24 December 1964 5 SC No. 0065,:l.JAIA Copy No. UUt'-, SPECIAL REPORT DECLASSIFIED E.o. 12958, sec. 3•6 NL.J '17-ISS­By__,H.. NAD.& D ­ ' ""uvt. ate /a.;,...f7 - CZECHOSLOVAKIA TRIES NEW ROLE IN THE SOVIET BLOC THIS MATERIAL CONTAINS INFORMATION AFFECT­ING THE NATIONAL DEFENSE OF THE UNITED STATES WITHIN THE MEANING OF THE ESPIONAGE LAWS, TITLE 18, USC, SECTIONS 793 AND 794, THE TRANSMIS­SION OR REVELATION OF WHICH IN ANY MANNER TO AN UNAUTHORIZED PERSON IS PROHIBITED BY LAW. DISSEMINATION CONTROLS This document MUST NOT BE RELEASED TO FOREIGN GOVERNMENTSo If marked with specific dissemination controls in accordance with the provisions of DCI D 1/7, the document must be handled within the framework of the Iimitation so imposed. -&HOR:E'f' , 24 December 1964 CZECHOSLOVAKIA TRIES NEW ROLE IN THE SOVIET BLOC The former "model satellite" Czechoslovakia is embarking on a policy of reducing its subservience to the USSR. Unlike Rumania, which began to assert its national interests primarily in reaction to spe­cific bloc economic policies, Czechoslovakia is re­sponding to internal pressures both inside and out­side its party for a more objective, rational or­ga.nization of Czechoslovak society and for a respon­sive national leadership. These pressures finallyconfronted old-time Stalinist party First SecretaryAntonin Novotny with the choice between abandoninghis hard-line policies or being forced out of of­fice. Khrushchev's ouster gave the regime the op­portunity to speed up a process which otherwise would probably have taken place gradually. Novotny's new stand was illustrated by presi­dium and central committee statements issued in Prague in support of Khrushchev after his ouster, by publication just two days after the ouster of a draft economic reform program which includes broader use of the market mechanism, and by No­votny's refusal to attend the 7 November anniver­sary celebrations in Moscow. The cha.nge in Pragueis also evident in attempts to improve economic and political relations with the West. These stepshave been enthusiastically supported in the central committee and have greatly enhanced Novotny's posi­tion as an independent and flexible national leader. Growth of Political if not eliminate Novotny's hard­And Economic Pressures line leadership. Novotny purged·the would-be renegade Barak in 1961. SECRET the party central committee had gained enough influence to put through a resolution favoring at least some tentative steps toward de-Stalinization. During this period Czecho­slovakia's economic difficulties became the most severe in the entire Soviet bloc. Gross na.­tional product was barely in­creasing. The growth of indus­trial production had slowed drastically, from an average yearly increase of about nine percent in 1958-60 to about two percent in 1962-63, and indus­trial production actually fell in 1963. Net agricultural pro­duction had shown a downward trend since the late 1950s. Capita.l investment declined both in 1962 and in 1963. Per capita consumption and real wages re­mained nearly constant. The strain in the economy was aggravated by a series of unexpected events: the military buildup occasioned by the Ber­lin crisis of 1961, a bad crop and the collapse of trade with Communist China in 1962, an unusually severe winter in 1962­63, and a shortage of electric power in 1963. In 1962 and 1963, Czecho­slovakia could not at the same time achieve a rapid rate of industrial growth, maintain the standard of living of its peo­ple, and balance its foreign payments. Unable to obtain credits from the USSR and bur­dene~ with drawings on its own credits of the order of $50 mil­lion a year, Czechoslovakia had to balance its payments by in­creasing exports much faster than imports. The rise in ex­ports and the holding down of imports took place mainly at the expense of capital invest­ment and industrial production. The regime, seriously concerned with rising public dissatisfac­tion, decided to keep food sup­plies as stable as possi~le by increased food imports. Political Crisis of 1963 SECRET- The liberals, stimulated to greater efforts in pa.rt by the worsening economic situation, began to exercise meaningful influence in party affairs. A further contributing factor was .growing ferment among the in­ tellectuals, reminiscent of 1955 and 1956 in Poland and Hun­ gary. The liberal movement was greatly strengthened by the bold drive among the Slovaks to regain some degree of autonomyand to rectify past injusticesagainst them by Prague. By and large the demands of Czech and Slovak party liberals coincided, calling for specific changesin administrative, legal, cul­tural, educational, and economic procedures, for redress of pastStalinist excesses, and for the removal of Stalinists from the regime. The political and economic disarray was accompanied by in­creased public discontent, fos­tered by the poor economic sit­uation and the breakdown in party discipline. Czech-Slovak national animosity re-emerged as a crucial problem, adding to the instability. Novotny Capitulates Novotny reluctantly and clumsily began to de-Stalinize and to liberalize economic pol­lc1. Demuds on him increased, bowever, uatil be was forced to pur'9 several leading Stalinist& --mainlJ Slovaks unpopular in Slovallia--a.nd be himself was in danser of being toppled tn late 1963. The Soviets intervened, despatching Brezhnev to Prague to resolve what appeared to be an imminent leadership crisis in December 1963. A period of retrenchment followed, duringwhich Novotny remained in the background while many of the lib­eral changes were codified and a degree of order was restored through a series of compromisesfavoring the liberals. The strug­gles within the party from then on focused on solution of domes­tic economic problems, as No­votny fully associated himself with plans for economic reform. By virtue of