EASTERN EUROPE'S DEBT TO THE WEST: MORE GROWTH ON THE INSTALLMENT PLAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040053-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 24
• Document Creation Date: December 20, 2016
• Document Release Date: March 30, 2006
• Sequence Number: 53
• Publication Date: December 1, 1972
• Content Type: IM

 App19: CIA-F ~?-$ f j"9 I70004005S8
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Eastern Europe's Debt to the West:
More Growth on the Installment Plan
CIA
I
BMNCIJ
IMN 34a H H jlE C
Secret
IN
ER IM 72-170
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r -1
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1972
INTELLIGENCE MEMORANDUM
EASTERN EUROPE'S DEBT TO THE WEST:
MORE GROWTH ON THE INSTALLMENT PLAN
1. The debt of Eastern Europe' to the West on medium-term and
long-term credit has jumped from some US $600 million in 1960 to about
$3.8 billion at the end of 1971, most of the increase reflecting the rapid
growth in purchases of Western machinery and equipment. Of the 1971
total, Romania owed roughly $1 billion, Poland $775 million, East
Germany $650 million, Hungary $500 million, and Bulgaria and
Czechoslovakia $450 million each. This memorandum evaluates the burden
of debt throughout Eastern Europe, looks at the wide variety of factors
bearing on the credit situation in these countries, and analyzes export
potential, import needs, and the trade and ,redit policies of both Western
and Eastern Europe in projecting the indebtedness picture to the mid-I 970s.
SUMMARY AND CONCLUSIONS
2. Among the East European countries, only Romania and Bulgaria
at the moment are facing serious debt repayment pressures. In spite of
recent debt rollovers, the Romanians probably will be running into another
pinch some time in the 1970s. They might have to resort to more
rescheduling or sharp cutbacks in imports, or both. The Bulgarians have
less to worry about; they are only marginally dependent on imports from
the West. At the other end, Poland, coming off trade surpluses with the
West in 1970-71, and Hungary, with good export prospects and shrewd
financial managers, have a good deal of room to raise imports and
1. Bulgaria, Czschoslovalda, East Germany, Hungary, Poland, and Romania. Data for Yugoslavia
are included whore appropriate for comparison, but the complex Yugoslav debt situation will be
treated in a separate memorandum.
Note: This memorandum was prepared by the Office of Economic
Research.
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indebtedness in the 1970s. Czechoslovakia and East Germany also can
absorb more debt, particularly if some lengthening of average terms can
be .achieved. For Eastern Europe as a whole, total indebtedness to the West
probably will exceed $6 billion by 1975 - more than $2 billion over the
present level.
3. Eastern Europe's debt and debt-servicing burden looks high
compared with large debtors in the "Third World." Other factors, however,
tend to improve Eastern Europe's relative position. These countries are far
more advanced than the typical less developed country, are able to generate
substantial domestic investment, and have the administrative machinery to
control excessive increases in indebtedness. Moreover, many developing
countries unlike Eastern Europe have substantial direct foreign investment,
earnings from which are an additional claim on foreign exchange supply.
Finally, the USSR, so far at least, has been willing to help countries avoid
default (Bulgaria and Hungary) or just to tide them over temporary
emergencies (Poland).
4. In spite of these factors, growing indebtedness to the West is of
central long-term concern to Eastern Europe, as a possible future constraint
on imports and on economic growth. The leaders in Eastern Europe, aside
from Bulgaria, have begun to realize that growth is increasingly dependent
on Western technology and credits and that continued large gains in exports,
requiring new markets for manufactures, are an uphill struggle. This has
led the East Europeans to seek out new channels of financing - in the
United States and Japan and in the Eurodollar market - and at least to
think about permitting foreign investment. Then too, the buildup of debt
undoubtedly has provoked some of the renewed interest in integration and
specialization within the Council for Mutual Economic Assistance (CEMA),
although this certainly will not prevent increases in imports from the West.
5. Some of the East European countries may have to tighten the
belt in the 1970s, but Western Europe - with the largest political stake
in keeping trade with Eastern Europe growing - is likely to act to ease
the pain. Major liberalizing steps may include spreading medium-term loans
into very long-term obligations; guaranteeing West European joint
investment with. East European countries (those which allow it); and perhaps
eventually even promoting regional institutional arrangements between the
Common Market and CEMA to facilitate financing of trade and joint
ventures. The East Europear countries would be apt to pick selectively
out of such a grab bag. Roma,iia would leap particularly at long-term loans;
Poland and Hungary, not urgently needing to stretch out their obligations,
might welcome the investment guarantees; and the Czechs and East Germans
probably will remain suspicious of, and Buigaria not particularly interested
in, major new Western initiatives.
cle
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6. Eastern Europe owed some $3.8 billion on medium-term and
long-term credits to the developed West at the end of 1971. Romania
accounted for about $1 billion; Poland, about $775 billion2; East Germany,
$650 million; Hungary, $500 million; and Czechoslovakia and Bulgaria, $450
million apiece.3 These estimates are rough, and the structure of the debt
is even less well known, making it hard to nail down the debt service burden.
