Inflation, Communist Style

The controlled press of the Soviet Union and other Communist countries has recently found fresh and juicy evidence of capitalist decline: the double-digit inflation now ravaging Western nations. By contrast, Red journalists crow, living standards in the socialist bloc have markedly improved in the past decade or so, while price rises have been virtually nil. There is some truth to that claim, but like vodka, it has to be taken cautiously in order to avoid losing touch with reality.

Officially, most Communist governments maintain virtually zero inflation because prices for almost all goods and services are set by state agencies and changed only rarely. Though workers who overfulfill production quotas are showered with medals and occasionally cash bonuses, wages, too, are generally controlled, on the basis of supply of consumer goods available. If supply goes up 5%, say, so do wages. That way, supposedly, there is no excess cash chasing scarce goods.

So goes the theory. The reality is somewhat different. Basic services such as housing, medical care and mass transit in the Communist countries are generally cheap, but prices for many items from cars to quality foods have long been set so high that they remain beyond the reach of most Russians, as well as Poles, East Germans, Czechs, Rumanians, Hungarians and Bulgarians. Says one Soviet economist ingenuously: "We do not have inflation -- we just have high prices."

Moreover, as a matter of policy, prices for some goods are set below the cost of making them. Vladimir Sitnin, chairman of the Soviet Union's state price committee, notes: "There is some relation between production costs and prices, but not necessarily a direct one. Retail prices have a social objective, varying from low prices for schoolbooks to higher prices for liquor."

Consumers pay dearly in other ways for official price stability. Many goods are offered in only skimpy variety and threadbare quality because that is all factories can afford to make at state-set prices. Massive government subsidies must be paid to industries and to Soviet agriculture in order to keep prices steady despite regular rises in production costs, caused by inefficient use of workers and machines. The subsidies chew up capital that would otherwise be invested in new plant and equipment and contribute to the persistent inability of Communist economies to expand fast enough to meet demands of consumers.

In addition, undisguised inflation exists in sectors not subject to iron-fisted government control--imports, goods sold on sanctioned free markets and those peddled in widespread black markets. There is an Orwellian rip-off on the prices of so-called new products. By making the most minute change in any item--even installing a new car heater --a factory manager can get it classified as new and kick up the price. That does not count as an "increase" because the product theoretically has just come to the market. In the Soviet Union, the latest model Volga car costs $12,170, about 68% more than its predecessor, though only an engineer could see the difference.

Free Market. All these factors make misleading the Soviet Union's claim to being free of inflation. Many prices are oppressively high for a country in which a working husband and wife average about $350 in income per month between them. Butter and sausages, for example, cost $2.05 per lb., and coffee more than $2.60. That is in state stores, where supplies often run short. Then consumers frequently turn to the free market, where farmers sell produce they have grown on private plots for whatever the traffic will bear.

Some farmers have grown relatively rich flying into major cities to hawk suitcases full of tomatoes at $4.68 per lb. in winter or strawberries and cherries at $2.34 per lb. in the spring. In addition to high prices, the drabness of many consumer goods is sparking a shoppers' rebellion. So many Soviet men turned up their noses at shapeless suits selling for $90 each that the government was recently forced to offer them at half price. Even then they did not move. Soviet buyers are turning increasingly to expensive imports: $18 cotton sports shirts from Iran, $50 platform shoes from Yugoslavia. Those are official prices; the black market is more costly still. For example, a Seiko watch that goes for $70 in the West brings $325, and a pair of genuine Levi's jeans $130.

Surge in Demand. Conditions are little better in the Communist countries of Eastern Europe. Poland, which boasts only a 1.9% annual inflation rate, has been forced to bow to public pressure and raise workers' wages 7% in each of the past three years. The rise has created a boom in demand that has pushed up many unofficial prices. Nearly all the country's food is sold on the free market. Last year the price of beef climbed 7%, potatoes 8.5%, sauerkraut 24% and pickles--a staple of the Polish diet--a walloping 33%.

In Czechoslovakia, which claims price rises of only 2% a year or less, consumers are balking at paying high prices for shoddy goods. Sales of Skoda cars have nosedived, and for the first time in the country's history, thousands of brand-new models are slowly rusting on factory lots. To stir consumer appetites, the government has permitted Western goods to be sold in state stores, but the price is high (nearly a month's salary for a pair of Austrian ski boots).

Yugoslavia, the only Communist country that allows a kind of free-market pricing, is the most prosperous-looking state in Eastern Europe. Its streets are crammed with Mercedeses and Fords, its shops filled with French perfumes. But the price of affluence has been steep. Last year the government candidly reported an inflation rate of 20%, about as bad as anything in the West. The key problems are the inefficiency inherent in the country's centralized planning system, rising wages and large imports from the West. Recently the Yugoslav mint reported that the cost of making coins now exceeds their value. A 20-para coin (worth about 1.3 cents), for example, now costs 32 paras to produce. As a result, Yugoslavia will soon probably convert entirely to paper money--provided, of course, that the price of paper does not scoot up.

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