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ALFRED
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
P.
Contraclua] I'orms for Fast-West Industrial Qxjpcration:
New
Thinking
in the Hast.
.John
I:
...and in the
West?
Parsons
Alfred P. Sloan School of
Management
Massachusetts Institute of lechnolopy
WP
# \9^A-R1
September 1087
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
r-.r.n.r''^;"-'
j
Contractual
New
Fonns
for F,ast-Wcst Industrial Qxjpcration:
Thinking in the Fast.
.lolin
I'.
...and in the
I'arscins
Alfred P. Sloan School of
Massachusctt";
\VP#
West?
hi'ititutc
Management
of Technology
Scplemher
IQ.14-S7
|f)R7
Remarks prepared for the Fast-West Conference, Gorbachevs 'New hinking:' Social and Economic
Reforms," Middlebur\' Center for Fconomic Studies, October 6-R, \W1 Draft \'ersion--plcasc do not
quote without permission.
1
The
materia] in this paper
is
based
in part
upon
a series
of research
\isits to
the
German
Democratic Republic sponsored jointly by the Ministr> of Higher I'ducation in the (jDR and the
Internationa! Research and Fxchanges Board (IRFX) in the US.
gratefully acknowledge the helpful
discussions with my colleagues in the GDR Academy of Sciences, the Ilumboidt University of Berlin, the
Institute for Politics and Fxonomics. and the Uni\ersity of Fcoiiomics.
I
CONriRACriJAI. I'ORMS
I
OR
Nl-W Tf I INKING IN
I.
l-ASI-WIvSI INDUSIRIAI.
IMI' I'ASI
AND
.
IN
I
COOPI^RM
ION:
WIuSI?
III'
Introduction
New
communitN'
times
prcseiif us with
upon
small part
dcmnml new
tliinkiiig
an opportunity.
v\licthcr or not the \\'es1
leadership of the S(nict I'nion and,
experience of the
problems
last tx'.o
I
I
is
v^hich arc possible and necessary
I
iti
Smiel
the
I
tiidii
ami
up
ii
tlie sticialist
he future of last-West economic relations depends
to the challenges posed
by these developments
think, of the other socialist countries ha\c analyzed
decades and lirau
in the international arena,
clianges occuring
lie
fundamentally neu conclusions regarding
among them
m
bctucen firms
the forms
<if
socialist
and
;i
no
in
The
tlie
large \ariety of
business .and corporate rmancial relations
c.ipitalist
paper hy outlining the logic of the
ne\i.
thinking
in the socialist states
for business relations bct\*.ccn last
ami
\\'esl--in
broad terms and with
nations
1
u.mt to begin
this
reganling the appropriate forms
a specific reference to
the
experience of the industrial cooperation agreements that briefly flourished between Tast and West during
the IQTO's.
If
do we
I
am
in the
successful in characterizing this logic, then the question will immediatel_\' pose
West draw conclusions from
leading the socialist
approach
to the
community
to the
same problems
addressed the identical
set
am
1
the
new
not
same
iiistcirical pcrioif"
thinking,
of historical experiences
I
am
that
uc
in
the
were popular
in the
relations.
I
1970s and our
will use the
own
is
example of the
we
liow
sense in the logic
will exist for
West have
not convinced that
successfully engage as equal partners in the negotiations with the s(Kialist
forms of our economic
there
then an implicit challenge
convinced
at all
If
itself,
our
own
yet successfully
are prepared to
community over
industrial cooperation
the
new
agreements that
response to and analysis of thcm--among academic economists,
2
Husmessmcn and gn\cmmcnt
practicing
polic\makcr<.--as an example of uIhtc
ue
and liow
<ilior1
fall
\vc
must adapt our thinking
I
tliink
is
it
time for some 'new thinking
leadership and guidance to
uith
a
llie
a successful strategy for the future
will outline
what
attention
we
if
(if
examination of one
critical
arc to give
\Vc must he an equal partner
s
the logic of the strategy of one's partner
own
some
I
ast
in
in
giving
and West
Only
the negotiation,
preconccpti<ins and past mistakes can one expect to develop
and to implcinent that strategy
consider to he the prejudices
I
the West
design of the forms of husiness relations hetweeti
correct and honest assessment
and with a
rn
leadership and
if
we need
we
negotiation with one
overcome and where we need
to
are to
in
s
partner.
to focus
I
our
develop a reasonable slrateg\ for
negotiating the acceptahle and stimulating contractual forms
f(ir
industrial coctpcration
between Past and
West
What's
2.
New
in Ihc
'New
'Iliinking,' or...
