1. I shall use the terms East and West to distinguish between the East European countries of the Soviet bloc and the rest of the world. Although this is a rough distinction, I shall use it mainly to differentiate between the East European countries that are members of the Council for Mutual Economic Assistance (CMEA) and the Warsaw Pact, and newly industrializing countries (NICs) in the rest of the world. Accordingly, Yugoslavia is not in'the East but in the West.

2. The World Bank classifies all of the NICs examined here as “upper-middle-income” countries. In 1982 dollars, gross national product (GNP) per capita ranged from a low of $ 1,910 in Korea to a high of $5,910 in Singapore. Because of significant differences in accounting conventions for determining national income and suspected biases in statistical reporting in the East, precise comparisons of income levels between the NICs and the countries of Eastern Europe are impossible. Using CIA figures, Jan Various estimates that within Eastern Europe 1983 GNP per capita ranged from a low of $4,742 in Romania to a high of $9,070 in the GDR. These estimates suggest that in terms of the level of GNP per capita, the GDR, Czechoslovakia, and possibly Hungary may be more comparable to the industrial market economies of the West than to the NICs. See Vaňous, , “Diverging Trends in CMEA Economies in 1984: Recovery in Eastern Europe and Downturn in the Soviet Union,” Wharton Econometric Forecasting Associates, Centrally Planned Economies: Current Analysis, 27 03 1985Google Scholar.

3. Between 1973 and 1978 the gross medium and long-term debt of the developing countries increased by 200%, with debt from private creditors increasing fourfold.

4. For example, compared to 1980, East European terms of trade with the Soviet Union declined by about 7% annually between 1981 and 1982, mainly as a result of the rapid growth in the prices of Soviet energy exports compared to the prices of East European machinery and industrial goods exports. These shifts in CMEA prices reflected similar shifts in energy and industrial prices which occurred in world markets in 1979 and 1980.

5. The ruble price of oil, which was still about 25% below the world-market price in 1982, appeared to have pulled even with the falling world-market price by 1983. United Nations, Economic Commission for Europe, Economic Survey of Europe in 1983, Section 4.3 (New York: United Nations, 1984), p. 219Google ScholarPubMed.

6. Within CMEA trade, “hard” goods are those for which there is generalized excess demand and which can usually be sold without significant price reductions on Western markets. “Soft” goods are those for which there is excess supply and which face more limited sales prospects on Western markets because of quality problems or because they are made to fit the specifications of a bloc purchaser.

7. For a comparison of interest rates and credit availability between the East European countries and other developing countries during this period, see Portes, Richard, “East Europe's Debt to the West: Interdependence Is a Two-Way Street,” Foreign Affairs, no. 2 (07 1977), pp. 751–82CrossRefGoogle Scholar. East European borrowers were especially attractive among the West European banks, which continued to expand their lending to such borrowers even as the willingness of U.S. banks to lend to them began to wane after the mid-1970s.

8. As I note later in the essay, the 1968 economic reforms in Hungary abolished quantitative central planning and gave enterprises the right to decide on output levels and input use. In practice, a variety of state policies that shaped enterprise decisions continued to strongly influence enterprise choices. For more detail on the structure and functioning of the Hungarian economy during the 1970s, see Hewett, Ed, “The Hungarian Economy: Lessons of the 1970s and Prospects for the 1980s,” in Joint Economic Committee, East European Economic Assessment, pt. 1 (Washington, D.C.: GPO, 1981)Google Scholar, and the Comisso-Marer essay in this volume.

9. For a complete discussion of the expansion drive and the general theory of the shortage economy under central planning, see Kornai, Janos, The Economics of Shortage (Amsterdam: North Holland, 1981)Google Scholar.

10. For a discussion of soft budget constraints see Kornai, ibid., and his “‘Hard’ and ‘Soft' Budget Constraints,” Ada Oeconomica 25, nos. 3–4 (1980)Google Scholar.

11. For more on the distinction between inward- and outward-oriented development strategies, see Balassa, Bela, “Structural Adjustment Policies in Developing Countries,” World Development (01 1982), pp. 23–38Google Scholar.

