Efficiency in natural resource usage: A comparison of market central planning policies

The foreign trade stt?Jcturz of CtecRoslovmLia is examined f;o expiain t,*e intensive absorption of natural resources in centrally planned econlomit:s(C ES). A COn’ip&‘iSOn with Austria using input-output pricing mode!s indicates that import3 tire the ~pe;:Gn source of this foreign tiade bias. This is traced to a bi 3s in *technr915gZy and comestic prefe fGncP;s towardI; natural resource producris. It is concluded1that pricing in CPEs should reflect the resulting scarcities.

Long before the present energy crisis, some uncharacteristkailg: frank discussions were taking place in the centrally planned economies (CPEs) of Eastern Europe about policies towards natural resources in general and towards energy resources in particu1a.r. One aspect oi^these discussions originated in the increasing scarcity of nrsitycnikge

at ,

*Rizy acknowledge nents are due t5 .ProIessor!s J. Bhaga;tti (MIT), P. Desai (Columbia University), K. Griffin (Oxford Unive,sit!,r), Ct. Helleiner {Toronto University), and to a JPM referee who ihave commented on scve~l a:;pects of she study. They are obviously in no ,+ v:ay responsible 1’~ any errors or shortcomings that WI) rcm:Gn, Computational assislancc 5f JQSkolks (Vienna) is also gratcMly acknow’Mo,ct. akia, CX% 1The “natural-resource-poor countries’! reF:r here to BQaria, Czt~cho~l~~ Hungary, Poland, and Romania. The natural resource :n;lo~merai oi~iousl j varies from country to c5unt1-y and in the case of s,I>rnerltatural 1~=s~.~urces the endor.wnent is quite favorable in Poland, Romania, and BulgGa.

resources. it was rogued [see, e.g., Goldman arbdF’lek ( 1967), pp,, 1 l-- 161 that the absorption +f variousNRP used as inputs in production processes was “excessive” by internati::nal standan%. This “technology bias” and the “demand bias” mentioned above have\ substantially contributed to a rapid expansion of input demand for NRP tq the CPEs, particularly in the 196Os, with the trend continuing in the following decade. Moreovq in view of balance of paymeks diScult.ies that ali CPEs have been experimenting in one way or &other, the bias toward NRP absorpth)n has been detrimental fcjr the deficit countries. The pattern of rapid expansion of impo.2 demand for NRP in CPI3s has been quite similar to the one experienced b.v some developing countries. In Itheirstudy of import substinltion policies of selected developing countries, Little, Scitovsky, and Scott argued t.hat balance of payments difficulties of these countries have not been reduced by protection and import substitution since industrialization generated rapidly expanding demand. for imported raw niaterials. Moreover, neglect of comparative &vantages has resulted in some cases in a re4uc=tion in t.he traditionally expormbk surpluses of food and inef$icient use of industrial capacities was another factorlrof increasing demand for l\lRP [Little, Scitovsky, and Scott &1970), p. 101, Severi studies attempted to t’ysess the foreign trwdts structure of the CPZs in order to see whether a bias from a “normaP” pattern can be Zentified [see, e.g., van Brabant ( 19’73) and Brmer ( 1976)]. These studies relied on the well-knoyln gravity model; apart from methodological difficulties in using this appro~h, the findings have been rnconclusive and even contradictory. The purpose of this paper is, therefore, “~3assess the NRP absorption in the CPEs by examining the fore@ trade structure, r.4M*nk1qmp i*uUtiCua V cf domestic consumption, and, finally, the input smctures in selected industries. Rather than exarniuics all CPEs, a case study of Czechoslovakia will be adopted. It is !believcd, however, that the findings of this study art: more general and applicable to s’everal other CPEs. The paper is divided into six sections. The second states the main hypotheses and outlines the a priori expectations. The third section decribes the imethodology and t&e discussion of NRP content of foreign trade is in uhe fourth section. This is followed b,f (:he assessment of tbe efficiency of NRP use in the M?..lta section. The six+thand final section provides an assessm~znt of the firrdings, summar~~zestl~m, and outlines, their policy in@catioris.