Reading History's Judgement of
\\'hat
is
the nature of the
the socialist model, of national
comparable with
the
common
"If
new thinking
that of a capitalist
view
is
it
a recognition of the failure of
to successfully deliver the ccoiKMnic proikictivity
cconom\'^ .Some variant of an afTinnntivc answer to
this
question
is
economic shortcomings, he must impose on the
it.
a profound transformation ni the
the Soviet I'nion's inventive, productive and investment spirits
to solve the Soviet I'nion's
countrv' a structural
economy'--that
is
West:
in the
Gorhacliev
in the Soviet I'nion'^
economic planning
Ixonomy
SociaJi.st Political
economic reform--or,
will set free
as he calls
7'he implications of such a far-reaching reform are potentially very disruptive
lor
a starter,
most proposals involve the abandonment of central planning.
As Marx would have said, the central plan has become a fetter.'
...
I
think that this
is
a
fundamentally mistaken assessment of the direction of thinking which
the changes in the approach of socialist countries to economic relations
underestimates or completely ignores the positive experiences which the
their choice of plan
it
is
too
is
self-satisfied
socialist c(nintries
spurring
and
it
have had with
over market and socialism over capitalism.
Marshall
I.
pp. 57-8
&
Cioldman, '(jorbachcv and I'conomic Reform.
60,
Foreign AJfairs. 64:56-7.\ Tail
1*^85,
3
I
he
ncu thinking
and lessons from the
that
is
hislorv-
a
much more
of socialism;
ccimplicntrii synthcsi<;
(if
hdlh positi\c and ncpntisc experiences
dogma
represents a fundamental questioning of particular
it
identified with socialism, but a questioning in terms of tiie essential theoretical
have been
framework of Marxism-I <"nmism and continued commitment
The 'new
the Hegelian tenninolog>', negations--of capitalism
to
plannmu and socialism
thinking'
confrontation of the ideology of Marxism with the experiences of the
is
last
as opposiles--or, in
the result of the serious
two decades
the frank
is
It
recognition of both the successes and the failures of that period, and the resultant formulation of a
fundamentallv new
and
conception about the relationship of the
strategic
to the capitalist world
Ihe
accord,
failures
In concrete
which
their political
socialist political
Communist
economy with
(if
the
and economic ideology was
their pre\i(His strategics
In the assessment of the
terms
confirmed two kc\ tenets of
I)
for
world to
in the
ha\e called attention to the uiuleilsing changes
which they were not correctly attuned or
to each other
Ihe successes have illuminated the features
world which they had correctly assessed and to which
in
economics
ha\c illuminated the underlying changes
I'he successes
which the leadership had fonncrly been attuned
fundamentally
socialist
in the
world to
were not appropnatc
Parties of the socialist states histors' has
economic
regard to international
relations:
the importance and value of cconoinic planning to the general national welfare, and 2) the primacy of
national economic independence for political self-determination and the importance of political
community
of slates has seen confirmed their basic
determination for economic success.
The
commitment
They ha\c proxcn the workability of planning,
successfulh'
economic
to
planned economies.
manage
social
well being and
and economic de\elopment
which avoids certain
conflict, especially those associated with
terms of race and
commitment
class.
classical
The
socialist
community
in a
\cr\' tragic
inanncr uhich
forms of ecc>nomic and
states has also seen
and organic wholeness of
as a unit
economic analyses of international
its
ability to
yielils a bni;id
and development
in
and
social divisions in
confinned their basic
their individual national
They long ago rejected the notion ever present
trade
improsemeni
social crises
unemployment, uneven development, and
community of
to the integrity, sovreignty
that of the socialist
socialist
self-
economies and
in
neo-
that the prospects of the individual
nation are one with those of the profitability of the individual corporations which operate in various
4
and
industrirs
acrci'^s
experience with
national hciundarios, and
socialist
economists leases
me
My oun
not think that thc\ rcgtct this ticparlurc
d(i
1
with the impression that while the particular
interpretation or implementation of tlicsc two key principles
often
is
hoth dchaled. the fundaincnta!
tenets arc not widely questioned
If
to ask,
these two principles represent the continuil) in socialist political
whM
is
First,
new'
and
in
thinking of the
in tlie
is
the Marxist tenninology of the socialist
readily
and publicly admitted
technological development has
sense,
and
2) the relatively
development of an
of the socialist
made
stable
to
then
it
is
appropriate
s
thcmscKcs, the objeclixe material conditions
IWo
to
by spokespersons
changes are present,
kc\'
in these countries:
1)
industrial production necessarily international in a qualitatively
grouth
in the capitalist
effective international trade
community
,
community''
socialist
under which these two principles must he implemented ha\e changed
although only one
cconom\
develop
a
world since World
War
II
and
competing form
extensive
its
and financial structure combined with the
relatise failure
for a multilateral international econoinic
has guaranteed the operation of the international trading and financial system largch'
new
in a forin
system
not
altogether different from the present capitalist system.
