria and Romania , proxies for less developed countries . As will be explained shortly, being mor e or less developed has an impact on the development process which is independen t of institutional arrangements . Are there effects dependent on communist rule ?

This question and a related one, are there conceptual or theoretica l grounds for expecting a different impact of communist rule on two seemingl y

iii similar countries like Bulgaria and Romania, are discussed in Chapter II .

The term, "development pattern", means the characteristics of economi c growth, including its sources and sectoral composition, and the main structura l changes taking place in a national economy over a period of time . If develop- ment patterns are representative of economic systems, they must be measured o n the basis of sufficient samples . In the project, the capitalist countries ar e usually taken to be the members of OECD, plus some East Asian and Latin American developing countries . At times the sample shrinks to the Wester n European and even only the Southern European countries .

The sample for the communist-ruled countries nearly always includes th e six East European members of CMEA, often also the Soviet Union, and less ofte n Yugoslavia .

A major research problem is how to decide if development patterns ar e "different" . Differences are sometimes presented as arithmetic averages acros s sample countries in each group . However, as often as has been possible , statistical tests are used to address the problem that nearly every importan t development pattern varies systematically with the level of GNP per capita an d sometimes with other factors such as country size (in the case of foreig n trade) . For example, growth rates of GNP tend to decline as the level of GN P per capita rises . So it would be biased to conclude that communist-rule d countries tend to grow faster merely on the grounds that average growth i s higher than for capitalist countries .

Whenever possible the research employs a statistical regression t o "normalize" data for differences in the level of GNP before drawing conclusion s about system differences . This involves estimating an equation of the for m

INDICATORi = an + b n* YCAP i + c n* POP i + d n* DUM j + e n , where INDICATOR is the nth pattern, a growth rate or a structural statistic , for the ith country, YCAP is national product per capita, POP is country siz e in terms of population, DUM is a dummy variable for the jth system or countr y group, and e is an error term . Differences in systems or country groups ar e estimated by the value and significance of the coefficient, d .

A major part of the project is devoted to collection of a data set t o test differences . Data cover about 40 countries and more than 30 variables fo r the period from 1950 to 1985 . In order to manipulate data more easily, the y have been reduced to average values for five year periods (1950 to 1955, 195 5 to 1960, etc) . The usual sample set for testing differences between communist - ruled and capitalist countries is 256 observations . This sample is sometime s used to test differences between Bulgaria and Romania, and the other communist - ruled countries . When data unique to communist-ruled countries is used, test s are made with a 50 observation sample only for the communist-ruled countries .

Comparisons of growth rates involving communist-ruled and capitalis t countries are always based on western estimates of GNP, industrial output, an d

iv agricultural output for the former countries and official statistics for th e latter . When Bulgaria and Romania are compared with other communist-rule d countries, primary use is made of official statistics of net material produc t (NMP), gross industrial output (GIO), and gross agricultural output (GAO) . Some comparisons are also made with western estimates, and are always s o designated .

C . Principal Finding s

Summary Table 1 provides an overview of the main quantitative evidenc e generated and explored in the research . The major finding is that from 1950 t o 1985 communist-ruled countries grew less rapidly than capitalist countries a t any given level of income, a result attibutable to a combination of lowe r growth of productivity, labor force, and investment) This was despite greate r shifts of labor out of agriculture and higher rates of investment, highe r participation rates, and higher education rates . There was no difference i n growth rates of exports and imports .

A second major finding is that communist-ruled countries have been "over - industrialized" . Shares of investment and labor force in industry, particu- larly heavy branches, have been larger than for a typical capitalist country a t the same level of income, while shares in services have been smaller .

Other major findings concern the comparison of Bulgaria and Romania wit h the other communist-ruled countries . Bulgaria and Romania grew faster at a given level of income per capita than the others, exhibiting higher growth o f productivity, investments, exports and imports (but not labor force), an d greater shift of labor out of agriculture . 2 At the same time, neither in- dustrial output nor agricultural output grew faster in Bulgaria and Romani a than in the other countries . This suggests that the faster growth in Bulgaria and Romania was derived from the effects of shifting resources from agricultur e to industry (and perhaps was connected to relative pricing in the two sectors) .

A second major finding in the case of Bulgaria and Romania is that mos t of their margin of faster growth compared to the other communist-ruled coun- tries was generated in the earlier years of communist rule . In 1976-80 and 1981-85 their behavior is more typical . This is consistent with the view tha t higher performance is connected to the (diminishing) possibilities of shiftin g resources from agriculture to industry .

Many other minor findings and numerous qualifications in the methods, th e data, and the results are reported below .

1 This conclusion is based on western estimates of GNP for communist-rule d countries and corrected growth rates of investment, as explained in the body o f the report .

2Similar results are obtained when growth is measured in both GNP and NMP . Bulgarian and Romanian data in the two cases show no unusual deviations unti l the 1980s in the case of Romania .

v

Summary Table 1

DIFFERENCES IN GROWTH AND STRUCTURE : COMMUNIST-RULED VS CAPITALIST COUNTRIES AN D BULGARIA/ROMANIA VS OTHER COMMUNIST-RULED COUNTRIE S

------Communist - Ruled Bulgaria/Romani a Period versus versus Com - or Year Capitalist Growth or Development Pattern munist-Rule d ------

1950-85 lower 1) Growth of gross national product highe r 1950-79 same la) Stability of GNP 1950-79 same lb) Retardation of growt h 1950-85 lower 2) Growth of productivity (GNP) higher - converged * 1950-85 3) Growth of net material product highe r 1950-85 4) Growth of productivity (NMP) higher - converged * 1950-85 lower 5) Growth of fixed capital invest- highe r ment s 1950-85 6) Growth of net investment s highe r ("accumulation fund") 1950-85 higher 7) Rate of gross investmen t 1950-85 8) Rate of net investment same ("rate of accumulation" ) 1950-85 lower 9) Growth of occupied population same 1950-79 higher 10) Participation rate s 1975, 1980 higher 11) Secondary education rate s 1950-79 same 12) Growth of total population 1975, 1980 lower 13) Fertility Rate s 1950-80 dat a 14) Net international migration rate s problems 1950-85 lower - 15) Share of urban population sam e converged* 1950-85 lower 16) Total internal migration rate s 1950-85 lower 17) Net rural to urban migratio n rat e 1950-80 lower 18) rural to urban commuting rat e 1960-80 lower 19) Urban to urban migration rat e 1975, 1980 higher 20) Physicians per capit a 1975, 1980 higher 21) Nurses per capit a 1975, 1980 higher 22) Infant mortalit y 1980 higher 23) Air pollutio n 1980 same 24) "Physical Quality of Life " 1950-85 higher 25) Percentage shift of labor forc e higher out of agriculture

vi

Summary Table 1 (Continued )

Communist - Ruled Bulgaria/Romani a Period versus versus Com - or Year Capitalist Growth or Development Pattern munist-Rule d ------

1950-85 higher - 26) Share of labor force in agriculture sam e converged* 1950-85 higher 27) Share of labor force in industry sam e 1950-85 lower 28) Share of labor force in services sam e 1950-85 same 29) Growth of industrial output sam e 1950-79 same 29a) Stability of industrial outpu t 1950-79 higher 29b) Retardation of industrial growt h 1950-85 higher 30) Share of "heavy industry" of industria l labor forc e 1980 higher 31) Energy consumptio n 1980 higher 32) Consumption of metal s 1950-85 same 33) Growth of agricultural output same 1950-79 lower 33a) Stability of agricultural outpu t 1950-85 lower 34) Share of animal products in agri- lowe r cultural output 1950-85 lower 35) Net agricultural exports highe r 1950-85 lower 36) Fertilizer per hectare 1950-85 same 37) Specific crop yield variation s 1950-85 same 38) Growth of total exports higher 1950-85 same 39) Growth of total imports higher 1950-85 lower 40) Ratio of imports to GNP highe r 1950-85 lower 41) Ratio of total imports to tota l same exports 1950-85 lower 42) Change in terms of trade same 1970, 1975 greater 43) Trade diversion

------* Deviations usually vary over the period from 1950 to 1985 . When significan t system differences disappear by the 1980s, a convergence is indicated .

D . Main Differences between Communist-ruled and Capitalist Countries .

From 1950 to 1985 average growth rates of western-estimated GNP for th e communist-ruled countries tend to fall more than one percentage point belo w those for the capitalist countries, once differences in per capita income ar e normalized . Otherwise, there are no differences in stability of growth or th e tendency of growth to retard . About half of the difference in GNP growth rates is due to lower growth of factor productivity and the rest to lower facto r growth and change in labor structure .

vi i The communist-ruled countries exhibit lower growth rates of occupied population at a given level of income, even though participation rates in th e labor force are higher and grow faster . However, they have greater shift o f labor out of agriculture at given levels of income per capita .

Average growth of investment in fixed capital, a proxy for capita l growth, is similar for both groups of countries after official growth rates ar e corrected to correspond with western-estimated GNP growth . But when differ- ences in income per capita are considered, the growth of investment is lower i n communist-ruled countries . Limited evidence suggests that greater shares o f income are invested in communist-ruled countries .

Growth of industrial output is not higher in communist-ruled countrie s when it is measured by western estimates and differences in levels of GNP pe r capita are considered . While growth rate retardation is somewhat higher, ther e is no difference in stability of growth . In spite of this, communist-rule d countries are "overindustrialized" . Not only are investment and labor forc e shares in industry higher, but they are especially high compared to shares i n services and to shares of the population urbanized . Within industry, commit- ments to "heavy" industry (processing of industrial and energy materials an d heavy manufacturing) are still high by capitalist standards .

The growth of agricultural output has not been significantly differen t across systems when per capita income is considered, but the stability o f growth has been less under communist rule . Animal products average smalle r shares of output in Eastern Europe than in Western Europe . Eastern Europ e produces 20 percent higher gross output per capita of total population than i n Western Europe, using 80 percent more arable and crop land per capita of tota l population and 50 more persons occupied per hectare with about half as man y tractors and 20 percent less fertilizer per hectare . At the same time, in Western Europe domestic consumption standards are higher and the coverage o f imports by exports also higher . Therefore, it is quite possible that wastag e and lower terms of trade are problems for agriculture under communist rule .

The communist-ruled countries still provide too few service workers t o back up each person in industry and, at the same time, provide relatively fe w urban living accommodations for those in industry, forcing many to commute o r live in temporary quarters .

Higher investment rates imply lower shares of national income allocate d to consumption in the communist-ruled countries . Private consumption, espe- cially services, is relatively most neglected . The ICP of 1975 estimates private consumption in Romania to be only 50 percent of Spain, with Yugoslavi a at 56 percent, Poland 71 percent and Hungary 77 percent . Housing standards ar e far behind, especially in Romania, although in Bulgaria more space per capit a is provided than in either Hungary or Yugoslavia . Romania is also the leas t adequately supplied with sales personnel and sales facilities .

Although simple average growth rates are higher in earlier five-yea r periods in communist-ruled countries, there are no differences in the growt h rates of exports and imports due to system when differences in incomes pe r capita are considered . Still, in 1975 and 1980 the ratio of imports to GNP ,

viii measuring foreign trade dependency of communist-ruled countries, is, respec- tively, only 67 percent and 56 percent of that of a typical capitalist country . Low trade dependencies of the 1950s have not been made up .

Directions of trade are also influenced . According to Fink, turning inward among the communist-ruled countries reached a peak in 1955-62 . Sinc e 1960, their real trade with "nonsocialist" countries has grown faster than wit h "socialist" countries . Nevertheless, by 1970 Hewett shows there remain large trade diversion among CMEA countries in which their trade with Western Europea n countries is only 20-30 percent of normal capitalist trade . Diversion is eve n greater in machinery, according to Slama . All in all, communist rule pushe s up shares of machinery and industrial raw materials, and pushes down shares o f consumer manufactures and food products .

Communist-ruled countries (with Yugoslavia an exception) also have lowe r ratios of commodity imports to commodity exports than capitalist countries whe n measured on a similar CIF :FOB basis . This is attributed to weakly develope d international capital institutions and lower levels of invisible earnings .

E . Bulgaria and Romania Versus Other Communist-Ruled Countries .

A division of subject is followed in this section and the one following . Here the emphasis is on shared traits of Bulgaria and Romania that set them of f from other communist-ruled countries .

According to the regression analysis, Bulgaria and Romania have statisti- cally significant, higher NMP and GNP growth from 1950 to 1985 for a give n level of income per capita than the other communist-ruled countries . Thi s means that only part of their higher (simple unqualified) average is becaus e they have lower income per capita . Behind their higher growth rates o f national product are all of the following statistically significant differ- ences : higher productivity growth in the 1950s and 1960s, higher growth o f fixed capital investments, greater labor shift out of agriculture, and highe r growth of exports (and imports) .

At the same time, they do not have statistically significant highe r growth of labor, something that might have been expected . More interesting , they do not have higher growth of industrial and agricultural output . Their average growth rates are higher, but only because of their lower levels o f income per capita .

This raises a major question . If the two main sectors of the economy , industry and agriculture do not grow faster (than accounted for by incom e differences), how can NMP or GNP grow faster? There are two possibilities . "Services", that is all other sectors besides industry and agriculture, coul d have grown faster . But such an explanation does not fit the evidence tha t Bulgaria and Romania are the two most "overindustrialized" communist-rule d countries in the late 1970s and 1980s .

The other possibility which "fits" the facts is that higher nationa l product growth comes from a greater labor shift in the cases of Bulgaria an d

ix Romania . It appears likely that the "elasticity" of NMP or GNP growth wit h respect to labor shift is higher in Bulgaria and Romania than in other coun- tries . Evidence is that their residual productivity growth is unusually hig h at the same time that their difference in labor shift is unusually high, in th e 1950s and 1960s . Also, there is a good explanation of why the "elasticity" o f growth for labor shift was high . This could come from initial productivity o f labor in agriculture compared to industry being lower in Bulgaria and Romani a than in the other communist-ruled countries .

This explanation of the "difference" of Bulgaria and Romania woul d explain why their productivity growth relative to other communist-rule d countries falls in the 1970s and 1980s . The economic gains from being "les s developed" at the time communist rule was imposed are not enduring, lastin g only until labor is shifted out of agriculture and relative prices are changed . Possibly the only enduring influence of initial backwardness is that th e Bulgarian and Romanian people have up to this point not protested openl y against their communist rulers in any measure corresponding to the ineptness o f those rulers' policies .

F . Bulgaria Versus Romani a

The comparative measurement of Bulgarian and Romanian growth require s correcting Romania's early official data from the bias of 1950 weights . Whe n this is done, the same pattern of comparative growth emerges in virtually al l growth indicators . Bulgaria does better in the 1950s and 1960s, especiall y from 1955 to 1965, and Romania does better from the early 1970s to 1979 . It i s evident from official NMP, western GNP, industrial output, agricultural outpu t and foreign trade .

How much Romania catches up in the 1970s hinges not just on the variou s numbers, but on how much one believes that Romanian output and income figure s are politically exaggerated . The indicators, corrected for early technica l biases, show the same overall growth by 1985, based on 1950 and Bulgaria' s relative progress with a prewar base .

Bulgaria's better overall performance in the 1950s and 1960s is connected with its ability to generate larger shifts of labor out of agriculture an d higher export growth and not on higher growth of labor and investments . Investments grow at similar rates in both countries, but from a differen t combination of factors . In the early 1950s Bulgaria had a higher investmen t rate which then increased more slowly than Romania's . Its investment growt h depended on the growth of national income . In Romania's case, where nationa l income grew more slowly, investment growth also depended on the more rapidl y increasing share of investment in national income .

Bulgaria's larger shares of investment in national income in the earl y 1950s may be due to faster and better establishment of communist rule an d socialist institutions . Most certainly it also reflects Soviet discriminatio n in favor of Bulgaria . At the end of the war, Bulgaria, with an econom y suffering far less war damage, received small net capital transfers from th e Soviet Union . But Romania lost goods in reparations and other payments to th e

x Soviet Union in 1944 and 1945 worth an estimated third of its capital stock . From 1947 to 1957 both countries receive roughly the same absolute sums o f Soviet credits, which meant more relative help to smaller Bulgaria . In addition, surprisingly large shares of investments available to Romania in th e later 1940s and early 1950s were wasted in the defunct, first Danube-Black Se a Canal and in a massive program to increase petroleum output . By Stalin's deat h another factor came into play . From 1953 to 1957, according to Romania n domestic statistics, the volume of imported machinery used for investments fel l 50 percent to only 17 percent of what was available .

In the 1950s and early 1960s, Bulgaria pushed investments in agriculture , replacing labor and increasing productivity so that equalization of income s with industry was possible quite early . By the mid-1960s agricultural outpu t per head of total population was 40 percent more than in Romania, providin g higher consumption standards and food exports .

In 1950 Bulgaria already had larger shares of industry in food processin g and Romania larger shares in the processing of industrial materials and energy , both specializations as much influenced by nature as policy . While Romani a also had a larger initial machinery branch, that difference virtually disap- peared in the subsequent major priority put by both countries on the branch . Since 1965 the elasticities of branch growth are similar in both countries .

Romania's relative progress in the 1970s was partly Bulgarian slowdow n and partly acceleration of Romania's economy following a gradual rise of th e share of national income invested . Romania's turn West made little differenc e since better Bulgaria terms of trade in the 1970s gave way to better ones fo r Romania in the early 1980s . Romania did face greater temptation from western credit . But a positive result of the relative westward orientation was tha t Romanian exports to the West of manufactured goods are more to its comparativ e advantage and have served to keep its market shares in OECD imports fro m falling as much as Bulgaria's .

There are important differences in the economics and politics of Bulgari a and Romania . Romania's agricultural organization is a succession of increasin g centralization and limitation of the private sector . Bulgaria's heralded "agro-industrial complexes" are failures, but now it might be turning to a combination of cooperative and private share-cropping that could work . Neithe r country successfully implemented decentralizing reforms in industry and foreig n trade, although Bulgaria could now be making hesitant progress towards tha t end . All in all, the Bulgarian economy is better organized even withou t reforms . The Bulgarian polity shows a certain reason . Yet it would be wrong to overlook the fact that both economies suffer major structural deviations an d would face extreme strain if opened to greater competition from the world . And this necessary step toward changing development into maturation is held bac k politically in both countries by the same combinations of forces - veste d interests, fear of worker and consumer discontent, and, above all, fear o f losing control over people's movements and thoughts . Bulgaria has not yet sun k to the depths of Ceausescu's scarred land, but without major changes, Romania' s present may be Bulgaria's future .