these compromises-­which helped ensure Khrushchev's continued support--Novotny was able to reconsolidate his powerby the summer of 1964. The Czechoslovak leadership in October announced a draft program for liberalization of the economic system which goes beyond reform proposals anywhere else in the Soviet bloc. Until the latter part of 1963, Novotny Party first •cnttary Novotnywelcomta Sovtet em111a1y .......,, on hi• arrival In Ptoaueon 10December1963. had a.dvoca.ted tighter economic controls and blamed the partialdecentralization of 1958-60 for some of the regime's economic difficulties. As early as 1962, however, his liberal critics claimed that the decentraliza­tion had failed because it had not gone f a.r enough. By 1964 criticism ha.d become more intense; a large number of leading Czecho­slovak economists were urging replacement of the Soviet-typecommand economy by a form of mar­ket socialism. These economists a.rgued that the Soviet-type sys­tem was effective in mobilizing resources, but was inefficient and inflexible in the detailed allocation of resources. An ad­vanced economy like Czechoslo­vakia's, which had exhausted its reserves, could no longer func­tion efficiently under this sys­tem. to economic planning and manage­ment, using mathematical methods and procedures borrowed from Western corporations; (2) a del­egation of authority over most short-range planning and current production to enterprises and trusts; (3) the basing of enter­prise incentives on current in­come instead of on fulfillment of plan a.ssignments; (4) increased flexibility and greater ration­ality of prices; and (5) a par­tial substitution of financial regulations for direct orders as instruments of state control. Investment and foreign trade policy are to be governed by more careful evaluation of eco­nomic advantage than in the past,and less by political or ideo­logical considerations. Relations With the West SHCltE'f' cultural-educational exchanges with Western Europe and the US and has genera.lly been more co­operative in official contacts with the West. Despite these positive changes, there have been and will probably continue to be some isola.ted lapses, probably due to the influence of regimemembers--particularly in the security apparatus--who remain opposed to rapprochement. The Foreign Ministry has found it­self embarrassed by police ac­tions on two recent occasions --the atta.ck on the US Embassyin protest over US policy in the Congo, and the arrest of a US citizen on espionage cha.rges--which have conflicted with the regime's professions of goodwill. Significantly, however, the regime continues to supportthe Foreign Ministry in its gen­era.l policy toward the West. In need of Western currencyand desirous of more favorable trade relations with the West. the Czechs have sought realis­ tically to settle outstanding economic differences--mainly claims issues--with Western European countries and the US. In some cases they have met with success and moved on to cultural agreements or negotiations for improved trade relations. Other steps aimed at broadening eco­ nomic relations with the West include measures taken last year to attract Western tourists; the provision of some special incentives to exporters; and a greater stress on economic cri­ teria rather than political ex­ pediency in elaborating foreign trade plans. This interest in broader economic relations with the West has not yet had much practical effect. Czechoslovakia. 's trade with non-Communist countries in 1963 was lower than in 1961, amounting to only 25 percent of total trade, as compared with about 30 percent in Hungary and Rumania and about 35 percent in Poland. Steps such as those described above--and of course Western credits--may lead to some increase in the share of Western trade over the unusually low levels of recent years. None­theless these steps will not overcome the principal obstacle to expaa-.d trade with the West li'Q: of aoa~ Ozecho­ U SEORHP Any substantial increase in the competitiveness of Czech­oslovak manufactures in the West will take sustained efforts for many years in adapting the structure of production, making planning and management more flexible, and improving market­ing and servicing abroad. Changes ~long these lines are implicit, and in some cases explicit, in the regime's broad program for the allocation ·of resources and for economic reform. It is likely in particular that large Czechoslovak producers will be allowed more direct contacts with foreign customers; that bonuses in the production of goods for export will be based at least partly on earnings in foreign currency; and that the structure of domestic prices will be brought closer to the structure of prices on the world market. Even if implemented vigorously, such reforms will not necessarily cause a substan­tial reorientation of Czecho­slovak trade, but they are likely to increase its flexibility con­siderably by broa.dening the al­ternatives to trade with the bloc. Relations with the Bloc Prague's increased interest in economic relations with the West does not appear to have weakened its trade ties with the USSR. The USSR accounts for nearly 40 percent of Czechoslo­vak trade (as compared with about the same for Rumania and around one third each for Poland and for Hungary). This is a higher share than a few years ago, and accounts for a large part of the materials needed by Czecho­slovakia. Plans are being drafted for a substantial increase in trade with the USSR, and techni­cal cooperation is closer than ever. Nevertheless, there is probably widespread resentment at the failure of the USSR to extend credits during the eco­nomic crisis, and there is im­plied criticism of the USSR in the complaints about inefficient industries, many of which were built to process Soviet raw ma­terials or to meet Soviet speci­fications. • -SECRET