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The Classical Communist System
Money
Price
Foreign trade
CMEA
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Money
Formally: Magnetized economy
Actually: Semi-magnetized
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Institutions of Financial
System
Banking system - state owned
State Budget
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Banking System
Central Bank
Investment Bank
Savings Bank
Foreign Trade Bank
Government
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Functions
Central Bank: emission of money
credit to SOE
Investment bank - financing the
investment
Savings bank - public deposits
and loans
Foreign trade bank
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Money is ‘Earmarked’
Money for materials
Money for wages
No free flow of money
MONEY IS NONCONVERTIBLE!!!
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Spheres of Classical Communist System
With soft budget constraint and
passive money
- SOE
With hard budget constraint and active
money
- formal and informal private sector
- households
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State Owned Enterprises Soft budget constraint - a firm receives regular
external assistance when it is in trouble - money is always available
greater importance of quantitative targets
weak interest in costs and profits
weak income responsiveness
weak price responsiveness
low efficiency
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Passive Money
Money fails to operate as the general medium of exchange and plays a passive, supplementary, secondary role when SOEs conduct financial transactions with each other, the banking system and the state budget
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Private Sector& Households
Hard budget constraint - the bureaucracy does not assist them in financial trouble
- availability of the product desired...?
- availability of the purchase money…?
stronger profit motive
stronger responsiveness to income
stronger responsiveness to price
higher efficiency
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Active Money
Money plays an active role in private and households sector
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Price
Administrative producer price
Administrative consumer price
Market price
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Producer Prices(administrative prices)
Seller and buyer - sectors in public
ownership
principles for price setting: must reflect socially necessary costs should encourage producers to perform specific tasks ought to be stable
Deficiencies: complex system of fiscal redistribution contradictory principles prices carry no useful information fails to create equilibrium
Are set centrally
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Consumer Prices(administrative prices)
Seller: public sector
Buyer: households
Principles (additional) must influence the demand of the population (realistic) should be used for the purpose of income redistribution
Deficiencies:prices lowered artificially unordinary growth in demand
chronic shortage, since supply can not keep pace
Are set centrally
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Market Prices (Parallel markets)
Informal private sector
Households/ formal and informal private sector
Seller
Buyer
Price = market price + risk premium
formal private sector
Based on agreement
• Semi-legal and illegal markets
• Legal free markets
- agricultural market
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External Economic Relations
Political considerations are the prime criterion
for controlling the external economic relations
Economic considerations are subordinated to them
economic, scientific and cultural isolation
from the capitalist world
expansion of foreign trade within the bloc
(the Soviet Union and its allies)
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Foreign Trade
State owned production firm
Foreign trade firm
Domestic price = import/export price:
• absence of a uniform rate of exchange between domestic and foreign currencies
- different exchange-rate multipliers
- different positive or negative taxes
Foreign country
Monopoly in its own field
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Layers of Insulation
Domestic production
Mono bank system
Foreign trade firm
Foreign market
REASONS:
• political considerations
• protect the internal sector from the disturbances of the outside world
Despite the layers of insulation some adaptation to external markets takes place
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Deficiencies
More attention is paid to bargaining within the bureaucracy than with the foreign buyer, seller or bank inflexible foreign trade and credit activities
It is more important to win the approval of the superior organizations than to leave a foreign customer satisfied or to make the maximum financial profit
The production sector is not obliged to adjust flexibly and speedily to the situation on foreign markets
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Foreign trade/financial relations with capitalist countries
Import hunger - import as much as possible
- hunger for top-quality machines and
equipment
- chronic shortage Export aversion
- can not compete on the foreign market in
terms of quality, modernity or reliable delivery
price reductionPropensity to indebtedness
- to cover foreign trade deficit
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Foreign trade with socialist countries
Import/export- import hunger for the hard goods (good
quality)
- import aversion to the soft goods
- no aversion on the export side (no force
exporting)
Tendency : zero trade balance
Bilateral relations
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CMEA(1949 - 1991)
Council of Mutual Economic assistance(CMEA or COMECON)
Members: (1990) - Soviet Union, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, Cuba, Mongolia, and Vietnam. Yugoslavia was a ‘limited participant’
Mission: to increase the trade among the socialist countries, namely within the CMEA, based mainly on bilateral negotiations
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Organizational Structure
Council Session
Executive Committee
Council Committees
SecretariatStanding Commissions
Scientific institutesDepartments
Interstate economic organizations
International economic organizations
International economic unions
Joint enterprises
International economic partnerships
Interstate conference
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Deficiencies of CMEAVery little happened to promote a planned
development of the international division of
labor within the CMEA
There was hardly any joint investment and
no flow of capital between member
countries
Currency of member countries never
became convertible
Foreign trade was not measured in terms of
money or profits increase rigidity
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Conclusion
Money and Price- play passive role in sector with public
ownership
- play active role in sector without
bureaucratic coordination
Foreign trade - higher proportion among
socialist countries based on bilateral relations
CMEA - inefficient
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Thank You!Thank You!