I. Introduction, 167. — II. The prewar wage and price trends, 172. — III. The wage inflation of the thirties, 175. — IV. Wartime inflation, 181. — V. Postwar deflation, 183. — VI. Concluding remarks, 188.

I. Introduction, 368. — II. Pre-Soviet history, 369. — III. Early Soviet projects, 372. — IV. The Combine controversy, 375. — V. Implementation: 1928–1937, 378. — VI. De-emphasis on the Combine, 1937–1955, 383. — VII. The Sixth Five Year Plan, 1956–1960, 387. — VIII. Criteria of evaluation, 389. — IX. Evaluation of the Combine, 395. — X. Summary, 403.

I NTERNATIONAL comparison of trade barriers has always been complicated by the problem that the barriers take different, and not easily comparable forms: tariffs, exchange controls, differential sales taxes on domestic and imported products, explicit commodity quotas, implicit or hidden quotas (in the cases of western state trading and all of the trade conducted by the communist nations), and so forth. In 1958 a distinguished panel of experts headed by Gottfried Haberler [4] suggested that the degree of protection can be very roughly judged by the extent to which the price paid to the producer exceeds the world price for importers. . They were well aware of many of the difficulties of this method such as the effect on both domestic and world prices of the goods in question of subsidies given to both exporters and domestic producers. The United Nations Economic Commission for Europe used this technique in 1960 [ 12 ] to study agricultural protection in Western Europe. They also were aware of many of the statistical and methodological pitfalls of this technique and, in particular, called attention to the problems raised by the existence of disequilibrium exchange rates and the levy of tariffs on commodities requiring differential amounts of fabrication in the importer. Several other workers have also found the Gatt approach convenient, e.g., Dardis and Pryor [4, 8]. Pryor, interested in comparing the trade barriers by Eastern and Western Europe, respectively, to the exports of underdeveloped nations as a result of discussions which grew out of UNCTAD I. innovated by adjusting the ratios of domestic to world prices for the fact that the price levels of some nations are biased upward by a relatively large reliance on sales as opposed to income taxation. I point out in this paper two major difficulties with the use of the ratio of domestic to world (or import) price as a proper and unambiguous measure of barrier to imports. The first has to do with problems of defining barrier in view of the several different price ratio-quantity relationships which are possible under differing circumstances and assumptions. Second, the implications for this method of disequilibrium prices and repressed inflation are explored. This is particularly relevant for comparisons involving the Union of Soviet Socialist Republics and Eastern Europe [7] since the economies of these nations have consistently experienced repressed inflation. However, it is also relevant to comparisons which would have included Western Europe after World War II and some of the underdeveloped nations at present.

IN recent years considerable interest has attached to economic relations among the nations of the Soviet Bloc. One aspect of these relations which has received particularly intensive analysis has been the terms on which trade has been conducted between the Soviet Union and the communist countries of Eastern Europe.' Dr. Horst Mendershausen, utilizing the now annually published Soviet foreign trade returns, has attempted to throw some light on this question by comparing the average unit values of Soviet exports to and imports from the Bloc and Free Europe, respectively, where the same class of export or import is sold to or purchased from some countries in each group.2 Some of the major results of Mendershausen's analysis for the years I955-58 are as follows: (i) For more than 2 out of every 3 commodities sold by the Soviets to both the Bloc and Free Europe, the Bloc nations have paid a higher average price than the Free European nations. Had the Bloc imported from the Soviets at the Free Europe price, the cost of their imports (of the sample of commodities studied) would have been reduced by the following percentages in the I955-58 period: i6, II, 7, I2. (2) The Soviet import sample is quite small and the results therefore somewhat more tentative. In I955 and I958, the Soviets actually paid the Bloc higher prices for a slight majority of commodities than they paid Free Europe. On the other hand, in I956 and I957, the Soviets paid the Bloc lower prices than Free Europe in roughly 2 out of every 3 cases. The weighted average, furthermore, was very unfavorable to the Bloc in all years. Had they sold to the U.S.S.R. at the same prices that Free Europe did, their receipts (for commodities covered) would have been increased by the following percentages over the years I955-58: I3, 22, 2I, 20. (3) Mendershausen concludes on the basis of the above evidence that the Soviets price discriminate against the members of their Bloc, charging them more for exports and paying them less for imports than they do for comparable commodities in trade with Free Europe. Regarding the procedures which lead to discrimination, Mendershausen concludes:

