Changes in Europe Could Disintegrate East’s Trade Bloc

The stunning political and economic changes now sweeping Eastern Europe may be about to claim their first institutional casualty: the Council for Mutual Economic Assistance, the Eastern countries’ common market.

The 10-member council, known as Comecon, has been in trouble for several years as East European countries chafed under trading terms with the Soviet Union that too often left them the losers.

Hungary and Poland long have been pressing for reforms. A meeting of Comecon trade officials last May left member countries split and on the verge of a possible blowup.

Since then, the easing of political constraints by the Soviet Union and the move by a growing number of Eastern European countries toward more market-oriented economies have intensified pressures for changes in Comecon, such as its conversion into a market-oriented economic trading bloc similar to the European Community in Western Europe.

Comecon could break up if the more reform-minded governments do not get their way. Just last month, Hungary decided formally to abandon its efforts to reform Comecon and instead to negotiate separate trade deals with each of its Eastern European neighbors.

“We have to go bilateral,” said Ivan Szegvari, deputy director of the government’s Economic Planning Institute and one of its top specialists on Comecon. The organization, he said, “is falling apart by itself” because it is not responding to the need for change.

Janusz Kaczurba, Poland’s no-nonsense undersecretary of foreign economic relations, warned that Poland will go the same route as Hungary if Comecon is not turned into a more market-oriented operation.

“We have been trying to inject some common sense into this organization, but so far without any particular success,” Kaczurba said. “But we’re not going to wait until hell freezes over. If we see no response, we are ready to move ahead with bilateral treaty arrangements.”

Early next month, senior trade officials of the Comecon countries are planning to meet in Sofia, Bulgaria, for what officials here hope to turn into another major attempt to reform the Eastern European trading bloc.

Created in 1949, Comecon was designed to be Moscow’s answer to the U.S. Marshall Plan, a way that the Soviets could compete cheaply with the American effort to provide seed money to rebuild Western Europe’s economies in the aftermath of World War II.

The secret was supposed to be that trade among Comecon nations would be conducted by barter: The Soviet Union would buy manufactured goods from Eastern Europe in exchange for oil and raw materials such as iron ore. That in turn would help finance the reconstruction of Eastern Europe’s war-torn industrial base.

Each year since then, Comecon officials have fixed trade quotas, decreeing which countries should provide tractors and automobiles and which should ship grain or energy supplies. Politics dictates many deals. The bargaining is cemented with a complex web of quantitative limits, bogus exchange-rate calculations and other gimmicks to justify whatever arrangements are worked out. Smuggling and black-market operations are the rule.

If anything, Comecon has proved to be a Marshall Plan in reverse, with the European countries assisting the superpower.

Although the Soviet Union has provided oil and raw materials as promised, the East Europeans have had to barter away their products at a far lower value than they would have received in trade with the West. Western analysts figure that the Soviets drained some $14 billion in economic benefits from Eastern Europe in the 1950s, about the same that Western Europe received under the Marshall Plan.

When Western banks extended massive credit to East European countries in the late 1970s, much of it eventually found its way to the Soviet Union. In effect, said Zbigniew Niemczycki, vice president for European operations of Curtis International, the U.S. multinational, the Comecon system was “financed by Western money.”

Because Soviet quality standards were so low, the Comecon arrangement gave East European industries no incentive or means to modernize and become more competitive. “We wound up unable to produce anything that the West wanted to buy,” Hungary’s Szegvari lamented.

The recent collapse of oil prices around the world has only aggravated the distortions. East European countries are now running a massive trade surplus with Moscow, providing goods to the Soviet economy on credit.

The value of Hungary’s surplus alone tops 1 billion rubles and “is impeding our efforts to restructure our own economy,” Szegvari said. The surplus means that Hungary, in effect, is financing Soviet production by providing more goods to the superpower than it is getting in return.

Hungary and Poland are leading the push for reform but--until recently, at least--they have run into opposition from East Germany, Bulgaria, Romania and Czechoslovakia, which have held firm for the status quo. The three non-European members--Vietnam, Cuba and Mongolia--have also opposed any change.

The Soviet Union itself has recently signaled its willingness to go along with some reforms. Soviet officials recently unveiled a series of proposals that outside analysts believe may serve as a blueprint for change. And the liberalization in East Germany and Czechoslovakia is expected to soften the opposition in those countries as well.

At the same time, the importance of Comecon to Poland, Hungary and other reform-minded countries is being diluted by the prospect of closer economic ties with the West. Both of those countries have expressed a wish to move toward an informal association with the European Community, which is moving toward a goal of a single Western European market in 1992. And they are fast forging their own ties with individual Western countries.

Lincoln Gordon, a Brookings Institution East Bloc analyst, said that the changes have made Comecon an idea whose time has gone.

“It’s an organization whose substantive affect on financial flows, trade and investment is negligible,” he said. “Its disappearance would not be very important to anyone.”

Poland’s Kaczurba, while agreeing that Comecon “has become almost irrelevant,” said his own government is going to take at least one more stab at reform.

What the Hungarians and Poles want at minimum is a conversion of Comecon into a market-oriented economic trading bloc. In place of the barter system, goods would be priced at world prices and transactions would be in hard currencies such as the dollar or the West German mark.

At the same time, the Eastern European and Soviet governments no longer would have to coordinate their five-year economic plans and parcel out mandatory “joint ventures” between individual, and often unwilling, countries. Under the new Solidarity government, Poland’s Kaczurba pointed out with delight, “we don’t have any five-year plan to coordinate.”

The reformers would also scrap a requirement that Comecon members maintain a balance in their trade with each of the others.

The Soviet Union is supporting reforms of Comecon partly out of fear that the organization might otherwise crumble, analysts here and in the United States said. Apart from the political embarrassment that such an outcome would cause, the Soviets could lose customers for their goods and be forced to scramble harder to buy needed imports.

Curtis’ Niemczycki predicted that even if Poland and Hungary succeed in reforming Comecon in the short term, the Eastern European countries will become part of the European Community within 10 years. The EC now consists of 12 Western European countries.

Officials in Eastern Europe concede that they plan to move closer to the European Community.

“The determinant goal is to enter the EC sooner or later,” Szegvari said.

Comecon and the EC already have signed an agreement that establishes formal relations. Once the East Bloc countries move to make their currencies freely convertible, as many now are doing, the tie should be even easier to expand.

That does not necessarily mean that trade between Eastern Europe and the Soviet Union will collapse. Marek Borowski, Poland’s vice minister for internal markets, noted that Poland still does some 60% of its trade with the Soviet Union and its Eastern European neighbors and is not about to give all that up.

It also does not want to risk a political backlash from the Soviet Union, which is in enough economic trouble already. “It isn’t our desire to go very fast into the EC,” he said.

Hungary’s Szegvari raises the possibility that the spread of the reform movement might put pressure on the East Bloc countries to act more as a unit. For example, he notes, one reason that Hungary earlier had moved more rapidly to bolt Comecon was that it was hoping to get substantial Western aid in response to its reform efforts. But now, he said, with more Eastern European countries shucking classic communism, the prospects for “massive” Western aid are slimmer.

Still, as the reformers in Eastern Europe push to expand economic and trade ties with the West, they are not hiding their distaste for Comecon.

“There should be only one external world for our companies--we can’t have two sets,” Poland’s Kaczurba said.