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 détente, 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."