7. The rough estimates of debt and debt servicing, however, coincide
with the general views of West European bankers - and the managers of
Soviet-owned banks in the West and of the Soviet insurance agency in
Vienna. They uniformly agree on the rank order of debt burden and range
of creditworthiness among the East European countries. As shown in
Table 1, Bulgaria and Romania had the largest debt servicing relative to
exports in 1971 and Czechoslovakia and Hungary the least.
8. Comparisons of debt servicing requirements among countries are
both difficult and misleading. The best available figures - from the World
Bank - exclude the part of the debt that is non-guaranteed private
financing, often a large: share. The relatively high 20% to 25% debt service
ratios found for countries such as Mexico, Argentina, India, and Pakistan
would probably rise steeply if all debts were reflected. In any case, the
debt service ratio is generally admitted to be a doubtful indication by itself
of comparative debt burdens. Mexico, for example, has avoided repayment
problems and has consistently enjoyed favorable credit treatment in Western
financing markets, even though its debt service ratio on public external
debt alone ran well over 20% during most of the late 1960s. Other factors
are equally important in assessing use debt burden - particularly export
trends and potential, the size of foreign exchange reserves, and the term
structure of the debt.
9. The term structure of the debt is important. Now that Bulgaria
and Romania, with predominantly long-term indebtedness, have been able
to run up relatively large debts, they have the least scope for stretching
2. Excluding PL-480 credits - some $400 million - which call for only a small part to be repaid
in hard currency; other very long-term and small obligations to the United States; and $50 million
in Mutual Security Act loans of 1957-59.
3. Except as ncherwisc indicated, all dollar figures in this memorandum have been converted at
1970 exchange rates. The realignment of exchange rates in 1971 resulted in an appreciation relative
to the dollar of the values of the major currencies in which East-West trade is conducted and East
European indebtedness is booked. Conversion at present exchange rates would raise the dollar figures
by perhaps 10%.
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Eastern Europe: Estimated Debt and Debt-Service Ratios
with the Industrial Westa
Debt
Debt
Service
End-of-year
Service
Ratios
Debt
Exports
Average
Amortization
Interest
1971
1970
1971
1971
1970/71
1970/71
1970/71
(Percent)
Million US $
Total Eastern
Europe
3,350
3,825
4,418
1.120
876
244
25
Bulgaria
400
450
268
115
85
30
43
Czechoslovakia
400
450
761
155
125
30
20
East Germany
600
650
1,050
260
223
37
25
Hungary
400
500
609
122
90
32
20
Poland
650
775
1,062
228
178
50
21
Romania
900
1,000
668
240
175
65
36
Yugoslavia
1,900
2,100
1,080b
550
445
105
Sib
2,180c
25c
a. Repayments and interest are figured on the average of 1970 and 1971 debt, except for Yugoslavia, for
which actual data are available for the end of September 1971.
b. Hard currency commodity exports.
c. Exports including not earnings from invisibles less interest payments.
out their debt, short of periodic refinancing. Even if Bulgaria's average
repayment period were substantially extended from 5 to 8 years, it would
merely mean a lowering of the debt service-to-export ratio from 43% to
31 % - still a very high figure. On the other hand, countries such as East
Germany, with almost no long-term debt, could obtain quick symptomatic
relief from a leng,-heaing of terms. With an extension of average terms from
3 to 5 years, East Germany's servicing ratio would go from 25% to a
seemingly comfortable 17%.
10. All factors considered, Bulgaria currently is in the worst financial
shape in Eastern Europe; in 1971 the debt exceeded exports by nearly
70% and debt servicing was estimated to represent 43% of exports. Bulgaria's
exports to the industrial West have been by far the lowest in Eastern
Europe - both as a share of total exports (only 12% in 1971) and on
a per capita basis ($32 in 1971). Although exports to the West have grown
impressively, very large gains would be needed even to approach a
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comfortable debt burden. On the other hand, Bulgaria has been able to
count on Soviet support - indeed intervention - when it has been hard
pressed to meet repayments.