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CONTENTS

EXECUTIVE SUMMARY iii

CONTENTS . . xii i

LIST OF TABLES . . xv

Chapter I . INTRODUCTION . 1

I-A . The Research Proposal . . . . 1 I-B . Conceptual and Theoretical Questions . 2 I-C . Some Empirical Issues . . 6

Chapter II . OVERVIEW : PRECONDITIONS AND POLITICS . . 1 2

II-A . The Issues . 1 2 II-B . The Preconditions . . . 1 2 II-C . The Politics of Communist Rule . . . . 1 4 II-D . The Impacts of Past and Politics on Economic Development . 1 6

Chapter III . GROWTH PATTERNS OF NATIONAL PRODUCT . . 1 7

III-A . Issues and Measurement Problems . 1 7 III-B . Systemic Effects on Growth Rates . . . . 1 8 III-C . Bulgaria and Romania Versus Other Communist-Ruled Countries . . 20 III-D . Bulgaria Versus Romania 2 0

Chapter IV . THE SOURCES OF GROWTH . 23

I V-A . The Issue . . 23 IV-B . Plans and Growth of National Product . . 23 IV-C . Aggregate Production Functions . . 2 5 IV-D . Systemic Differences in Sources of Growth . 2 6 IV-E . Bulgaria and Romania Versus Other Communist-Ruled Countries . 2 9 IV-F . Bulgaria Versus Romania . 2 9

Chapter V . INVESTMENT AND CAPITAL ACCUMULATION . . 3 2

V-A . Conceptual and Measurement Problems 3 2 V-B . Systemic Comparisons of Investment and Capital Accumulation . 3 2 V-C . Bulgaria and Romania Versus Other Communist-Ruled Countries . 3 3 V-D . Bulgaria Versus Romania . . 3 5

Chapter VI . LABOR FORCE : GROWTH, STRUCTURE, AND CONSUMPTION . 3 8

VI-A . Labor Force Growth . . 3 8 VI-B . Changes in Labor Force Structure and Urbanization . 3 9 VI-C . Comparisons of Consumption Standards . . . 42

CONTENTS (Continued )

Chapter VII . INDUSTRIALIZATION PATTERNS . 4 4

VII-A . Conceptual and Measurement Problems Across Systems . . 4 4 VII-B . Systemic Effects on Industrial Growth Rates . . 4 4 VII-C . The Overall Role of Industry in Communist-Ruled Countries . 4 7 VII-D . The Branch Structure of Industry . . 4 7 VII-E . Bulgaria Versus Romania . . . . 4 9 VII-F . Comparative Industrial Institutions in Bulgaria and Romania . . 52

Chapter VIII . PATTERNS OF CHANGE IN AGRICULTURE . . 55

VIII-A . Theory and Concepts about the Effects of Communis t Rule in Agriculture . . . 55 VIII-B . Systemic Differences in Agricultural Performance . . . . 55 VIII-C . Bulgaria and Romania Versus Other Communist-Ruled Countries . 57

Chapter IX . SYSTEMIC EFFECTS ON FOREIGN TRAD E AND ISSUES WITHIN THE CMEA . . . . 6 5

IX-A . Concepts of Foreign Trade Development under Communist Rule . 6 5 IX-B . Empirical Analysis of Systemic Effects on Foreign Trade . . 6 5 IX-C . Bulgaria and Romania Versus Other Communist-Ruled Countries . 6 9 IX-D, Bulgarian and Romanian Institutional and Policy Commitment s to CMEA . . . . . 75

Chapter X . THE CHALLENGES OF WORLD MARKETS . 77

X-A . The Issues ...... 77 X-B . Growth Rates of "Nonsocialist" Trade Since 1960 . 77 X-C . Commodity Patterns of Bulgarian and Romanian Nonsocialist Trade . 78 X-D . Competition in Western Markets . . . . 79 X-E . Balances of Payments and Import Capacity . . 8 3 X-F . Institutions for Access to Western Markets . 8 4

Chapter XI . SUMMARY AND CONCLUSIONS : BARRIERS TO MATURITY . . 8 7

XI-A . From Growth to Maturity 8 7 XI-B . The Need for Reforms and Barriers to Maturity . . 8 7 XI-C . Summary of Structural Deviations . . . 8 8 XI-D . Structurally Induced Disequilibrium in Communist-Rule d Countries 8 8 XI-E . Comparison with the Southern European Capitalist Countries . 89 XI-F . Interaction of Structural and Political Barriers to Maturin g in Bulgaria and Romania . . 90

REFERENCES CITED . . 93

xiv

LIST OF TABLE S

Summary Table 1 . Differences in Growth and Structure : Communist-Rule d vs Capitalist Countries and Bulgaria/Romania v s Other Communist-Ruled Countries . .. . vi

I-1 . "Normal" Variations of Economic Structure 9

III-1 . Percent Average Annual Growth of GNP 1 8 III-2, Identification of Time Shifts in GNP Growth, 1950-1985 . . 1 9 III-3 . Ratio of Growth in GNP to Growth in NMP . . 2 1

IV-1. Plans for NMP Growth and Their Fulfillment .. . 24 IV-2. Regression Experiments on Sources of NMP Growth . . 2 7 IV-3. Regression Experiments on Sources of GNP Growth . . 2 8 IV-4 . Comparison of Data on Growth of "Factor Inputs" , Communist-Ruled and Capitalist Countries, 1950 to 1985 . . 3 0

V-1 . Trends of Accumulation Rates, 1950-1984 . . 3 4

VI-1 . Indicators of Overindustrialization and Underurbanization • . 4 1

VII-1 . Comparisons of the Official Growth Rates of Industria l Production of the Communist-Ruled Countries, 1950 to 1985 . 45 East-West Differences in Industrial Structure, VII-2 . 1964-66 . ▪ . 4 8 VII-3 . Elasticity of Branch of Industry Growth for CPEs, DMEs, an d LDCs from 1966 to 1973 and 1973 to 1980 4 9 VII-4 . Relative Output Growth of Branches by Five-Year Periods . •. 50 VII-5 . Comparative Shares of Exports in Industrial Outpu t of Communist-Ruled Countries, 1970-1984 . • . 5 2

VIII-1 . Comparative Agricultural Output per Capita, 1966 to . 1982 ▪ . 5 6 VIII-2 . Coverage of Agricultural Imports with Agricultural Exports , Eastern and Western Europe, 1970 to 1981 ... . 5 7 VIII-3 . Variability of Wheat Yields and Rainfall in Selected Countries , 1950 to 1980 . . 58 VIII-4 . Growth of Agricultural Output in Bulgaria and Romani a Compared to Eastern Europe by Five-Year Periods, 1950 to 1985 . 5 9

IX-1. Comparison of the Changes in Major Foreign Trade Variable s across Systems by Five-Year Periods, 1950 to 1985 ▪ . 6 6 IX-2. Per Capita Foreign Trade of Selected Countries .. ▪ . 6 8 IX-3. Deviations from Estimated Normal Import Dependency . ▪ . 7 1 X-1 . Estimated Ratios of Foreign Trade with the West to GNP in 198 0 and 1985 for the Communist-Ruled Countries . .. • . 8 0

xv

1

Chapter I . INTRODUCTION

I-A . THE RESEARCH PROPOSA L

As originally proposed and accepted, research under this contract wa s

directed to three questions : (1) In the time period 1950 to 1985, hav e

patterns of economic development in the communist-ruled countries of Easter n

Europe differed from those of capitalist countries? (2) Have the patterns o f

two less-developed communist-ruled countries, Bulgaria and Romania, differe d

from the common experience of that group? (3) Have Bulgaria and Romani a

exhibited any significant variations that might suggest the limits to polic y

under the common institutional framework of communist political arrangement s

and socialist economic institutions ?

The accepted proposal was to review published research covering bot h

quantitative and historical-narrative approaches, and, as necessary and wher e

feasible, to extend and supplement such research . The objectives have bee n

achieved . The research results are reported here, in other working papers an d

publications, and in a 400 page manuscript being edited for publication .

Following the presentation of theoretical and methodological questions i n

the remainder of this section, the substance of research findings will b e

described in the remaining sections covering major aspects of economic develop-

ment, each of which summarizes a chapter in the full manuscript, as follows :

Chapter II . Bulgarian and Romanian Overview . Chapter III . Growth Patterns of National Product . Chapter IV . The Sources of Growth . Chapter V . Investments and Capital Accumulation . Chapter VI . Labor Force and Consumption . Chapter VII . Industrialization Patterns . Chapter VIII . The Contributions of Agriculture . Chapter I v . Foreign Trade and the CMEA . Chapter X . Challenges of World Markets . Chapter XI . Summary and Conclusions : The Barriers to Maturity . 2

I-B . CONCEPTUAL AND THEORETICAL QUESTION S

I-B-1 . Why "Communist-Ruled" Countries ?

The designation, "communist-ruled countries" has been chosen in place of

"socialist countries" or "CPEs" because it is really communist rule tha t determines and restricts choices of institutions and policy . Yugoslavia and , less since 1968, Hungary are not CPEs . Besides, the effort to monopolize th e term "socialist countries" by ruling communist parties should be recognized a s propaganda .

"Communist rule" is a political system based on the following element s

[Comisso-86, 20] : (1) a single Marxist-Leninist party with a monopoly o n political power, (2) a highly centralized, hierarchically organized state an d economy, (3) a lack of differentiation between state-governmental and economi c institutions, and (44) a politically penetrated form of sovereignty in whic h party interests rather than national or economic interests govern policy .

I-B-2 . The Expected or Theoretical Effects of Communist Rul e

This project concerns mostly facts and their meaning . Still, an attemp t is made to direct empirical inquiry according to the existing body of theoreti- cal-conceptual literature on the expected economic effects of communist rule .

According to this literature, there are five main reasons why the structure o f development might be different under communist rule :

(1) Preexisting Conditions . It is possible that communist rule tend s

to occur more in countries that have abnormal structures . It has been

suggested that Eastern Europe, as part of the periphery, had stunted

industrial sectors, slanted foreign trade and overly lar ge agricultur e

sectors . 3

(2) Economic Ideology . The Marxist view of extended reproductio n calls for a faster growth of the means of production than the means o f consumption and an even faster growth of the means of production for th e means of production (investment over consumption, heavy industry ove r

light industry) . The Marxist view of services considers them relativel y

less important, but at the same time calls for widely distributed publi c health and educational services .

(3) Political Ideology and Power . Under the concept of capitalis t encirclement, national and ideological security calls for reduced depen- dence on imports from capitalist countries, on national sources of defens e materials and equipment, and on reduced and controlled personal contact s and information flows . These are all devices that also enhance the powe r of the ruling group over others in the system .

(4) Economic Centralization . Central administration can pus h

resources into sectors and branches considered to be "advanced" faste r

than market forces can in capitalist countries . That is, there is th e possibility that economic structures will resemble what policy makers i n communist-ruled countries perceive as the directions the advanced capital-

ist economies are headed and so have structures more advanced than thei r development levels .

(5) Decision Rules and Rent Seeking . The combination of an irration-

al price system and the typical success indicator system lead to excessiv e

requests for capital (projects that are too large, too capital intensiv e

and too numerous), while central capital allocation according to the abov e

mentioned priorities puts too much capital in too few projects in the hig h

priority areas . Second, an irrational price system and the typica l

success indicator system make it not only difficult to identify ad- 4

vantageous foreign trade but also provide reduced rewards for engaging i n

it . Third, import competition poses unwelcome threats to managers an d

workers, while export markets are poorly understood, require extra work

and bring politically unwelcome contact with foreigners . And, fourth ,

central planners favor activities that are easier to control from th e

center, including domestic over foreign activities, while trying t o

influence outcomes through capital allocation instead of increase d

efficiency, and through education and general health services rather than

more effective personal incentives .

The system's combination of objectives and decisionmaking arrangements can be predicted to have an impact on the pattern or structure of both nationa l income and national product, while the net effects on growth rates are unclear :

(1) Predicted Changes in National Income or the uses of nationa l

product compared to an economy under capitalist rule at a similar level o f

economic development are : (a) An increase in the share of national income

invested in physical capital and a decrease in the share consumed ; (b) o f

the share of national income consumed, an increase in the share of publi c

(social) consumption and a decrease in the share of private (individual )

consumption ; (c) of the share of private consumption, an increase in th e

share of goods and a decrease in the share of services ; (d) of the shar e

of services in consumption, an increase in the share of public service s

and a decrease in the share of private services .

(2) The Predicted Effects on Production, compared to a similarl y

placed capitalist country are : (a) Of the output shares of the thre e

broad sectors of production, increased share of industry, decreased shar e

of services and possibly decreased share of agriculture ; (b) a similar 5

relative shift in the structure of labor and capital inputs, but with a n

even greater relative shift in the shares of capital (increased i n

industry, decreased in the others) ; (c) of the output shares in industry ,

a relative increase in the shares of so-called heavy industries and a

relative decrease in the shares of light industries (including foo d

processing) ; (d) an even greater relative shift of capital shares to heav y

industry and a smaller relative shift of labor to heavy industry ; (e) a

smaller relative share of population living in urban areas ; (f) a smalle r

relative share of national product exported and a smaller relative shar e

of imported goods for all national uses .

(3)Predictions about Growth will depend on a balance of particula r

factors including : (a) how much the investment rate (or the Marxis t

"accumulation rate") changes ; (b) capital :output ratios ; (c) the shift of

resources out of agriculture when there are disequilibrium values o f

marginal products ; (d) economies of scale ; (e) costs of taking ove r

foreign technology ; (f) labor force growth ; and (g) incentives for labor .

I-B-3 . The Expected Differences in Bulgarian-Romania n Patterns and Other Communist-Ruled Countrie s

As will be explained shortly, Bulgaria and Romania would be expected t o grow faster just like other less-developed countries . It is a differen t question if communist rule has different effects on less-developed than o n more-developed countries . For example, communist rule seems always to get th e process of development started, something that cannot be said for capitalism .

Initially, it might be especially useful for forcing people to accept educatio n and public health when ethnic and religious barriers inhibit change .

Class structures and social cultures vary with the level of development .

Would the resulting influences be different if communist rule is imposed in an 6 already developed society like that in the GDR compared to a peasant societ y like that in Bulgaria or Romania? Is "new socialist man" more likely wher e working class consciousness already exists or where working class and middl e class corruption has not penetrated ?

I-B-4 . Should Bulgaria and Romania Differ from Each Other ?

While Bulgaria and Romania have shared many influences, they also hav e differences . Size and diversity of natural resources are obvious . Othe r differences in historical political and economic culture are more difficult t o document, but appear to have been important . And since its imposition , communist rule in both countries has been different in terms of both externa l commitments and internal structure and style . Both shared and differentiate d influences are discussed in more detail in Chapter II, "Overview : Past an d

Politics" that surveys recent Bulgarian and Romanian history and contemporar y political development .

I-C . SOME EMPIRICAL ISSUE S

I-C-1 . What Are "Development Patterns" ?

The term "development pattern" is used in the title of the project an d appears in each thematic question . A development pattern means the charac- teristics of economic growth, including Its sources and sectoral composition , and the main structural changes taking place in a national economy over a period of time . The limits of inquiry are suggested by the chapter title s listed above, and their content .

Each chapter follows roughly the same format . First, conceptual and dat a problems are identified . Then follow three sections, each of which focuses o n the empirical evidence to answer one of the three main research questions 7

listed above . One can see that if there is only one "pattern" in each chapter , with the three comparative dimensions at least 24 answers must be summarized .

But, indeed, there are more .

I-C-2 . The Problem of Representative Sample s

Another concern is how one decides if development patterns are representa- tive of economic systems . The tendencies common to groups of countries, th e capitalist and the communist-ruled, can be identified only on the basis of a sufficient sample of both . In this project, the capitalist countries ar e usually identified by the members of OECD, plus some East Asian and Lati n

American developing countries . At times the sample shrinks to the Western

European and even only the Southern European countries .

The sample for the communist-ruled countries nearly always includes th e six East European members of CMEA, often also the Soviet Union, and less ofte n

Yugoslavia . But it never includes less-developed communist-ruled countries .

It is possible that, by not including more LDCs, capitalist and communist - ruled, that biases are introduced into estimates [see Birkett-86a] .

I-C-3 . When Are "Differences" between Groups and Countries Significant ?

A third problem is how one decides if development patterns are "dif- ferent" . Differences are sometimes merely those in the arithmetic averages o f sample country-groups . This is admittedly deficient and not just because th e significance of differences in sample means is untested . The deeper problem i s that nearly every important development pattern varies systematically with th e level of GNP per capita and sometimes with other factors such as country siz e

(in the case of foreign trade) . For example, growth rates of GNP tend t o decline as the level of GNP per capita rises . So it would be biased to

8

conclude that communist-ruled countries tend to grow faster merely on th e

grounds that average growth is higher than for capitalist countries . As ofte n

as possible the research employs a statistical regression to "normalize" dat a

for differences in the level of GNP before drawing conclusion about syste m

differences .

The methodology incorporates the approach of Hollis Chenery who identifie s

statistical patterns of economic development common to a large number o f

countries by cross-country regressions [Chenery and Syrquin-75] . Theoretical-

ly, behind such patterns are the joint effects of similar technological change s

on the supply side and of similar income elasticities on the demand side .

According to this view, if all countries began with similar initial resourc e

endowments and adopted similar institutions, each would have nearly the sam e

economic structure at any given level of economic development .

Specifically, what this means is demonstrated by Table I-1 which i s

adopted from Chenery and Syrquin . In their case, the commonly expected

patterns of economic development are estimated on the basis of a cross-countr y

data set by fitting a regression equation of the form ,

(1) INDi = YCAP n , POP n

where IND i is one of the indicators in Table I-1, n is a country in the sample ,

YCAP is gross national product per capita measured in U .S . dollars of a give n

year, and POP is country population . The theory of the model says that th e

indicator changes with changes in the level of economic development, a s

measured by YCAP, and in the scale of economic activities, as measured by POP .

It is expected that observations for individual country data in the sampl e

will be scattered around the regression surface . Such deviations could resul t

from differences in resourc e endowments (including neighboring countries) an d

from both systemic and policy differences reflecting country institutions .

9

Table I- 1 "NORMAL" VARIATIONS OF ECONOMIC STRUCTURE

------Predicted values at different per capita GNP, US$ 196 4 ------100 300 500 800 1000 ------Structure of production (% ) a . Primary share 45 .2 26 .6 20 .2 15 .6 13 . 8 b . Industry share 14 .9 25 .1 29 .4 33 .1 34 . 7 c . Utilities share 6 .1 7 .9 8 .9 9 .8 10 . 2 d . Services share 33 .8 40 .3 41 .5 41 .6 41 . 3 Labor allocation (%) a . Primary shar e 65 .8 48 .9 39 .5 30 .O 25 . 2 b . Industry share 9 .1 20 .6 25 .8 30 .3 32 . 5 c . Services share 25 .1 30 .4 34 .7 39 .6 42 . 3 Population (% ) a . Urban share 22 .0 43 .9 52 .7 60 .1 63 . 4 Gross national product (%) a . Export rati o 19 .5 23 .O 24 .4 25 .5 26 . 0 b . Import ratio 21 .8 24 .3 25 .4 26 .3 26 . 7 c . Investment rate 15 .8 20 .3 22 .0 23 .4 24 . 0 d . Government revenue 15 .3 20 .2 23 .4 26 .8 28 .7 ------Source : Hollis Chenery and Moises Syrquin, Patterns o f Development1950-1970 (London : World Bank and Oxford University Press, 1975), Table 3 .

Thus, Iceland might not be expected to have "normal" commitments of resource s

to agriculture and Albania, because of its import substitution policies, woul d

not be expected to have "normal" ratios of exports or imports to GNP .

The focus of research under this contract can now be more precisel y

identified . First, have the communist-ruled countries exhibited an economi c

development pattern that differs from that characteristic of capitalis t

countries? This possibility is illustrated by data on the "normal" decline o f

expected growth rates for capitalist countries as GNP per capita increases, an d

the overall deviation from this pattern of the communist-ruled countries, whic h

suggest that communist rule has depressed growth rates at a given level of GN P 1 0 compared to capitalist rule . This illustration of different developmen t patterns will be further discussed and necessarily qualified below .

I-C-4 . TheQualityand Comparability of Existin g Information about Communist-ruled Countrie s

A major part of this project was devoted to collection of a data set t o test differences . It covers about 40 countries and more than 30 variables fo r the period from 1950 to 1985 . In order to manipulate data easily, most serie s have been reduced to average values for five year periods (1950 to 1955, 195 5 to 1960, etc) . The usual sample set for testing differences between communist - ruled and capitalist countries is 256 observations . This sample is sometime s also used to test differences between Bulgaria and Romania, and the othe r communist-ruled countries . In this case, tests also use a smaller sample of 5 0 observations only for the communist-ruled countries .

As expected there are many problems of comparability of data from com- munist-ruled countries which are discussed at length in the full researc h manuscript . A few observations are merited here .

In the early part of the research great effort was committed to findin g the best measures of comparable US dollar values of the GNPs of all countrie s in the sample . This is reported in an earlier publication of the author an d not repeated here [Jackson-87a ; also see Marer-85] .

Poor quality data always make it more difficult to explain and qualif y results . Take a simple example, that of how to handle two data sets, officia l and western estimates . Not only does this double the number of tables and th e work of regressions, but it turns out that the growth of communist-rule d countries is slower in western estimated GNP than in official statistics . Bu t no conclusive judgment of which data set is more biased is possible at thi s time (the evidence is reported in more detail) . 1 1

There is major problem in deciding what is the best way to estimate th e comparative levels of per capita GNP that are used in the regressions . As i s known, meaningful exchange rates do not exist for most communist-ruled coun- tries . More important, not all of them have had comparable studies of purchas- ing power parity . If fact, not one good study is available for Bulgaria an d this remains a point of major qualification to the research presented here [se e

Marer-85 and Jackson-87a] .

There is the special problem of Romanian data . They are more biased tha n data for other communist-ruled countries, including Bulgaria . Some of th e early technical problems can be overcome in the Romanian data, but there is n o way to judge the degree of political bias since the late 1970s .

The last point . An effort is made to survey as much existing work b y other scholars as possible . It offers valuable insights and is incorporated a s fully as possible . But doing so tends to make explanation more complicate d because of differences in data, samples, time periods, and methodologies .

Unfortunately, some of the best work has not been replicated and improved b y its authors . 1 2

Chapter II . OVERVIEW : PRECONDITIONS AND POLITIC S

II-A . THE ISSUE S

The chapter provides a necessary chronological overview of Bulgaria an d

Romania in order to tie together the following material that is organized b y

separate economic problems and treated analytically . Three issues are covered :

political and economic development up to the Second World War, the effects o f

the War on the Bulgarian and Romanian economies, and the emergence and subse-

quent development of communist rule in each country .

II-B . THE PRECONDITIONS

1) Bulgaria and Romania before communist rule shared similar climates, th e

Orthodox religion, subordination to several hundred years of Ottoman rule , delayed emergence of modern states, predominant occupation in farming and rura l dwelling, and low levels of productivity and income compared to nearly al l

other European people .

