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

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-01634R000100060017-7
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 29
• Document Creation Date: December 9, 2016
• Document Release Date: October 6, 1998
• Sequence Number: 17
• Publication Date: April 3, 1958
• Content Type: REPORT

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THE SINO-SOVIET BLOC ECONOMIC OFFENSIVE:
HAZARDS FOR THE UNDERDEVELOPED COUNTRIES
3 April 1958
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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,
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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.
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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
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.. 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
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iv
page 5
5
10
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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
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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
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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
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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.
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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
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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
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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