cause of the recurrent frictions with Rumania over the past sev­eral years, inasmuch as Rumania's main desir~ was to develop new manufacturing branches. For many years, Czechoslo­vakia has had no real alterna­tive to a predominant economic dependence on the Soviet bloc. The original . reason was politi­cal, but with the development of the Soviet-type economic sys­tem in Czechoslovakia and of a structure of production tailored t~ meet bloc needs, economic reasons were added. Largely cut off from world markets, Prague came to regard exports to the bloc, many of which were of low quality, as vital for the support of its industrialization. In recent years, bloc customers have become more discriminating and the Rumanians have even turned down Czechoslovak machin­ery on the ground that it did not meet world standards. Thus trends in the bloc as well as domestic difficulties and the attractiveness of Western tech­nology have pushed Czechoslova­kia toward important changes in its economic structure and its economic system. Czechoslovakia now is fast approaching a degree of autonomyin the bloc comparable to that of Poland and Hungary, and has embraced the policy of realistic economic planning adopted bythese two countries after 1956. Both of these countries and East Germany are ahead of Czechoslo­vakia in actual economic reform, but their programs for future reforms are clearly intended to increase the efficiency of the command economy, while the Czech­oslovak program puts a great deal more stress on the use of the market mechanism. The changing atmosphere in Czechoslovakia brought about changes in Prague's relations with other Eastern European countries permitting an exchangeof ideas which have had further effect on Czech policy. In his efforts to demonstrate his flexi­bility and willingness to de­Stalinize, Novotny began some time ago to woo Yugoslavia and to imply a desire to emulate certain Yugoslav practices. Even though a great deal of this was purely for the sake of improv­ing his image, closer relations did in fact develop. Now the . Yugoslav system--political and economic--is being discussed in Prague as the model for changesin Czechoslovakia. Similarly Czechoslovakia has drawn closer to Poland and Hungary, conscious of Buda.pest's recent successes in gaining pop­ula.r support without sacrificingdiscipline or public order. Prague has scrupulously avoided expanding its relations with SBBltET Rumania, however, and has re­ frained from any public mention of Gheorghiu-Dej's independent position within the bloc. Pre­ sumably the Czechs have been fearful of the Rumanians' bold­ ness, but this may change now tha.t the Czechs themselves have ta.ken a bolder line. The developments of the past two years within Czechoslo­vakia. ha.ve not been well received by Novotny's Stalinist neighborUlbricht in East Germany. None­theless, the "new, flexible" Novotny ha.s ma.de no attempt to allay Ulbricht's fear, and rela­tions between the two partieshave gradually deteriorated. ably was to avoid offending the Yugoslavs. Unlike Rumania, however, there is nothing expressly "anti­Soviet" in Prague's position today, and there is no de-Rus­sification as there has been in Rumania. It is unlikely that the Czechs will engage in an anti-Soviet campaign as long as they can effectively demonstrate their decision-making freedom without one. Novotny, upon his re-election as President in No­vember, publicly rea.ssured the Soviets that Czechoslovakia would remain a member of the Warsaw Pact. Prospects Czechoslovakia apparentlybelieves that the Russians-­particularly under a new regime whose stability is far from cer­tain--will not or cannot inter­fere with Prague's assertion of national self-interest. o .. 0 '1 .... .... D ::r tD llfl ~ 0 t:I .. tD Q. .... < t:I tD ..., OQ .. ::r 8BCRR't1 "' • • tD bY far the la.rgest such programconducted by any Eastern Euro­pean country. Frictions over CEMA policies may arise, but there are no reasons for serious differences with the USSR unless the Soviets try to transform CEMA into a truly supra.national organization--an unlikely event because of widespread opposition within Ea.stern Europe. Concomi­tantly Prague will continue its efforts to expand trade with the West. Although differences over such matters probably can be amicably negotiated if Moscow takes an enlightened view of Prague's positions. Czechoslo­vakia nonetheless now can be expected to press harder than ever to protect its national interests. As a result, politi­cal problems are bound to arise between the two allies. More­over, Novotny, who now has staked his political career and pres­tige on a program designed to serve Czechoslovakia's national interests, will be little in­clined to subordinate his poli­cies to the needs of Moscow should a conflict of interests arise. does not preclude specific anti­ Western steps from time to time by Czechoslovakia if Czech rela­ tions with Moscow make this tac­ tically advisable. Looked at from the viewpointof the Soviet bloc as a whole, the new trend in Czechoslovakia demonstrates anew that the pat­tern of relationships between the countries of Eastern Europeand the USSR has been radicallyaltered over the past decade. The westward flow of Soviet ex­ploitation and control has been tempered by an eastward flow of political pressure. The vast network of Soviet agents, mili­tary, and police and of Eastern European party leaders and func­tionaries who owed their first loyalties to the USSR and Stalin has disappeared. Each Eastern European leader now is free to test the limits of Soviet hegemony and to choose the course which appears to be the most promising for his own country. In all of these coun­tries except East Germany and Bulgaria, this choice is more and more likely to reflect na­tional and even European inter­ests rather than those of the ussa and the bloc.