Differences there were, too . Bulgarians had been ruled directly by th e

Turks, who exterminated their boyar class . Romanian boyars survived to rule under the Turks and then led the country's 19th century nationalist revival , offering traditional leadership of its peasants . Both had large minorities , especially after 1918 . But Bulgaria's minority was largely Turkish and Moslem , while the Germans and Hungarians in Romania could turn to "mother" Europea n states more highly developed than Romania . And while Romania's capital was fa r more developed in all respects than Sofia, Bucharest also had economically an d culturally successful minorities vying with ethnic Romanians . 1 3

Romania also had more diverse natural resources, was larger and mor e complexly developed than Bulgaria, but its very richness, together with larg e and influential non-Romanian minorities, created fertile soil for nationalism , especially economic, and xenophobia . Bulgaria, on the other hand, had bee n liberated by Russian intervention and while it looked in turn to Russia ,

Germany and again Russia as sponsor, Romania echoed the slogan of its Nationa l

Liberal Party, prin noi insine, figuratively "we can do it alone! "

It is more difficult to identify the behavioral consequences of shared an d unshared preconditions because of the lack of scientific evidence to answe r major questions . Concerning shared preconditions, for example, did Bulgarian s and Romanians (and others under Turkish power, Orthodox religion, and Balka n weather) acquire durable behavioral propensities that carried over to the ne w institutional setting? Was unusually vigorous nationalism provoked by th e combined influences of foreign domination, ethnic fragmentation, and Or- thodoxy's willing subordination to it [Petrovich-80]? In politics, wer e

Bulgarians and Romanians unusually obsequious and cautious? Did they tend t o seek patrimonial sponsors and leaders in economics, too? Did they view th e state under national leaders as obliged to direct national resources toward s national goals? And, as peasants, did they have strong biases against commer- cialism? It is tempting to view the pre-communist evolution of political an d economic cultures as providing potential sources of reinforcement of communis t rule, especially its more nationalistic tendencies .

Concerning unshared preconditions, it is also tempting to see past source s of different evolutions after 1944 . Were Romanians more prone to servilit y because their boyars survived while the Bulgarian ones did not? Were they eve n more biased against commercialism because commerce was more often in "alien" 1 4

hands? Were Romanians even more fearful of foreign intervention, because thei r

natural wealth, oil, was more tempting than Bulgarian land and sunshine ?

2) On the eve of the war, Romania not only produced more agricultura l

output per capita, but it also had important beginnings of heavy industry ,

something entirely lacking in Bulgaria . But the Romanian economy had grown more slowly . Already expanding at a faster pace, Bulgaria's less-develope d economy progressed further during the war and responded quickly at its end , partly because of modest Soviet aid . Romania's economy suffered significan t damage and lost in 1944 and 1945 to the Soviet forces goods valued at nearl y its 1945 GNP (see Chapter IX) . Bulgaria's communist party also took ove r quickly and moved to establish socialist economic institutions more quickl y than in Romania's case .

II-C . THE POLITICS OF COMMUNIST RUL E

3) Both parties went through early leadership struggles, but whereas the

Stalinist Gheorghiu-Dej survived through the Khrushchev era, it was probabl y

Khrushchev that determined the succession of Zhivkov . While the Romanian communist leaders struggled to promote industry and economic independence, th e

Bulgarians pushed both agricultural and industrial development, and increasing trade with the Soviet Union . Soviet differentiation is clear enough . Not onl y did equipment exports to Romania fall by half between 1953 and 1958, but afte r

1958 and until 1969 Romania had an export surplus with the Soviet Union, whil e

Bulgaria accumulated a large deficit .

By this time, although Khrushchev was gone, Zhivkov found no trouble in quick alignment with Brezhnev, whose leadership style bore some resemblance t o that of Zhivkov . In Romania Dej was also gone and Ceausescu was riding 1 5

Romanian defiance of the Soviet invasion of Czechoslovakia towards a persona l dictatorship, now more and more like those in Albania and North Korea .

4) Zhivkov and Ceausescu, partly because they came into office so young , now share the longest terms of office in Eastern Europe and rule without th e challenge or effective public protest that deposed party leaders in othe r countries . What are the ingredients of their success and what have been th e economic consequences of their rule ?

As with the two countries' preconditions, one can emphasize either th e similarities or the differences . The list of similarities is long enough .

Both legitimized early rule by a combination of being associated with hig h social mobility [Connor-86, 51-59] and popular cause, Zhivkov in bettering th e conditions of peasants and Ceausescu in defiance of Brezhnev . Both used th e party first secretary's job to fill offices with supporters, who have by no w been removed from high office in both countries . Only Zhivkov and Ceausesc u remain . Recent events in Bulgaria now make it clear that Zhivkov, too , contrary to the views of Comisso [Comisso-86, 39], is a "patrimonial" part y chief according to her definition :

"In patrimonial systems .. . the power of the party as a whole essentiall y depends on and reflects a single individual [and] other members of th e political elite maintain their positions thanks to the patronage of th e main leader, who personally controls the allocation of political resource s to reward loyal followers . "

Both Zhivkov and Ceausescu master the musical chairs game of reorganiza- tion and reassignment . Both suppress economic information and both are quic k to denounce any hint of market socialism, while preaching the necessity o f closer connections between productivity and personal incomes . Also, both mus t now owe their survival to support groups whose immediate interests the y protect . Neither those who provide Zhivkov his support nor those who provide 1 6

Ceausescu his are interested in change, economic or political . This i s understandable, given the probable gains and losses of reforms .

There are differences . Zhivkov is not known for nepotism on the famil y scale of the Ceausescu's, because he lacks the large family for it . He permits it on a grand scale in the party hierarchy . No cult of personality exists in

Bulgaria and others often share the rostrum, but nobody for long . Bulgaria n economic and social policies show signs that Zhivkov does seek and listen t o advice, thus avoiding the wild twists and inhumane turns of Romanian policy .

II-D . THE IMPACTS OF PAST AND POLITICS ON ECONOMIC DEVELOPMEN T

What may be more important is that as long as Zhivkov and Ceausesc u survive at the top, there is little hope for the kinds of economic reform s needed to stimulate better links with the non-communist world . The obstacle s that both leaders maintain will be in the end more important in the future in both countries than either the obvious difference in their politics or thei r economics . The economics now need to be seen in more detail and in compariso n with other communist-ruled countries .

1 7

Chapter III . GROWTH PATTERNS OF NATIONAL PRODUC T

III-A . ISSUES AND MEASUREMENT PROBLEM S

There is no completely adequate way to resolve differences in the growt h

rates and the several alternative measures for the communist-ruled countries .

The evidence is examined in detail in the full manuscript, but not further i n

this chapter . In what follows, western estimates of GNP refer to those of th e

Project on National Income in East Central Europe [Alton-87] and the CIA [CIA -

82], which are used to estimate the numbers in Table III-1 .

As shown below, growth rates of GNP for a sample of over 40 countries fro m

1950 to 1985 depend on the level of GNP per capita . Thus, bias results from a

comparison of systems in terms of simple average growth rates without consider-

ation of the fact that less-developed countries ought to grow faster than more -

developed ones . In fact, there may be a progressive tendency for growth rates t o

fall with increases in per capita national income in the period, 1950 to 1980 .

Estimates of the Effects of Per Capita GNP on Growt h

I (1) GR = 10 .89 - 1 .13 LGLV Adj R 2 = O .1 5 [10 .99] [6 .88] SEE = 2 .1 3 (2) GR = 12 .13 - 1 .30 LGLV - 1 .22 CD Adj R 2 = O .1 9 [11 .84] [7 .77] [3 .68] SEE = 2 .08 I (3) GR = 11 .16 - 1 .17 LGLV - 0 .64 BR Adj R 2 = 0 .1 6 [10 .92] [6 .95] [1 .07] SEE = 2 .1 3 (4) GR = 11 .39 - 1 .20 LGLV - 0 .41 BL Adj R 2 = O .1 5 [10 .16] [6 .62] [O .95] SEE = 2 .1 3

where GR is the growth rate for each five-year period, _ LGLV is the natural log of average GNP per capita i n each five-year period and CD, BR, and BL are dumm y I variables, respectively, for communist-ruled countries, ) = Bulgaria-Romania, and balkan countries . Values in = brackets are T-statistics . I

1 8

Table III- 1 PERCENT AVERAGE ANNUAL GROWTH OF GN P (calculated as least squares trend )

Country 51-55 56-60 61-65 66-70 71-75 76-80 81-8 5 ------Communist-Rule d Bulgaria 5 .6 6 .9 6 .3 4 .6 4 .4 1 .2 0 . 9 Romania 5 .8 4 .O 5 .2 4 .4 6 .O 3 .8 2 . O

Czechoslovakia 2 .3 5 .4 2 .0 3 .5 3 .3 2 .2 1 . 3 GDR 9 .O 5 .6 3 .0 3 .2 3 .5 2 .3 1 . 6 Hungary 4 .3 3 .5 4 .2 3 .O 3 .3 2 .3 O . 9 Poland 2 .8 2 .9 4 .4 3 .7 6 .4 O .9 1 . 2 USSR 5 .3 5 .7 4 .6 5 .O 3 .9 2 .6 2 . 3 Yugoslavia 2 .7 6 .0 6 .4 4 .6 6 .O 6 .0 1 . 2

Average CR* 4 .1 4 .9 4 .5 4 .O 4 .6 2 .6 1 . 4

Capitalis t All* 4 .4 4 .O 5 .3 5 .4 4 .6 4 .1 2 . O Southern* 6 .1 4 .3 6 .7 6 .3 5 .7 3 .6 2 .O ------* Unweighted average of listed countries : (a) the eigh t communist-ruled countries in this table ; (b) the capitalis t countries in the O .E .C :D . plus Argentina, Brazil, Chile , Uruguay, Mexico, Singapore, Hong Kong, Taiwan, South Korea an d Malaysia ; and (c) the Southern countries - Portugal, Spain , Greece and Turkey .

Source : Calculations of the author from data of the CIA and th e Project on National Income in East Central Europe . ------

III-B . SYSTEMIC EFFECTS ON GROWTH RATE S

1) Growth rates of eight communist-ruled countries for the sample period

are more than one percentage point less than growth rates for capitalis t

countries at the same level of GNP per capita . The tendency for lower growth

rates of the communist-ruled countries is concentrated in two periods, 1966-7 0

and 1976-80 . However, according to Pryor, over the period from 1950 to 197 9

neither the retardation of GNP growth nor its stability depends on difference s

1 9

Tabl e III-2 IDENTIFICATION OF TIME SHIFTS IN GNP GROWTH, 1950 TO 198 5 (based on a sample of 42 countries)

------Period >> 51-55 56-60 61-65 66-70 71-75 76-80 81-8 5 ------A. Effects on the tendency for higher growth rates to be as- sociated with lower levels of GNP per capita (based on a separat e regression on the data in Table III-1 for each time period) :

Constant 6 .86 * 9 .12 * 8 .92 * 11 .66 * 15 .06* 15 .35 * 2 .7 6

LGLV -O .46 -0 .87 *-O .65 -1 .10 * -1 .72 * -1 .84* -0 .1 4

B. Effect on dummy variables for country groups (based on a separate regression on the data in Table III-1 for each tim e period using LGLV and the respective dummy for a country group) :

CD -O .74 0 .40 -1 .17 -2 .0 0 * -O .73 -2 .4 2 * -O .7 2

BR 1 .10 O .64 O .18 -1 .43 -O .41 -2 .6 0 * -O .5 9

BL 1 .5 8 * O .57 O .57 -O .89 -O .22 -1 .9 8 * O .0 6

C. Confidence interval around predicted growth rates (based on a regression on growth rates in Table III-1 using only dumm y variables for time periods) :

Predicted NMP 7 .8 6 .4 4 .8 6 .3 6 .6 3 .8 1 . 6

+ 1 .65(SEE) 7 .7 7 .6 8 .5 8 .5 8 .O 7 .2 5 . 3 Predicted GNP 4 .3 4 .2 5 .1 5 .1 4 .6 3 .8 1 . 9 - 1 .65(SEE) 0 .9 O .8 1 .7 1 .7 1 .2 0 .4 -1 . 5

Communist-ruled countries with significant deviations : -high growth GDR -low growth (no countries) ------LGLV - natural logarithm of GNP per capita in U .S . dollars o f 1980 ; CD - dummy variable for eight socialist countries ; BR - dummy variable for Bulgaria and Romania ; BL - dummy variable fo r Bulgaria, Romania, Greece, Turkey and Yugoslavia . * - significan t at the 90 percent level or more . SEE - standard error of th e estimate . ------2 0

in economic system [Pryor-85] . Whether his result would be affected b y

increasing the sample to the number of countries and the longer time period

used in this study is not yet known .

III-C . BULGARIA AND ROMANIA VERSUS OTHER COMMUNIST-RULED COUNTRIES

1) The characteristics of Bulgarian and Romanian growth rates are teste d

using both GNP and official NMP data . The test shows no significant differen-

ces between their growth rates and the growth rates of the sample of capitalis t

countries for the period 1950 to 1985 . Thus, they are exceptions to th e

tendency of other communist-ruled countries for lower growth rates at a give n

level of GNP .

This conclusion is reinforced in the test using official NMP .

2) Bulgarian and Romanian growth performance is also compared by five-yea r

periods . In GNP terms, Bulgaria does best in 1956-60 and 1961-65, whil e

Romania's best is 1971-75 . But, at any given level of GNP per capita, Bul- garian growth rates are higher than the Romanian figures . A similar but more

erratic pattern shows up in the NMP data, except that Bulgaria's performance i n

1961-65 is not so good . Both countries suffer a deterioration of relative

performance in 1976-80 and 1981-85, indicating they began to behave more lik e normal communist-ruled countries .

III-D . BULGARIA VERSUS ROMANI A

1) The pattern of each year's growth rate is also compared . Bulgaria and

Romania shared greatly fluctuating growth up to 1960 with Hungary and Yug o

slavia . From the mid-1960s Bulgaria began a period of stable, slightl y declining growth that took place also in the GDR, the Soviet Union, Hungary and

2 1

Table III- 3 RATIO OF GROWTH IN GNP TO GROWTH IN NM P

------Country 51-55 56-60 61-65 66-70 71-75 76-80 81-8 5 ------Bulgaria 80 86 103 82 86 79 8 7 Romania 78 85 86 87 81 86 8 9

Czechoslovakia 78 93 104 86 90 93 9 8 GDR 88 91 98 91 90 92 8 8 Hungary 98 84 100 84 87 94 102 Poland 77 84 94 90 87 98 10 6 USSR 78 87 93 89 92 93 97 Yugoslavia 94 89 96 96 101 100 103 ------Source : Based on growth rates in Tables III-1 and III-4 . Average annual growth rates have been converted into equiva- lent indices of growth before calculating the ratios, o r (100+r )/(100+r2), where r 1 is the GNP growth rate and r 2 i s the NMP growth rate . ------

Czechoslovakia . Romania, Poland and Yugoslavia exhibited another pattern o f

more erratic, but up to 1975 increasing, growth, that then abruptly decreased .

2) The average variance of NMP growth rates in Bulgaria and Romania i s

very high in the period 1950 to 1960 . But as has been shown [Brada-86] ,

comparing variance without considering differences in average growth rates is a

biased measure of stability . When stability is measured in terms of th e

coefficient of variation, even in the period 1950 to 1960, Bulgaria and Romani a

fall into the middle range of communist-ruled countries, with more stabilit y

than either Hungary or Yugoslavia .

3) As shown above, Romania's official growth rates show no especiall y

large deviations from the western estimates . Still, no comparison is complet e

without special questioning of Romania's record . It is defective in two ways :

one technical and the other political . Technically the problem is tha t

Romanian growth up to 1975 is always measured in terms of early year prices . 22

In a comparison with Bulgarian NMP growth, 1950 = 100, Romania's official inde x catches up and passes Bulgaria's in 1963 and grows 14 percent more by 1985 . An alternative unofficial Romanian index using 1955 prices in place of 1950 price s

just for the period from 1950 to 1959 is available . When linked to th e official index in 1959 the resulting index catches up with the Bulgarian inde x

in 1978 so both end up with just the same amount of NMP growth from 1950 to

1985 .

Such a "correction" still fails to consider the political biases o f

Romanian data . Clearly there is greater likelihood of overstatement of growt h

in Romania's official statistics in the later 1970s and 1980s . A carefu l auditing of Romanian national accounts would surely show it to have had les s overall growth of national product than Bulgaria since 1950, but how much les s would be simple guesswork at this point .

4) In a comparative political context, Romanian growth reached a low poin t compared to Bulgarian growth in 1959, the year Soviet troops departed Romani a and the year Bulgaria surged ahead in a "great leap forward" . Zhivkov's firs t years in office were very good ones from this point of view, whatever th e causes . Romania did somewhat better in the early 1960s, but not so well afte r the change of leadership and the years of challenging the Soviet Union .

Ceausescu had to wait until the early 1970s before conditions allowed Romani a to take its own great leap, but the direction of the leap is doubtful . 2 3

Chapter IV . THE SOURCES OF GROWT H

IV-A . THE ISSU E

Growth rates vary statistically with the level of GNP (or NMP) per capit a because the "sources of growth" - capital accumulation, labor force growth , etc . - also tend to vary with level of national product per capita . In the research, growth of national product is assumed to come from three sets o f factors : (1) factor inputs, defined broadly to include exports and shifts i n labor, (2) environmental conditions and policies, and (3) a residual, calle d

"residual productivity" . The relation is statistically estimated as a produc- tion function . In addition, the relationship between growth and plans fo r growth is also explored .

IV-B . PLANS AND GROWTH OF NATIONAL PRODUC T

The relationship between growth rates and growth planned in medium-term ,

(normally) five-year plans is measured as the ratio of actual and planned siz e of NMP in the final year of the plan, not the ratio of actual to planned growt h rates . The latter is arithmetically ambiguous when growth rates are negativ e or zero and otherwise distorts the degree of plan fulfillment .

Over the whole period from 1950 to 1985 average plan fulfillment i s similar across the seven countries, with the best fulfillment record in th e

Soviet Union . One might expect Bulgaria and Romania to do rather poorl y because of inexperienced planners, poor data and management systems, unstabl e weather, etc . Instead their average plan fulfillment record is better tha n

Poland's and as good as Hungary's or Czechoslovakia's .

2 4

Table IV- 1 PLANS FOR NMP GROWTH AND THEIR FULFILLMEN T

Plan BUL CZC GDR HUN POL ROM SU **YU G Period ------

A. Planned Average Growth Rate of NM P

1986-90 4 .30 3 .45 4 .55 3 .00 3 .50 7 .95 3 .95 --- 1981-85 3 .70 2 .30 5 .10 2 .80 1 .67* 7 .10 3 .40 --- 1976-80 7 .70 4 .90 5 .00 5 .55 7 .15 10 .50 4 .70 --- 1971-75 8 .10 5 .10 4 .90 5 .75 6 .75 11 .50 6 .75 --- 1966-70 8 .50 4 .25 5 .40 3 .70 6 .00 7 .00 6 .85 --- 1961-65 8 .50 7 .40 5 .50 6 .30 6 .00 7 .00 6 .90 11 .90 1960-65 @ ------9 .80 1959-65 9 .90 6 .80 6 .00 7 .3 0 1958-62 8 .5 0 1958-60% --- 4 .20 --- 1957-61 --- 9 .1 0 1956-60 --- 8 .00 8 .00 8 .50 8 .50 9 .9 0 1953-57 # 8 .5 0 1951-55 --- 10 .00 13 .00 10 .00 1950-55& --- 13 .40 1950-54% --- 18 .10 --- 1950-54 --- 10 .30 --- 1949-53 13 .10 8 .20

B. Ratio of Actual Average Growth Rate to Plan Average Growt h Rate (see note of explanation) .

1981-85 100 .O 99 .5 99 .4 97 .3 97 .6 97 .5 99 . 5 1976-80 98 .6 98 .8 99 .1 97 .8 94 .4 97 .1 99 . 6 1971-75 99 .7 100 .6 100 .5 100 .5 102 .4 99 .7 99 . O 1966-70 101 .1 102 .6 99 .9 103 .O 100 .0 100 .7 100 . 8 1961-65 97 .5 94 .9 98 .1 97 .9 100 .1 101 .9 99 .7 89 . 4 1960-65@ -- - 99 . 5 1959-65 98 .3 97 .6 99 .2 99 . 6 1958-62 100 . 1 --- 1958-60% ------102 . 8 1957-61 ------94 . 9 1956-60 --- 99 .1 99 .2 98 .3 98 .5 99 . 3 1953-57# 99 .3 ------1951-55 ------102 .8 --- 100 .8 101 . 2 1950-55& ------99 . 5 1950-54% ------90 . 6 1950-54 ------97 . O 1949-53 98 .O 99 .8

(Continued )

25

Table IV-1 (Continued )

------Plan BUL CZC GDR HUN POL ROM SU **YUG Perio d ------

C . Average Fulfillment in Percent - All periods .

All 99 .2 99 .3 99 .6 99 .4 98 .9 99 .5 99 .8 --- -

------Actual average growth rates are based on beginning and endin g year indices in order to conform to the meaning of the pla n targets which have the same base . They differ from the leas t squares growth rates reported in Chapter III . The "fulfillmen t ratios" compare the reported size of NMP in the terminal yea r compared to the planned size of NMP, not the annual realized an d planned growth rates (comparison the latter can not be done whe n growth is negative and is misleading anyway .

Reconstruction plans are not included : Bulgaria 1947-48 ; Czechoslovakia 1947-48 ; Hungary 1947-50 ; Poland 1946-49 ; Romani a 1949 and 1950 .