11. Romania's debt in 1971 ran 50% above exports - almost
two-thirds above exports if short-term debt is included. In 1970, Romania
was able to obtain refinancing of part of its debts to West Germany. The
People's Republic of China also helped out with a $40 million hard currency
credit. The picture has been substantially improved, however, by a rapid
growth in Romanian exports to the West, at an average rate of 17% per
year during 1966-71. Good export performance, aided by the refinancing
in 1970, has been reflected in a stead;' reduction of Romania's debt service
ratio, from more than 45% of exports in 1969 to about 35% in 1971.
Another favorable factor is a gold reserve estimated at some $125 million
(at $38 an ounce), out of a total gold and hard currency stock of about
$200 million at the end of 1971.
12. About 75% of Romania's medium-term and long-term
indebtedness is on private, government-guaranteed credits from NATO
countries, principally West Germany, France, and the United Kingdom.
Another 15% is estimated to be on credits from non-NATO countries --
Austria, Japan, Sweden, and Switzerland - and the remaining 10% on
private non-guaranteed credits from Western lenders. Since 1965, rnore than
two-fifths of the private, government-guaranteed credits have been
long-term, with repayment periods ranging between 6 and 10 years - some
from date of delivery and some from date of putting the plant into
operation. Interest rates have generally ranged between 5% and 8%.
13. The other countries - Czechoslovakia, East Germany, Hungary,
and Poland - have stayed out of debt troubles in the 1960s. In all of
these countries, debt servicing has been running between one-fifth and
one-fourth of exports. Each, however, has special features, especially East
Germany, with its liberal swing credit arrangements with West Germany,
and Hungary, with its innovative dealings in the Eurodollar market. Exports
to the West in all of these countries grew at an average annual rate of
10%-11% in 1966-70, except for Hungary (14.5%).
14. Czechoslovakia has had no known difficulty in handling its debt
servicing. Debt to the West has grown rapidly since the Soviet invasion
in 1968, partly reflecting increased imports of food and consumer goods
to assuage the population. The structure of the debt leans heavily toward
medium-term credit - about three-fourths of the total debt in 1971. Much
of the increase in indebtedness in recent years has been with financial
institutions in Austria and Switzerland, which now account for about
one-half of total indebtedness and finance a considerable part of
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Czechoslovakia's purchases from other countries, notably West Germany.
Political sensitivity on the question of indebtedness to West Germany may
have influenced this development.
15. The East German debt position is anomalous in two ways - in
the very small amount of long-term credit involved, perhaps $20 million
outstanding out of some $300 million in government-guaranteed credits,
and in the availability of a substantial "swing" credit in trade with West
Germany, now running at 585 million marks (about $180 million at the
current exchange rate) and likely to be raised in the near future a Some
unknown part of the "swing" is used, in effect, as medium-term credit.
East Germany also draws on the Soviet-owned banks and other banks in
Western Europe (in Switzerland, Austria, France, the United Kingdom, and
Sweden, but not West Germany) for short-term and medium-term
non-guaranteed credits. Many or most of the deliveries financed abroad do
not appear in either East or West German statistics on inter-German trade,
but are included in East German statistics on total imports. Medium-term
credits from these sources probably run something like $250 million at
present. Because of the small share of long-term indebtedness, debt
servicing - now more than 25% of ';xports to the developed West - is
high relative to the size of the debt.
16. Hungary, with the most adept bankers and perhaps the most
consistent and prudent economic policy, maintained by far the lowest ratio
of debt to exports in Eastern Europe until 1969 - the second year of
the economic reform. Since then, extensive drawings on medium-term
Eurodollar and other credits largely to finance purchases of equipment,
coupled with a huge trade deficit in 1971, have brought the debt to $500
million - 82% of exports to the industrial West. The debt service burden,
however, remains relatively light by East European standards, and a sharp
reduction in the trade deficit with the West this year should reinforce
Hungary's excellent credit rating in the West. So far, Hungary remains the
only East European country to have floated Eurobond issues - one in 1971
for $25 million and another in 1972 for $50 mi;tion. It has also been more
active in borrowing from Western banking consortiums, arranging at least
$120 million in Eurodollar loans since 1968.
17. Poland's credit record is spotless. The debt service ratio also has
been declining somewhat since 1969. Total indebtedness includes about
$725 million owed to Western Europe and Japan and about $500 million
to the United States, of which some $400 million is for very long-term
PL-480 credits, most of which is to be repaid in zlotys. In addition, the
4. The "swing" limit, set since 1968 at 25% of East German deliveries in the previous year,
represents the ceiling for the East German deti-t in the clearing account kept iror trade between
the Germanies. No provision is made for obligatory settlement of the "swing" balance.