Second, and again
changed.
in the
Dogmatic Marxist
terminology of the Marxists themsehes, the subjective conditions have
rejection of various
developed under the hegemony of the
Rmns
neo-classic;il
of economic relations and of key concepts
paradigm
sophisticated differentiation and analysis of these concepts
traditionally fought
any attempt
to itlcntify the social
in the
West
h.ive given
wav
to a
more
Marxists and ("ommunist Parties have
problems of capitalism with personal,
technological, and juridical features of capitalism and this has Iraditionallv been a central distinguishing
feature of
era a
Communists
vis-a-vis other socialists
and reformers of capitalism
dogmatic rejection of key economic forms and
hallmark of
^
socialist
economic theorv
in
intellectual
deveUipments
the existing socialist states
I^onid Abalkin, "A Creative Approach
Marxist Review. 2^:80-88, 1'5S6; Gerhard Grote and
However,
That
is
in
the West
changing,^
Developing the Political
Ilorst Kuhn, "Komparative
to
since the Stalin
a
There remains
Ixonomy
\'or1eilc
became
of Socialism,"
und
Ausnut/ung im Aussenhandel sozialistischer lander,' Wirtschafl.fwuxenscAafl, 34:1138-1 \%.
(Comparative Advantage and its Application in the f'orcign Trade of Socialist Nations).
ihre
1^)86,
World
5
an assertion
(if
Ihc ccntrality of cxplciitation ami of the essentially exploitive nature of capital,
identification of this with
eg
particular juriJical fonns of
by orthodox Marxist economists
rejected
between
socialist
Much
and
economic
in socialist states
relations
That applies
is
now
but the
once again being
economic
to
relations
capitalist states as ucll
of the dispute
among
western analysts regnrding the likeK' direction and extent of the
reforms rc\ol\es around each analysts unstated position \is-a-\is the continued commitincnt of
two ideals-planning and national economic sovreignty--or an
policy
makers
issue
Those westerners who pronounce
to the
socialist
absokiti/.ation of this
elation or a hopefullness that the current reforms and 'new
thinking' perhaps herald a recognition of the failures of socialism and the virtues of the market and
that they portend large scale future
mo\ements toward market
s\ "Sterns. fanc\'
maintain the serious commitment to these twci principles which
!
that policy
makers do not
Ihese analysts do not
claim exists
recognize that these principles are not only an clement of the political orthodoxy of these states, not
only something to which \arious political
leailcrs
and
intellectuals
of personal interest but are honestly maintained propositions;
principles
which ha\e been
essentially
confirmed
in
thc\'
continue to cling for ob\ious reasons
do not recogni/e
that these are
When
the eyes of socialist economists
other
western analysts pronounce their deep skepticism about the future direction and magnitude of the
reforms,
it
is
because they recognize that these fundamental tenets are not under question, but they
themselves cannot conceive of qualitalise change unless these tenets arc challenged
two principles
from
into evcrslhing
Ihey turn these
and ignore the significance of the ideological developments which follow
a reassessment of old ideological
dogmas
within a framcwcirk
Ih.it
inamtains
a
commitment
to
planning
3.
Compensation Agrtxnncnts —
I^cssons from ihc I970's
East-West industrial cooperation was an exciting and important subject
discussion of the current prospects for cooperation and trade
lessons.
One
developed
of the key
in the
new forms of economic
relations
is
in
the l'^70
s
and any
certain to look back to this period for
between
socialist
and
period of detente was the industrial compensation agreement
capitalist firms
in
which the
socialist
6
company would purchase from
the \\c.stcrn
company
machincr\--and the western company would agree
to be
cquipmcnl-uholc plants and
to a long-term "schedule of purchases of the products
manufactured or processed with the equipment
cooperation was
large-scale capital
An
important feature of
this
form of
ituiustrial
integrati\c character: a chain of protluclion leading from rau materials to finished or
its
intcrmedian,' goods, requiring planned and tightly coordinated production
each stage
at
not admitting
anti
of coordination arranged exiusivcly hy market signals uas organized with the coordmalion of production
Of
crossing the boundary between the socialist and capitalist workis
economic decisions
arises
when
large scale purchases of
manufactures occur repeatedly between the
socialist
course, de facto coordination of
raw innleriaU, consumer goods, or
and the
Ilowexer, the character of
capitalist stale;
cooperation and integration engendered by industrial compensation agreements
that
engendered by simple repeated
the late l'56n's and the I'^Vn's
it
is
sales of the variety
of goods that made up
qualilativeh different preciseK becau-^e
light
it
is
c]ualilati\ely higher
than
!'ast-\\'es| trade prior to
requires the long term
organization of closely related and strategicalK significant industrial operations and econoinic \ariables
across the boundan. of Fast and West
Industrial compensaticin agreements are an important case to study for a second reason
1970
s
During the
various socialist countries experimented with a variety of forms of economic cooperation with
western firms and nations
significant
form
every socialist
Industrial
compensation agreements
state.