(*) - Poland did not formally approve a five-year plan for 1981 - 85 because of disruptions from marshal law ; the figure is an average of projections for 1981 and 1982 together with target s for a three-year plan for 1983-85 . (**) - The first Yugoslav FY P for 1957-61 had targets compared to 1939 . The from 1952 throug h 1956 only annual plans were made . Subsequent plans were fo r 1957-61 and 1961-65 . (%) - Hungary's first FYP for 1950-54 wa s amended in 1951 with much higher targets . Also, a three-yea r plan was used for 1958-60 . (#) - Bulgaria completed 1FYP in fou r years so 2FYP was for 1953-57 . (&) - Poland's first plan was fo r six years . (@) - Romania abandoned 2FYP in 1959 for a six-yea r plan, 1960-65 . ------

IV-C . AGGREGATE PRODUCTION FUNCTION S

Growth sources are further explored by the estimation of productio n

functions on the combined time-series and cross-section data, identified i n

Chapter III . Estimates for comparison with capitalist countries are made usin g

GNP growth ; estimates using NMP growth provide intra-system comparisons . Th e

independent variables, referred to as "factor inputs", include investmen t

growth (a proxy for capital growth) and labor force growth, as well as export 2 6 growth and the shift of labor out of agriculture . Use of the latter two variables in an aggregate production function is justified on the grounds tha t they might account for part of total productivity change . The independen t variables to represent environment are size of population, level of nationa l product per capita, changes in terms of trade, and growth of GNP for OEC D countries . Policy variables are investment rate, share of imports from othe r communist-ruled countries, and the ratio of imports to exports .

All "factor inputs" turn out to be statistically significant, but only th e level of national product per capita among the environmental and polic y variables is .

IV-D . SYSTEMIC DIFFERENCES IN SOURCES OF GROWTH

1) The regression on GNP shows about half of the difference in overal l growth rates, measured in Chapter III, is due to lower growth of "residua l factor productivity" in the communist-ruled countries . The estimates of tim e shift suggest that the relative performance of communist-ruled countrie s declined as they achieved higher levels of GNP per capita . This confirms

Burkett's study of comparative productivity levels in 1975 which suggests a tendency for productivity among communist-ruled countries to decline wit h increasing levels of development (even though the study found no evidence tha t productivity was actually lower in communist-ruled countries [Burkett an d

Skegro-88]) .

2) Comparisons are made of differences across systems in the growth o f factor inputs and proxies for productivity . The communist-ruled countrie s experience, comparatively, very high labor shift, averaging over 150 percent o f the capitalist countries, and relatively high export growth . But average

2 7

Table IV- 2 REGRESSION EXPERIMENTS ON SOURCES OF NMP GROWT H

------Regression 1 2 3 4 5 6 ------

Sample 54 54 54 54 54 5 4 Adj . R2 O .69 O .71 0 .71 O .71 O .72 0 .72 SEE 1 .47 1 .45 1 .43 1 .44 1 .42 1 .4 1

Constant 1 .54 1 .58 8 .39 1 .46 1 .51 7 .3 3 [2 .67] [2 .81] [2 .55] [2 .60] [2 .72] [2 .20 ] GI 0 .24 0 .22 0 .21 O .22 O .20 O .2 0 [6 .19] [5 .68] [5 .19] [5 .43] [5 .09] [4 .77 ] GL 0 .59 O .55 0 .54 0 .82 O .76 O .7 3 [1 .92] [1 .82] [1 .81] [2 .52] [2 .34] [2 .26 ] GX 0 .27 0 .23 0 .21 0 .25 O .21 O .2 0 [4 .23] [3 .39] [3 .11] [3 .84] [3 .16] [2 .97 ] LGSL O .38 O .3 3 [1 .75] [1 .53 ] LGLV -O .83 -O .7 1 [2 .11] [1 .78 ] BR 0 .99 O .87 O .7 8 [1 .82] [1 .61] [1 .44] ------GI - growth of gross fixed capital investment (least square s growth rate) ; GL - labor force growth ; GX - growth of tota l exports (least squares growth rate) ; LGSL - natural log of th e decreased percentage share of labor force in agriculture ; LGL V - natural log of the midyear value of NMP per capita measure d in 1980 US dollars ; BR - unity for observations that ar e either Bulgarian or Romanian and zero for all others .

Numbers in brackets are T-statistics . ------

export growth starts much higher and ends up lower than in capitalist coun-

tries . Average investment growth, once adjusted to eliminate probable overes-

timation, is about the same in both systems . Average labor growth is about 5

percent less in the communist-ruled countries than in the capitalist countries .

It remains in subsequent chapters to test the statistical significance o f

difference averages of "factor inputs" across systems .

28

Table IV- 3 REGRESSION EXPERIMENTS ON SOURCES OF GNP GROWT H

------Regression 1 2 3 14 5 6 7 8 ------Sample 25 14 25 14 254 254 25 14 25 14 254 25 14 Adj . R 2 O .57 O .66 O .67 O .67 O .67 O .68 O .68 O .6 9 SEE 1 .57 1 .34 1 .33 1 .32 1 .3 14 1 .31 1 .31 1 .3 0

Constant 2 .35 1 .34 1 .30 3 .40 1 .41 1 .40 4 .28 3 .6 7 [15 .78] [7 .50] [7 .40] [4 .61] [7 .70] [7 .76] [5 .43] [4 .37 ] GI O .28 O .24 O .22 O .23 O .24 O .22 0 .22 0 .2 1 [16 .41] [15 .35] [13 .90] [14 .49] [15 .26] [13 .66] [14 .09] [13 .28 ] GL O .37 O .37 0 .39 O .33 0 .35 O .36 O .27 O .3 0 [4 .74] [5 .38] [5 .69] [4 .72] [4 .95] [5 .21] [3 .79] [4 .09 ] GX O .16 O .15 O .16 O .17 O .15 O .16 0 .1 5 [8 .46] [7 .46] [8 .15] [8 .64] [7 .71] [8 .57] [7 .88 ] LGSL 0 .23 0 .26 0 .17 [2 .83] [3 .18] [1 .94 ] LGLV -O .32 -O .44 -O .3 4 [2 .88] [3 .74 [2 .24 ] CD -O .35 -O .47 -0 .64 -0 .6 5 [1 .66] [2 .20] [2 .89] [2 .97 ] ------9 10 11 12 13 14 15 1 6 ------Sample 254 254 254 254 254 . .. .(not reported) . - Adj . R 2 O .67 O .6 8 O .68 O .68 O .6 7 SEE 1 .34 1 .3 1 1 .3 1 1 .3 1 1 .3 4

Constant 1 .3 4 3 .80 1 .3 1 3 .1 8 1 .29 [7 .58 ] [5 .07] [7 .51] [3 .92] [7 .18 ] GI O .24 O .23 0 .22 O .22 O .24 [15 .47] [14 .66] [14 .03] [13 .84] [15 .27 ] GL O .35 O .29 O .36 O .31 0 .3 9 [4 .49] [4 .05] [5 .25] [4 .35] [5 .58 ] GX O .17 O .16 O .15 0 .16 O .1 6 [8 .63] [8 .49] [7 .71] [7 .83] [8 .28 ] LGSL O .25 O .1 7 [3 .10] [1 .96 ] LGLV -O .38 -0 .29 [3 .37] [2 .35 ] BR -O .61 -O .91 -O .77 -0 .9 4 [1 .60] [2 .36] [2 .03] [2 .46 ] BL O .44 . .(not significant) .. [1 .77] ------(Continued ) 2 9

Table IV-3 (Continued )

------GI - one-year lagged average growth of gross fixed capital investmen t (least squares growth rate) for each five-year period where investmen t growth rates for socialist countries have been corrected for the sam e possible overstatement as the ratio of growth of national product i n GNP terms to growth of national product in NMP terms ; GL - averag e growth rates of labor force for each five-year period ; GX - one-yea r lagged average growth of total exports (least squares growth rate) fo r each five-year period ; LGSL - natural log of the decreased percentag e share of labor force in agriculture from beginning to end of each five - year period ; LGLV - natural log of the midyear value of GNP per capit a measured in 1980 US dollars ; CD - unity for socialist countries an d zero for others ; BR - unity for observations that are either Bulgaria n or Romanian and zero for all others ; BL - unity for Balkan countrie s (Bulgaria, Greece, Romania, Turkey and Yugoslavia) and zero for others . Numbers in brackets are T-statistics . ------

IV-E . BULGARIA AND ROMANIA VERSU S OTHER COMMUNIST-RULED COUNTRIE S

Bulgaria and Romania have a higher residual productivity growth than th e other communist-ruled countries in the regressions on NMP growth and account s

for nearly two thirds of their higher NMP growth, noted in Chapter III . Th e regression results also hint that they have had even greater differences i n marginal productivity between agriculture and industry than in the othe r countries .

In regressions on GNP, Bulgaria and Romania show no significant differen- ces in residual factor productivity compared to all capitalist countries . Bu t they record less than other Balkan countries (Greece, Turkey and Yugoslavia) .

IV-F . BULGARIA VERSUS ROMANI A

1) Bulgarian NMP is compared to that in Romania by first calculating thei r

"expected growth", using the common production function for communist-rule d countries and their own actual growth of "factor inputs" . Then the ratio of

30

Table IV- 4 COMPARISON OF DATA ON GROWTH OF "FACTOR INPUTS " COMMUNIST-RULED AND CAPITALIST COUNTRIES, 1950 TO 198 5

GNP Invest Invest Labor Labor Pop Expor t Period Growth Growth Growth Growth Shift Growth Growth A. Average of all countries in sampl e 51-55 4 .4 5 .6 5 .6 1 .13 3 .3 1 .3 6 .7 1 56-60 4 .O 5 .O 5 .O 1 .05 3 .9 1 .3 5 .7 6 61-65 5 .3 8 .5 8 .5 1 .25 4 .1 1 .5 6 .5 1 66-70 5 .4 6 .7 6 .7 1 .05 3 .9 1 .3 9 .9 6 71-75 4 .6 6 .2 6 .2 2 .00 3 .3 1 .2 6 .4 6 76-80 4 .1 3 .5 3 .5 1 .81 2 .7 .9 7 .74 81-85 2 .O - .4 - .4 1 .40 2 .2 .9 5 .24

B. Average of all communist-ruled countries in sampl e 51-55 4 .1 5 .1 7 .8 .99 6 .0 1 .3 9 .57 56-60 4 .9 7 .4 9 .1 .71 6 .4 1 .1 12 .93 61-65 4 .5 5 .2 6 .9 .76 6 .2 .8 9 .28 66-70 4 .0 5 .7 7 .3 1 .08 5 .8 .7 8 .7 6 71-75 4 .6 4 .7 7 .1 .87 5 .9 .6 8 .9 5 76-80 2 .6 3 .9 5 .9 .67 3 .4 .6 5 .9 8 81-85 1 .4 -2 .9 -1 .8 .37 1 .5 .4 4 .1 3

C . Ratio of (B) to (A)* * * ** ** 51-55 98 .7 97 .8 110 .9 99 .34 181 .6 100 .1 114 .1 5 56-60 104 .7 112 .2 121 .4 98 .34 164 .3 99 .2 138 .8 4 61-65 96 .2 85 .6 92 .7 97 .62 152 .1 96 .4 113 .7 1 66-70 93 .5 95 .7 103 .3 100 .18 147 .6 96 .9 94 .69 71-75 100 .2 93 .1 104 .3 94 .59 181 .4 97 .4 112 .27 76-80 93 .1 101 .9 111 .9 94 .54 126 .7 98 .2 92 .1 0 81-85 97 .0 88 .1 93 .2 94 .99 67 .9 97 .4 94 .83 ------

* Ratios based on conversion of average annual growt h rates to growth indices . ** Adjusted investment growth i s based on the official investment growth rate times th e ratio of GNP to NMP growth in Table III-3 .

------

their actual to their "expected growth" is calculated . They perform similarly .

In two periods, 1951-55 and 1961-65, they do worse than expected and in onl y

one, 1956-60, better than expected . From 1966 on, they are just "normal "

communist-ruled countries in terms of "residual factor productivity . " 3 1

2) Bulgaria and Romania differ more from each other (and more from th e other communist-ruled countries) in terms of the growth of "factor inputs" .

Bulgaria has greater labor shift, except in the 1970s, and export growth in al l periods except 1971-75 . Its investment growth is higher in 1956-60, 1966-7 0 and 1981-85 . Only labor grows slower generally in Bulgaria than in Romania , but not in the period 1966-70 and 1971-75 .

3) The key to Bulgaria's ability to generate faster NMP growth tha n

Romania in the period up to 1970 is to be found in (a) why so much labo r shifted per unit of investment growth, and (b) why exports grew so much faste r than NMP grew . The two ought be connected in Bulgaria's industrialization an d agricultural development, as well as its foreign trade policy . 3 2

Chapter V . INVESTMENT AND CAPITAL ACCUMULATIO N

V-A . CONCEPTUAL AND MEASUREMENT PROBLEM S

1) Capital accumulation plays a key role in both western and Marxis t

economic growth theory . Therefore, it is surprising that western theory o f

capital accumulation and investment in communist-ruled countries is not wel l

developed, tending to concentrate on fluctuations of investment rather than

trends in growth and the share of national income invested .

2) There are major data problems because capital stock series are onl y

published for a small number of capitalist countries . The published data fo r

Bulgaria and Romania are considered rather poor quality . Investment growth, a s

already noted in Chapter IV, is probably overstated in the official statistic s

of communist-ruled countries (at least to the same extent as is the growth o f

industrial output) . In addition, statistics published on the share of nationa l

income invested, the "accumulation rate", are not comparable to similar data o n gross investment rates in capitalist countries .

V-B . SYSTEMIC COMPARISONS OF INVESTMENT AND CAPITAL ACCUMULATION

1) Growth rates of investments in fixed capital stock, when adjusted fo r likely overstatement, prove to be significantly less at a given level of GNP in communist-ruled countries than in capitalist countries . But there is n o statistically significant difference in the overall stability of investmen t growth .

2) Lower growth rates of investment in communist-ruled countries can b e attributed partly to lower growth rates of GNP, observed in Chapter III . I t remains a somewhat clouded issue if differences are also due to changes of

3

3 Estimation of the Effects of Per Capita GNP on Investmen t

(V-1) GI = 20 .4 - 2 .54LGLV - O .34CD AdjR 2=O .1 1

[7 .36] [2 .54] [O .38] Observations=254 1

(V-2) GIK = 20 .2 - 2 .52LGLV - 2 .20CD AdjR 2=0 .1 1 [7 .51] [5 .73] [2 .53] Observations=25 4

(V-3) GI = 18 .7 - 2 .3OLGLV + 3 .21BR AdjR 2=O .12 I [7 .00] [5 .22] [2 .04] Observations=254

GIK = 17 .8 -2 .19LGLV + O .53BR AdjR 2=O .0 9 1 (V-4) [6 .70] [4 .99] [O .34] Observations=25

d 4 where GI and GIK equal, respectively, the official an "corrected" growth rates of fixed capital investment , LGLV is the natural log of GNP per capita in 1980 U .S . dollars, CD is the dummy variable for communist-rule d countries, and BR is the dummy variable for observation s on Bulgaria and Romania .

Numbers in brackets are T-statistics

. There is weak. investment rates across systems evidence that communist-ruled

countries have higher investment rates than capitalist countries . Contrary t o

Bergson, the rates seem high at all levels of income and not just in the earl y

stages of development .

V-C . BULGARIA AND ROMANIA VERSU S THE OTHER COMMUNIST-RULED COUNTRIES

1) Regression analysis shows that Bulgaria and Romania have investmen t

growth rates nearly 3 percentage points higher than other communist-rule d

countries at a given level of development . Their investment growth is als o

more stable than in either Hungary or Yugoslavia .

2) Accumulation rates measured in current prices show varying pattern s

across the communist-ruled countries . In the Soviet Union, they are almost 34

Table V- 1 TRENDS OF ACCUMULATION RATES @ , 1950 TO 198 4

------Value of Tren d Country 1950 Mean 1980 Slope CV** R2

Bulgaria 23 .5 26 .2 28 .0 .151 0 .17 .1 0 Romania 15 .4 27 .1 33 .5 .604 O .17 .6 4 19 .2* 31 .2* .468* .51 * Czechoslovakia 16 .2 21 .O 24 .6 .280 0 .22 .2 8 GD R (data available only for 1950-66) Hungary 21 .3 23 .5 25 .4 .136 O .2 2 .0 7 Poland 26 .8 26 .5 26 .2 - .019 0 .19 .0 1 Soviet Union 26 .0 26 .5 26 .8 .028 O .06 .03 ------@ the ratio of net investment to NMP used in current prices . * with estimated values for 1952-54 and 1957-58 . ** Coefficient of variation (standard error/mean value) . ------

fixed at about 26 percent of national income from 1950 to 1985 . The averag e for the whole period, 1950 to 1985, is also about 26 percent for both Bulgari a and Romania . However, in Romania they began at exceptionally low levels an d rose to exceptionally high levels by the end of the 1970s . In Bulgaria ther e were higher initial values and only small increases .

A difference is revealed when accumulation in constant prices is compared .

Bulgaria and Romania had the highest rates of real marginal investment among the communist-ruled countries, respectively 39 and 35 percent of the increas e in real national income from 1950 to 1980 .

The two countries probably have followed different pricing policies, wit h

Bulgaria tending to reduce prices of investment goods compared to other good s in national income more than Romania . 3 5

V-D . BULGARIA VERSUS ROMANI A

1) The capital stock indices for Bulgaria and Romania are tested fo r

consistency by comparison with data on new fixed capital investments put int o

place measured in constant prices . Both countries' data appear to be consis-

tent, showing a regular cycle centered on five-year plans . Bulgaria's data ar e

also consistent with that country's greater relative emphasis in recent year s

on capital retirements .

2) If Hungary and Poland can be considered along with Bulgaria and Romani a

as less-developed communist-ruled countries, it makes sense to compare th e

shares of imports in machinery and equipment invested . Romania's share fel l

rapidly from about 50 percent in 1950 to barely 15 percent in 1957, and the n

rose to about 33 percent in the 1960s . This was about Poland's share at th e time, suggesting that larger communist-ruled countries tended to more self - supply .

Hungary at this time was importing about 45 percent, but nowhere as muc h as the 75 percent recorded by Bulgaria . Then in the late 1960s, the shares o f both Bulgaria and Romania began a steady decline .

In the last decade, Romania had the lowest ratio of growth of importe d machinery to total investment growth in CMEA, and under the fanatical hand o f

Ceausescu, now imports only about 10 percent of its needs . It has reached an apex of autarchy . Bulgaria seems to be also moving in this direction, althoug h still very far from Romania's extreme position . In the last decade only th e

GDR had as low a ratio of the growth of imported machinery to total fixe d capital investments as Bulgaria . And in the 1980s Bulgaria was importing onl y about 40 percent of needs, suggesting a possible reversal of its traditiona l policy of emphasizing import and CMEA specialization . Perhaps this reflect s its own export difficulties . 36

3) Bulgaria has lower depreciation rates than does Romania, by estimate s

of the ECE, but neither are at any extreme among the communist-ruled countries .

Still, probably as a result of having had high investment growth, Bulgaria ha s

the highest share of fixed assets under five years old and Romania ranks second

with Poland .

This has not kept capital productivity from falling at least as fast as i n

the other communist-ruled countries . In fact, in 1981-85, Romania recorded th e greatest decrease in the group . One would expect capital productivity to b e

affected by the shares of equipment in investment and by the ratios of commis-

sioned assets to investment flows . But in neither regard do Bulgaria an d

Romania stand out .

14) Over the period from 1950 to 1979 the communist-ruled countrie s allocated on the average 141 percent of gross fixed capital investments t o

industry, while the OECD countries averaged a much smaller 28 percent . It i s assumed that this difference is statistically significant, even though no tes t has been made or reported by others .

The GDR and Romania led all communist-ruled countries in the 50 percen t share of investment allocated to industry, which, relative to labor in in- dustry, implies more extreme policies in Romania . Bulgaria's share of 38 percent marks it more as communist-ruled than capitalist . In Chapter VI , following, evidence on labor shares will be added to contend that communist - ruled countries are "overindustrialized", in 1980, at the cost of having fa r too few resources in housing, trade and other services .

5) From 1950 on, investments grew at similar rates in Bulgaria an d

Romania, but for different reasons . Bulgaria's growth came from faster growin g national income, Romania's from a combination of slower growth of nationa l

income and rising investment rates . Also, the early year share of investment 37 available for agriculture and manufacturing industry was higher in Bulgari a because such large shares in Romania around 1950 were wasted in the firs t

Danube-Black Sea canal project and in petroleum exploration . 38

Chapter VI . LABOR FORCE : GROWTH, STRUCTURE, AND CONSUMPTIO N

VI-A . LABOR FORCE GROWT H

1) The theory of systemic differences in growth of the total labor forc e has had less theoretical consideration than the question of systemic differen- ces in the structure of labor force allocation .

2) Comparable estimates of total labor force are not easy to find , especially for less-developed capitalist countries and the communist-ruled economies . For example, the data are not published in the CMEA Yearbooks . A problem is the comparable estimation of activity, especially for househol d members in agriculture and for younger and older persons . The definition of an active or occupied person varies considerably across countries .

3) The simple average growth of the labor force and population acros s eight communist-ruled countries is much smaller than the average of the large r sample of capitalist countries . Labor force growth turns out to be sig- nificantly less, nearly one percentage point, for communist-ruled countries a t a given level of GNP per capita .