identified here as a bias, is defined in the following section. At this stage it may sufEce to say that ISas identi.fies the gap between actual performance from some idealized sttrndard (paracigm). .With respect to NRP the following pattern oftraGe can be expected. As in the case of LDCs pursuing import substitution policies, the impon of NRP into Czechoslovakia is increased in order to meet domestic demand. This also raises the constraint on the: lexpo~tof NRP. In other words, 1. The share of NRP in total imports should be \qreatcr than some established a priori standard. . 2. The share of NRP in total exports should be smzallerthan the same standard. Moreover, U-Iattempt is made to identify the possible origin of the above biases.* Gi owing domeP.ic scarcity of NRP (resuhing in rising import demand and reduced exlport suppiiy) can be due to (i j accelerated growth, (ii) bias: in structure oz?production towards natural resource intensive industries, (iii) relatively am;rll natural resource endowment, (iv) low efficiency of KRP use, and (v) bias in dom&ic prefeien6:es towards NW%) use and consumption. For reason explained in the following secr.ioras,only the arguments (iv) and (v) wili be tested. The assumptmonsare discussed in some detail in the sixth section.

The pesent empirical testing involves a number o irlethodological issues. Among them art: ( I) definition of bias, (2) methodology of calculation of NR.P content of foreign trade, and (3) treatment of intercountry differences in prices. The bias is defined here ii3 the static framework of intercountry comparison. The methodi adopted :isbased on an inp&output approach rhat impr)ses certain restrictions on the se!ection of eompzred countries, in terms 0; factor enduwmerlts, growth, and level of development. The countties in the sample should t~so be comparable in social and histlz~cal backgroum1 [Hanson (1871). pp. 327--3431. For comp:~rison to Czechoslovakia, Austria is assumed to meet tjlese cc&itions most closely.. The assu tio,l is assessed in some detail .n the :,ijcth se&on. Naturaily, Austria i arket economy pur:-z!*~ga relatively free trade policy, in contrrist tlo cer‘atr;lllypIarmed Czechoslovakia. The NFLPcontent of tr_atdehas been calculated bv e the familiar Leoniief statistics (a) (1) =t=N,/N,

and the intercountry comparison of Leolatief statistics represented by fl* iu the ratio of as for the comptied ~ou;~tries.

where N’ZZdk’aectand indilre::b NRP requirements per unit of exports (or imports respectively), X= exports* M=

ilYlpOI-tS,

c: = Czechoslovakia, a.nd ,4 =

Austria.

44 similar technique is applied in the case of imports, but, due to da.ta iimitations, the interpretation is snore cumbersome. Ideally, the direct and indirect NW requirem:nts per unit of imprts should be calculated from trajde and production data of the partner countries in order to assess the *trueexchang: of NlW for NM?. Since such calculations are not feasible, the standard pr;act.ictt adopted fn the literature, represents total NW required to rep1a.22 one unit of’ imports,, Thns, the Leontief statistics represent tRe ratio of tot& NW reauirements per unit of exports and total NM? requirements per unit of imp&t replacement. Th.e statistics can be calculated both for Cze&oslav;zkia and Austria and the ratio of these two statistics gives W. It is in the nattre of our assumptions that $2” is the s:tme if ( 1) tcshnology is identical in both countries and (2) the structure of Anal demand is the ~amc. However, ouli intercountry CcImparisonof ;prolduction and use in general, and trade structures in patiicular, may be fleeted by differences ~ZIprices existtig in both coun!:rics. A. repricing of the actual input--output tables by comparable prices presents qtlite a diff~cult problem and, in the absence of the actual price vecto:-s implicit in the *+-rilu:ltionof physical supplies in both input-+output table, no existing W?nique is completely satisfactory.3 Nevc:rtheless, th(: method described

%a addition. the intercountry differences may be due t:, different terms of trade fawd by ~thtcliatf!es. This point: i$ ccnsidered in wme detkl in tk \arc;tsection of this papeT, “Some

