Legacies of Central Planning
Legacies of Central Planning
The historical differences in economic systems underlie current conditions that affect Western business with HPEs. The HPEs, unlike the market-driven systems of the West, did not rely much on the market to determine what to produce or what price to charge. In the former USSR, for example, 95 percent of prices were changed only twice between 1955 and 1991. Prices therefore bore jjttje resemblance to what prices or costs would be in a market economy.
Currencies were not convertible, and their values were set arbitrarily in relation to Western ones. Since the countries decided centrally what was to be produced and consumed domestically, they planned certain production to be in excess of domestic consumption and certain production to be less. Those excesses and shortages became in turn their planned exports and imports, respectively. These then were varied only on an emergency basis because of supply problems.29 Imports were bought by large foreign trade organizations (FTOs) whose buying decisions might have little to do with whether foreign-made goods were of higher quality or lower price than domestically produced ones. Since they tended to buy little from the West, they were not very familiar with many of the companies that are well known in market economies.
By late 1990 the majority of consumer prices, but not labor prices, had been deregulated in Czech and Slovak, Hungary, Poland, and Yugoslavia;30 however, most prices were still administered in other HPEs. When HPEs sold abroad, their inability to know what their costs and prices would be in a market situation made it difficult for them to sell. For primary products, such as fuels and minerals, this was less of a problem because there was usually an established world market price that could be referenced. Most CIS exports, for example, are of this type; however, Eastern European exports usually are not. The problem still manifests itself in two ways. First, COMECON countries have agreed to settle deficits with convertible currencies and to set market prices on trade with each other; however, much of the production within HPEs is still highly protected and of a quality that is not really marketable internationally except in other HPEs. HPE governmental buyers worry that the prices from other HPEs are too high. The result is that the buyers look to similar Western products to get an indication of value, which is a very cumbersome and inexact process.
Second, HPEs were formerly accused of dumping their products into Western markets. For example, the former Soviets were charged with selling such products as automobiles and trucks in the West for a fraction of their costs in order to earn foreign exchange. But since costs were not calculated the same way, it was impossible to determine whether they were sold at below what the costs would be if computed on a market basis. To the extent that prices are still administered and soft budgets prevail in HPEs, prices may still bear little resemblance to cost. Furthermore, such HPEs as China, Poland, and the CIS have greatly devalued their currencies so that their exchange rates are "more realistic." Thus far, the post-1989 euphoria has prevented new charges of HPE dumping, except for China. However, until market economies are more nearly in place in the HPEs, there are risks that Western governments will protect against HPE exports by claiming that subsidies and undervalued exchange rates create unfair competition.
In selling to the West, HPEs largely viewed exports as a necessary nuisance to pay for imports. Eastern sellers were effectively price-takers, lacking the competitive experience to obtain higher prices through such market-economy mechanisms as product differentiation. This situation is still quite prevalent. Probably the only HPE trademarks that are well known in the West are Aeroflot for air service, and Lada and Yugo for automobiles, and none of these has a quality image that commands price premiums in the West. HPE enterprises will have to compete primarily on the basis of price, and they may have difficulty competing against the low-wage countries of Southeast Asia. The lack of internal competition within HPEs also makes it difficult for their firms to react to competitive market demands when they attempt to sell in the West. For many products that they have sold, there have been reports of a lack of responsiveness to users' needs, poor maintenance, and poor after-sales support services.31 In the absence of being able to counter this problem independently, HPE firms are turning to Western firms for assistance. For example, in 1990 the former USSR signed a five-year contract with DeBeers Consolidated Mines so that the South African company would market all of its diamonds. Another approach has been to develop cooperative ventures with Western firms which infuse production and quality improvements into existing factories and then put their own well-known trademarks on the goods for export. Two notable examples are factories to make Schwinn bicycles and Levi's jeans in Hungary.32 The Eastern European countries also have encountered problems in selling goods in the West because of unfamil-iarity with the prevalent sophisticated advertising methods. Even though these countries have relied on Western advertising agencies, the agencies have only slowly been able to convince them of the need for such things as marketing segmentation and the targeting of budgets toward key products.33
Before instituting major economic reforms, HPEs set their exchange rates on their nonconvertible currencies arbitrarily, perhaps motivated by political reasons so that their statistics made them appear much wealthier than they really were. Independent assessments, such as those made by the CIA, were lower than the HPE official figures, but still much higher than they have since been calculated. For instance, the CIA had estimated the former Soviet Union's per capita gross national product at about one third and its GNP at about one half of that in the United States. These figures gave Western companies an overly optimistic picture of short-term HPE market potential for their products and services. In 1990, the former Soviet Union devalued the ruble greatly, and international agencies (the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, and the European Bank for Reconstruction and Development) cooperated with former Soviet agencies to estimate its economic size. The resultant estimate for the former USSR was that the GNP was only about one tenth that of the U.S. in 1989 and the per capita income only about 14 percent of that of the U.S., or about the same as Brazil. New calculations also placed Eastern European figures at less than half what they had been assumed to be.34 Today, even state enterprises in the HPEs may report figures to central authorities that understate their performance in order to continue receiving subsidies. In turn, central authorities may undervalue exchange rates to improve trade surpluses. Therefore, the economic figures may make Western firms overly pessimistic about business opportunities in HPEs.