Moreover, the
restructure their chemical industry
industrial
on
parties
Sergei
the part of the
("MTA
were experimenting
USSR,
in
one component
in
in
a
degree
(if
and significance which exceeded the various other forms
those years.
11:28-32, 1983.
Fast-WeM Trade
utilized as
by
countries to modernize and
Ponomarcv, "Compensation-Based (\>operati(Mi and
Foreign Trade of the
'^
compensation agreement was
\\as ad\c>catcd
The industrial compcnsalicm .agreement thcrefcire had
ccntrality, acceptance or institutionalization
all
houe\cr. perhaps the onl> new and
fmancing and organizing large-scale industrial cooperaticMi which
for
the long-term strategic cooperati\e effort
with which
\\ere.
Chemicab, OI (M),
Paris,
1980
the
Western (Countertrade' Concept,
7
Compensation agreements
agreement of capital equipment
sale
presumably
to
in
uhich the equipinent
via traditional loan financing
equipment has
capital
a
long-term slake
purchase and somehow market
compensation agreeinent
is
form of contract
arc a peculiar
a
arrangemenfs
portion of the products inaniifacturcd
not a direct equity in\'cstment either
and they would earn the corresponding
according to
hears the
full
In a
making
at
the
seller
is
of the
obligated
factor),
Ihit a
imestment the
how
well the\ operated the plant
compensation agreement the operator of the plant, the
and
socialist firm,
and in\estment banking,
a
compensation agreement
is
one of
rcfcrrctl to
a
wide
with the
eft-handed financing'.
I
Peculiar'
is
n(M meant, however, to be pcrjorati\c
description and say that a compensation contract
package
that
made--
sure that the plant operated efficiently
range of special or peculiar project financing arrangements whith arc smnclimcs
which
to the traditional
costs of operalions--of inefficient and of efficient operalions--and thc\ earn the profits.
In the field of ccirporatc finance
label
new
In a direct equi1\
in
uell the products sold
is
the seller of the capital ecjinpmcnt
in the project
profit or loss
conform
coinpcnsation agreement the
supplier of the capital equipment vvoulii have a stake
how
hcs ilo not
dclnered ami payment
is
in a
I
for the right situation
certain
all
is
In this case
'custciin tailored
of the parties face the necessary incentives for efficiency.
label "the
might be best
is
to
reword the
the right form of financing
There arc a variety of situations, a \anety of market environments, in
market imperfections require the use of such custom
economists under the
It
il
lemons problem,'
arises
when
tailoreil
packages
One problem,
well
in
order to assure
known
the seller of the plant and
lo
equipment has
superior information regarding the quality and/or future \alue of the commcxlity to be produced from (he
plant
When
commitment
this
is
the case, the seller of the plant and
equipment
is
uillinp to enter into the
to purchase a large quantity of the products manufactured
of their claim that the dcli\ered equipment
will
at
the plant as a demonstration
produce high quality or highly valued products.
buyer of the plant and equipment can pnidcnlls accede to paying a high price
equipment, whereas had the
demanded
a
seller
demanded
the
more
for the plant
traditional sale contract the buyer
Ihc
and
would have
discount on the basis of the suppliers lack of willingness to stand behind their product.
The compensation agreement then
provides advantages to both
sitlcs;
the buyer receives high quality
plant and
equipment and the
higher price for their equipment e<irresp(inding to
seller receives a
its
Several other similar situations can arise which would warrant the use of n compensation
quality
contract in preference to any other form of financing
The imporlnnce of these considerations have
been repeatedly documented
3.
1
The
Socialist
How
Conception of Oimpcnsation Agreements
did socialist economists view compensation contracts''
particular, considered an acceptable
form
were not widely accepted'' What does the
for
cooperation while
socialist
otlier
Why
were compensation contracts,
in
fonns of contracts and financing
conception of compensation contracts
tell
us about
the likely future openness of socialist economists, busincsspersons and policymakers to altcrnati\e forms
of arranging ccHipcrativc ventures?
