THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOPED COUNTRIES

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CIA-RDP78-01634R000100060017-7
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RIFPUB
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K
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29
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December 9, 2016
Document Release Date: 
October 6, 1998
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17
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Publication Date: 
April 3, 1958
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REPORT
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-'Approved For Reba 2000/09/08 : CIA-RDP78-016;0000100060017-7 THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOPED COUNTRIES 3 April 1958 Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 Approved For Rele 2000/09/08 : CIA-RDP78-01600010006'0017-7 THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOPED COUNTRIES I INTRODUCTION In 1953 the Soviet Bloc began to use economic programs as a means of expanding its influence in the underdeveloped coun- tries of the Free World, particularly in Asia and Africa. In these regions, new nations are struggling for national identifi- cation and economic improvement. Through offers of credit, tech- nical assistance and trade to underdeveloped countries, the Bloc is seeking to promote its political objectives--to reduce the influence of the United States and its allies, to disrupt Free World alliances and to increase its own prestige and power. President Eisenhower, in his message to Congress on the mu- tual security program said: "If the purpose of Soviet aid to any country were sim- ply to help it overcome economic difficulties without infringing its freedom, such aid could be welcomed as forwarding the Free World purpose of economic growth. But, there is nothing in the history of international Communism to indicate this can be the case. Until such evidence is forthcoming, we and other free nations must assume that Soviet Bloc aid is a new, subtle, and long-range instrument directed toward the same old pur- pose of drawing its recipient away from the community of free nations and ultimately into the Communist orbit0 A, Soviet Bloc Capabilities As Deputy Under Secretary for Economic Affairs Co Douglas Dillon reported to the Senate Committee on Foreign Relations: "`The USSR is now the second greatest industrial power in the world. The entire Bloc, including Communist China, has a gross national product of $280 'billion. It produces in quantity the principal kinds of manu- factures, including machinery and capital goods, which the less developed countries require for their econ- omic development, The USSR also has at its disposal the resources of a large part of Eastern Europe, includ- ing the industrial economies of Czechoslovakia and East Germany. It is also capable of arranging its economy so as to absorb large amounts of raw materials and foodstuffs from the rest of the world--cotton, wool, hides, rubber, nonferrous metals, oilseeds, sugar, Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 Approved For Relove 2000/09/08: CIA-RDP78-016 2000100060017-7 cocoa and the like > There is little doubt, there- fore, that from the technical-economic viewpoint, the Bloc can greatly intensify its economic relations with the less developed countries of the Free World. Also, it can probably do this with economic benefit to itself. Industrial growth within the Bloc, which has increased much more rapidly than has its output of agriculture and raw materials, probably would now make it economically advantageous to the Bloc to encourage expanded trade with the Free World, exchang- ing in increasing degree Bloc industrial goods for Free World foodstuffs and raw materials, The Bloc, in. short, can throw into the scale sizeable economic resources not only without damage to itself but probably with positive economic benefi.to" B. Motivation Behind the Bloc Economic Offensive By and :Large, Bloc activities are motivated by one of the ultimate aims of international Communism--the control, direct or indirect, of the emerging countries. In pursuing this aim the Bloc encourages existing tendencies toward over-rapid indus- trialization, nationalization, expropriation, and disruption of traditional ties with the West. Such actions result in a disturbed internal. situation, both political and economic, which would be susceptible to Communism. They have the simul- taneous