The European centrally planned economies (CPEs) have sustained chronic hard currency deficits since East-West trade began to expand in earnest about fifteen years ago. While their outstanding hard currency debts almost doubled over 1975-76 as a result of an inability to adjust quickly to the Western recession-a previously unsuspected vulnerability-other systemic factors rooted in Stalinist central as practiced in the CPEs, have been responsible for the more secular balance-of-payments problems.' I refer to the wide use of direct controls to allocate intermediate products, the prevalence of or over full-employment planning, and irrational domestic pricing. These have several implications for economic performance which are relevant to the CPEs hard currency balances of payments. First, the CPEs tend to produce relatively low quality manufactured products and have a marked inability to sell their products in Western markets. Inability to compete successfully is not due to price, but, to quote a Hungarian economist, Imre Vajda, to deficiencies in performance, reliability, appearance, packing, delivery and credit terms, assembling facilities, after-sale services, advertising, selling itself , primarily factors other than price . (p. 53). This ineptness results largely from lack of competition-the fact that domestic products are distributed by the plan rather than sold and that quantitative goals take precedence over qualitative goals. Further, taut planning results in sellers' markets, additionally weakening managerial incentives to improve quality. Nor does play a significant role in intrabloc foreign trade. This trade is characterized by large state trading agreements, protected markets, and little or no direct contact between the producing enterprise in one nation and consuming enterprise in the other. Second (and related) is the well-known relative weakness of socialist nations in innovation and technological change. This is due to the absence of competition just noted, to rewards for innovation which are inadequate to offset the risks or overcome inertia, and to the dysfunctional organization of R&D establishments and their relations to operating enterprises. Third, the CPEs trade with each other and with the West at roughly world prices, even though these prices usually have no organic or consistent relationship to domestic prices. Their exchange rates serve as units of account but not as real prices. Their currencies are not only totally inconvertible into each other, they are also largely inconvertible into goodsso-called commodity inconvertibility (see the author, 1978). That is to say, foreign importers (exporters) are not allowed to compete freely with local enterprises for products (markets) because this would disrupt the plan. This significantly reduces short-run ad hoc exports-most exports have to be planned long in advance. These factors lead to at least three causes of persistent hard currency shortages: 1) the *Professor of economics, Tufts University and associate, Harvard Russian Research Center. Some of the ideas in this paper appeared earlier in my 1973 article. A much longer current version is available on request. I am indebted to Abram Bergson for incisive criticisms of two earlier drafts. 'Other than systemic factors may also be responsible. For example, the current availability of Western investments and credits on reasonable terms and the present willingness of the CPEs to entertain such relations with the West is one such factor. It should also be noted that the LDCs and some advanced industrial nations also have chronic balance of payments problems. However, I argue that the factors to be mentioned below are unique to the CPEs.

The U.S. policies toward the USSR in the postwar period have been less friendly than those of our NATO allies. These policies have been, however, a largely understandable reaction to the miliary posture and undemocratic domestic policies of the USSR and to the nature of its economic system. But the situation is changing rapidly. The Gorbachev Reform is already a minor social, political, and economic revolution, and may well turn into a major one. These circumstances require a reassessment of our policies toward the Soviet Union. Some reassessment has already taken place as indicated by our signing the INF Treaty. Nevertheless, the overall tone of our administration is dominated by attitudes of skepticism and show me when hardly a week goes by that the Soviets do not show by saying or doing something that two or three years ago was unthinkable. I think it is important for us to adopt a more positive approach toward the Soviet reform. Our major foreign policy goal over the past forty years has been containment of the Soviet Union. This goal has been enormously expensive to implement, and pursuing it bears much of the responsibility for the difficult economic problems this nation faces today. The relentless pursuit of this goal has been based on the assumption that, while uneasy truces between the two camps might be worked out from time to time, the differences between us are irreconcilable over the long run. Now, for the first time in Soviet history, this assumption may no longer be valid. There is little doubt that Gorbachev genuinely wants to eliminate many of those aspects of the Soviet system that we consider objectionable and to end the cold war. His task will be difficult and good relations with the West would simplify it. Gorbachev's policies are in our interest. The opportunity should not be missed-it may not come again for decades.