Most western accounts of
compensation agreements
in
the socialist countries' use of counlcrtraile policies
particular assert that these pc^licics
in
general and
conform with the emphasis
in socialist
countries on 'planned' industrial production and long-term 'planning' of supply ant! demand, that these
policies arc a
flexible in the
consequence of the
failure of the
market, to accept the rigors of
manufactured with the
goods
capital
companies
true'
logically
from
this idea,
but
their
it
is
incorrect
wrapped
supply and
that they bu\' as
Fhese assertions are generally meant to argue that
in socialist states to
this
it
demand
bundle of
false
1 he incorrectness of this disposition
is
products
incorrect
Socialist
form of contract, custom
economists have
for a
be
or ilcficicnf' form of contract stems
There
kenial of truth to
is a
arguments.
challenged immediatel\ by the argument
the compensation contract, far from being a deficient form of industrial cooperation,
efficient
to
unfolds o\er the lifetime of the equipment
or deficient understanding of economics
in a
for tlic
be prepared to be
tailored to provide the best incentives to
all
is
I
made abo\e
that
the optimal' or
parties involved.
long time identified compcns.iiion contracts as useful for the purpose
John E. Parsons, "A Theory of Countertrade Financing of Intemalional Business, Sloan School
of Management Working Paper. #16,^2-85, John V Parsons, "Forms of (jDR Economic Cooperation with
the Non-Socialist World," Comparative Economic Studies, v 2^?, Summer \^f<1. Rolf Mirus and Bernard
Yeung, "Economic Incentives for Countertrade," mimeo, May l^R.S.
"
9
which
outlined above.
I
I
hey have argued long and hnni and gcncralls quite currecth agam'^t the
western assertions that this contract form was incfTicicnt
There
howe\cr,
is,
a kernai
of truth to the
common
^^'estern
description of the socialist acceptance
of compensation contracts as essentially related to the broader ideolc>gical character of
economy. The
socialist political
acceptance of and championship of compensation contracts as a form of
socialist
industnal cooperation did not follow from an analysis of \arious jundical forms of cooperation and their
incentive characteristics.
widespread
vSystematic analytic modeling of incentives
in the socialist states
Republic shou's,
for
A
survey of the economic literature
forms of
extremely backward and not \cry
in the
example, that practically no other form of contract
and certainly the incentive properties of alternative forms of
focus of discussion.
is
One can
contr.icts
ha";
(icrman Democratic
been given serious attention,
have nc\er been the central
sec the reflection of the iiarrouness of thinking regarding altcrnatisc
juridical contracts for organizing the financing of cooperatixe capital projects in the
regulations governing joint large scale capital projects of the
(?MI-A country: the only acceptable form
equity ownership by the host c<nintry and repayment of capital contributions with interest for
This restriction
participants.
on
foniis of
CMF'A
problems of organizing international agreement:
broadly debated or entertained even
only
new fonn of
explicitly
How
then
is
is
it
Of
^cicialisl
CiDR,
i<;
for
not mercK' a result of the practical
example, altcrnainc forms are not even
specialists involved in
and
other
capitali'-l
thi<; fiekl
Pxen today, the
rnion
firm^ \\hicli the Soviet
is
the joint \enture.
the case that the socialist states
articulate correctly their valuable features'
is
in the
among academic
business contract between
considenng
cooperation
all
is
course, there are difTerenees
I
came
to endorse
compensation contracts and
to
he socialist acceptance antl championship of industrial
among
the socialist countries in
tliis
regard
i
he vSoviet Union
currently actively advocating joint ventures between socialist firms and has succeeded in incorporating
the principle of direct relations' between firms in different socialist countries in the most recent
communique concluding the meeting of ministers of the CMI'A countries. 1 he GDR, on the other hand,
while signing the communique is stonewalling any actual development of 'direct relations' involving
contractual or formal obligations such as those which are the subject of this paper.
Vladimir Kamcntsev, "Restructuring
Review, 30:89-96, 1987.
in
the
USSR:
Ixtcrnal I'.conomic Aspect,'
World Marxht
in
cooperation slcinmcd from ihrcc factors
of Fast-West trade:
f
I)
wliicli
coincrgcd tluring
tlic
was
the objective basis for industrial eooperali<in
complex forms of coordinated operations,
(2)
years of detente and
eompen'^ation eonlraels
expansion
and demanding of
large
;iic, in
tlic
fact,
an appropriate form of
contract, especiall)' for capital projects focusetl
upon
which the
concentrating and for which the basis for trade was
great,
and
socialist countries
(.^)
were interested
as western authors
in
the processing of natural resources, a scctcir
have stressed, compensation contracts
Tit
with or
at
on
least did luit
patently contradict the reigning ideological conception of socialist planning and proper forms of
The
cooperation with western states
cooperation were
a
early period of detente
The objective opporlunitic;
period of testing
industrial cooperation forced the socialist states to entertain
compensation contract was
a
and the
natural form which
new
initial steps at
economic
for trade .and the objective necti for
f(^rnls
of cooperation.
accomodated the objective
comlition";
I
he
and which did not
require too serious an adaptation of the ideological structures.
