"Price scissors" refers to an economic phenomenon when for a certain group or sector of productive population, the overall valuation from their production for sale outside this group drops below the valuation of the demand of this group for goods produced outside the group after a period of reasonable equilibrium. A typical example is when changing world price levels cause a country’s exports to plummet in value, while the valuation of its imports remains relatively stable.
This phenomenon draws its name from a graphical illustration of its effects over time. Plotting time on a horizontal axis against price level on a vertical axis, with agricultural prices and industrial prices shown in two separate curves, the graph should appear like a pair of opening scissors. Historically, the phenomenon has most frequently taken the form of falling prices for agricultural produce and steady prices for industrial goods. Thus, the price scissors are most devastating to countries that are net agricultural exporters and net industrial importers. Perhaps the most vivid illustration of the effects of the price scissors and its potential effects occurred in countries throughout Eastern Europe in the early 1930s. The phenomenon is not exclusively of international scale: early Soviet Union had industry/agriculture price scissors internally, see Scissors Crisis.
History of global price scissors
Early 1930s: Crisis and response
The crash of the United States stock market in 1929 heralded the beginning of the Great Depression, but the crisis in Eastern Europe began in earnest with the collapse of the Creditanstalt in Vienna in 1931. In the ensuing worldwide panic, agricultural prices dropped severely, while prices for industrial goods remained relatively stable as governments imposed protectionist policies. Between 1929 and 1934, agricultural prices received in Romania dropped 56%, while industrial prices paid fell only 19%. Across the region, agricultural prices dropped an average of 34% over that period. Unsurprisingly, the opening of the price scissors was especially hard on peasants. As prices fell, peasants worked hard to increase their output of grain. Because of the highly inelastic demand for grain, however, this effort only further decreased prices and revenues, impoverishing peasants even more. Peasant incomes dropped by nearly 60% in Romania and Poland.
The sharp deterioration of the terms of trade caused by the price scissors was devastating to Eastern European governments as well. The heavy international borrowing of the 1920s now became a serious liability. The debts, accounted in nominal terms, became increasingly difficult to service as the value Eastern European governments received for their exports shrank to almost nothing. Worse, the response of the government to this cut in revenues was to increase taxes on the peasantry. As Aldcroft explains, “In [Bulgaria, Romania, and Yugoslavia] for example some 50 percent of the total cash income of the peasantry disappeared in taxation”.
Where the fragmentation of land reform had decreased agricultural efficiency, government response to the price scissors often exacerbated the problem. Any mechanization of agriculture would have meant an increase in rural unemployment, a move that, in combination with the dire conditions imposed by the Depression, would have been political suicide for any ruling regime. Thus, for example, Yugoslavia actually banned the use of tractors in the 1930s. Although keeping agriculture inefficient may have kept unemployment nominally lower, it did nothing to help ease the burden on the peasantry in the long run.
While policy responses such as taxing the peasantry and banning mechanization may seem counterproductive in hindsight, the price scissors had effectively tied the hands of the Eastern European governments, leaving them with few if any options. The revenue drought brought about by the decline in terms of trade meant that governments had very little money with which to implement effective policy responses. Faced with the choice of sacrificing the well-being of their peasantry or defaulting on their international debts, governments chose to pursue long-term solvency at the expense of their citizens. Even within such limitations, though, some of the region's governments were able to implement reasonably successful policies to aid their peasants. Romania declared a moratorium on debt payments in 1932, followed two years later by a decree that all debts would be reduced to half of their nominal value. As with a similar decree in Bulgaria, this Romanian policy gave some much-needed relief to the peasantry, which, like the government, was generally burdened with high levels of debt.