effect of discouraging the entry of Western capital, managerial skills, and technological know-how, all vital to economic development. The Blocs long--range motivation was again made clear as recently as September 1.957, when Soviet Far Eastern expert E. M. Zhukov quoted Lenin's remarks that "we are devoting all of our efforts so that Mongols, Persians, Indians, and Egyptians should draw closer to us and merge with us...." Communist ef- forts, therefore, may be directed toward the development of socialized economies of broad industrial bases, and of dissatis- fied proletarian elements. The proletariat, of course, can be exploited by Communist-dominated political parties and trade unions, C o Techn ..ques The Soviet Bloc economic penetration program has been imple- mented in four major ways: credit offers, technical assistance programs, trade agreements, and commercial penetration activi- tieso These four techniques have been carefully examined in many countries and in almost all instances there was a demon- strable potentiality for subversion. The following pages con- tain concrete examples of the unfortunate results experienced by many recipient countries. Approved For Release 2000/09/08 :1CIA-RDP78-01634R000100060017-7 Approved for Releie 2000/09/08 : CIA-RDP78-0168000100060017-7 THE SINO--SOVIET BLOC ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOPED COUNTRIES Contents INTRODUCTION page i A. Soviet Bloc Capabilities B. Motivation Behind the Bloc Economic Offensive C. Techniques I. Sino-Soviet Bloc Credit Program A. General B. Examples of Integrated Single Country Programs le Afghanistan 2. Syria C. Political Implications of 'Bloc Credits 1. Subversion as General b. Strengthening Local Communist Parties 20 Political "Strings" and Leverage ao General bC Specific Examples D. Economic Implications of'Bloc Credits to Project Disappointments a. Hidden Costs ba Bakery Complex in Afghanistan c. Aswan Dam Approved For Release 2000/09/08 iCIA-RDP78-01634R000100060017-7 Approved For Relate 2000/09/08 : CIA-RDP78-016&0000100060017-7 .. Soviet Offers to Ceylon. Sugar Mill in Indonesia 2. Internal Disturbances Arising From Bloc Credit 'Projects a. India Syria II. Sino-Soviet Bloc Technical Assistance Program A. General B. Scope of Bloc Technical Assistance 1. Bloc Specialists in Aid-Recipient Countries 2. Technical Training in the USSR C. Political Implications of Technical Assistance 1. Technicians in Afghanistan 2. East German Survey in the Sudan 3. Trade Mission in Ethiopia D. Economic Implications of Technical Assistance 1. Numbers and Cost of'Technicians 2. Narrow Specialization E. Soviet Participation in UN Program III. Sino-Soviet Bloc Trade Agreements A. General B. Examples of the Hazards of Bilateral and Barter Trade 1. Reorientation of Trade Patterns as a Result of Bilateral Agreements a.. Afghanistan b. Egypt c. Ceylon Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 iv page 5 5 10 Approved For Rele 2000/09/08: CIA-RDP78-016000100060017-7 Barter Trade Hazards page 12 Burma; 12 b. Argentina 13 Co 'olitica .Implications 13 1. Iran 13 2. Greece 14 3. Holland 14 4. Australia 14 Israel 15 6. Finland 15 D. Bconomic Implications 15 1, Shoddy Goods 15 Egypt 15 b 4, Afghanistan 15 Syria 16 Indonesia 16 Iran.. 16 2. Price Manipulation 16 Burma 16 b Hong Kong 16 eO Iran 17 d. Egypt 17 eo Greece 17 Resale in Third Countries 17 a. Burma 17 b. Egypt 18 eA Turkey 18 Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 Approved For Reler 2000/09/08: CIA-RDP78-01630000100060017-7 Failure to Honor Terms of Agreements page 18 Japan 18 Egypt 18 c. Burma 19 Difficult Trading Practices 19 a. India 19 b. Hong Kong 19 c,, Switzerland 20 d. Sudan 20 IV. Commercial Penetration 21 A. The Technique. 21 B. Examples 21 1. Communist-Controlled Branches of the Bank of China 21 2. Promasheksport 22 3. Bank of Chios- 22 Approved For Release 2000/09/08 : D JA-RDP78-01634R000100060017-7 Approved For Relet 2000/09/08 : CIA-RDP78-01630000100060017-7 THE SIN(-SOVIET BLOC ECONOMIC OFFENSIVE: HAZARDS FOR THE UNDERDEVELOPED COUNTRIES SIN(--SOVIET BLOC CREDIT PROGRAM A. General Soviet economic assistance almost always is extended in the form of loans. Very little grant assistance has been made available by the Soviet Union or its Satellites so fare The economic offensive has been, and will probably continue to be, primarily directed toward economically vulnerable countries in which the Bloc hopes that its political objectives can be ad- vancedo The acceptance of Soviet credits carries with it certain