G:> ~~~~~~~~~~,t~~

only briefly here mezts the bitii.sicobjective, i, e.* the $wc. input--output tabies co&l be rev&led by means of comparable ?tices.*’ Basically, our alternative aoproach is based on the f;uniliar inpuf.I output price models5 md r;imple ymperties of matrices. In specific term%, the method enables us to calculate comparable prices that are unic]lue)y \ defined es characteristic vsctors as8cciated with the clominant characteristic root of the teciulological matrix.” The merit of the method is quite atraightrorward. The method makes possible an ictsrcountry comparison of technological matrices on the a_ssumptionthat dM@renesin the observed technological matrices are caused mainly by the dl%rent &rices that were used in the valuation of ~III:;sisal f’iom. Pari pmm, 3 ratio between the newly obtained prices ann; tic’tuallprince can bl: caiculated. Such a ratio may be used to identif3r the degree of overvaluation or undervaluation of the actual price:? The calcul;~tions are: baseld on 18 X 18 input-output tables for Czechoslovakia for 1962 and Austria for 1964. In order to ensure the csmpmabihty of both tables various adjust,ment.s had to be made [see Drabek ( 1978), Appendix 1, for a detailed description of the adjustments]. They \nyeremade to conform as nn. ch as possible to the standardii ed methodology prepared by the Secretariat of the Economic Commission for Europe (United Nations 197 i )* PRP were selected from the eight&en sectors on the basis of high ranking WR.P input coeffficients, which in t bur case led to the selection of four inpu _--outputsectors (see Table 1),

An attempt is made in this section to test the hypothesi: t:lat Czechoslovxk: trade with IVl?Jl y&asbiased, as suggested in the SKccnd section. The calculation of total NRP (Tmbedied in the foreig? trade of Cz.echoslov :rkia and Austria is sumlgarized irk Table 1. Following our - ----

“The meti!ud which was originally deve3oped by Kjw and Simerda is summ&zed in Appendix 1, For the proaf and more d&.i.lted dwussion see KJ?IIant! Slmerda ( :I973 j. For ;BIIalternative ;ippl,ication OPthe method we Dri&ek [ 1979). ‘For R formal presentation of input--ougwt price nwdzls ba:;e$don the work cf Lwrtief. xe Sekerka. Kyn, and i&j1 ( 1979), pp. 183- 203. ‘See $Qn and Simepda (1973), p. 2012. For tile proof that Enput--og3;p*:pricer; are unambiguously -defined and computable EI practice set: Brbdy ( 1962), pp. 243 -.128. ‘The interpretation of the level ofhypctwtical prices ~.r7tust be used with cailtio 4. -here s a ‘ith vast liter,sture discussing various proble!r.l!; arising in the application cf sha reference to hypothetical p&:es derived by means of ~~~ut-o~t~~t tec~~~i~~c~~% r,-Pevmt s irvey c9f th2 BitCrature c ai? b2 found, for warnpIe, in Dr&ek ( 1978).

Tablg: 1: l@)i~ect arid Indirect Natural Remme Produet Requirements Per unit Of ~xpo:rts and @mt Repkernents: Gz&o~~ova.kia( 1662) and ad btria ( 1964ja _--II__ ______ - ____ - _.-_ A-- -_ ______I --m ---____ _ ________ CzeehosloPrralria Eqxwts: IIug0t-d _c_^_____-.._-_ ___ _--1___1_ 0.29405 &r&&we and forestry 0.74823 cod, oil, and natural gas cather mining 0.35543 0.370923 IFood prcxessing Total 0.394G3

Sectws -_I-_______-__

asource: 3;‘k.5cx-‘scomputations

Austria

Exgsrts:

cMumIp 1:

ImportG CWUmn %

0.41352 0.34997 1.05484 0.43413 0.50373

_-__I_--_

0.71 2.14 0.34 0.85 0.78

from srandardized input-output tables.

‘Import replacements.

met~odologiclal procedure described above [equation (1)7, the table contains values of Leontief statistics that represent the NW content of exp,rts rektive to that of imports. The Leontief statistics were calculated for be in&i.viduzuNW sectors shown in Table 1 as well as for total NEW. The Leonieif statistics for Czechoslovakia and Austria are shown in columns, the first and second respectively: the third coEumn indicates numerically the difference in Leontief statistics between both countries. Apart from diSerences due to spr~ific methodology adpoted in the @or~~tion of the two Snput-ou:put tables, no other allowances for prick differences between both countries was made for in these cakulations. (A similar procedure was applied in Table 2.) 0n the whole, the k&r?.2 IC,!Table 1 conform to the generally well-kwwgi fact that both countries derived considerable savings from f