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USSR reportedly extended a hard currency credit of $100 million for
purchases of meat in 1971-72. An extremely rapid growth of imports of
capital equipment this year could have increased indebtedness to Western
Europe and Japan to $800 million by the end of July 1972. In addition,
$60 million in US credits from the Commodity Credit Corporation were
drawn in fiscal year 1972, bringing the estimate of Poland's total hard
currency indebtedness to around $1 billion by mid-1972.
18. Even aside from the drawbacks of comparing debt servicing ratios,
Eastern Europe's debt burden looks high relative to other debtor countries.
However, most of these countries - certainly those most heavily in debt -
are less developed countries. This and other special considerations set the
debt picture in Eastern Europe apart from those elsewhere.
19. First, Eastern Europe is industrialized. Czechoslovakia (the Czech
lands) and most of East Germany are old industrial areas. Important
industries and well-developed handicrafts also were found in other East
European areas before World War II, including the more developed areas
in Yugoslavia - Slovenia and Croatia. Today, industry's contribution to
gross national product (GNP) ranges from almost 40% in Romania, Hungary,
and Poland to about 50% in Czechoslovakia, East Germany, and even
Bulgaria. Per capita GNP in Eastern Europe runs from $1,300 to $1,600
in Bulgaria, Romania, Hungary, and Poland to about $2,400 in
Czechoslovakia and East Germany. Even the level in Bulgaria and Romania
is higher than in all but a handful of less developed countries.
20. Second, East European governments generally have exercised
effective control over investment, consumption, and imports, unlike many
less developed countries. By contrast, Yugoslavia resembles Western less
developed countries in this respect, not Eastern Europ With this control,
Eastern Europe has been able to generate - or force - substantial domestic
investment and provide for remarkably steady industrial growth. Economic
policy and the economies themselves have shown surprising stability even
after abrupt changes in the leadership, as in Czechoslovakia, Poland, and
East Germany in recent years. The regimes have demonstrated that they
at least have the machinery for sound debt management.
21. Third, the resources of the USSR stand behind the East European
countries. The USSR at various times has bailed out Hungary, Bulgaria,
and Poland with hard currency loans when needed to meet repayments,
or to meet their immediate needs. And the USSR, if asked, probably would
do something for Romania as well. The strongly independent Romanians,
however, are not likely to ask; as a last resort they have some gold. As
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a result of these stabilizing factors, Eastern Europe has met its debt
payments on time, except for Romania, which asked for refinancing largely
to spread out some shorter term obligations.
22. Finally, in evaluating Eastern Europe's debt, it should be
remembered that many less developed countries, in addition to their debt
to the industrial West, have substantial private direct foreign investments,
earnings from hich are an additional claim on foreign exchange supply.
Except for a few projects in Yugoslavia and one joint ownership deal in
Romania, there is no Western direct investment in Eastern Europe.5
Moreover, many less developed countries also have received Soviet credits,
while the East European countries, aside from emergency Soviet assistance,
have tended since the mid-1960s to become creditors rather than debtors
to the USSR. This; development mainly reflects Eastern Europe's sizable
investments in the Soviet raw materials base since 1966. In short, relatively
high debt service ratios for Eastern Europe do not indicate instability or
irresponsibility, but rather lack of alternative sources of Western capital
goods.
Prospects for Extorts
23. East European exports to the industrial West will probahly grow
at a rate of between 7.5% and 10.5% a year during 1971-75. This projection
is an updating of earlier studies based on the outlook (as of 1968-69) for
East European output of exportable products and ',Vest European demand
for this output.6 Taking account of the fairly uneven trade trends in the
area in 1970-72, the current forecast gives a broader but slightly higher
range of estimates than the earlier studies. It still indicates some decline
from the high rates of the late 1960s. Past and projected rates of growth
of exports are given in Table 2.
24. Romania and Poland, followed closely by Hungary, have the best
medium-term prospects for expanding exports to the West. Although the
slower growing product lines - agricultural products and raw materials -
still account for a large share of sales, these countries have been rapidly
boosting output and exports of intermediate industrial manufactures -
metals, chemicals, and even textiles - that will continue to dominate trends
in exports through 1975. Such products also make up a large share of East
German and Czech exports, but the relatively slow growth in output will
hold down exports to the West. These countries could eventually make
major gains in sales of coi Sumer goods and some items of machinery, but
5. Foreign investment in Yugoslavia, permitted on a partnership basis since 1967, still is only
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Eastern Europe: Average Annual Rates of Growth of Exports
Percent
1956-60
1961-65
1966-70
1971
Partial
1972
Projected
1971-75
Total
9
9.5
11.5
9
13a
7.5-10.5
Bulgaria
20
18
11
3
4
8-15
Czechoslovakia
10
8
11
2
3
5-8
East Germany
9
6
10
16
10
7-9
Hungary
6
12
15
-4
23
8-11
Poland
7
12
17
10
15
9.13
Romania
22
9
12
21
N.A.