Most HPEs have liberalized trading relationships by decentralizing decision making. Whereas decisions on imports and exports used to be made by the giant national foreign trade organizations (FTOs), more decisions are now made at the regional or enterprise level. For example, in 1980 China had only a handful of FTOs that could deal with imports and exports; by 1989 the figure had risen to about 5000.35 Previously, Western firms complained of difficulty in gaining audiences with FTO officials and lengthy negotiations once they did. With decentralization, there are new problems, such as trying to determine with which entity to make contact.36 Once contact is made, the decision makers may be so inexperienced with Western companies that they don't know fully if they are dealing with powerful and highly reputable foreign firms or not. Furthermore, transformation brings more turnover of personnel, which aggravates inexperience. Finally, there are more uncertainties about subsequent approvals from various ministries and whether locally made concessions, such as on currency conversion, will be honored at the national level.
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The historical differences in economic systems underlie current conditions that affect Western business with HPEs. The HPEs, unlike the market-driven systems of the West, did not rely much on the market to determine what to produce or what price to charge. In the former USSR, for example, 95 percent of prices were changed only twice between 1955 and 1991. Prices therefore bore jjttje resemblance to what prices or costs would be in a market economy.
Currencies were not convertible, and their values were set arbitrarily in relation to Western ones. Since the countries decided centrally what was to be produced and consumed domestically, they planned certain production to be in excess of domestic consumption and certain production to be less. Those excesses and shortages became in turn their planned exports and imports, respectively. These then were varied only on an emergency basis because of supply problems.29 Imports were bought by large foreign trade organizations (FTOs) whose buying decisions might have little to do with whether foreign-made goods were of higher quality or lower price than domestically produced ones. Since they tended to buy little from the West, they were not very familiar with many of the companies that are well known in market economies.
By late 1990 the majority of consumer prices, but not labor prices, had been deregulated in Czech and Slovak, Hungary, Poland, and Yugoslavia;30 however, most prices were still administered in other HPEs. When HPEs sold abroad, their inability to know what their costs and prices would be in a market situation made it difficult for them to sell. For primary products, such as fuels and minerals, this was less of a problem because there was usually an established world market price that could be referenced. Most CIS exports, for example, are of this type; however, Eastern European exports usually are not. The problem still manifests itself in two ways. First, COMECON countries have agreed to settle deficits with convertible currencies and to set market prices on trade with each other; however, much of the production within HPEs is still highly protected and of a quality that is not really marketable internationally except in other HPEs. HPE governmental buyers worry that the prices from other HPEs are too high. The result is that the buyers look to similar Western products to get an indication of value, which is a very cumbersome and inexact process.
