Now, Credit-Card Communism

First there was "goulash Communism"--the term coined in the early 1960s to describe Nikita Khrushchev's insistence that Red economies satisfy consumer needs instead of concentrating only on the development of heavy industry. Now the Soviet bloc is following an even more heretical strategy that might be called credit-card Communism--the customers in this case being governments rather than individuals. Totally violating Marxist prejudices, the Soviet Union and its six economic allies in Eastern Europe* are trying to modernize their antiquated economies by borrowing heavily from their supposed class enemies, the capitalists of the West.

During 1975 alone, these seven nations took out $9 billion in new loans, increasing their total indebtedness to $32 billion. So far this year, borrowing has continued at the same furious pace. The latest estimates put Eastern European debt to the West at about $37 billion. That is more than three times the total of Lend-Lease aid extended by the U.S. to the Soviet Union during World War II.

Reliance on Western credit reflects some profound changes in Eastern Europe. Since 1970, when riots by Polish workers protesting higher food prices brought down Party Boss Wladyslaw Gomulka, Soviet-bloc countries have made a determined effort to improve the material standard of living of their people. Encouraged by diplomatic detente, they have developed a voracious appetite for Western products, buying everything from consumer goods to entire factories. One result: the economic woes of the capitalist world, to which Communist planners initially thought they would be immune, by last year made themselves felt on the other side of the Iron Curtain. Inflation sharply raised the prices of the Western goods that the Communists buy, while the 1974-75 recession dried up what few Western markets had existed for Eastern European goods. So Comecon's trade deficit with the West went from $5 billion in 1974 to $12 billion in 1975, and the red ink could be covered only by borrowing heavily from capitalist banks, suppliers and governments.

Grain Debt. The biggest borrowers are the Soviet Union ($15 billion) and Poland ($9 billion). The Russians have used the money not only to buy technology but to pay for the nearly 18 million metric tons of grain imported from the U.S. in the past two years. Poland, with the second largest population in Eastern Europe, has had the most ambitious industrialization program. Hungary too is an important debtor relative to its size. It has borrowed $3.5 billion in the West, or almost $320 for each of its 11 million people.

To service loan-seeking Communists, several American banks have opened offices in Eastern Europe. Bank of America, Citibank and Chase Manhattan have all gone into Moscow. Manufacturers Hanover Trust has an office in Bucharest, and First National Bank of Chicago has one in Warsaw. The business has been lucrative. Commissions and miscellaneous fees can add up to $2 million on a $200 million loan--and that does not count later collections of interest. In addition, Communist countries have a good record of paying debts promptly. Says one American banker: "There is a lot of merit in lending to a stable, centralized, planned economy."

For all that, some Western financiers in recent weeks have begun to express discreet concern about Comecon's mounting pile of debt. The Basel-based Bank for International Settlements has noted that the ratio of debts to exports --which determines a country's ability to repay loans--has reached a high level in some Communist countries. Bank of America, Citibank, Chase Manhattan and Manufacturers Hanover all conspicuously took no part in a recent $250 million loan to the Soviet Union's Foreign Trade Bank. Some Western banks are also trying to raise interest rates charged to Communist borrowers. They had been tacking a 1.25-percentage-point premium onto whatever rate they had to pay to borrow funds to relend in Eastern Europe. Now some are demanding a 1.5 premium.

Eastern European officials too are getting concerned about their deepening debt and have started programs to cut imports and increase exports. Inevitably, that will require some belt tightening as resources are shifted away from the consumer sector. Already, imports of various Western goods, ranging from Scotch to steel, are being reduced.

Capitalist Partners. The effort to boost exports has pushed some Communist nations into a further affront to ideology: inviting capitalists in as partners to make their industries more efficient. In Hungary, for example, Corning Glass Works of the U.S. owns 49% of a Hungarian company that will produce blood gas analyzers and Sweden's Volvo has a minority share in a vehicle-production plant.

Above all, Eastern Europeans are beginning to understand they must improve the quality of their goods if they hope to sell enough abroad to pay for more of their imports. Says Karoly Ravasz, a Hungarian official: "Instead of ordinary lathes, we must produce precision machinery. Instead of textiles that sell in flea markets, we want to sell fashionable clothes." Only in that way can the Communists avoid going much deeper into hock to the West.

* Bulgaria, Czechoslovakia, East Germany, Hungary, Poland and Rumania.

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