3.2
Tlic Western O)nccption of (x)mpcnsation Agreements
Tlie western conception of cotnpensation agreements has been the hostage of the ideological
misconception and narrowness with which uc approach the subject of
relations with the socialist states.
which appears
abstract,
and
is
is
perfectly rational
It
is
The
economies and economic
ironic that a form of financing of large scale capital project^
when \iewed from
the
framework
analyzed in a prejudicial and irrational fashion because
therefore
socialist
summanly denounced and
(^f
it
western economic theory
is
in the
the focus of r,asl-\Vest trade
dismissed.
incorrect accusations that ha\e been
made
in the
cciinmon Western analyses of the subject
include:
1)
that a
compensation agreement
industrial cooperation
conforming
innovative and flexible western
2) that a
to the
firni
is
an inherently cumbersome fonn of financing trade and
cumbcrsomeness of planning and imposed upon
the
more
seeking to trade with a socialist countp,';
compensation agreement
is
a burcacratic solution to the evident deficiencies
economies and backward management techniques;
in particular
it
is
of planned
an alleinpt to push low quality goods
II
on western markets or
tlic
a
means hy
uhicli the socialist
management can
process of ensuring the quality of the products manufacliirccl
management has an
decisions since
it
bilateral
operation and a
must purchase the
the socialist firm can
?i)
interest in the
shift
or
socialist countries
sell
legal
in a s(H-ialist
compensation
into
countr\'--the weslcni
foundation for participating
pr<Hiucts; alternative])' a
management
bring uestein
tcMitraet
operating
in
is
a
means by which
the risk of marketing to the better equipped western firm;
demand c(impensation
contracts because they are attempting to force a
balancing of trade on their western partners;
4) socialist countries prefer
compensation agreements
compensation contracts because they
arc a de\ice
by which they can sa\c on
pre>' to the fallacious
';carce foreign
concept that
exchange uhen
o
purchasing large-scale capital equipment.
While each of these accusations could be
limitations and qualifiers--! think
it
would be
fair
and with the correct
valid--in the right context,
to assert
both
that the\
do net accurately
eharacteri7c the important and \'alueable role uhich a properly designed eompen<;ation agreement can and
do
ser\'e
and
that ihey reflect instead the prejudicial focus of western analysts
on the imagined
irrationality of nearly ever>' legal, administrative, or policy des'ice utili/.ed by a socialist firm or
economy.
7Tic accusations arc wrong, and
the problem with a frank and
open mind
ue
common
view continues to focus
making wrong accusations because we
Althovigh
which have established the uniquely \aluablc
the
are
initially
role for
upon
in recent
years there haxe arisen a
compensation
the
presumed
are not studying
set
e-onlrnct<; in particular
irrational
motnations
of studies
circumstances
for their use
by
the socialist states.
A good example of the strikingly polemical character of the discussion is given by Philip
Dcckcrman of PhJipp Brothers, Inc in a Statement" issued to the Journal of Comparative Businesx and
Capital Market Imw, 5:407-8, 1985: Tor the past four years US. multinational corporations have been
forced to consider a group of trade methods which fall under the rubric of 'countertrade'. Although
these practices have been utilized outside the United States for
them abhorcnt, and continue
to seek sales through
more
many
years,
many
traditional arrangements.
corporations believe that the relationship between buyer and
seller
countertrade assumes a parasitic posture in favor of the buyer.'
U.S. corporations find
These
U'.S.
should be symbiotic, whereas
12
Pmhlcms
3.3
with (Compensation Contracts
\\'hat real
the 1970
s''
problems did
\vc
the r.xpericncc of the I970's
--
discover from the actual experimentation uilh tompensation contracts
The priman,' problem with uhich we became familiar
between Fast and West
in the
managenicnt and regulation of
is
that there are inherent tiifferencc-s
their respective
economics and these
differences imply direct conflict or disagreements regarding the sets of ohligatioTi<; atid coinmitmcnts
which
are acceptable in long-tenn indu>;trial cooperaticin agrcement<;
apparent
1
his conflict immciliately
execution of any industrial cooperation arrangement, and
in the
it
becomes
did in the case of
compensation agreements.