Second, HPEs were formerly accused of dumping their products into Western markets. For example, the former Soviets were charged with selling such products as automobiles and trucks in the West for a fraction of their costs in order to earn foreign exchange. But since costs were not calculated the same way, it was impossible to determine whether they were sold at below what the costs would be if computed on a market basis. To the extent that prices are still administered and soft budgets prevail in HPEs, prices may still bear little resemblance to cost. Furthermore, such HPEs as China, Poland, and the CIS have greatly devalued their currencies so that their exchange rates are "more realistic." Thus far, the post-1989 euphoria has prevented new charges of HPE dumping, except for China. However, until market economies are more nearly in place in the HPEs, there are risks that Western governments will protect against HPE exports by claiming that subsidies and undervalued exchange rates create unfair competition.
In selling to the West, HPEs largely viewed exports as a necessary nuisance to pay for imports. Eastern sellers were effectively price-takers, lacking the competitive experience to obtain higher prices through such market-economy mechanisms as product differentiation. This situation is still quite prevalent. Probably the only HPE trademarks that are well known in the West are Aeroflot for air service, and Lada and Yugo for automobiles, and none of these has a quality image that commands price premiums in the West. HPE enterprises will have to compete primarily on the basis of price, and they may have difficulty competing against the low-wage countries of Southeast Asia. The lack of internal competition within HPEs also makes it difficult for their firms to react to competitive market demands when they attempt to sell in the West. For many products that they have sold, there have been reports of a lack of responsiveness to users' needs, poor maintenance, and poor after-sales support services.31 In the absence of being able to counter this problem independently, HPE firms are turning to Western firms for assistance. For example, in 1990 the former USSR signed a five-year contract with DeBeers Consolidated Mines so that the South African company would market all of its diamonds. Another approach has been to develop cooperative ventures with Western firms which infuse production and quality improvements into existing factories and then put their own well-known trademarks on the goods for export. Two notable examples are factories to make Schwinn bicycles and Levi's jeans in Hungary.32 The Eastern European countries also have encountered problems in selling goods in the West because of unfamil-iarity with the prevalent sophisticated advertising methods. Even though these countries have relied on Western advertising agencies, the agencies have only slowly been able to convince them of the need for such things as marketing segmentation and the targeting of budgets toward key products.33
Before instituting major economic reforms, HPEs set their exchange rates on their nonconvertible currencies arbitrarily, perhaps motivated by political reasons so that their statistics made them appear much wealthier than they really were. Independent assessments, such as those made by the CIA, were lower than the HPE official figures, but still much higher than they have since been calculated. For instance, the CIA had estimated the former Soviet Union's per capita gross national product at about one third and its GNP at about one half of that in the United States. These figures gave Western companies an overly optimistic picture of short-term HPE market potential for their products and services. In 1990, the former Soviet Union devalued the ruble greatly, and international agencies (the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, and the European Bank for Reconstruction and Development) cooperated with former Soviet agencies to estimate its economic size. The resultant estimate for the former USSR was that the GNP was only about one tenth that of the U.S. in 1989 and the per capita income only about 14 percent of that of the U.S., or about the same as Brazil. New calculations also placed Eastern European figures at less than half what they had been assumed to be.34 Today, even state enterprises in the HPEs may report figures to central authorities that understate their performance in order to continue receiving subsidies. In turn, central authorities may undervalue exchange rates to improve trade surpluses. Therefore, the economic figures may make Western firms overly pessimistic about business opportunities in HPEs.
Most HPEs have liberalized trading relationships by decentralizing decision making. Whereas decisions on imports and exports used to be made by the giant national foreign trade organizations (FTOs), more decisions are now made at the regional or enterprise level. For example, in 1980 China had only a handful of FTOs that could deal with imports and exports; by 1989 the figure had risen to about 5000.35 Previously, Western firms complained of difficulty in gaining audiences with FTO officials and lengthy negotiations once they did. With decentralization, there are new problems, such as trying to determine with which entity to make contact.36 Once contact is made, the decision makers may be so inexperienced with Western companies that they don't know fully if they are dealing with powerful and highly reputable foreign firms or not. Furthermore, transformation brings more turnover of personnel, which aggravates inexperience. Finally, there are more uncertainties about subsequent approvals from various ministries and whether locally made concessions, such as on currency conversion, will be honored at the national level.
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