4) While communist-ruled countries have lower fertility rates at give n levels of income than capitalist countries, they have higher life expectanc y according to the author's regressions for 1975 and 1980 . Ceausescu's ofte n cruel effort to force higher fertility caused a historically unprecedented ris e in 1967 . Otherwise, even Romanian policy has not overcome other incentives fo r small families .

5) Average rates of participation in 1970 and growth rates of participa- tion from 1950 to 1979 were higher in communist-ruled countries than in capitalist countries at a given level of income . The difference in participa- 39 tion rates was especially great for females and greatest for females i n agriculture [Pryor-85] .

There is an unresolved problem of how much of the difference in femal e participation in agriculture across systems is due to different statistica l practices . One condition favoring high rates in communist-ruled countries i s that relatively larger numbers of rural households may have a male living i n town or commuting to town for work .

7) Good comparisons across systems of international migration rates ar e unavailable . Estimates made in this study show generally lower rates i n

Eastern Europe than in Southern Europe . But in some periods and communist - ruled countries international immigration rates are very high . Not surprising , this is the case for the GDR . Other communist-ruled countries have experienced large losses during short periods of political disturbance or when minorit y groups have left . Bulgaria's record of very high emigration in 1950-60 an d again in 1970-75 reflects the latter phenomenon, whereas in the 1960s it ha d almost no departures . Romania's commerce in people has provided a stead y exodus that takes about 5 percent of its natural population growth and in som e years produces a healthy amount of invisible foreign earnings .

8) Secondary education rates in regressions for 1975 and 1980 are highe r in communist-ruled than capitalist countries at a given level of income . This effect is stronger at lower than higher levels of income, suggesting a conver- gence of systems [Burkett-86] .

VI-B . CHANGES IN LABOR FORCE STRUCTURE AND URBANIZATIO N

1) Over the whole period, 1950 to 1985, the shift of labor out of agricul- ture averaged about 40 percent more each year in the eight communist-rule d countries than in the larger sample of capitalist countries . Because much of 40 the difference is associated with different average incomes per capita, th e statistical test just barely fails usually accepted levels of significance .

Bulgaria and Romania have much larger labor force shifts at a given level o f income than either a normal capitalist country or the other communist-ruled countries .

2) Turning to the resulting structure of labor force, the communist-rule d countries, at a given level of development, have significantly larger shares o f labor in industry and smaller shares in services (here, services include al l the labor force not in industry, construction, agriculture and forestry) . The y also have significantly smaller shares of total population located as permanen t residents in urban areas .

Romania leads all communist-ruled countries in its excessively high shar e of labor in industry and its low share in services, given its level of develop- ment . Bulgaria is in the second rank in terms of industry (roughly the same distortion as Czechoslovakia, the GDR and Hungary) and shares second wit h

Poland in distortion of services .

"Overindustrialization" is measured in this study by two ratios : (1) in terms of occupation as the overage of industrial labor compared to servic e labor, and (2) in terms of location as the overage of industrial labor to urba n population . In communist-ruled countries there too few service employees t o support each industrial employee . And many work in industry for each on e finding an apartment in town .

Romania has the greatest "overindustrialization" by either measure .

Bulgaria is second in the distortion of labor force shares, but ranks fairl y low in terms of the distortion of industrial labor compared to urbanization .

3) Ofer notes errors in the theory that communist-ruled countries save o n the cost of urbanization by restricting employees in industry through the

4 1

Table VI- 1 INDICATORS OF OVERINDUSTRIALIZATIO N AND UNDERURBANIZATIO N

======Ofer Jackson -

1940 1950 1960 1967 1975 1980

A. Ratio of Services Labor Share to Industrial Labor Shar e

Bulgaria 79 58 64 78 72 6 7 Romania 83 70 59 77 72 7 3

Czechoslovakia 71 71 82 79 89 8 9 GDR 68 63 68 70 72 7 2 USSR 97 82 79 87 91 9 1 Hungary 117 114 92 104 93 9 3 Poland 100 71 63 72 77 7 9 Yugoslavia 102 76 80 95 111 1 1 14

B. Ratio of Industrial Labor Share to Urban Population Shar e

Bulgaria 67 74 110 126 144 1 14 4 Romania 79 100 88 113 196 19 2

Czechoslovakia 118 108 127 125 167 16 1 GDR 112 106 106 109 133 13 5 USSR 118 117 117 112 149 16 0 Hungary 102 116 147 155 183 16 7 Poland 89 121 116 126 158 15 5 Yugoslavia 133 160 145 141 165 180 ------Source : Calculated from Manuscript Tables VI-6 and VI-8 , as the ratio of divergence from normal industrial share s divided by the divergence from normal service labor o r urban population . Significance of country ratios has no t yet been calculated . ------

substitution of capital for labor [also see King and Brada-80] . Not only ar e

industrial labor force shares too large, but major cities have been closed t o

immigration, suggesting disequilibrium between demand and supply for urba n

places . In addition, not only are total internal migration rates rather low ,

but the component of urban-urban migration is extremely low according to th e 42 limited data for comparison with capitalist countries . Finally, there is als o evidence that the ratio of males to females in urban areas is rather high i n the communist-ruled countries, suggesting that males had to move withou t females because of the problem of finding housing .

4) There is evidence of large flows of labor commuting on a daily o r weekly basis in the communist-ruled countries, but no good comparisons acros s systems [Fuchs and Demko-77] .

VI-C . COMPARISONS OF CONSUMPTION STANDARD S

1) The direct evidence on consumption nearly all points in the same direction, that per capita consumption is less in communist-ruled countrie s than in capitalist countries at a given level of development . The Internation- al Comparison Project shows the following per capita individual (or private ) consumption levels compared to Spain in 1975 : Romania - 50 percent, Yugoslavia

- 56 percent, Poland - 71 percent and Hungary 77 percent [Kravis-82] . However , no evidence has been found to test for the expected effects of changes i n levels of income .

2) Food consumption standards are discussed in Chapter VIII on agricul- ture . Consumption of proteins and quality foods per capita is lower in Eastern

Europe than in Western Europe .

3) All comparisons of housing in Europe show Eastern European countrie s behind in terms of space and amenities . According to data for the early 1970s ,

Romania's housing standards rank lower than in the other communist-ruled countries (excluding Albania for which no data is available) in terms of spac e per person or amenities . Bulgaria ranks better than Yugoslavia or Hungary .

4) The private service component of consumption is especially neglected and has been shown to cost residents in communist-ruled countries additional 4 3 time shopping, moving from point to point, and in quality of goods provided .

Romania is by far the least adequately provided with sales personnel and sale s facilities . Bulgaria, on the other hand, ranks at the top along with the GD R and Poland [Pryor-77] .

The ratio of public to private services is increased in communist-rule d countries . Therefore, residents are relatively better off in terms of educa- tion and public health . But these advantages, as mentioned, tend to be erode d at higher income levels . 4 4

Chapter VII . INDUSTRIALIZATION PATTERNS

VII-A . CONCEPTUAL AND MEASUREMENT PROBLEMS ACROSS SYSTEMS

Industrialization is a necessary but insufficient condition for economi c development, although it has been both necessary and sufficient under communis t rule . As explained in Chapter V and VI, "overindustrialization" is a result .

This chapter turns to the branch consequences of such an emphasis . Here, th e study of industrial structure across systems is hindered by the lack o f detailed sub-branch classifications and by problems of differences in th e valuation of branch output .

VII-B . SYSTEMIC EFFECTS ON INDUSTRIAL GROWTH RATE S

1) It may come as a surprise that system makes no statistical differenc e in overall industrial growth rates when the measure for communist-rule d countries is western estimates . Bulgaria ranks the highest of a sample of OEC D and communist-ruled countries in terms of the ratio of actual growth to tha t expected on the basis of a regression of growth on level of GNP per capita .

Romania ranks with Greece and Spain by the same measure, although it is no t known if these individual country differences are significant .

Bulgaria's rank was earned primarily by exceptionally rapid growth in th e

1950s and 1960s, not in the 1970s and 1980s when it managed only an averag e performance . Romania lagged Bulgaria by about five years, having a rather poo r performance in 1951-55 and winding down in the later 1970s .

2) When measured from 1950 to 1979, retardation of industrial growth i s higher for communist-ruled countries than for capitalist countries . There is

4 5

TABLE VII-i . COMPARISONS OF THE OFFICIAL GROWTH RATE S OF INDUSTRIAL PRODUCTIO N OF THE COMMUNIST-RULED COUNTRIES , 1950 TO 198 5

------Five Year Time Period Country 51-55 56-60 61-65 66-70 71-75 76-80 81-85 Ave * ------Bulgaria 13 .7 15 .9 11 .7 10 .9 9 .1 6 .O 14 .6 10 . 3 Romania 15 .1 10 .9 13 .8 11 .9 12 .9 9 .6 3 .8 11 . 1 Czechoslovakia 10 .9 10 .5 5 .2 6 .7 6 .7 14 .6 2 .7 6 . 8 G .D .R . 13 .7 8 .7 5 .8 6 .6 6 .5 14 .9 14 .2 7 . 2 Hungary 13 .2 7 .6 7 .5 6 .1 6 . 14 3 . 14 1 .9 6 . 6 Poland 16 .2 9 .9 8 .5 8 .4 10 .4 4 .7 0 .3 8 . 3 U .S .S .R . 13 .2 10 . 14 8 .6 8 .5 7 .4 4 .4 3 .7 8 . 0

B . Ratio of Growth Implied in Wester n Recalculations to Official Gross Output@

Bulgaria .974 .985 .970 .98 0 .967 .975 .973 .975 Romania .935 .984 .966 .993 .969 .952 .984 .97 0 Czechoslovakia .938 .989 .978 .975 .973 .981 .989 .975 G .D .R . .980 .982 .979 .976 .970 .980 .977 .97 8 Hungary .960 .979 .989 .974 .964 .991 .995 .97 9 Poland .944 .980 .981 .981 .974 .961 .997 .974 ------@ calculated as (1 + growth rate)/(1 + growth rate), so th e number indicates the relative amount of output in the end year o f the period implied by one growth measure compared to the other . Ratios of average growth rates varied from 0 .54 in Romania's cas e to 0 .68 in the cases of Bulgaria and the USSR .

Sources : Official data and Table VII-1 .

no significant difference in stability across the two groups . Bulgaria has th e

highest retardation indicator in the sample, whereas Romania shows non e

(through 1979) . They rank as moderately stable, given their rather hig h

average growth rates .

3) Western estimates of industrial growth of the communist-ruled countrie s

reduce the index of industrial output by about 3 percent at the end of an y

period . There is a constant deviation of western and official measures o f

4 6

Bulgaria's growth, but unusually large deviations in Romania's case in 1951-5 5

and 1976-80 .

4) As demonstrated in the box below, Bulgarian and Romanian officia l

industrial growth rates show no significant differences when compared wit h

official growth rates for the other communist-ruled countries, once th e

expected effect of levels of income per capita is considered .

= Estimations of The Effects of Per Capita NM P on Industrial Growth

(VII-1) IGR = 143 .72 -4 .81LGLV +O .33BR AdjR 2=O .7 1 [12 .56] [10 . 148] [O .48] Obs = 56 1

_ (VII-2) IGR = 37 .52 -4 .14LGLV +O .26SL -O .13BR Adj R2=O .73 = [9 .22] [8 .12] [2 .61] [- .19] Obs = 5 6

= where IGR is the growth rate of industrial output, LGL V

I is the natural logarithm of NMP per capita, SL is the = shift of labor out of agriculture (see Chapter III), an d I and BR is a dummy variable for observations on Bulgaria

I and Romania . S = } Numbers in brackets are T-statistics .

A comparison of Bulgarian and Romanian official industrial growth rates i s

biased by Romania's use of 1950 price weights for the period 1950 to 1959, as

already explained in Chapter III . According to alternative measures based o n

1955 prices, Romania's industrial growth fell behind Bulgaria's growth afte r

1950 and did not catch up until the 1970s, then ended in 1985 with the sam e

overall growth since 1950 . 47

VII-C . THE OVERALL ROLE OF INDUSTRY IN COMMUNIST-RULED COUNTRIE S

1) In 1970 Bulgaria's per capita industrial output reached an estimated 8 0 percent of the Soviet level . Romania managed only 60 percent of the sam e standard . Later estimates are not made .

By 1985 their relative commitments to industry, measured as percentag e shares of inputs and outputs in the industrial sector equaled the most advance d communist-ruled countries . Both had about 45 percent of labor, bigger share s than Hungary, Poland and the Soviet Union . Romania's 45 percent allocation o f capital stock was as large as that of the GDR, while Bulgaria's share exceede d that of Czechoslovakia . Over 60 percent of their NMP was produced in industry , equal to that of the GDR and Czechoslovakia and greater than in Hungary, Polan d and the Soviet Union .

7) Comparison of production functions for industrial output of communist - ruled countries turns up statistically insignificant coefficients for bot h

Bulgaria and Romania [Brada-85b ; Kyn and Kyn-76 and -77] . The more limite d comparison of partial productivity ratios of the communist-ruled countrie s shows that Bulgaria and Romania still depend on much larger shares of outpu t coming from increased inputs rather than increased productivity . In thi s sense, as well as others, they remain less-developed communist-ruled countries .

VII-D . THE BRANCH STRUCTURE OF INDUSTRY

1) In addition to having greater shares of labor and investment allocate d to industry as a whole, structural comparisons made for the 1960s show th e communist-ruled countries had industries long on shares of heavy branches , especially material processing, and short on shares for the food branch .

Bulgaria, a single exception, had a normal sized food branch by the standard s of the capitalist countries .

48

TABLE VII- 2 EAST-WEST DIFFERENCES IN INDUSTRIAL STRUCTURE, 1964-6 6 (percent of employment )

------Branch Western Europe Eastern Europe I II All Bul . Rom . Yug .* * ------Food 11 .9 16 .8 12 .1 18 .4 9 .8 9 . 9 Textiles 7 .3 12 .2 10 .8 11 .2 11 .1 15 .5* Clothing, footwear 8 .9 11 .8 7 .O 5 .2 5 .3 (* ) Leather 0 .8 1 .6 1 .5 0 .8 4 .1 3 . 3 Wood products 7 .1 9 .5 7 .2 5 .3 16 .5 10 . 0 Paper 3 .8 1 .7 1 .3 1 .O 1 .5 1 . 9 Printing 4 .6 3 .3 1 .2 O .9 1 .4 3 . 2 Chemicals 6 .3 5 .6 5 .7 4 .2 5 .9 6 . O Petroleum, coal O .6 O .5 1 .2 O .5 2 .9 7 . 1 Nonmetallic minerals 4 .8 5 .9 6 .7 6 .2 7 .3 8 . 8 Metals, machinery 40 .2 27 .6 38 .O 25 .8 33 .6 33 . 5 Other 3 .7 3 .5 7 .7 20 .5 0 .6 0 . 8

Total 100 .O 100 .O 100 .O 100 .O 100 .0 100 .O ------I = developed countries ; II = less-developed countries ; All = average for Soviet Union and C .M .E .A . Six ; Bul = Bulgaria ; Rom = Romania ; Yug = Yugoslavia ; ** classifica- tion might not be consistent ; clothing and footwea r included with textiles .

Sources : United Nations, Economic Commission for Europe , Structure and Change in European Industry . New York, 1977 . 229 ; Statistiski godishnjak Jugoslavije [Statistica l Yearbook of Yugoslavia] (Belgrade, 1971) 86 . ------

2) Data on the relative growth of branches since 1965 shows that foods ,

chemicals, and light manufacturing grew less compared to total industria l

growth in the communist-ruled countries than in either the developed or th e

less-developed capitalist countries . Both heavy manufacturing and machiner y

grew, relative to the total, faster in communist-ruled than in develope d

capitalist countries .

49

Table VII- 3 ELASTICITY OF BRANCH OF INDUSTRY GROWTH FOR CPEs, DMEs, and LDCs from 1966 to 1973 and 1973 to 198 0

------CPE DME LD C Branch 66-73 73-80 66-73 73-80 66-73 73-8 0 ------Food 81 .0 81 .4 91 .9 106 .1 87 .O 98 . 0 Textiles 82 .4 84 .3 95 .7 84 .4 85 .4 83 . 8 Clothing 93 .2 89 .7 77 .1 86 .5 82 .5 89 . 4 Wood Prod . 86 .8 84 .8 100 .O 89 .7 80 .5 106 . 1 Paper/Print 100 .0 83 .3 93 .8 101 .1 119 .6 87 . 3 Chemicals 109 .3 100 .9 124 .2 106 .7 118 .5 96 . O Mineral Prod 93 .1 88 .1 97 .6 97 .6 97 .9 110 . 6 Basic Metals 84 .3 84 .9 96 .3 83 .5 90 .8 114 . 5 Metal/Machinery 118 .2 117 .O 104 .O 104 .1 129 .9 115 . 2 Light Mfg . 86 .1 88 .2 92 .5 97 .6 89 .2 92 . 6 Heavy Mfg . 109 .6 106 .3 106 .6 101 .5 116 .9 106 . 3

Total 100 .0 100 .0 100 .0 100 .0 100 .O 100 .0 ------Elasticity equals a branch's growth in the period divided b y the total growth in the period .

Source : Author's calculations from C . Leechor, H . Kohli, S . Hur, Structural Changes in World Industry, (Washington DC : World Bank, 1983), 81-83 . ------

VII-E . BULGARIA VERSUS ROMANI A

1) Bulgarian and Romanian industrial structures are compared in terms o f

their different labor force shares by branches in 1950, 1965 and 1980 . To a

surprising extent, structural differences are the same in 1950 and 1980 . In

all three periods, Bulgaria had larger shares in the food branch, although it s

margin declines . Romania has larger shares in both the wood processing an d

machinery branches .

Comparisons of their branch growth elasticities suggest that difference s

in relative branch growth up to 1965 tended to make both industrial structure s

more alike . Since then branch elasticities are nearly the same . Largely

5 0

Table VII- 4 RELATIVE OUTPUT GROWTH OF BRANCHE S BY FIVE-YEAR PERIODS *

------Period 51-55 56-60 61-65 66-70 71-75 76-80 81-8 5 ------Energy -Bulgaria 1 .49 1 .13 1 .14 1 .11 0 .84 1 .10 1 .0 0 -Romania 1 .15 1 .08 1 .34 1 .23 O .86 O .80 O .9 4 Fuel s -Bulgaria 1 .08 O .73 1 .34 1 .23 O .98 O .97 O .83 * -Romania O .93 O .85 0 .77 O .77 0 .70 O .77 O .9 3 Ferrous metal s -Bulgaria 5 .36 1 .52 1 .90 1 .40 1 .09 O .98 O .9 1 -Romania 0 .76 1 .46 O .90 1 .02 O .93 O .97 0 .9 6 Nonferrous metal s -Bulgaria 1 .45 1 .27 O .97 O .76 -(not available) - -Romania 1 .05 1 .08 O .98 1 .03 O .88 O .84 0 .8 3 Machinery, metalworking -Bulgaria 1 .27 1 .45 1 .33 1 .23 1 .29 1 .18 1 .24 -Romania 1 .38 1 .25 1 .15 1 .19 1 .25 1 .15 1 .08 ------of which : electrical engineering, electronic s -Bulgaria 1 .71 1 .41 1 .49 -Romania 1 .73 1 .46 1 .67 1 .45 1 .46 1 .19 0 .9 5 ------Chemicals -Bulgaria 1 .40 1 .47 1 .25 1 .58 1 .12 1 .20 1 .12 -Romania 1 .45 1 .33 1 .63 1 .50 1 .13 1 .01 O .99 Building materials -Bulgaria 1 .71 1 .07 1 .24 .96 1 .01 1 .07 O .87 -Romania 1 .25 0 .96 1 .10 1 .05 0 .88 1 .17 O .8 9 Wood processin g -Bulgaria O .83 O .73 O .76 O .76 0 .86 O .87 O .9 3 -Romania O .90 1 .03 1 .06 O .88 0 .79 O .90 0 .9 4 Paper and pulp -Bulgaria O .87 O .82 0 .98 1 .24 1 .15 O .91 O .9 5 -Romania 0 .68 1 .00 1 .26 1 .11 O .84 O .90 0 .92 Glass and ceramics -Bulgaria 1 .17 1 .58 1 .37 1 .11 0 .98 1 .03 0 .8 8 -Romania 1 .04 O .98 O .94 1 .01 1 .06 1 .00 1 .0 3 Textile s -Bulgaria *** *** 0 .75 0 .90 O .92 0 .96 O .9 4 -Romania O .86 0 .80 O .86 O .97 O .96 1 .06 O .9 5 Clothing -Bulgaria *** *** O .81 1 .11 0 .92 0 .86 O .9 8 -Romania 0 .74 O .95 O .89 1 .02 1 .20 O .96 1 .32

(Continued )

5 1

Table VII-4 (Continued )

------Period 51-55 56-60 61-65 66-70 71-75 76-80 81-8 5 ------Leathe r -Bulgaria O .65 0 .88 0 .81 1 .02 0 .89 O .83 1 .0 8 -Romania O .84 O .85 0 .85 0 .90 0 .84 0 .98 1 .0 9 Printing -Bulgaria O .76 0 .75 O .72 1 .05 0 .79 1 .22 O .87 -Romania 1 .04 O .99 1 .04 0 .81 0 .59 O .85 O .9 4 Food s -Bulgaria O .76 0 .90 O .96 O .79 O .86 0 .87 0 .9 1 -Romania 0 .84 0 .84 O .79 0 .78 0 .78 0 .85 0 .92 ------* elasticity is branch growth in the period divided by th e growth of gross industrial output . ** Coal only . ** * Bulgaria did not provide separate data for textiles an d clothing ; elasticity of the two branches were in 1951-5 5 ------

because of sizeable increases in the shares of machinery branches, Bulgaria an d

Romania exhibit more structural change from 1970 to 1985 than the othe r

communist-ruled countries, according to a study by the Economic Commission fo r

Europe for the period, 1970 to 1985 .