The most
western
well
built factories,
known example was
and obligated
the large flou of chemicals
for delivery in
Western Fiirope.
from
I'.astern i'urope,
deliserv- pcrioils
same chemicals and was shutting
cerlaiii plants
advocated cancelling the obligations
to
organi7C the compensation agreements
inevitable wrangling
when
course,
it
Caveat emptor
it
\lan\ persons therefore
off workers.
is
possible to play
down
initial decisicins to
thi<;
is
debate as
an>'
two
certainly an iTnport.uit principle to
the
ju<;t
parlies,
weaken o\er
the
coming
years.
policies availble to the
economy were
countries
It
is
into and
HoueNcr,
what that would mean were the markets
to dismiss the larger
Western [-uropcan governments
problem
in this \va\
to influetice the future
life
that
government policy makers have the
right
then certainly a persistant temptation to exercise various policy controls to
as aggregate
demand, employment
policies, industrial
dcvclopmcnt--in
and,
if
knew
for chemicals to
uciuld be incorrect.
performance of the
constrained or modified by the existence of contracts with finns operating
a fact of
be
remember:
the western suppliers of the capital equipment agreed to the buy-back of the chemicals they
what obligations they were entering
Ihc
and laying
which follows disappointing performance of project on which
they socialist or capitalist, embark.
As
Western Turope was experiencing an o\er supply of the
purchase the products and denounced the
Of
in
The conlracfs were written with
reasonable anticipation that the contrnctcd supplies wouKl be needed by the western buyers.
turned out during certain of the
produced
in the socialist
not an obligation,
affect precisely
such things
socialist countries, to adjust the
"Are East-bloc buybacks worth the price''" Chemical Week. November R, 1978, pp.
"Countertrade in chemicals," Chemical and Engineering News, August 14, 1978, pp. 32-44.
29-.14;
in
1.-^
planned operation of
socialist nations,
a gi\x"n finn
houevcr,
Any
acceptable tradeoffs
and
its
commilinciils to the otlier firms
utilize dilTcrent controls
policies,
how
is
It
an issue to which
This
problem
is
little
careful attention has
similar to the
is
signed must impose a
be inlerpicled
thcisc obligaticins arc to
ami
different systems of obligations of the respective capitalist
issue.
have made difTcrenl choices regarding
compensation agreement wiiich
industrial
obligations on both parties, and
and
and
(npilalist nation<;
of
set
incorporated into
;uul
socialist countries uill
remain a troubling
been given
one of the creation of an international
capitalist
economy
transcending the borders of any single capitalist state while simultaneously maintaing different national
monetary and
and regulations
fiscal policies
occupied macroeconomists
qualitativeK' different
each different
and more
difficult
distinct social systems, with different
in
Ilic fact that the character
I'ast-West trade are so different
makes
in
of the
the prc>blem
With the confronlalion of industries which operate within
forms of economic rcgidation and response
circumstances, the danger that policies
has
capit.alist si,ites--an issue that
a great deal in the past feu years
and economic ssstems involved
political
in
one country may
to
changing economic
conflict with those in another, or that a
contract written between the socialist and capitalist partners cannot appropriateh tlefine obligations
given conflicting regulator*' systems
is
qualitatively greater,
f
inns
in socialist
countries will seek
greater levels of cominitinent than western firms are used to offering and greater levels than
western firms can reasonal->ly
adverse conditions
c>ffcr
given a regulatory system
ih.at
some
expects the individual firm to weather
F'irms in socialist countries will be less willing to permit the labor market to absorb
the costs of adjustments in operating decisions to
new conditions than
will their capitalist
counterparls
and partners.
Although
it
is
this
problem became apparent
in the
not a problem with compensation contracts per
revealed the bad news
This
is
a
se,
experience of compcns.ition agreements
of interest
will arise
in
problem with any form of cooperation
with any contract form, and we must anticipate
cooperation
in
order to appreciate where
I970's,
these contracts were merely the messenger that
in
which
large-scale industrial
processes arc coordinated across the boundary dividing the socialist and the capitalist world.
problems
in the
we
arc
its
return as
we
This
enter this
going and see the problems that
new
will
stage
14
arise
is
It
ncccssan' to cic\clop a mcnius operandi for the iinpat
and systems on projects of inter-system
this
it
modus operandi cannot
will
industrial cooperation.
be what they had fancied
I
I
of national regulatory prerogati\es
lie
20 or 30 vears ago; thc\ ha\c recogni/ed that
10,
incorporate man> features basic to the capitalist financial system
into negotiations
on
a
new compromise
compromise on our terms
alone;
we
regulation of a capitalist
economy
cooperation agreements
will
But we
be fooling ourselves
will
in toto will
be nestled
We
Wc
cannot view
in
the
this
if
wc
own
negotiating, and
wc do
sensible
we
fanc> that
it
will
be a
arc going to hn\'c to identify those elements of a national
framework of any
will
rccogni/c as influencing the basic character
industrial cooperation agreement.