9-12
not enough by 1975 to yield faster rates of export growth than in the
past decade. Bulgarian exports are hard to predict; growth has been and
may continue to be erratic. Bulgaria's export growth has slowed from an
average of 20% in the late 1950s to only 3%-4% in the past two years.
On the other hand, output is booming in major exportable lines (chemicals
and metal manufactures), and good prospects exist in sales of wine and
out-of-season fruit.
25. Other studies - involving trade models - come up with overall
forecasts that fall within the range of the present estimates, but differ
substantially when individual countries and commodity trends are
considered. A trade model developed for the UN's Economic Commission
for Europe (reflecting data for 1957-67) gives alternative rates of 8.4% and
10.3% for exports to the West through 1980, but projects faster rates for
the more developed East Europear countries, including East Germany and
Czechoslovakia, than for the less developed countries. Another model,
developed by Hungarian economists, projects a rate of 7.5% for all CEMA
countries including the USSR, but predicts a sharp growth in agricultural
exports and almost no growth for machinery through 1975 - exactly the
opposite of trends in the 1960s.7
Probable Slowdown in Import Growth
26. In view of the projected drop in rates of growth for exports,
the existing levels of indebtedness, and current trade deficits, the growth
7. These studies are discussed in the Appendix.
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of imports from the industrial West will almost certainly slow down in
the 1970s for most East European countries. The evident exception is
Poland, which should be able to carry out plans to accelerate the already
fairly rapid growth of imports from the West from 64% in 1966-70 to
74% in 1971-75. The other countries have more or less explicitly indicated
a sharp downturn in the growlb of imports from the West. In the past,
such in&cations have usually not been borne out, but the present outlook
is different, particularly for Czechoslovakia, East Germany, and Romania.
Hungary too will probably curtail the rise in imports. Bulgarian imports,
having been kept down in the late 1960s, may grow somewhat faster in
the 1970s.
27. The problem is that the dependence of the East European
economies on imports from the West has been increasing, but that most
of them will have difficulty financing a continuation of this trend. It is
even unlikely that several of them can maintain the degree of dependence
of economic growth on imports from the West of the past several years.
Past trends reflect especially a sharp rise in imports of Western plant and
equipment as a share of investment, and also increasing imports of raw
materials and intermediate goods for the chemical, light, and - in some
countries - the food processing industries, largely in support of rising
domestic consumption.8 In short, imports from the industrial West have
been important in upgrading East European technology and in maintaining
economic stability. Imports from the industrial West, by commodity grouts,
are shown in Table 3.
28. In compiling Table 4, it was assumed that economic growth will
continue at the same rates as in 1966-70 and that increments in imports
from the West will bear the same relation to increments in the national
products as in 1966-70. This yields a much more conservative projection
for imports than would be obtained by projecting past trends.
29. Declines in rates of growth of imports during 1971-75 compared
with 1966-70, overall and for all countries except Bulgaria, are shown in
Table 4. Import growth at even these moderate rates probably would create
balance-of-payments problems for Romania, Czechoslovakia, East Germany,
and Bulgaria. Actual imports in these countries may, therefore, grow more
slowly than the rates shown in Table 4. On the other hand, Poland and
Hungary should be able to increase imports faster than shown in Table 4.
These judgments clearly emerge from looking at the indebtedness that would
result by 1975 from setting the projected rates of growth of exports against
these import rates.
8. -his it shown for Hungary - and projected to 1975 - in an interesting article discussed in
the Aprandix.
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Eastern Europe: Imports from the Industrial Wert, by Commodity Groups
roodstuffs,
Raw Materials,
Intermediate
Machinery and
Consumer and
Miscellaneous
Fats, and Oils
Including Fuels
Chemicals
Manufactures
7Yansport Equipment
Manufactures
Total
1960
204,092
180,913
128,930
409,409
262,407
45,057
1,230,808
1965
364,706
244,142
269,617
464,470
547,394
76,764
1,967,093
1970
391,427
385,617
492,937
934,749
1,186,117
173,941
3,564,788
1960
17
IS
10
33
21
4
100
1965
18
12
14
24
28
4
t00
1970
II
11
14
26
33
5
100
1960
100
100
too
100
100
100
100
1965,
179
135
209
113
209
170
160
1970
192
213
382
228
452
386
290
a. Data are from OECD publications, and total Import' In general are tower, fora variety of masons, than alm8ar data from official East European
source'.