2) The Soviet Institute for Economics of the World Socialist Syste m

estimates that Bulgaria and Hungary had the largest shares of industrial outpu t

exported in 1970, but by 1984 Bulgaria fell behind Hungary . Romania shared

last place with Poland both times, partly because larger country size i s

associated with lower trade dependence .

Bulgaria ranked second to Czechoslovakia in 1970 in terms of the share o f

output of the machine building branch that is exported . By 1984 Hungary passe d

both to lead the group, while Romania, once more, came in last place . Roma-

nia's position matched its very low share of imported machinery used i n

investments, considered in Chapter V . This does not preclude a few product s

for which Romania is a major exporter such as oil field drilling equipmen t

52

Table VII- 5 COMPARATIVE SHARES OF EXPORTS IN INDUSTRIAL OUTPU T OF COMMUNIST-RULED COUNTRIES, 1970 TO 198 4

Total Industrial Machinebuilding Country Output Outpu t 1970 1980 1984 1970 1980 198 4 ------Bulgaria 16 24 24 32 43 4 3 Romania 11 13 14 11 14 1 5

Czechoslovakia 14 20 21 34 45 4 5 GDR 12 17 19 21 32 3 1 Hungary 17 31 32 29 49 4 7 Poland 9 14 14 21 26 26 ------Source : O .T . Bogomolov, Strany sotsializma v mezhdunarod- nom razdelenii truda (Moscow : Nauka, 1986), 301 .

where it has ranked second to the U .S . Also, in 1975 it exported 81 percent o f

its output of diesel locomotives and 53 percent of freight and tank cars ,

specialties held by Romania in the CMEA . But the list of products of whic h

Bulgaria exported as much as 90 percent of its output is much longer . And it

is clear that Romania's industrial production is to a high degree only for sel f

supply, if even poorly for that .

VII-F . COMPARATIVE INDUSTRIAL INSTITUTIONS IN BULGARIA AND ROMANI A

1) Communist Romania inherited larger average enterprises than Bulgari a

[Jackson and Lampe-82, 493, 564-565], a tendency maintained under communis t

rule . The average enterprise, 1 .6 times larger in terms of employment i n

Romania than in Bulgaria in 1960, increased to 2 .9 times by 1985 . Whil e

enterprise size tends to vary according to branch of industry, Romanian

enterprises are larger in all branches, although there are exceptions as i n

ferrous metallurgy and the food industry . 5 3

By comparative data of 1965, neither Bulgaria nor Romania has had th e concentration of very large enterprises (over 5000 persons employed) found i n

Hungary, Czechoslovakia, or the USSR [Economic Bulletin for Europe-70, 71] .

Bulgaria's industrial employment tends to be as concentrated in small enter - prises (under 500 persons) as is the case in the GDR . All communist-rule d countries in 1965 had larger enterprises than would be predicted on the basi s of country sizes and other variables estimated for capitalist countries . Th e variation ranged from 16 times larger in Czechoslovakia to 1 .9 times larger in the GDR, with Romania at 9 times the predicted value and Bulgaria only 4 time s

[Pryor-73, 192-193] .

2) The "enterprise" is, of course, a unit of organization and not technol- ogy, and even though it is defined the same way in both Bulgaria and Romania , as a unit that has both distinctive legal identity and independent accounting , without a detailed comparison of the decisionmaking rights vested in enterpris e management, one ought not to draw any conclusions about the comparativ e concentration of decisionmaking in the industry of the two countries . In thi s respect, both countries have had highly centralized planning and managemen t systems . Both announced reforms and decentralization in the 1960s, Bulgaria i n

1965 and Romania in 1969 [Spigler-73 ; Feiwel-77], but afterwards reverted t o even more emphasis on improving the efficiency of central planning and large - scale management [Allen-77 ; Jackson-77 ; Kaser-81] . A second reform effort ,

"new economic and financial mechanisms" in each case, coincided in late 197 8

[Jackson-81a,81b ; Kaser-82 ; Feiwel-82] . But in Romania, with its whol e management system under extreme centralization since the 1981 foreign deb t crisis, "reforms" have been the mere excuse to cut wages without delegatin g decisionmaking authority or decreasing the inconsistency of central pla n directives [Jackson-86b] . Bulgaria's leaders have not had to cope with crisis, 5 4 but they also failed to implement reform measures for industry that wer e promulgated at the beginning of 1982 [Grosser-84 ; Spetter-84 ; Jackson-86a] .

Those measures met stiff resistance from workers on up to conservative part y officials, so much so that one wonders how they ever managed to be approved in the first place . From whatever sources, the spirit of reform acquired in 198 5 a new life that has seen a thorough reshuffling of top level bodies an d thousands of pages of laws, regulations and other instructions for introducing central management through indirect financial instruments and state orders , along with a wholesale price system and exchange rate system designed to align

Bulgarian wholesale prices with international prices . However, the new system is not free of contradictions and it remains completely unclear how it is bein g introduced [Jackson-87a] .

55

Chapter VIII . PATTERNS OF CHANGE IN AGRICULTUR E

VIII-A . THEORY AND CONCEPTS ABOUT THE EFFECTS OF COMMUNIST RULE IN AGRICULTUR E

Agriculture's role is often seen as an initial source of "contributions "

to economic development in the forms of capital transfers, workers, and foreig n

currency . Under communist rule it has passed through several stages, includ-

ing (a) an initial land reform to gain political support from peasants, (b) a n

"exploitation" phase whose length and depth is even debated for the Sovie t

Union, but which appears to be even shorter in Eastern Europe, (c) a phase o f

significant commitment of material inputs in order to develop more productiv e

agriculture, (d) a fourth phase of emphasis on increasing quality foods, meat s

and fresh produce, and (e) a present phase emphasizing efficient production .

Throughout the period, the importance of private and cooperative institu-

tions has lent an element of nonconformity to the system, something also foun d

in the highly subsidized agriculture of capitalist countries . There is lackin g

a theory of agriculture under communist rule that links central planning/ad-

ministration to nonconforming farm organizations .

VIII-B . SYSTEMIC DIFFERENCES IN AGRICULTURAL PERFORMANC E

1) The Soviet Union and the communist-ruled countries in Eastern Europ e

presently produce about 60 percent of the American level of per capita outpu t

and 20 percent more than in Western Europe [Lazarcik-85, -81] . Yet domestic

consumption standards are quantitatively lower, even without considering thei r

lower quality standards, while the U .S . and Western Europe are also able t o

cover far greater shares of agricultural imports with agricultural exports,

56

Table VIII- 1 COMPARATIVE AGRICULTURAL OUTPUT PER CAPITA, 1966 TO 198 2 (In percent of United States = 100 )

------Country/area 66-70 71-75 76-80 81/ 2 ------Bulgaria 78 .7 76 .2 74 .6 73 . 6 Romania 55 .5 59 .2 66 .8 58 . 7

Czechoslovakia 58 .8 62 .9 61 .7 56 . 3 GDR 66 .1 70 .3 70 .8 71 . 5 Hungary 81 .4 91 .1 92 .O 87 . 7 Poland 65 .8 67 .2 61 .5 49 . 6 Yugoslavia 53 .2 53 .7 53 .5 51 . 8 Eastern Europe 63 .5 66 .1 65 .7 59 . 9 USSR 63 .1 62 .6 59 .1 51 . 2 Western Europe 52 .7 53 .3 51 .2 49 . 9 USA 100 .0 100 .O 100 .0 100 .O ------Source : Gregor Lazarcik, "Comparative Growth of Agricul- tural Output, Inputs, and Productivity in Eastern Europe , 1965-82," in East European Economies : Slow Growth in the 1980's, Vol . 1 . Selected papers submitted to the Join t Economic Committee, Congress of the United States (Washing - ton DC : USGPO, 28 October 1985), 420 .

Wastage or statistical exaggeration must account for greater portions of outpu t

under communist rule .

2) It is shown by Pryor, using western estimates of the growth of agricul-

tural output for the period 1950 to 1979, that there has been no significan t

difference in growth rates across economic systems . But there has bee n

significantly greater instability of agricultural output in the communist -

ruled countries than in the capitalist countries . Brada's research suggest s

that the source of instability of crop output was the especially high in -

stability of areas planted, not so much instability of yields [Brada-86] .

The author's research suggest that Bulgaria, Romania and Yugoslavia hav e

had unusual crop instability, compared to their weather . As shown in Tabl e

VIII-3, their yields are as unstable as annual rainfall . Other countries i n

5 7

Table VIII- 2 COVERAGE OF AGRICULTURAL IMPORTS WITH AGRICULTURAL EXPORT S EASTERN AND WESTERN EUROPE, 1970 TO 198 1

Country/area 70-72 73-75 76-78 79-8 1 ------Western Europe 58 .4 62 .1 64 .5 76 . 3 Eastern Europe * 61 .5 52 .9 44 .8 33 .3 ------Note : * Including the USSR and Yugoslavia ; Easter n European countries except for Hungary and Yugoslavia hav e imports evaluated on an F .O .B . basis that actually raise s their rate of coverage .

Source : UN/ECE, Economic Bulletin for Europe, 35 :3 (Jun e 1983), 223 .

the sample studied, communist-ruled and capitalist, have had less crop in -

stability than rainfall instability .

3) Compared to Western Europe, Eastern Europe uses 80 percent more arabl e

and crop land per capita to produce only 20 percent more agricultural outpu t

per capita . In Eastern Europe (excluding the Soviet Union) about 50 mor e

persons are occupied on each hectare than in Western Europe . By contrast ,

Western Europe uses about twice the tractors per hectare and 3-4 times th e

tractors per person as the average for Eastern Europe and the Soviet Union .

Western Europe also applies about 20 percent more chemical fertilizer per

hectare . No comparative studies of combined input productivity in a larg e

sample of countries in both systems has been found in the research .

VIII-C . BULGARIA AND ROMANIA VERSUS THE OTHER COMMUNIST-RULED COUNTRIE S

1) Bulgaria and Romania have higher average growth rates of gross output ,

but not net output, than the other communist-ruled countries . Their best year s

5 8

Table VIII- 3 VARIABILITY OF WHEAT YIELDS AND RAINFAL L IN SELECTED COUNTRIES, 1950 TO 1980

------Coefficient of Variatio n Country Wheat Yield# Rainfall Locatio n ------Bulgaria 15 .26 17 .54 Sofi a 19 .53 Rus e Romania 15 .42 18 .22 Buchares t Yugoslavia 14 .60 18 .55 Belgrad e 3 .27 Ljubljan a Poland 10 .12 *21 .11 Warsaw *16 .70 Wrocla w Hungary 12 .65 19 .61 Budapes t Czechoslovakia 9 .00 *20 .10 Pragu e

Austria 9 .61 *16 .71 Vienn a Greece 13 .45 *24 .44 Athen s Italy @ 8 .04 1 .77 Mila n *19 .99 Palermo Spain 16 .51 *27 .94 Madrid ------Coefficients of variation based on the standard error s of the estimates around the least squares trend line o n yields divided by the average yield during the perio d from 1950 to 1984 .

- national average . @ - Yield variability significant- ly larger than corresponding rainfall variability ; * - rainfall variability significantly larger than cor- responding yield variability . ------

were in the late 1950s, the 1960s and early 1970s . In the last ten year s

comparative and absolute performance has declined . When differences in level s

of development are considered, Bulgaria and Romania do not generate sig-

nificantly higher growth rates of agricultural output .

The share of animal products in total agricultural output has risen in th e

Soviet Union and Eastern Europe, but remains on average lower than in Wester n

Europe . Bulgaria and Romania have typically produced very small shares, onl y

recently equal to the average of prewar Eastern Europe . It is possible tha t 59

Table VIII- 4 GROWTH OF AGRICULTURE OUTPUT IN BULGARIA AND ROMANIA COMPARED TO EASTERN EUROPE BY FIVE-YEAR PERIODS, 1950 TO 198 5 (average annual rate of growth as least squares trend )

------Country/area 51-55 56-60 61-65 66-70 71-75 76-80 81-8 5 ------Bulgari a Total Output 3 .1 7 .3 5 .2 1 .1 1 .7 1 . 14 0 . 2 Crops 1 .1 7 . 14 6 .6 O .1 -O .4 -O .6 -2 . 1 Animal 6 .5 7 .1 3 .6 2 . 14 14 .O 3 .3 2 . O Net Product 2 .7 6 .6 4 .7 -2 .1 1 .5 -4 .2 -3 . 4 Romani a Total Output 14 .8 4 .O -1 .1 1 .2 5 .5 2 .6 2 . 7 Crops 6 .5 5 .8 1 .2 -0 .7 4 .5 1 .5 4 . 4 Animal 4 .9 3 .5 1 .O 2 .9 6 .3 3 .5 1 . 4 Net Product 5 .2 14 .7 -1 .O -2 .3 O .8 1 .3 3 . 2 East Europe* Total Outpu t 2 .8 4 .O 2 .3 1 .7 3 .9 1 .6 1 . 6 Crops 2 .O 3 .5 2 .9 1 .O 2 .1 O .5 2 . 7 Animal 3 .6 4 . 14 1 .8 2 .1 14 .9 2 .1 1 . O Net Product 2 .4 3 .3 O .6 -1 .O 1 .8 -O . 14 2 .7 ------* excluding Yugoslavia .

Sources : Gregor Lazarcik, "Agricultural Output and Produc- tivity in Eastern Europe and Some Comparisons With the USS R and USA," in Reorientation and Commercial Relations of th e Economies of Eastern Europe, a compendium of papers submit- ted to the Joint Economic Committee, Congress of the Unite d States (Washington DC : USGPO, 16 August 1974), 337,339 ; "Comparative Growth of Agricultural Output, Inputs, an d Productivity in Eastern Europe, 1965-82," in East European Economies : Slow Growth in the1980's, Vol . 1 ., Selected papers submitted to the Joint Economic Committee, Congres s of the United States (Washington DC : USGPO, 28 Octobe r 1985), 394, 396 ; and Research Project on National Income i n East Central Europe, Agricultural Output, Expenses an d Depreciation, Gross Product, and Net Product in Easter n Europe1965, 1970and1975-1986, OP-96 . (New York : L .W .Interna.tional Finance Research, 1987), 39, 40 . 6 0 natural conditions contribute to this result, but allocation priorities see m more important .

2) Bulgaria and Romania are joined by Hungary as communist-ruled countrie s with consistent records of export surpluses in agricultural products . On bot h an absolute and a per capita basis, Bulgaria and Hungary far exceed Romania .

3) Production functions estimated in this research for crops in Bulgari a and Romania turn up almost identical results . The growth of inputs of anima l fertilizer, percentage of arable land irrigated, and average annual rainfal l appear to have been unrelated to output growth . Output per occupied perso n increased O .47 percent in Romania with a 1 percent increase in capital pe r person and 0 .10 percent with a 1 percent increase in chemical fertilizer pe r hectare per person . For Bulgaria, the respective coefficients are 0 .40 an d

O .11 .

4) In Bulgaria the share of total investments going to agricultur e increased from 11 percent in 1950 to 30 percent in 1960 and then declined i n

1980 to 12 percent . In Romania, the share rose from 12 percent in 1950 to 2 0 percent in 1960 and then declined to 13 percent in 1980 .

When investment shares are considered in comparison to labor shares ,

Romania has always had the lowest ratio, about 33 percent until 1975 and rising to 45 percent in 1980 . Bulgaria's ratio in 1960 was 54 percent, not as high a s either in the GDR or Czechoslovakia and in 1980, 50 percent, which ranke d

Bulgaria second to Romania at the bottom .

The author estimates that in 1960 Bulgarian fixed capital per hectare in agriculture was only about 5 percent more than in Romania . A Polish specialis t put Romanian livestock per hectare higher than in Bulgaria in 1975, accordin g to Wädekin [1982] . He also finds that Bulgaria has the highest share of arabl e land under irrigation in Europe, a figure which reached 29 percent in 1980 . At 6 1 that time Romania reported 21 percent, also far more than in the other com- munist-ruled countries . But such investments have no statistical influence o n crop production at the aggregate level, suggesting they have been ineffectivel y used .

By 1980 Bulgarian and Romanian tractor horsepower availability per hectare of agricultural land equaled Hungary's, but were far below the levels of th e

GDR, Czechoslovakia and Poland . Romania had lagged behind and only recentl y improved its relative ranking . Bulgaria was also behind until the mid-1970s , although not as far as Romania .

5) From 1950 to 1972, Lazarcik estimates Bulgaria used over twice th e material supplies per person occupied in agriculture as Romania . Yet the

Bulgarian levels were only from one third to one half those of Czechoslovakia .

With such low levels, it is not surprising that in the 1970s, such inputs gre w at a far faster rate than in other communist-ruled countries . But the return s obviously diminished since in both countries net output stagnated or declined .

In 1980 Romania ranked second only to Yugoslavia as user of the leas t chemical fertilizers per hectare . Bulgaria uses 60 percent more per hectare , but still less than the average of East European communist-ruled countries .

Bulgaria, probably because of its extensive irrigation facilities, has th e highest electric energy consumption rate and also has the highest use rate o f plant protection chemicals of the East European communist-ruled countries .

6) By 1980 shares of occupied persons in agriculture equaled 30 percent i n

Romania and Poland, a lower 23 percent in Bulgaria and Hungary, and 11-1 4 percent in the GDR and Czechoslovakia . When adjusted to persons occupied pe r hectare of agricultural land, differences across the communist-ruled countrie s are quite small in 1980 . Only Romania and Poland recorded over 20 persons per 6 2 hectare, while the Bulgarian figure of 16 nearly equaled the 14-15 per hectar e common to the GDR, Czechoslovakia, and Hungary .

The communist-ruled countries record both greater shares of total labo r force in agriculture (shown in Chapter VI) and two or three times the labor pe r hectare compared to capitalist countries . Part of this excess may reflec t statistical practices, such as more generous definition of working females an d other household members . Food shortages and housing shortages have encourage d rural dwelling with urban occupation . The numbers reach half the rural labo r force in the GDR, Czechoslovakia and Hungary, and most still work on household agriculture in spare time . It is also the case that the average days worked b y someone in agriculture have risen as capital and new technology is introduced .

On Bulgarian collective farms, average days worked increased 30 percen t from 1952 to 1970 while numbers of persons working declined only 25 percen t

(actually persons increased from 1952 to 1965 as collectivization was com- pleted) . Romania, as testimony to its greater underinvestment and othe r policy, experienced only an 8 percent increase in average days worked from 196 5 to 1980 when persons working on collectives decreased by 55 percent . Romanian farm labor has also been poorer quality . In 1970 some 44,000 agricultura l specialists with secondary and higher technical education worked in Bulgaria n agriculture, while only 29,000 were recorded in Romania . The ratio per perso n occupied was four time higher in Bulgaria than Romania .

7) In the 1950s through Eastern Europe, workers on state farms commonl y were paid only about 75 percent of average industrial wages, something whic h probably reflected in a large part differences in days worked per year . Wag e differences narrowed during the 1960s in all communist-ruled countries .

Larger income gaps were common for those on collective and private farms .

The GDR moved in 1952 to introduce systems of advance, guaranteed minimum 63

payments for collective farmers and soon followed Bulgaria and Hungary .

Romania did not do this until after 1970 . In Bulgaria, earnings of a collec-

tive peasant were only 30 percent of the average wage in 1953, but by 1955 th e

income of a peasant family from all sources was 95 percent of a worker family' s

total . Romania lagged in this regard with income from agricultural work of a peasant only 50 percent of the average worker's wage in 1965 and not muc h higher in 1975 . However, with two-thirds of Romanian peasant household s counting a wage earner by the latter date, family incomes from all sources wer e more equal .

In a large measure, differences in incomes reflected differences in rea l productivity between agriculture and other sectors . This, in turn, mirrored the marginal allocation of capital and material supplies and comparativ e education standards in each country .

8) Relative incomes received in agriculture in communist-ruled countrie s have not reflected movements in relative producer prices in agricultur e compared to industry because of the complex incidence of subsidies .

Relative producer prices in agriculture rose in at least three waves .

First, the extremely low prices first paid for compulsory deliveries wer e eliminated in the 1950s . Then in the 1960s premium prices were introduced fo r above-plan deliveries . A third wave came in the late 1970s and early 1980s both to compensate for rising energy prices and to stimulate agricultura l production .