12. For reasons of stylistic convenience, I shall frequently use the term East Asian NICs to generalize from the experiences of Taiwan, Korea, and Singapore and the term Latin American NICs to generalize from the experiences of Brazil and Mexico. In reality, of course, there are many differences among the countries of East Asia and among those of Latin America; thus the generalizations drawn from the sample of countries I examine are not always representative of other countries in the two regions.

13. For a brief comparison of development strategies in Brazil and Mexico, see the comment by Albert Fishlow in this volume.

14. First-stage import substitution involves import substitution in consumer goods industries, while second-stage import substitution involves import substitution in intermediate and capital goods industries. The former is generally thought to be easier to accomplish than the latter and usually occurs first in developing countries. In Eastern Europe the objectives of the central planners for heavy industry tended to place special priority on second-stage import-substitution projects.

15. These findings are reported by Poznański, Kazimierz, “Competition between Eastern Europe and Developing Countries in the Western Markets for Manufactured Goods,” Joint Economic Committee, East European Economies: Slow Growth in the 1980s (Washington, D.C.: GPO, 1986)Google Scholar. His findings for Latin America are based on the export performance of Mexico, Brazil, and Argentina.

16. Balassa's methodology rests on the assumptions that in the absence of external trade shocks each country's terms of trade would have remained at its average 1971–73 levels throughout the 1974–78 period and that the world demand for exports from developing countries would have increased during this period at the same rate as in the 1963–73 period. For a complete description of this methodology, see Balassa, Bela, “Adjusting to External Shocks: The Newly-Industrializing Developing Countries in 1974–76 and 1979–81,” Weltwirtschqftliches Archiv 121, no. 1 (1985)Google Scholar.

17. Undoubtedly, there were some important differences in the magnitude of the effects of external shocks within Eastern Europe. For example, in the mid-1970s these effects were smaller in Poland and Romania than in the other East European countries because the former two were net exporters of energy at that time, so their terms-of-trade losses were smaller. Indeed, Poland's overall terms of trade actually improved between 1974 and 1976 when the terms of trade of the other East European countries declined sharply. See Tyson, Laura D'Andrea, Economic Adjustment in Eastern Europe (Santa Monica: Rand, 1984)Google Scholar.

18. Indeed, some observers have argued that the irresponsibility of the banks was the real cause of the worldwide debt crisis. See, for example, Darity, William, “Loan Pushing: Doctrine and Theory,” International Finance Discussion Paper 253 (Washington, D.C.: Federal Reserve, 1984)Google Scholar.

19. One could argue that the slowdown and partial reversal of economic reform in Hungary in the mid-1970s was a structural change in response to external shocks. Most observers, however, believe that this reversal was already underway before these shocks occurred as a result of internal opposition to the reform and its effects on income differentials. Economic difficulties caused by external events simply strengthened this process.

20. Ironically, although much of the developing world viewed direct foreign investment with suspicion because of its perceived threat to national autonomy, in one important respect it was a smaller threat than borrowing at variable interest rates because its risk was shared by both borrower and lender. This was to become painfully apparent when the need to impose austerity measures to deal with the debt crisis during the 1979—84 period became a major constraint on national autonomy.

21. By openness to international capital flows, I do not mean that there were no state controls over such flows. To different degrees, the state played an active role in controlling the magnitude, composition, and objectives of foreign borrowing in all of these countries. Control was strongest in the East European countries where state agencies made or approved all decisions regarding foreign borrowing. Control was weakest in Mexico because of the difficulties of enforcing exchange controls and capital movements over a relatively open border with the United States.

22. Poland's hard-currency trade deficit declined by 30% between 1975 and 1978 but remained very large by pre-1975 standards. Hard-currency trade deficits actually increased during this period in Czechoslovakia, the GDR, and Hungary. In contrast, Brazil's trade deficit declined by 42%, Mexico's by 76%, and Korea's by 48% during the same period.

23. Became my focus is Eastern Europe's balance-of-payments problems and debt problems with the West, the debt-service ratios in question are measured relative to debt-repayment requirements and export revenues in convertible currencies, and exclude debt and export revenues in nonconvertible bloc currencies. See the notes to Table 1 for more detail.