Eastern Europe: Average Annual Rates a Growth of Imports
1956-60
1961-65
1966-70
1971
Partial
1972
Hypothetical
1971-75a
Bulgaria
26b
23
6
-1
-16
6
Czechoslovakia
16
8
13
2
-3
9
East Germany
9
6
15
5
25
10
Hungary
3
10
13
21
-5
9
Poland
12
5
10
14
45
8
Romania
20
19
17
8
N.A.
1l
a. F cc-Bon on based on past growth of
b. 1957-60.
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Implications for Indebtedness
30. The projections shown in Table 2 for exports, even using the
higher estimates, and for imports, calculated under consenativi assumptions
concerning their relationship to economic growth, result for most countries
in large cumulative trade deficits. Poland, however, shows a substantial
surplus, and Hungary, a comfortable deficit.
31. These cumulative deficits imply an increase in indebtedness to
the West and in debt service ratios (see Table 5). Trade deficits are only
approximate measures of increases in medium-term and long-term
indebtedness. Differences among countries in reporting imports,9 increases
in short-term credits, and changing balances on net invisibles, all would
affect a more complete and precise calculation of indebtedness. But the
orders of magnitude are reliable enough to lead to some clear conclusions.
It is evident that Poland will have the greatest flexibility and that Hungary
can cope with the situation, but others may hesitate to get into debt so
deeply.
32. If the same relationship as in recent years between debt, debt
servicing, and exports were roughly maintained, East European indebtedness
would reach about $5.8 billion by 1975, using the higher of the two export
projections from Table 2. More likely, the debt will exceed $6 billion, given
a lengthening of average terms and some scope for increasi,ig debt service
burdens for several countries. Still, thiF figure - some $1 billion less than
the figure in Table 510 - would mean on the average not only a slower
growth of imports but also some reduction in the contribution of imports
from the West to economic growth. In Czechoslovakia and East Germany
this adjustment could be painful. Hungary and Poland, however, will be
able to increase their reliance on Western imports and their rates of growth
without incurring overly large debts. Planned Polish imports and exports
in 1971-75 imply a slight net decrease in indebtedness (to $750 million,
compared with $775 million in 1971) and a debt-service ratio of only about
15% by 1975. But if Warsaw decides to increase considerably its
indebtedness, it can do so without difficulty.
33. There is no reliable basis for predicting the limits to indebtedness
for the other East European countries. The judgment that debt service ratios
as high as projected in Table 5 will probably not be allowed to occur is
not based mainly on doubts as to the ability of these countries to handle
repayment -tnd still less on any question as to the willingness of West
9. Poland, East Germany, and probably Bulgaria report imports f.o.b. the border of the exporting
country as stated in their statistical yearbooks. Hungary reports c.i.f., also as stated. Czechoslovakia
apparently reports at approximately c.i.f., contrary to stated procedure, and Romania probably
continues to report at contract prices as last stated in 1964.
10. Which excludes a net debt for Poland.
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Eastern Europe: Cumulative Trade Deficits in 1971-75
and ImpliM Indebtedness and Debt Service Ratios in 1975
Indebtedness
Cumulative
7)ade Balance
Implied
Indebtedness
Related Debt
Service Ratios
1975
End of 1973
1971-75a
1975
(Percent)
Million US $b
Total
3,350
-3,088
7,170
Bulgaria
400
-306
706
43
Czechoslovakia
400
-1,029
1,429
42
East Germany
600
.1,286
1,886
53
Hungary
400
-272
672
17e
Polandd
650'
+1,382
Romania
900
a. Using the higher of the two rates of increase projected for exports given on page 9, and the
projection for imports given on page 11.
b. At 1970 exchange rates. Projected exports used in calculating debt and debt-service ratios arc
also computed at 1970 exchange rates.
c. Even at the lower rate projected for exports the debt-service ratio would rise only to 30%.
d. Poland's cumulative trade su' plus is not included in implied indebtedness. If the policy
indebtedness suggested by Poland's own trade plans were added ($750 million in 1975), the total
would be $7,920 million.
o. "-:eluding PI,-480 debts.