The author has compared movements in the agricultural terms of trade i n

Bulgaria and Romania . From 1950 to 1960 Bulgarian agricultural producer price s increased 81 percent compared to industrial producer prices . In the sam e period, they increased relative to industrial prices 236 percent in Romania , witnessing how low they were in 1950 . After 1960 Bulgarian moved up more than 64 in Romania, up to 1977 the relative increases were 150 percent in Bulgaria an d only 46 percent in Romania, and from 1977 to 1985, respectively, 49 percent an d

9 percent .

The introduction of cost accounting in Romania's large collective farm s came only in the 1970s, so little was known about the relationship of prices t o costs . Since then in both countries it is known that, despite major relative price increases, meat production and some crops chronically tend to cost mor e than producer prices and must be subsidized . 65

Chapter IX . SYSTEMIC EFFECTS ON FOREIGN TRADE AND ISSUES WITHIN THE CME A

IX-A . CONCEPTS OF FOREIGN TRAD E DEVELOPMENT UNDER COMMUNIST RUL E

1) Western theory of the effects of communist rule on foreign trad e extends the Soviet tendency towards autarchy to both a preference for com- munist-block trade and relative autarchy in the multicountry communist worl d after 1948 . In addition, Soviet readiness to supply industrial raw material s and markets for finished manufactures, backed up by corresponding relativ e price structures, is a major influence differentiating commodity structures .

2) Little has been written about the theoretical effects of syste m differences on the growth rates of exports and imports . Simple average growt h rates for the sample of communist-ruled countries are higher in early five-yea r periods and lower in later five-year periods than the average of the sampl e capitalist countries . The regressions show no significant systemic effect s when differences in the level of national product are considered .

IX-B . EMPIRICAL ANALYSIS O F SYSTEMIC EFFECTS ON FOREIGN TRAD E

1) Communist rule has the theoretically expected effects of maintainin g abnormally low levels of foreign trade dependency as measured by imports ( a condition which might have been inherited from the prewar capitalist world) .

In 1975 and 1980, imports of a typical communist-ruled country were, respec- tively, only 67 percent and 56 percent of the levels expected for countries o f such population size and per capita national income [Jackson-87a] .

2) The distribution of trade by groups of countries is influenced by bot h policy and systemic factors . Among the former are restrictions on trade with

66

Table IX- 1 COMPARISON OF THE CHANGES IN MAJOR FOREIGN TRADE VARIABLES ACROSS SYSTEMS BY FIVE-YEAR PERIODS, 1950 TO 198 5

------Ratio of Change in Period Export Import Imports : Terms o f Growth* Growth* Exports@ Trade * ------All Capitalist Countrie s 1951-55 138 .3 132 .1 129 .6 103 . 1 1956-60 132 .3 132 .9 126 .O 99 . 6 1961-65 137 .1 142 .5 129 .1 102 . 6 1966-70 160 .7 159 .4 128 .9 100 . 6 1971-75 136 .7 139 .O 127 .1 88 . 1 1976-80 145 .1 138 .8 127 .2 101 . 7 1981-85 129 .1 105 .6 114 .5 99 . O

All Communist Countries 1951-55 157 .9 160 . 7 113 .1 106 . 2 1956-60 183 .7 194 .O 112 .9 96 . O 1961-65 155 .8 149 .7 111 .0 98 . 8 1966-70 152 .2 156 .1 107 .6 98 . 8 1971-75 153 .5 162 .6 114 .O 95 . 9 1976-80 133 .7 122 .2 121 .5 95 . 3 1981-85 122 .4 99 .2 105 .3 98 . O

Ratio of all communist-ruled to all capitalist countrie s 1951-55 114 .1 121 .7 87 .O 103 . O 1956-60 138 .8 146 .0 90 .0 96 . 4 1961-65 113 .7 105 .1 86 .O 96 . 3 1966-70 94 .7 97 .9 83 .0 98 . 2 1971-75 112 .3 117 .O 90 .O 108 . 9 1976-80 92 .1 88 .1 95 .O 93 . 8 1981-85 94 .8 93 .9 92 .0 99 .0 ------* Growth from beginning year to ending year, @ averag e of annual ratios calculated in current prices an d adjusted to a common CIF :FOB basis .

Computations of the author from official and interna- tional sources ; see Chapter III for more detail . 6 7 communist-ruled countries by capitalist countries, which declined in the 1960 s and are virtual non-existent in a few like Austria and Finland . Communist - ruled countries also began to search more actively for trade possibilities wit h capitalist countries in the 1960s . Both factors account for Fink's findin g that the highest levels of integration (or isolation) of' the communist-rule d countries was in the period 1955 to 1962 . But on balance, western policie s have played a smaller role in the country distribution of trade than policy an d systemic factors on the other side .

Trade shares by "socialist" and "nonsocialist" country groups are in- fluenced by both the relative growth of volume in constant prices and relativ e prices . Evidence of' volume growth since 1960 shows that real exports an d imports of the USSR and the six East European countries to other "socialist " countries grew more slowly than to "nonsocialist" countries, with the excep- tions of exports in 1966-70 and 1971-75 and imports in 1981-84 . Naturally, th e patterns of relative growth are more complicated at the CTN commodity level .

Official trade statistics show higher shares of intra-"socialist" trad e than if trade flows were revalued at world market prices [Marrese and Vanous -

83] . In 1975, for example, the latter would have been anywhere from 79 percen t to 95 percent of the shares measured in official prices .

Hewett's estimates for 1970 of the effects of CMEA compared to the EE C shows that CMEA had strong trade diversion effects, with individual countrie s in CMEA trading only 20-30 percent of the levels with Western European coun- tries as would be expected in normal capitalist trade [Hewett-76] . Slama applies a similar model to trade in machinery, finding that intra-CMEA trad e was 5 .5 times expected levels in 1965 and still 2 .8 times in 1978, while East -

West trade was only about 12-18 percent of expected levels [Slama-83] .

6 8

Table IX- 2 PER CAPITA FOREIGN TRADE OF SELECTED COUNTRIES (current US dollars at official exchange rates )

------Country 1975 1980 198 4 ------

Bulgaria - imports 620 1089 141 9 - exports 538 1171 143 4 Romania - imports 251 594 33 5 - exports 251 513 47 5

Czechoslovakia - imports 615 989 110 5 - exports 566 973 110 9 GDR - imports 670 1140 137 6 - exports 599 1034 149 0 Hungary - imports 682 860 75 8 - exports 579 810 80 2 Poland - imports 369 537 28 6 - exports 302 478 31 6 USSR - imports 145 258 29 3 - exports 131 288 33 3 Yugoslavia - imports 360 676 52 2 - exports 191 403 44 7 Austria - imports 1239 3234 259 2 - exports 992 2315 208 1 Greece - imports 588 1092 97 1 - exports 252 533 49 1 Portugal - imports 410 939 79 0 - exports 208 468 51 6 Spain - imports 452 906 74 5 - exports 216 556 606 ------

* Unadjusted for different evaluations of imports at CIF and FOB .

Source : UN, International Trade Statistics Yearbook, 1985 . ------

3) The commodity distribution of trade is different under communist rule .

Import and export shares of machinery and industrial raw materials have bee n

higher and those of manufactured consumer goods and food commodities smalle r

than in the trade of capitalist countries [Ofer-80] . 6 9

4) The total terms of trade of the average communist-ruled countr y declined in every five-year period between 1950 and 1985 . The unweighte d average hides the different experiences of the USSR and the six East Europea n countries . Their terms of trade improved from 1960 to 1970 with socialist an d nonsocialist countries . Then all except Romania experienced greater decline s in terms of trade with socialist than nonsocialist countries, a result largel y of higher import prices for Soviet oil that, in turn, was exported as finishe d products to nonsocialist countries .

5) The ability to import for a given level of commodity exports has bee n significantly less for communist-ruled countries than for capitalist countries , despite the exception of Yugoslavia . Low import :export ratios in intra -

"socialist" trade reflect both the weakness of institutions for capita l transfers among communist-ruled countries and the reduced earnings fro m services and other invisibles . But the ratios are also lower in trade with th e capitalist world and reflect not only typically low levels of invisibl e earnings, but also weakly developed export capacities that are discusse d further in Chapter X on world markets .

IX-C . BULGARIA AND ROMANIA VERSU S THE OTHER COMMUNIST-RULED COUNTRIE S

1) Because Bulgaria and Romania have faster growth of national produc t than the other communist-ruled countries, they would be expected to have faste r growth of exports and imports (as this suggests, there are probably simul- taneous equation biases in the estimates of Chapter IV) . Regression analysi s shows this to be the case, even after correcting for the expected effects o f differences in levels of NMP per capita .

A difference between the two is that Bulgaria had relatively higher expor t growth, while Romania had relative higher import growth . Also, Bulgaria's 7 0 highest periods of growth came earlier before 1965, while Romania's highes t periods of relative growth coincided with fast growth of NMP in the 1970s .

The real volume of exports to "socialist" countries grew twice as fast i n

Bulgaria as in Romania from 1960 through 1975 . Similarly high growth rate s characterized Hungary and Poland in the same period . After 1975, both Bul- garian and Romanian trade with "socialist" countries increased only as fast a s the average for all communist-ruled countries .

2) After correcting for the expected effects of population size and leve l of national product per capita, Romania had one of the lowest levels of foreig n trade dependency of the communist-ruled countries in 1955 and 1965 . In th e

1975, while not reaching Yugoslavia's level, Bulgaria's dependency was almos t as high as would be expected if it were capitalist .

Romania's foreign trade dependency rose from 1975 to 1980 and then fel l abruptly in 1985 to levels similar to that of the Soviet Union . By contrast ,

Bulgaria experienced a fall in dependency from 1975 to 1980, but in 1985 again reached levels about as high as would be expected for a similarly place d capitalist country . It is the only communist-ruled country so doing .

Since the econometric analysis of dependency was done in terms of imports , some comment is necessary about export dependency . Bulgaria had a large trad e deficit in 1975 and again in 1985, but an export surplus in 1980 . Romania als o had a trade deficit in 1980, but a very large surplus in 1985 . So dependenc y measured in export terms would tend to narrow the range of differences betwee n them .

3) Given that Bulgaria and Romania are less-developed, communist-ruled countries, they ought to have had higher ratios of imports to exports than i s their actual case . To the contrary, if intra-"socialist" trade flows are

7 1

Table IX- 3 DEVIATIONS FROM ESTIMATED NORMAL IMPORT DEPENDENC Y 1955 TO 198 0

------Pryor van Brabant Jackson Country 1955 1955 1965 1975 198 0

A. Actual divided by predicted normal import :GNP ratios :

Bulgaria .29 .48 .82 .95 .80 Romania .25 .42 .47 .66 .7 3

Czechoslovakia .38 .65 .80 .77 .6 3 GDR .38 .75 .69 .74 .60 Hungary .40 .62 .76 .56 .5 1 Poland .29 .63 .63 .70 .54 USSR .22 .54 .46 .46 .40 Yugoslavia* N/A N/A N/A 1 .18 .85 Greece* N/A N/A N/A .87 .7 6 Portugal* N/A N/A N/A 1 .04 1 .29 Spain* N/A N/A N/A .88 .79 Turkey* N/A N/A N/A .69 .65

B. 95 percent confidence intervals for the ratios in (A) :

Bulgaria .19- .46 .35- .66 .55-1 .49 .36-2 .37 .28-2 .3 1 Romania .17- .41 .30- .56 .31-O .85 .27-1 .78 .26-2 .09

Czechoslovakia .24- .59 .48- .89 .55-1 .47 .29-1 .40 .23-1 .79 GDR .25- .61 .55- .99 .47-1 .26 .28-1 .85 .21-1 .7 0 Hungary .26- .62 .46- .85 .53-1 .41 .21-1 .44 .18-1 .47 Poland .20- .47 .47- .86 .43-1 .14 .27-1 .76 .19-1 .55 USSR .15- .37 .39- .72 .31-O .84 .18-1 .16 .15-1 .1 1 Yugoslavia* .43-2 .94 .30-2 .4 4 Greece* .34-2 .26 .27-2 .1 8 Portugal* .39-2 .75 .46-3 .7 4 Spain* .34-2 .28 .28-2 .2 6 Turkey* .26-1 .87 .23-1 .92 ------

Notes : * Yugoslavia and the capitalist countries are include d in the sample used to estimate the normal equation . Values o f imports of the communist-ruled countries are adjusted down i n order to compensate for the overstatement of intra-CMEA price s at official exchange rates by 20 percent in 1955 and 1965, 1 0 percent in 1975 and 15 percent in 1980 . Yugoslav trade is adjusted by only half these amounts . Also, all but Hungary ar e adjusted up by 4 .5 percent from FOB to an estimated CIF basis . ------(Continued ) 7 2

Table IX-3 (Continued )

------Sources : Calculations from information on the estimates o f Pryor and van Brabant from Edward Hewett, "Foreign Trad e Outcomes in Eastern and Western Economies," in East Europea n Integration and East West Trade, edited by Paul Marer and Joh n Michael Montias (Bloomington IN : Indiana University Press , 1980, 46-47 . A description of Jackson's estimates is availabl e from the author . ------

revalued in world market prices, their ratios of imports to exports fall belo w those of the more-developed communist-ruled countries .

Both countries' trade with "socialist" countries other than the Sovie t

Union has been balanced, if not annually then over short periods . In contrast , their Soviet trade has been highly unbalanced, often shifting from larg e deficits to large surpluses . Significantly different capital transactions wit h the Soviet Union were a major factor in their comparative development .

While Bulgaria acquired small capital transfers in 1944 and 1945, Romanian capital losses through reparations and confiscations were possibly as much a s

30-50 percent of existing fixed capital and nearly a year's GNP at its 194 5 level . From 1947 to about 1957 known Soviet credits to both countries wer e roughly equal, but favored Bulgaria because of its smaller size . During thi s time, Romanian imports of equipment fell by nearly half from 1953 to 1958 [van

Brabant-74] . Again from 1958 to 1969, Romania received absolutely smaller amounts of Soviet credits . Accumulated Soviet trade balances were negative fo r

Bulgaria until about 1969 while Romania's were mostly positive . After 1973 ,

Bulgaria accumulated even larger deficits, by 1985 more than $4,000 millio n current US dollars . During this same period, Romania accumulated an expor t surplus with the Soviet Union reaching $1,400 million . 73

It is possible that intra-CMEA trade balances reflect implicit pric e adjustments or some effect of exchange rates . Otherwise, there is no good explanation of why Romania would be a major Soviet creditor in the 1980s .

4) In the 1950s both Bulgaria and Romania objected to the relative pricin g structure emerging within CMEA . Like the Soviet Union, they were disadvantage d by the high prices for machinery and the low prices for raw materials an d foods . However, according to Kaser [Kaser-67], Bulgaria succeeded in obtainin g special prices for its raw material exports . Romania failed to do so, some - thing which must have added incentive for its relative shift of trade to th e

West in the early 1960s .

Already by 1955-60, Romania's share of "socialist" trade was only 7 3 percent, compared to Bulgaria's 87 percent . In estimated world market price s the 1960 shares were even less for both, respectively 63 percent for Romani a and 74 percent for Bulgaria . Both countries' "socialist" shares fell in th e

1960s . In fact, the ratio of imports to exports in "nonsocialist" trade i n

1956-60 was higher in Bulgaria than Romania . In other words, it shifte d imports relative to export earnings even faster than Romania . Availabl e western credits added a stimulus to relative CMEA prices .

Still, Bulgaria's real exports to "socialist" countries grew faster tha n to "nonsocialist" countries from 1965 through 1975, while its real imports fro m socialist countries grew faster for even longer, from 1965 through 1980 . B y contrast, the only period that Romanian exports grew faster to "socialist " countries than to "nonsocialist" was in 1976-80, while its imports fro m

"socialist" countries did so only in 1981-84 when Western imports by Ceauses- cu's debt policy .

Since trade shares by country groups are calculated in current prices, th e movements of prices affect them . Bulgaria's lowest "socialist" trade share 7 4

occurred in the mid-1970s ; then the effects of price increases for Sovie t

petroleum pushed it up to levels of the early 1960s . Romania's "socialist "

trade share reached a low point of 40 percent in 1980, then rose under th e combined influences of increased imports of Soviet petroleum, and both highe r prices and volumes for food and oil field equipment exports .

Hewett's study of regional trade propensities in 1970 shows Bulgaria wit h

30 percent and Romania with 20 percent of the levels of trade with Wester n

Europe that would be expected had they been capitalist and not members of a

tariff union . Trade between Bulgaria and Romania was only 70 percent o f

expected levels of partners in a tariff union, but Bulgarian-Soviet an d

Bulgarian-GDR trade were, respectively, five times and four times those levels .

Bulgaria and Romania both showed preferences for machinery trade wit h other communist-ruled countries in Slama's study, but with Bulgaria's prefer-

ence a high 10 times the expected level and Romania's only about 2 times . I n

fact, the dollar value of Bulgaria's imports of investment goods from com- munist-ruled countries in 1980 were five times its imports from OECD countrie s

(a ratio similar to that of the GDR) . In contrast, Romania's ratio was slightly over unity, the lowest of the communist-ruled countries .

5) Bulgaria and Romania in the 1970s had nearly balanced trade with othe r communist-ruled countries in investment goods, something that reflected larg e

Soviet imports deficits in this category . Because of that, the other Eas t

European countries all have export surpluses .

The ranking of Bulgaria and Romania in terms of per capita exports o f

investment goods to CMEA is very different . By 1985, Bulgaria reached th e

levels of Czechoslovakia, only exceeded by the GDR . Romania had even lower pe r capita levels than Poland, although not as low as the Soviet Union . 75

The commodity shares of Bulgarian and Romanian imports are similar an d vary little over the period, 1950 to 1985 . But export shares differ . Bulgari a in every period had shares of food product exports twice those of Romania . In turn, Romania had the higher shares of exports of industrial materials . Sinc e

1971, Bulgaria also has higher machinery shares, while Romania has highe r shares of consumer manufactures .

In Ofer's study of trade shares, Bulgaria is the exceptional country, th e only country with higher than expected agricultural export shares and ne t exports . It also far outperformed either Romania or Yugoslavia in the growt h of machinery export shares and net exports . Data estimated by the ECE show that since 1960 Bulgaria's food exports to other "socialist" countries hav e grown faster than all such exports combined from the USSR and the six Eas t

European countries . Romania had only one period, 1976-80, of extra fast growt h of food exports to "socialist" countries .

The only product group that Bulgaria and Romania have faster export growt h to "socialist" countries than the seven countries combined is machinery . I n this case, Bulgaria has had continually higher growth than Romania .

IX-D . BULGARIAN AND ROMANIAN INSTITUTIONA L AND POLICY COMMITMENTS TO CME A

Little is known about the detailed comparative institutional aspects o f intra-CMEA trade at the country level, although information has been accumu- lated about exports under so-called specialization agreements . In the mid -

1960s, Bulgaria led all other CMEA members in the shares of its CMEA exports o f machinery and chemical covered by such agreements . By the 1980s, all European members except the Soviet Union moved up to Bulgaria's levels, suggesting tha t existing product lines of the each country acquired the designation of "spe- cialized" . Even Romania, despite having a low level of participation in 7 6 multilateral specialization agreements, managed to acquire large shares o f exports through bilateral specialization agreements and by dint of having lo w levels of exports to CMEA in the first place . In any case, econometric test s by Crane and Skollar show no connection between the establishment of a n agreement and the growth of a country's exports [Crane and Skollar-88], s o

Bulgaria's early advantages should not be exaggerated .

Besides, Bulgaria and Romania share the problem of specializing in products that are energy- and material-intensive . Only Bulgaria is successfu l on any import scale with an alternative, that of electronics exports . But it s success has not led to the acid test of spillovers into world markets . 77

ChapterX .THE CHALLENGES OF WORLD MARKET S

X-A . THE ISSUE S

Policy shifts in the West and the East promoted a "catching up" growth o f foreign trade between the communist-ruled countries and the rest of the worl d from the 1960s on . Why was this thrust not continued in the mid-1970s? D o

Bulgaria and Romania enjoy advantages as less-developed countries ?

X-B . GROWTH RATES OF "NONSOCIALIST" TRADE SINCE 196 0

1) As discussed in Chapter IX, the exports of the communist-ruled coun- tries grew faster to the "nonsocialist" than to the "socialist" countries i n

1961-65 (the record before 1960 has not yet been processed) and again from 197 6 on to 1984 . Imports from "nonsocialist" countries exhibit an even mor e impressive growth in real terms compared to those from "socialist" countries i n the whole period until 1981-84 when credit and market competition reduce d available hard currencies . There is a question of whether this growth is jus t catching up or if it reflects better markets in the nonsocialist countries .

2) Bulgaria and Romania both averaged higher growth of real exports an d imports with "nonsocialist" countries than the average communist-ruled country .

Whether this is due to their lower development levels has not been test . Hig h export growth to "nonsocialist" countries was the general rule among th e communist-ruled countries in 1961-65, but afterwards only individual countrie s managed extremely high growth rates as did Romania in 1966-70 and 1971-75 ,

Bulgaria in 1976-80, and the GDR in 1981-84 . Bulgaria and Romania lost th e magic touch in the latter period . 7 8

Import growth from "nonsocialist" countries exhibited an even more mixed pattern, with Poland highest in 1971-75, Romania in 1976-80, and Bulgaria i n

1981-85 . Each one did so by heavy borrowing so, given the problems of th e other two, Bulgaria's present positions merits careful attention .