implications not always clear to the recipient countries. As yet there is no evidence that the Soviets are motivated by any altruistic desire to aid economic progress. Rather, they look upon aid as a means of securing changes favorable to their interests. Thi.u.s they hope to influence the recipient countries to adopt or maintain policies consistent with Soviet objectives. Bloc loans essentially are lines of credit for the financ- ing and purchase of capital_ goods, raw materials, and technical assistance fro-,,r, the Bloc. As pointed out in the State Depart- went, Bulletin of 27 January 1958, In negotiating agreements, th BT oc gives no evidence of requiring economic justification for the projects involved." Where a development plan exists, the Bloc credit is designed to underwrite projects already de- cided upon by the recipients; sometimes such plans are based on recommendations of Free World institutions. In such cases the Bloc will be able to disclaim responsibility for failures in development planning. Instead of economic justification, there has been an obvious effort to select projects which will have both an important psychological impact on the recipient country, and propaganda value throughout the Free World American aid generally has been designed to build a founda- tion on which. the recipient country 4 s economy can safely ex- pand? For the most part, the Soviets have ignored this aspect of the problem, and in some instances the Bloc program will probably result in economic imbalances in the recipient cou.n- tries, The type of projects Most frequently financed by Soviet credits has been spectacular in nature and n.o t neces- sarily those most -likely to produce any basis for expansion of real output 4 The actual effect of Bloc credit programs Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 Approved For ReleW 2000/09/08: CIA-RDP78-01630000100060017-7 has been inflationaryin countries where implementation has'been most rapid, such as Afghanistan. In countries where Bloc credits have not yet been drawn down, an inflationary threat remains. B. Examples of Integrated Single Country.Prograrns 1. Afghanistan The Bloc has extended $125 million to Afghanistan for "economic development." Short-range projects being sponsored by the Soviets are designed to give the Afghans the feeling that this development is indeed taking place. It is estimated that funds at least equal to the amount extended by the Bloc must be raised to covers the indigenous share of project expenses contracted under the various Bloc credit programs. Hence the eventual cost of Bloc aid projects in Afghanistan, if the total credit is drawn down, could run as high as $350 million. Repayment fbr projects must be made in goods. The ef- fect of Afghanistan's drawing down all of the Bloc credits would be to tie up a large percentage of, its exports for many years. It is doubtful that the aid given to Afghanistan will suffi- ciently stimulate production of exportable commodities to permit it to liquidate its indebtedness to the Bloc. The Afghans are already beginning to appreciate the economic implications of the indebtedness they are assuming. Recently, Foreign Minister Maim indicated to the US and Soviet Ambassadors that his country could accept no further loan assistance. 2. Syria .In order to repay Bloc credits, Syria will be required to direct a considerable portion of its exports towards the Soviet Bloc for many years to come. In addition, the Syrian Govern- ment is required to defray all local currency costs of the development program. A Syrian official estimated that these costs represent 70 per cent of total expenditures. Syria has already requested postponement of repayment on its arms debt. Deputy Under Secretary Dillon has commented that US economic experts believe that 'if Syria is to defray the local cur- rency costs of all these projects, estimated at $390 million, there would have to be a dangerous degree of money creation, resulting in serious inflation. The Communist prescription for meeting such a situation, of course, would be the introduc- tion of complete state control of the economy in order that resources could be directed away from consumption into develo - ment." (Department of State Bulletin, 24 March 1958, p. k72. Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 Approved For Rele 2000/09/08 CIA-RDP78-0163W000100060017-7 Before the creation of the United Arab Republica the Beirut newspaper Le Jour commented on the 1957 Syrian-Soviet economic agreement ry sita ing that: "The Syrian economy until 1970 will be strictly control- led by the Soviet Union, which has been entrusted with the mission of reorganizing and developing it, Nothing will escape the watchful eyes of the Soviet experts, not the soil or what is under the soil, or the factories or the bridges or the railroads or the dams or hydro- electric plants or irrigation plans ... what will happen if Syr_a cannot pay off this enormous debt which it has contracted with a great power which has always dreamed of placing Its hegemony over the Near East?" Although the creation of the UAR reduces direct Soviet influence upon Syria, the presence of Soviet personnel continues the threat, Co Political I lications of Bloc Credits 1. Subversion a, General Inevitably, the establishment of closer economic ties with the USSR opens the door to political subver-- sion. Soviet credit agreements, with their provisions for technicians, detailed studies, exploration projects, and technical assistance, which includes advice and supervision by Soviet experts at all economic levels, provide the USSR an opportunity for collection of intelligence and permit the establishment of an ever- wide`ning base for subversion o b. Stren thening Local Communist Parties Even when there is no evidence that Soviet Bloc aid is used directly to benefit local Communist parties, the gain in Soviet "respectability" and prestige prob- ably serves to strengthen the position of local parties and front groups in their bids for power. 20 Political Strin&s and Leverage a, General Although the Soviets boast about the absence of conditions attached to their aid, the facts indicate the reverse is true. Soviet strings indeed may be subtle 3 Approved For Release 2000/09/08 : CIA-RDP78-01634R000100060017-7 Approved For Rele 2000/09/08 : CIA-RDP78-01631Yr~00100060017-7 and not readily apparent, but they are present. Although the USSR sometimes trains local operating personnel for the installations being built, many of the plants under construction will be manned by Soviet nationals for several years. Thus, the presence of a large number (f Soviet citizens, each a potential channel for propa- tanda, becomes a lasting factor in the life of the recipient country. b4 Specific Examples R I M 1 9 I I f It has been demonstrated on a number of occasions that the Soviet Bloc stands ready to use economic grants for political purposes. In early 1957, the Pathet Lao attempted to make the acceptance of substantial foreign aid from Communist China a condition for political settlement with the Royal Lao Government. Soviet-Yugoslav economic relations show what can hap- pen in a country already intimately involved with the Bloc. Yugoslavia2s expulsion from the Cominform and the subsequent disruption of economic relations demonstrate the use of economic sanctions for political purposes. In August 1956, Yugoslavia signed an agreement with the USSR and East Germany for the construction of a 700 million ruble aluminum production complex, with an annual capa- city of 50,000 tons. Installation was to be completed- by 1961. Shortly after Soviet-Yugoslav political differ= antes came to the surface .n late 1956, the USSR and East Germany announced that the aluminum project would be deferred. Manufacture of plant components was not to commence until 1961 or 1962a With the next shift in political tide and the Tito-Bulganin meetings, resumption of the project was announced. The original agreement was unilaterally broken for obviously political reasons, despite the Soviet Union's continual claim that Bloc economic assistance is free from political conditions. ((Der Ta esspie el, Berlin, 6 October 1957; Die Wirtschaft, B'er In, b August 1957; Christian Science Monitor, June D. Economic Implications of Bloc Credits r e la Project DiCsappointments -1 4 M 1 4Y a. Hidde.n.Costs The low interest rates set in loan agreements con- cluded by underdeveloped countries with the Soviet Bloc have proven somewhat illusory; a number of service charges 4 Approved For Release 2000/09/08: CIA-RDP78-01634R000100060017-7 Approved For Rele 2000/09/08 : CIA-RDP78-01630000100060017-7 have added to the loans, with the net effect of raising over-all project costs. Practically; all Bloc assist- ance provides for the purchase of goods and services from Bloc countries exclusively. This restriction is applied even to technical assistance which the USSR renders through the United Nations,. In this way, re- cipient countries are prevented from obtaining the maxi- mum benefit from loan funds by purchasing t