European banks and governments to help out where necessary. Ratter, the
judr,ment stems mainly from the recognition by East European leaders (and
by the Soviet government, the silent guarantor of East European debt) that
deficits can hardly accumulate indefinitely at these rates. Such projections,
in short, serve to emphasize the policy considerations that have already
moved the East European governments to look for other ways of
maintaining economic growth and stability. These ways include further
"integration" within CEMA, encouragement to Western firms to become
joint investors in East European projects, and pressure on Western
governments for concessions on quoits, tariffs, and interest rates.
Eastern Europe's Debt Policy
34. The East European regimes have clearly become concerned over
their growing indebtedness as an eventual constraint on imports from the
West and on economic growth. This is not much of a problem for Bulgaria,
whose dependence on imports from the West is small, and its relatively
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high debt service ratio is accordingly not a matter of mc.eh concern to
the regime, in spite of Soviet chiding. For Romania, on the other hand,
the size and growth of indebtedness to the West has undoubtedly become
a central issue of long-term economic policy. The economic motive usually
cited for Romania's recent application to join the International Monetary
Fund is to become eligible for support from the Fund and for long-term
development credits from the World Bank. The same motive doubtless took
Romania into the CEMA Invesiment Bank in early 1971, after long
consideration, and made it generally more cooperative. with the USSR and
the CEMA organizations.
35. East Germany and Czechoslovakia, with much lower debt service
ratios, are nevertheless anxious about future balance-of-payments deficits.
As explained earlier, they expanded indebtedness rapidly in the late 1960s,
mainly on medium term, to carry out policies giv;,?il a high priority by
the leaders, and could easily increase further their long-l.erm debt. But both
can see growing difficulties ahead in increasing exports to the West, and
neither is disposed to push tourism or direct 'Western investment.
36. East Germany under Ulbricht ran up deficits - also with the
USSR - in the hope of completing rapidly the creation of up-to-date
petrochemical and electronic industries, while rebuilding the old centers of
major cities. Ulbricht's inflexibility in pursuing this goal put a majority
of the Politburo against him and apparently contributed to his replacement
in 1971. 'dis successor, Erich Honecker, battled unsuccessfully for a year
to ease reliance on Western -- especially West German - credit. His regime
will be able to push ahead with present growth plans by getting substantial
additional credit from West Germany, only too ready to help, and by
drawing much more heavily - once recognition is achieved - on long-term
credit from other Western countries. But the debt question, particularly
over the longer term, still is the subject of lively debate and evident
uneasiness.
37. Czechoslovakia went into debt rapidly after the Soviet invasion,
with the obvious intent of propping up the economy to help assure domestic
tranquility. This still appears to be a highly desirable policy for
Czechoslovakia's uneasy leader Gustav Husak. And even thoi.9h the
medium-term outlook for increasing exports is far from good,
Czechoslovakia can surely boost imports for some years, particularly after
formal relations are established with West Germany, thus weakening Czech
inhibitions against drawing more heavily on West German long-term credit.
38. Hungary and Poland, with much more room for maneuver, are
also conscious of, but basically optimistic about, the long-term credit
problem. The Gierek regime is resolved to modernize the economy in order
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to raise the lagging growth of labor productivity and provide the fuller
.life for the disgruntled Polish workers. The Hungarian leaders, who began
the 1970s in an ebullient mood, congratulating themselves on the success
of their unique economic reform, received a setback in 1971, when imports
from the West soared beyond expectation and exports actually dropped
a little. But the leaders did not overreact; they held fast against an abrupt
deflationary policy and accepted the prospect of running deficits with the
West for two or three years while the economy adjusts.
39. These differences in outlook toward trade with the West may
well have co~itributed to differences in approach on the que.7tion of
economic integration" within CEMA. There is really no basis, however,
for judging to what extent Czechoslovakia and East Germany see
"integration" as an eventual alternative to becoming more and more reliant
on the world market and to what extent the cooler approach of Poland
is explained by favorable prospects for expanding imports from the West.
But, for those countries most wary about possible credit problems in the
West h, 'ris de^ade, there certainly will be a tendency to make what they
can out of tl,e CEMA trade. Even the Romanians have warmed up a little
to the work of the CEMA commissions.
Western Europe's Stake
40. For West European governments, the eventual "crunch" in
East-West trade is also a matter of obvious interest, but, in their case,
political motives appear clearly uppermost. Although responsive to the
interests of industry and banks in the expansion and stability of the trade,
they realize that West European growth is not likely to depend much on
the trade even over the longer run. For West Germany, the biggest trader
avid creditor, and for France and other major West European countries,
the amounts risked in government credit guarantees can hardly appear large
when weighed against the political stakes in closer relations with the East.