24. Romanian statistics must be viewed with great skepticism. They often contain large inconsistencies and gaps that make any definite conclusions impossible. They are widely believed to overstate growth in overall output and improvements in the standard of living.

25. For a detailed discussion of the success of export promotion and import substitution in Romania in the mid-1970s see Tyson, Economic Adjustment in Eastern Europe, chap. 3.

26. That output in Korea actually declined by 3.5% in 1980, after rising at an average rate of nearly 11% between 1976 and 1979, indicates the severity of the deflation.

27. In 1982–83 two-thirds of the new credit Hungary received came from the IMF and the World Bank, and the remaining one-third came from commercial loans that would not have been available without the IMFs implicit “seal of approval” on Hungary's adjustment program. See Robinson, Sherman, Tyson, Laura, and Woods, Leyla, “Conditionality and Adjustment in Eastern Europe” (Paper presented at the Conference on the Soviet Union and Eastern Europe in the World Economy, Kennan Institute, 1984)Google Scholar.

28. For a complete and elucidating discussion of the evolution of the debt crisis in both Mexico and Brazil between 1979 and 1984, see Fishlow, Albert, “Latin American Adjustment to the Oil Shocks of 1973 and 1979,” in Hartlyn, J. and Morley, S., eds., Latin American Political Economy: Financial Crisis and Political Change (Boulder: Westview, forthcoming)Google Scholar.

29. These figures are taken from Wharton Econometric Forecasting Associates, Diemex-Wharton: Mexican Economic Outlook, 05 1985, Appendix, Table 1Google Scholar.

30. To an important extent, the slow growth or declines in the nominal dollar values of convertible-currency imports and exports throughout Eastern Europe during the period are attributable to the appreciation of the dollar, which depressed the dollar value of trade denominated in other convertible currencies. As an illustration, the nominal dollar value of Hungary's exports to nonsocialist markets increased by about 4% between 1980 and 1983, while the real volume of these exports increased by about 21%. These figures are calculated from data in United Nations, Economic Commission for Europe, Economic Bulletin for Europe 37 (12 1985), chap. 4Google Scholar.

31. Between 1980 and 1984 nominal merchandise imports declined by 36.6% in Brazil and 56.2% in Mexico, while nominal merchandise exports rose by 13.7% in Brazil and 23.4% in Mexico. These figures are based on preliminary estimates of import and export changes in Morgan Guaranty Trust Company of New York, World Financial Markets, 10–11 1984, Tables 3 and 4Google Scholar. Since the bulk of Brazil's and Mexico's trade was denominated in dollars, the appreciation of the dollar relative to other convertible currencies during this period did not depress the nominal dollar values of their imports and exports. Consequently, changes in dollar trade flows in Latin America are a better indication of changes in real trade flows than they are in Eastern Europe.

32. Between 1979 and 1982 merchandise export revenue increased by 42.1%, while merchandise imports increased by 23.1% in Korea. These figures are based on World Bank data presented in World Tables, 3d ed.

33. Cases in point are Brazil's policies to restrain the domestic price of oil as world prices skyrocketed in the late 1970s and Mexico's failure to devalue in 1980–81, despite the growing differential between its inflation rate and the rates of its trading partners.

34. It is important to emphasize that because of differences in the concepts and measurement techniques underlying estimates of output, comparisons of growth rates between the countries of Eastern Europe and the other countries I examine can be seriously misleading. Growth rates can be compared among countries within Eastern Europe and among the Latin American and East Asian NICs, but comparisons between the two groups of countries are ill-advised. Growth estimates for Yugoslavia are probably more comparable to those of Eastern Europe than to those of Latin America and East Asia. The usual caveat about the reliability of Romanian statistics applies to comparisons among the East European countries.