X-C . COMMODITY PATTERNS OF BULGARIA N AND ROMANIAN NONSOCIALIST TRAD E

1) In every period since 1960 Bulgaria and Romania have higher tha n average growth of their CTN 2 (fuels, industrial raw materials, chemicals ) exports to "nonsocialist" countries . The weaker side of both countries is CT N

3 (food and food raw materials) exports . Both also manage higher than averag e growth in CTN 1 (machinery) and CTN 4 (manufactured consumer goods), wit h

Bulgaria better in the former and Romania in the latter . Analysis of compara- tive growth in terms of models that estimate price and activity elasticities i n the West is hindered by the poor quality of econometric results obtained fo r

Bulgaria and Romania [Vanous-81] .

2) Unlike growth, commodity share statistics are measured in current pric e and, hence, show the effects of both price and volume movements . The larges t share of exports to "nonsocialist" countries for both Bulgaria and Romani a since the 1960s is CTN 2 . Both have had rising shares of CTN 1, machinery, an d steadily declining shares of CTN 3, foods, with this category reaching only 5 percent in Romania in 1981-85 . Instead, Romania increased its share o f consumer manufactures .

3) A contrast with export shares to "socialist" countries, discussed i n

Chapter IX, is useful . Both have exported twice as large a share of CTN 1 exports to "socialist" as to "nonsocialist" countries . Bulgaria also has twic e the share of CTN 4 (consumer manufactured goods) in "socialist" exports . 79

Romania, on the other hand, has only half the share of CTN 2 in "socialist" a s

"nonsocialist" trade .

4) Imports from "nonsocialist" countries of both Bulgaria and Romania ar e dominated by CTN 2, with it reaching 82 percent in Romania in 1981-85 . Tha t happened while Romania's CTN 1 (machinery) imports from "nonsocialist" coun- tries fell from a high of 46 percent of all "nonsocialist" imports to only 9 percent in 1981-85 .

X-D . COMPETITION IN WESTERN MARKET S

X-D-1 . Comparative Dependency on World Markets .

1) The ratios of the dollar values of trade with "nonsocialist" countrie s to country GNPs are estimated for seven East European countries in 1980 an d

1985 . A 10 percent export to GNP ratio is estimated in 1980 for Bulgaria ,

Romania, Yugoslavia and Hungary, with a lower 6 percent for the GDR, Czecho- slovakia and Poland . Export ratios rose for five countries, reaching 1 4 percent for Yugoslavia and 11 percent for the GDR . Thus, neither Bulgaria no r

Romania have exceptionally high levels of exports per dollar of GNP .

2) Import dependency ratios show more variation in 1980 from a high of 1 7 percent for Yugoslavia to a low of 6 percent for Bulgaria, the GDR, Czecho- slovakia and Poland . By 1985, it rose to 10 percent for Bulgaria and fell fro m

13 percent to only 8 percent for Romania, with two other countries, Yugoslavi a and Hungary, with 11 percent each . Again, there is no special pattern fo r

Bulgaria and Romania .

X-D-2 . Exports to OECD Countries and Import Market Share s

1) By 1980 exports of eight communist-ruled countries (the six Eas t

European plus Yugoslavia and Albania) averaged 30 percent less per capita than

8 0

Table X- 1 ESTIMATED RATIOS OF FOREIGN TRADE WITH THE WEST * TO GNP IN 1980 AND 1985 FOR THE COMMUNIST-RULED COUNTRIE S

------Country Exports Import s 19801985 1980 1985 ------

Bulgaria 10 11 6 1 0 Romania 10 12 13 8 Yugoslavia 10 11 17 1 1 Hungary 10 12 11 1 1 GDR 6 11 6 7 Czechoslovakia 6 6 6 5 Poland 6 6 6 4 ------* Either trade in convertible currencies or trade wit h nonsocialist countries .

Sources : Estimated from sources cited in Tables IX-2 and IX - 3 . ------

a small sample of four Southern European countries (Greece, Portugal, Spain an d

Turkey) . The exports of manufactured goods averaged $100 per capita for th e

communist-ruled countries and about $160 per capita for the others, an even

larger relative difference .

2) At the time East-West trade was opening up in 1965 the overall share o f

imports of OECD countries supplied by the communist-ruled countries (includin g

the USSR) was just 3-4 percent . By 1973, the OPEC crisis, it had not increased

and from then until 1984 it changed from 3 .3 to 3 .5 because the share of Sovie t

gas and oil deliveries had gone up . Without the Soviet Union, the combine d

shares of the others fell from 2 .1 percent in 1973 to 1 .5 percent in the earl y

1980s . Both the Southern European countries, three of which are now in th e

Common Market, and the Newly Industrializing Countries have done better in OEC D

markets than the communist-ruled countries . The share of the latter's export s 8 1 made up of manufactured goods (SITC 5-8) remained constant, while the share o f fuels rose from 8 percent in 1973 to 24 percent in 1984 . So market share s would have fallen even faster without Soviet oil to re-export .

3) Bulgaria's share of total OECD imports has fallen steadily and sinc e

1974 the share of manufactured goods within that total has gotten smaller .

Romania does somewhat better having a constant market share and a constan t percent made up by manufactured goods .

A large portion, 70 percent, of Bulgaria's manufactured exports to OEC D fall in the category of heavy manufactures . By contrast, Romania export s larger shares of furniture, clothing, textiles and leather goods, suggestin g more traditional comparative advantage .

X-D-3 . Comparative Terms of Trade and Prices .

1) In the late 1960s and early 1970s, the communist-ruled countries othe r than the Soviet Union experienced declining terms of trade, while, by com- parison, the Southern European countries did not . These relative position s were reversed from 1973 to 1979 when the latter had to pay OPEC prices and th e former, excluding Romania, still received the benefit of cheap Soviet . Wit h higher Soviet oil prices in 1980, their terms of trade were pushed down to 197 3 levels in "socialist" trade, but improved as refined oil products were sold i n nonsocialist markets .

2) There is not much evidence on export prices received by communist-rule d countries in world markets . Some on unit export values indicates that the y have received lower prices than the NICs for similar products [Poznanski-85 an d unpublished calculations by the author from Eurostat data] . Also, Romania an d

Yugoslavia may have won their EEC exports by price discounting . Their unit 8 2

values received in the EEC are much lower than prices received by other Easter n

and Southern European countries .

X-D-4. Marketing Efficiency .

Whether lower prices are due to lower quality products or poorer marketin g

is not clear . Evidence of the latter, estimated as the ratio of actual t o

maximum potential export earnings in OECD, suggests that Hungary's losses hav e

been high following economic reforms (in 1969, 1977, and 1978), while Romani a

and Poland both experienced greater losses in 1980 and 1981, when they were

under pressure to export at any cost . The country with the greatest relativ e

losses in the 1980s was the GDR . Unfortunately, since the OECD data do no t

include GDR exports to West Germany, its estimate might be biased .

A study by the Economic Commission for Europe [Economic Bulletin-81, -82 ]

found that Hungary and Romania alone maintained market shares in th e mid-1970s

by improving product structures, and Romania also by improving its countr y

structure . Then in the late 1970s, they also had disadvantageous produc t

structures . A similar study by the Vienna Institute [Dietz, Fink and Grosser -

88] for the period from 1981 to 1985 finds the GDR and Romania alone to hav e

positive overall competitiveness . A problem is that Romanian gains wer e

concentrated in fuels, chemicals and industrial materials, whose prices ar e

easily discounted, while its losses were in consumer and other manufactured

goods where product quality and market effort count . Bulgaria (with Hungary ,

Poland, Czechoslovakia) faced declining competitiveness in given products, a s

well as an unfavorable product structure . 83

X-E . Balances of Payments and Import Capacit y

1) Bulgaria began to finance imports from the West before Romania , although by 1966 both accumulated equal gross total debts . By the early 1970s ,

Romanian gross debt rose over twice Bulgaria's, although neither arrived a t risky levels by international standards .

After 1973, Bulgaria entered a six-year expansion of gross debt whic h ended with it having the highest debt burden indicators of the communist-rule d countries . It then averted a possible crisis through a combination of a reduction of western purchases and large-scale sales of petroleum product s based on Soviet oil imports . From the worst debt indicators, Bulgaria acquire d a position as risk free as Czechoslovakia .

Romania's debt, largely derived from western machinery imports, stood i n

1980-81 at more than twice the gross totals of Bulgaria in 1979 . But whil e

Bulgaria's gross debt indicators in 1980 were worse than Romania's, its ne t debts that really count for credit rating and ability to pay were much better .

In any case, as is known, Romania then joined Poland in having to reschedul e hard currency debt payments .

2) A comparison of debt burden indicators for the communist-ruled coun- tries and three Southern European countries (Greece, Portugal and Turkey ) suggests a very big systemic difference . The latter have much higher conven- tional indicators of the burden of debts . Yet, they did not have the crise s that actually unfolded in Poland, Romania, and Yugoslavia (and almost i n

Hungary and maybe in Bulgaria) . This demands an explanation .

One difference in that the less-developed capitalist countries generat e much larger ratios of invisible earnings and other remittances to commodit y imports than the communist-ruled countries, although Yugoslavia is an excep- tion . This is to be accounted for by different degrees of openness, including 84

temporary migration rights . But easily measured factors have been only part o f

the difference since debt burden indicators including invisible earnings an d

remittances with exports still show that in 1985 Greece, for example, ha d

nearly the same measured burden as Poland, and both Turkey and Portugal ha d

higher burdens than Hungary . Yet Poland and Hungary are suffering credi t

problems, not the others .

The remaining differences across systems are found in the weakness o f

credit institutions, problems of information and business contacts, uncertaint y

about political processes and concern that institutional reforms in Easter n

Europe might result in significantly more disequilibrated economies .

X-F . INSTITUTIONS FOR ACCESS TO WESTERN MARKETS

Institutional changes to promote access of communist-ruled economies to

western markets include reductions of trade barriers in western countries ,

participation in international organizations, establishment of domesticall y

located, foreign joint ventures and of companies located in western countries ,

and reforms of domestic production and trade organizations .

1) Two capitalist countries, Finland and Austria, have virtually no forms

of discrimination against trade with the communist-ruled countries . Most other

Western European countries have dismantled discriminatory tariffs and specia l

quotas since 1965, although, of course, Eastern European countries face th e

obstacles of EEC trade barriers, as do other nonmembers [Smith-79] . The U .S .

extended MFN to Yugoslavia, Poland, Romania, Hungary and China (although sinc e

effecting its withdrawal from Romania) . Even Japan has reduced specia l barriers . Yet in the opinion of experts [Wolfe-76 ; Kostecki-79 ; Poznanski-85 ]

some discrimination (rather obvious in the case of U .S . tariffs against non-MF N countries) remains and is higher than it is for imports from the NICS . 8 5

2) The effort to reduce trade barriers has been one objective of member - ship in GATT, now including Czechoslovakia, Yugoslavia, Poland, Romania, an d

Hungary, with Bulgaria awaiting approval of its bid for full membership [Jack- son-87b] . But Poland and Romania were admitted on terms that make reciprocit y nearly impossible, while Czechoslovakia, an original member, has a clearl y nonconforming foreign trade regime . For the others, admitted on the basis o f an effective tariff system, it remains to be seen if they actually enjoy equa l market access .

In addition to GATT, most communist-ruled countries in Eastern Europe hav e attempted to obtain some sort of special status with the EEC . Yugoslavia , first and most successful, still has quite limited rights and even less ha s been granted to Romania . Bulgaria's request was refused outright [Yannopoulu s and Shlaim-78] .

Bulgaria, Czechoslovakia and the GDR are not members of the IMF and th e

World Bank, while it would seem that Romania is no longer a welcome member o r one in good standing . Whether the three other East-European members (Yugo- slavia, Hungary and Poland) gain benefits that help their western trade, asid e from credits and a chance to bid on projects, is questionable .

3) Yugoslavia, Romania and Hungary all instituted some form of domestical- ly sited foreign joint ventures in the early 1970s . Bulgaria followed later i n the decade, but had to liberalize its laws in 1985 before achieving an y success . Romania's first ambitious steps soon stagnated for lack of complemen- tary domestic economic organization and political accommodation .

As of November, 1977, a compendium of companies organized in the Wes t

(basically OECD countries) by communist-ruled countries enumerates 35 fo r

Bulgaria and 29 for Romania [McMillan-78] . Bulgaria's relative effort look s greater than Romania's . In absolute numbers, both rank above the GDR and 8 6

Czechoslovakia, but much below Poland and Hungary, and the USSR . By 198 3

Bulgarian companies in the West increased by 37 percent and Romanian companie s by 24 percent, but Romania's low increase placed it near the bottom in numbers .

Romania's relatively greater effort is in LDCs where in 1983 it had the larges t number of companies of all communist-ruled countries . [McMillan-87] .

4) In 1969 Romania undertook what appeared to be liberalizing changes i n the organization of foreign trade that increased the number of foreign trad e organizations and placed more of them under the producing industrial central s and large enterprises . But this step was subsequently reversed [Brada an d

Jackson-77] . Also, an announced application of the principles of a Ne w

Economic Mechanism to foreign trading in 1978 probably never got off the groun d in the emergency measures applied since Romania's credit problems in 198 1

[Jackson-81a, -86b] .

Bulgaria also announced organization of a New Economic Mechanism in 197 8 which was supposed to have been applied to foreign trade in 1982 . This reform effort was apparently delayed or suspended . Since 1985 a more serious effort has been taken to decentralize foreign trade decisionmaking to the level o f major industrial organizations together with revisions of the price and foreig n exchange systems [Grosser-88b ; Jackson-88] . While this reform is one of th e conditions of Bulgaria's GATT application, it remains unclearly applied . S o far, there are no positive effects on export performance [Jackson-87] . I n fact, there is a worrisome expansion of Bulgaria's hard currency debt whil e exports are declining . There is also no indication that the Bulgarian Com- munist Party will permit any economic or political glasnost, now recognize d even by Gorbachev to be a condition of economic reform . 87

Chapter XI . SUMMARY AND CONCLUSIONS : BARRIERS TO MATURITY

XI-A . FROM GROWTH TO MATURIT Y

Evidence presented in this research report supports a tentative conclusio n that communist rule has failed to provide a superior means of economic develop- ment . The growth surge of the 1950s and 1960s was based on nonrecurring growt h sources . Besides it was not higher than would be expected in similarl y developed capitalist countries . The slowdown in growth in the late 1970s an d

1980s means there is little chance of catching up with Western Europe an d raises the possibility that communist-ruled countries will soon be overtaken b y the NICs .

More ominous than the growth slowdown are increasing signs that Stalin - inspired institutions not only have failed to routinize economic growth, the y seem increasingly unable to cope with the arbitration of divergent domesti c interests and to organize international interactions effectively . There is n o institutional maturity under communist rule .

XI-B . THE NEED FOR REFORMS AND BARRIERS TO MATURIT Y

Everyone, even reactionaries, agrees that some institutional change unde r communist rule is needed . The formidable obstacles include political barrier s such as ideology and vested interests, and the structural deviations identifie d in this research . Structural deviations interact with political barriers , causing the latter to be higher than in structurally conforming economies . 8 8

XI-C . SUMMARY OF STRUCTURAL DEVIATION S

The communist-ruled countries have relied too much on physical capital an d raw materials, while underutilizing human resources . Now they are overin- dustrialized . Too much manufacturing is really redundant, posing impediment s to interaction with the rest of the world . It is not just that much productio n cannot be exported for domestic gains because it is of poor quality compared t o similar products in world markets . The problem is that much of what i s available is simply the wrong products, most of it in heavy industry that i s also redundant and not export-competitive in the West . But the dimension o f structural malformation is higher under communist rule .

The system's initial advantages in mobilizing labor resources by mas s education and public health, and by transfers of labor out of agriculture, hav e passed and have now been offset by problems on the consumption side . Lack of housing deters matching place of residence and place of work, and reduce s secondary urban-urban mobility of labor . Too few service workers per in- dustrial worker increases real consumption costs and reduces labor produc- tivity . Low shares of consumption mean incentives are lower than people' s human capital, creating an incentive for economic emigration . Environmenta l conditions have deteriorated below those in Western and Southern Europe .

XI-D . STRUCTURALLY INDUCED DISEQUILIBRIUM IN COMMUNIST-RULED COUNTRIE S

Until recently, evidence of structural malformation was suppressed b y planning and central controls so it could only be detected by statistica l comparisons . Now the evidence comes from Yugoslavia, Hungary and Poland a s overt inflation higher than any in Western Europe, open unemployment, and ope n resistance of workers to wage and job readjustments . More open borders i n

Hungary and Poland also reveal the increasingly large numbers of people who 8 9 would seek jobs in the West . Finally, the failure to restructure export s remains, as before, an open record of misconstructed economies .

The lesson of these three countries is that if the economies of th e communist-ruled countries were opened to anything like world competition, ther e would result massive losses, plant closures, and unemployment . If consumer s and workers were open to free competition with the rest of the world, ther e would result massive pressures for import of goods and a potentially large - scale exodus of people that could only be suppressed by closed borders i n

Western Europe and North America .

XI-E . COMPARISON WITH THE SOUTHER N EUROPEAN CAPITALIST COUNTRIES

A lesson in comparative economics can be learned by considering what ha s happened in Southern Europe . Here countries also faced serious challenges i n the 1970s, not the least of which were political . Dictatorships ended i n

Portugal and Greece in 1974 and in Spain in 1975 just at the height of th e first OPEC-induced crisis . The subsequent stabilization of their democrati c politics brought all three into the European Community as full members, Greec e in 1981, and Portugal and Spain in 1986 . Turkey's path, with military coups in

1960, 1977, and 1980, remains less clear .

There is no doubt that the need for structural change crossed syste m boundaries [Donges and Schatz-85] . Nearly every recent report on Southern

Europe by either the ECE or the OECD has raised the issue [see OECD-83] .

Still, they have broken through economic barriers that existed around 1970 t o achieve levels of development converging on the rest of Western Europe . Thei r basic organizations, firms and governmental units carry out domestic develop- ment, with incentives and means of arbitration, not suppression of the diver - gent interests of domestic groups and individuals . They have a similar ability 9 0

to interact with the rest of the world, to acquire and assimilate informatio n

from it, while continuing through those markets to match average growth rate s

of the most-developed countries . This is what the institutions of a "mature "

society should be capable of and of which there is no sign in Eastern Europe .

POLITICALXI-F . INTERACTION OF STRUCTURAL AND BARRIERS TO MATURING IN BULGARIA AND ROMANI A

Relative to urban housing and services, Bulgaria and Romania are the mos t

"overindustrialized" of all communist-ruled countries . Both have too muc h

heavy industry, Romania more than Bulgaria, and it adds low levels of foreig n

trade dependency . Since 1965 Bulgaria has neglected development of agricultur e

and light industry . A big problem for Bulgaria is how can high levels of trad e

with CMEA be turned from impediments to advantages in western markets wher e

skills, institutions and comparative advantages are all different .

Most signs of disequilibrium have been suppressed in Bulgaria and Romania .

A spate of consumer price increases took place in the early 1980s, but recentl y

the main evidence in both countries is queues, poorly stocked shops, and blac k

markets for foreign currency . There is no question that conditions have been

much worse in Romania than Bulgaria . If one could calculate both the time an d

the money required to obtain goods in the Romania economy since 1982, one woul d

probably find Romanians as poor as Albanians, while facing enormous variation s

in the real costs of goods because of the unpredictability of supplies . Eve n

the old ways of providing for oneself have broken down .

Interfirm supplies have also been more chaotically managed in Romania .

How far Bulgaria has implemented reform measures calling for wholesale trade a t

negotiated prices remains unclear . It is suspected that they have not gone fa r

and that supplies are still distributed by a central allocation authority . 9 1

Romania's foreign trade was out of control on both the export and impor t sides in the late 1970s . Since then, imports have been suppressed and export s forced to the point of upsetting production and consumption . In the last tw o or three years Bulgaria's hard currency imports have experienced an amazin g increase, suggesting that neither central authorities nor new reform measure s are in control .

One may only speculate how many Romanians and Bulgarians would have bee n gastarbeiter if their borders had also been open . The only actual emigratio n of any magnitude from Bulgaria and Romania has centered on ethnic groups - Jew s and Germans from Romania, Turks and other Moslems from Bulgaria . These group s surely would have participated actively in any copying of Yugoslav conditions .

Also, a large ethnic Romanian exodus could be predicted by the numbers who hav e left illegally since the 1960s .

Nothing so dramatic as the end of dictatorship has taken place in Bulgari a and Romania . Instead, Ceausescu's authority has gotten increasingly oppressiv e and capricious in terms of all indicators, including the management of informa- tion flows across borders . Bulgaria has passed measures requiring elections with multiple candidates of enterprise managers and local officials, and ope n praise of personalities has been outlawed . Still, there is no doubt abou t

Zhivkov's paternalistic role . As far as he can be effective, there will be n o risking of political control and stability in the country by radical reforms .

And there is no sign that information policies have been changed or tha t contacts with foreigners are any less restricted than they were a decade ago .

9 3

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