| Central Planning and Commodity Inconvertibility |
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| Written by Bhopara | |
| Friday, 07 September 2007 | |
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In a communist country, the state owns the means of production and determines forex investment priorities in this or that sector of the economy. However, the absence of private property per se is not sufficient to warrant inconvertibility on the current account of the balance of payments. (Nor does the absence of private property prevent international lending and borrowing-it only forestalls trade in equities or the use of collateral that could constitute an equity claim.) It is not difficult to imagine a variety of state-owned enterprises, in commerce or in manufacturing, purchasing industrial materials abroad when the relevant foreign prices seemed attractive at the prevailing exchange rate. Similarly, these same enterprises could divide their output between domestic and foreign sales, either by direct exportation or because foreign buyers are free to acquire balances in domestic currency to bid for domestic goods. Currency convertibility would allow such decentralized decision making in foreign trade-the domestic currency would be internationally liquid-even though the participating enterprises were state owned and perhaps each was collectively managed by its workers. But such decentralization does require that domestic prices accurately reflect economic scarcity.Instead, the current output of producer goods and industrial materials is centrally allocated by administrative fiat in communist countries, sometimes called command economies.3 Prices serve only a residual role in account for cash flows when goods pass from one enterprise to another. Since prices are not used for allocative purposes domestically, it is inconceivable that foreigners be permitted what domestic enterprises cannot do, i.e., freely exercise monetary claims to purchase whatever domestic goods seem attractive at prevailing prices. Not only would nationally administered materials allocations be upset, but low price tags on some potentially exportable domestic goods may well conceal the fact that they are either very costly in real resources or are in actual shortage. Formal accounting prices need bear no systematic relationship to their value in use as seen by the planners. Hence, commodity inconvertibility is necessarily universal in centrally planned economies-otherwise central planning through materials allocations could not exist. A natural concomitant of commodity inconvertibility, therefore, is the concentration of all export trade in a single agency that purchases domestic goods to be sold abroad at what might be a very different relative prices.4 Centralized state trading agencies act as buffers between foreign and domestic relative prices--a need that is made more acute in the presence of taut or high pressure planning techniques where materials shortages are commonplace. Such agencies ignore any profits (or losses) to be made from buying domestic goods at one price in domestic currency and selling for another in foreign currency, which is converted at an official exchange rate. The higher the domestic- currency price of the foreign currency, the greater will be these accounting profits. Yet the export agency's decision making is mandated from the center so that the setting of the exchange rate (as well as the structure of domestic prices) is an unimportant element in its selection of goods to be exported- most unlike the situation in convertible- currency countries where the correct alignment of domestic and foreign prices through the exchange rate is a critical matter. For these same reasons, foreign exchange inconvertibility also holds: individuals and firms cannot freely convert their domestic-currency balances into foreign exchange in order to import foreign goods. Not only do the domestic prices of goods seen by household differ substantially from those seen by enterprises, neither set accurately reflects their real costs in domestic resources. In a noncommunist less developed country, this latter discrepancy may arise primarily because the official price of foreign exchange is kept too low, making imports look unduly cheap. In a centrally planned economy on the other hand, the discrepancy is not so uniform: many domestic prices would be too low at the official exchange rate and incorrectly signal that imports are not wantedand vice versa. In command economies, therefore, the import trade is also concentrated in a single comprehensive state agency (perhaps the same one responsible for exports) that sharply discounts the importance of domestic accounting prices in making its trading decisions. What criteria might the agency bring to bear on what to import or to export? A standard procedure in mathematical planning models is to calculate shadow prices that do, more or less accurately, reflect domestic scarcity. Undoubtedly, a state trading agency would have to make similar very complex calculations to evaluate each traded commodity-if only implicitly. In general, however, very little formal theory can be brought to bear on how state trading decisions are actually made.
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