35. CIA estimates of output levels in Eastern Europe based on standard GNP accounting concepts and corrected for some suspected biases in official East European data do not support this conclusion. According to these estimates, growth performance in Eastern Europe during the period under consideration is as follows:

36. In real terms, nonsocialist convertible-currency imports declined by approximately 52% between 1980 and 1983 in Poland and then stagnated in 1984. In Romania nonsocialist convertible-currency imports fell in real terms by approximately 43% between 1980 and 1983. In contrast, real nonsocialist convertible-currency imports fell by approximately 5% in the GDR between 1980 and 1982 and then rose sharply to about 14% above 1980 levels by 1984. The only other East European country with comparable real import growth was Bulgaria. These estimates are based on nominal imports presented in Vaftous, “Diverging Trends in CMEA Economies in 1984,” Table 10, and estimates of import and export prices for Eastern Europe's convertible-currency trade presented in United Nations, Economic Commission for Europe, Economic Survey of Europe in 1984–1985 (New York: United Nations, 1985), chap. 5, Table 5.3.3Google ScholarPubMed.

37. Import cutbacks from the West tend to overstate overall import cutbacks in East European countries, because a significant fraction of their imports comes from bloc sources. Given the complementary nature of bloc and Western imports, the possibilities for decreases in the latter without incurring a loss of output were limited in the short run. Nonetheless, import increases from bloc sources cushioned the losses in output that would have occurred if total imports had fallen to the extent Western imports fell. Only in Poland and Romania was the cutback in overall imports comparable to the cutback in Western imports. According to U.N. estimates, total real imports in Eastern Europe in 1983 as a percentage of total real imports in 1980 were as follows: Bulgaria, 119%; Czechoslovakia, 98%; GDR, 99%; Hungary, 104%; Poland, 75%; and Romania, 77%. Ibid., Appendix Table 8.15.

38. Between 1981 and 1983, in Mexico real merchandise imports fell by 63% and even after a modest recovery in 1984 reached only 44% of their 1981 levels. In Brazil real merchandise imports fell by 13% in 1981 and then by 21% between 1982 and 1983. These figures are based on updates of the World Bank, World Tables, 3d ed. Not all of the decline in imports is attributable to reduction in domestic demand and austerity. For example, in Brazil the realization of import-substitution projects in energy contributed to a drop in oil imports which was helped by declining world oil prices after 1982.

39. In both Eastern Europe and Brazil the decline in investment rates continued a trend that began in 1976. In Eastern Europe this trend was the result of the voluntary adjustment efforts during the 1976–80 plan period.

40. The population growth rate estimates are based on data appearing in World Bank, World Development Report (New York: Oxford University Press, 1984)Google ScholarPubMed.

41. There is considerable skepticism about the reliability of Romanian consumption figures. Anecdotal information based on various reports of shortages of consumer goods in 1981–82 suggests that consumption levels may have fallen significantly in those years. In addition, as the essay by Thomas Baylis in this volume indicates, consumption levels in the GDR may have declined temporarily in 1982.

42. In the case of Yugoslavia, control over consumption was made even more difficult by large holdings of foreign exchange in the household sector, the domestic purchasing power of which jumped dramatically as a result of large depreciations in the dinar.

43. See Knight, Peter, Economic Stabilization and Medium-Term Development Strategy in Brazil, Discussion Paper (Washington, D.C.: World Bank, 1985)Google Scholar.

44. According to Knight, as late as 1980 the basic needs of perhaps one-third of the Brazilian population were still not being met. Ibid., p. 5.

45. These estimates are based on work on the second economy in Hungary by Istvan Gabor. His findings also suggest that at least one-fifth of total output in Hungary is produced in secondeconomy channels. See Gabor, “The Second Economy in Socialism: General Lessons from the Hungarian Experience,” in Feige, Edgar L., ed., The Unobserved Economy (Cambridge: Cambridge University Press, forthcoming)Google Scholar.

46. In part, the socialist safety net operated automatically through the labor market. In Eastern Europe and Yugoslavia layoffs are essentially precluded except in the relatively small private sectors, so no loss of jobs accompanied slowdowns or reductions in output. In this way, socialsector employment acted as part of the socialist safety net and made possible a more even distribution of the burden of real income loss among workers. In contrast, in Latin America, because most employment and unemployment decisions were private, the state exercised only limited control over the distribution of the decline in real incomes between those lucky enough to retain employment and those who lost their jobs or failed to find employment as a result of austerity.