problem from an exclusively
U'e
v^estcrn objective
notion of the proper regulatory' einironment
not fool ourselves into believing that
form of governing the obligations
if
fancy that the framework for the
legitimately attempt to assert in negoatiations gcnerning the regulation of
cooperation our
he\ arc prcp.ired to enter
be the framework within which last-West industrial
planned economy, those elements of planning, which wc
of rights and obligations
I
be fooling ourselves
will
have rccogni/ed that
socialist stales
wc
to an agrccmenl--as
I
are
.'no
will,
of course,
new forms of economic
long as wc rccogni/e that
championing the only
claim that
wc
we
cfTicicnt
are
and
did in our response to
the socialist advocacy of compensation agrcements--then the negotiations can proceed fruitfully and
rationally
Rut
if
wc confuse ourscKes by imagining
the socialist conception
is
'irrational,'
then we
will
that ours
is
the ccirrecf form of regulation, that
obstruct the negotiations as
wc ha\c done with
the
compensation and countertrade forms of organization
4.
New Forms
of rxxinomic O)opcralion
Compensation contracts
-
and
arc necessary to
efTicicncics for other situations.
limited form of relationship.
direct equity investments
form of economic cooperation
are a very specialized
arrangement for industrial projects, custom
Other forms of contracts
ihc Possibilities
tailored, as
I
said, to resolve a particular
accomodate other problems,
would be optimal. While
a joint
this
is
financing
market problem.
to prinide the proper incentives
loint ventures, the currently fashionable buz/,
Westerners tend to view
(ir
word, are also a
venture as a political compromise
certainh the case
in
much
when
of the history of
15
Fast-West joint ventures and while
cooperation with western firms that
that joint ventures arc a
capitalist
nation
.Joint
patterns of financial
common
at
it
which can he used, each form
hand
is
how open
all
particular
in
approach of
about
and
how
little
economic cooperation
impediments or
prepared they arc for
imagination or
medium term
is
socialist
is
likely.
new developments
The
that,
visible
boundaries of
of juridical fonns or
a particular
circumstance.
socialist states, as
can help us decide
My
I
ue should
conclusions about
arc the following;
and
if
(
1)
how
far
anticipate
they will go,
there will be large obstacles
(2) the intellectual obstacles will in the
mentioned abo\e, do not
The
a staled
yet
level
show any
of analysis of
commitment
to
changing
nieir current acceptance of these new fonns derives from
recognition of the objective necessity that something must be done, thai these things can't be
that
somehow
the struggle between the
these forms of cooperation,
if
two
a single
countries can help us to see where the
and economic calculus remains very poor; hut they have
and these changes are
list
rcmcmhcrctl
economists towards compensation contracts and
appreciation of the logic behind various forms of economic cooperation.
incentives
tiic
appropriate to
in socialist
flexibility in the short term,
be overturned.
is
sliould he
an industrial cooperation project.
likely to lead,
significant progress
if
it
(if
parties will he to the de\clopinent of sophisticated
our discussion of the character of the new thinking'
to
limiting the fonns
form of corporate slrucuturc even within
earlier discussion of the
new openness
is
currently considering to this form,
is
contractual fonns for arranging the obligations
Our
the So\ict linion
ventures are just one particular example in a long
liabilities
The question
why
this explains
social
systems must be conducted
in a
a
all
bad,
woHd which admits
only because they have been forced upon the socialist community.
1
hey
have not yet identified the ideological conception which incorporates an understanding of the rational
kema! behind these forms of cooperation into an orthodox Marxist analysis of exploitation
a broad consensus that this
must change,
that these
But there
is
forms cannot be the essential problem, that they do
not conflict with Marxism, not even with orthodox Marxism.
One
needs to ask the same frank question of westerners as well, however.
approaching the new openness
in the socialist states as
what economic cooperation means:
direct
To what
extent are
we
an opportunity to push the very narrow view of
investment by
US
multinationals on the basis that they are
16
familiar with in the US'"
lo what
extent arc
wc prepared
to
respond
to tlie essential nature of the
problem, to what extent arc we prepared to abandon our prejudices and analy/e the ingredients
wc do not Icam some
cooperation more objectively.
If
which c\idcnced thcmsches
the 1970s, then
in
the hopes that arc in c\'idence currently, then
of
fca.sible
thinking'
objectives that
is
demanded
scn.'e
our
of the West
own
a.s
I
!
am
am
interests
afraid
afraid
and
well.
k5dk
lessons from the limitations
0^-3
we
we
will
will
our
oun approach
be a lonlributor to the frustration of
be
a strategy to
in
for
in a
poor position
implement them
to design a set
Some new
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