Prague Entwined in Comecon

ECONOMIC CHALLENGE

AFTER 41 years of communist rule, the rallying cry of Czech economic reformers is to rid the country of Soviet influence. Prague may find it easier to pull away from its military obligation to the Warsaw Pact than to loosen its integration into Eastern Europe's economy. Czechoslovakia's economy has been geared toward the Council for Mutual Economic Assistance (Comecon). That trade association, formed in 1960, includes the Soviet Union, Eastern Europe, and Soviet satellites like Cuba and Vietnam. Ethiopia, Afghanistan, and Nicaragua have observer status. Czechoslovakia supplies value-added manufactured goods in return for Soviet-subsidized raw materials, principally oil, natural gas, and ore.

Today the country's foremost economic priority is the ``broadening of commercial ties with non-Warsaw Pact neighbors,'' says Sasa Vondra, adviser to President Vaclav Havel. Mr. Vondra also says that Arab, European, and Norwegian energy must supplant Soviet crude and gas to relieve Czechoslovakia of its 95 percent dependence on Moscow.

The Soviet economy's difficulties are felt in Prague. Moscow can ill afford to continue heavy energy subsidies. In January the Soviets temporarily halted oil deliveries. Despite Soviet efforts to assure Prague that this was not intentional, Czech government planners here worry about the threat of energy cuts. References to the Kremlin's treatment of Lithuania are made often.

Former leader in industry

Prior to World War II, Czechoslovakia was one of the leading industrialized countries. Its highly skilled workers produced consumer goods unparalleled by European and Asian neighbors. But today Czech industrial managers oversee an inefficient labor force that produces substandard goods with outmoded technology. Their only sure markets are Comecon and third-world countries, which are open to the mediocre products and offer barter in return. This encourages Czech industry to remain stagnant.

A Czech official says industry's demise is due to communism. ``In 1948 we had an agreement with General Motors to produce 300,000 cars per year to export to Western Europe,'' recalls Miloslav Chrobok, Czechoslovakia's deputy ambassador to Washington. ``But it never happened because we had to produce heavy machinery to help the Soviets industrialize Eastern Europe, North Korea, Vietnam, Cuba.''

One of the Czech specialties under Comecon agreements was nuclear power stations and reactors. Skoda, the industrial giant, supplied hardware to Romania, Bulgaria, Hungary, and other Warsaw Pact countries. ``These orders have been canceled, and now we have losses. We must find other markets for these exports,'' Mr. Chrobok says.

Soviet leader Mikhail ``Gorbachev realizes that to maintain, to improve the Soviet standard of living, he doesn't need an empire, and consequently Czech production,'' Chrobok adds.

The 1.5 percent growth in the economy was sluggish last year, compared to an average 2.6 percent per year between 1983-1988, according to Germany's Deutsche Bank statistics. There has been no growth in the population to fuel economic activity. The level of 15.5 million citizens has held steady for decades, despite generous government incentives for childbearing.

The Washington-based Institute for International Finance published estimates in April of Czechoslovakia's trade balance for 1989. Trade with the West was negligible, although at a high for the past five-year period. Roughly $5.6 billion worth of goods were exported for hard currency. Prague paid $300 million more for Western imports.

In terms of trade with Central and Eastern Europe and the Soviet Union (non-convertible currency accounts), Czechoslovakia exported roughly $20 billion worth of goods, and imported $19 billion. The $1 billion that registers as a surplus in 1989 should be irrelevant, as trade between Comecon partners has been designed to balance over a five-year period.

But Czech officials, looking beyond Comecon agreements, see this surplus as a serious problem. Finance Minister Klaus and Minister of Foreign Trade Andrej Barcak have stated that the Soviets owe Czechoslovakia $2 billion. Chrobok says this account should be settled with payments in kind - oil and gas.

By Jan. 1, 1991, the Soviet Union will demand hard currency for its exports. ``We would like to postpone this deadline,'' Chrobok says, speaking for his cash-strapped government. ``We'd like to insist that the Soviets pay us in hard currency, too.''

Defense production is a bastion of Czech industrial output and a key source - perhaps as much as 50 percent - of foreign exchange. Tanks, guns, and submachine guns as well as nuclear materials are all export-oriented. The irony is that while East European reforms lead to massive demobilization of conventional forces and disarmament processes, Czech military sales are all the more precious.

``We have contracts with Iran, Iraq, Syria, Libya,'' says a government trade official. All of these arms and defense equipment deals must be honored, he says, stressing that Prague will press for more timely payments, some in the form of oil and gas.

Low foreign debt

Not anxious to rack up a large foreign debt (at $7 billion, Czechoslovakia has the smallest external debt in Eastern Europe next to Romania), the country has not borrowed abroad to finance capital investment in industry.

To produce consumer goods for hard currency, such as electronics and food-processing machinery, the Czechs need Western investment and technology.

A senior US Treasury official who watches East European industrial reforms counters any expectation for Czechoslovakia to extricate itself from its Comecon connections to produce internationally competitive goods.

``If you assume that advanced technology is the next move, then you're making big assumptions about capital flows to the country. And there's no cash locally,'' he says. ``But the Czechs will have a niche for their low-cost machinery for longer than they may want.''

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