47. The appreciation of the dollar relative to other Western currencies during the 1982–84 period caused the dollar value of East European liabilities denominated in Western currencies to decline. Since 40–50% of the hard-currency debt of a typical East European country was denominated in currencies other than the dollar, the impact of changes in exchange rates on the size of the debt at times exceeded the impact of current account surpluses. Since the developing countries held their debt mainly in dollars, the appreciation did not result in a comparably large decline in their debt.

48. These figures are taken from Vaňous, “Diverging Trends in CMEA Countries in 1984.”

49. In real terms, imports from nonsocialist sources actually increased by about 2.4% between 1980 and 1984 in Hungary. Using Hungarian import prices to deflate nominal convertiblecurrency imports in East Germany suggests that in real terms imports from nonsocialist sources may have increased by nearly 34% between 1980 and 1984 in East Germany. See United Nations, Economic Commission for Europe, Economic Bulletin for Europe 37 (12 1985), chap. 4Google Scholar.

50. In October 1985 Mexico's major creditors agreed to postpone nearly $1 billion in loan repayments due from Mexico in order to avert an outright default. New York Times, 2 October 1985.

51. If the debt-service ratio is calculated by comparing servicing requirements to revenues from both merchandise and nonfactor service exports, the ratio for Yugoslavia was only about 25% in 1983.

52. Because of the use of statistical cross-exchange rates rather than world-market crossexchange rates in official Yugoslav trade statistics, these changes in dollar export and dollar import values must be interpreted cautiously. For more on the possible distortions resulting from this procedure, see Vaňous, Jan, “Yugoslav Foreign Trade Performance and Payments Situation in 1984,” Wharton Econometric Forecasting Associates, Centrally Planned Economies: Current Analysis, 30 04 1985Google Scholar.

53. In the other three largest, non-OPEC debtor countries—Brazil, Mexico, and Argentinaonly about 25% of total debt was from public sources. OECD, External Debt of Developing Countries 1983 Survey (Paris: OECD, 1984), p. 43Google Scholar.

54. Korea was also helped by the shift in the terms of trade against net commodity exporters and in favor of net commodity importers during the 1983–84 period. Brazil and Mexico were hurt by this shift, and the falling price of oil cut into Mexico's export revenues.

55. Because of the continued buildup of debt during the 1981–84 period, Korea may find itself in economic difficulty in the future if world trade slows appreciably or if protectionist measures sharply reduce its export prospects, especially in such critical products as textiles. In this sense Korea has continued to pursue a very risky debt-cum-growth strategy that could encounter difficulties very suddenly. Growing awareness of this risk made this strategy and the issue of debt a major political controvery in Korea in 1985.

56. In the short run, Soviet pressures on its East European trading partners to increase their exports of hard goods to the Soviet Union are likely to impede greater openness to the West among bloc countries by diverting exports from Western markets to bloc markets.

57. Between 1980 and 1984 the GDR increased its lead in per capita GNP over every other East European country. In 1984 the GNP per capita in Czechoslovakia, the second most developed country in the bloc, was only 84% of the GDR level, and in Romania, the least developed country in the bloc, only 53% of the GDR level. See Vaňous, “Diverging Trends in CMEA Economies in 1984,” Table 7.

58. It is hard to determine the extent to which Romania is opting simply for greater inward orientation or autarchy, even at the expense of growth, or for greater bloc integration. In the early 1980s Romania was pushing for tighter trade links with the bloc, but the failure to win Soviet agreement to its request for subsidized oil imports tempered enthusiasm for this strategy. Little evidence to date supports the notion that Romania is willing to give up its national development objectives or autonomy to realize the possible benefits from greater specialization within the bloc.

59. In Hungary the ambitious reform blueprint introduced in 1985 has yet to be implemented to any large extent. Continued austerity conditions will undoubtedly slow the pace of its implementation.

60. The Jaruzelski leadership has declared itself in favor of the economic reform plans drawn up in Poland before the imposition of martial law. These plans call for the introduction of a Hungarian-type economic reform that would give greater decision-making authority to the enterprises. In keeping with this objective, the gigantic associations of enterprises have been abolished, and authority has been passed down to the enterprises in the expectation that they will exercise this authority when quantitative central plans are eliminated. To date, however, central planning has remained the dominant tool for economic management and enterprise discretion has remained limited.