They recognize that a breakdown in East-West trade, or ~.-'en a reduction
in its importance, could have serious political consequences for Europe.
41. Accordingly, it seems likely that West European governments and
economic establishments will do all they can - indeed whatever they need
to do - to keep the trade with Eastern Europe growing. Steps that may
be taken by the late 1970s include substantial refinancing of medium-term
indebtedness on a very long-term basis, perhaps with subsidizers interest
rates; guaranteeing West European capital investment in those East European
countries that allow such investment; and giving special consideration under
quotas and perhaps under tariffs for We.. European imports arising out
of Western investment and other "joint ventures." The United States too,
has been talking about insuring US business investments in Eastern Europe.
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42. In general, however, Western Europe is likely, as in the past, to
set the pace for other industrial countries in the treatment of trade with
Eastern Europe. For the United States, Japan, and Canada, the political
stakes and the economic risks will surely remain much smaller than Westerr
Europe's so far as trade with Eastern Europe is concerned. Trade with the
USSR of course is quite another matter.
43. The East European reaction to Western initiatives is likely to be
mixed, judging from present attitudes, which of course are subject to change.
Hungary and Poland, although having the least urgent need for major
Western liberalization, are already the leaders in pushing for it. They might
in particular welcome Western guarantees for investment, which would
eliminate one of the troublesome problems in dealing with potential
investors. Romania, currently the most in need of assistance, would certainly
take advantage of Western initiatives for longer term credit. Bulgaria is likely
to remain the least interested, and Czechoslovakia and East Germany may
be expected to rer In suspicious of further increases in Western influence
in the area.
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STUDIES PROJECTING EAST-WEST TRADE
Three recent studies projecting East-West trade in the 1970s are
mentioned in the text. One, by the UN Economic Commission for Europe,
deals with prospects for Soviet and East European exports to Western
Europe from 1965-67 through 1980. A second, by Hungarian economists
and also issued by the United Nations, projects bot;i imports and exports
for the same group of countries from 1955-66 to 1970, 1975, and 1980
in trade with all major areas. A third, published in a Hungarian economic
journal, looks at Hungarian imports both from the Communist countries
and from the West as inputs into major sectors of final demand, projected
from 195.;.68 to 1975.
ECE Projection of CEMA Exports to Western Europe
. As an example of what might be considered a "demand-pull"
formulation for projecting East European exports to 1980, a UN study
on intra-European trade shows prospects for East European exports to
Western Europe based upon least squares estimates of total imports of 11
industrialized West European countries, in five major commodity groups.1
These figures are intended only "to illustrate the consequences of
extrapolations into the future of certain current tendencies and growth
patterns."
Under one assumption, the seven "East European" countries (including
the USSR) would retain their 1965-67 market shares for each of five
commodity classes in each of 11 West European countries. Export growth
from 1965-67 to 1980 would be 8.4% per year, compared with 10% from
1957-59 to 1965-67. An alternative approach postulates "a continuation
of the changes in Eastern Europe's market share for five major commodity
groups in Western Europe at the same rates as obsel ved between 1957-59
and 1965-67." The resulting growth rate for exports is 10.3%, about as
fast as in the earlier period. Neither assumption is intended to reflect
anticipated changes in East-West trade patterns, although there will
undoubtedly be elements of both stability and change where East European
market shares are concerned,
1. Supplement to E CE 761/Add. 1, Analytical Report on the State of Intra?European Trade,
12 February 1970. In th., study, the Soviet Union is included as part of Eastern Europe, and
several non-European members of the industrial West are excluded.
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The alternative projections for 1980 bracket the projection in the text
of a 9% average growth in exports, and the range is close to our estimated
range of 7.5% to 10.5%. Past and projected Soviet export growth is slower
than overall East European growth, bringing the estimates even closer
together. But tl.e country projections rank quite differently from those
shown in Table 2 in the text, being higher than the range shown there
for Czechoslovakia and East Germany and lower for Bulgaria, Poland, and
Romania. The UN projections of average annual rates of growth in exports
compare as follows with the present ones.
UN Projections Present Projections
1965-67 to 1980 1971-75
Bulgaria 7.6 8-15
Czechoslovakia 10.1 5-8
East Germany 10.0 7-9
Hungary 8.5 8.11
Poland 7.5 9-13
Romania 8.5 9.12
USSR 7.8 N.A.
The ECE study assumes much the same trends as the present
memorandum for East European exports of major commodity groups (under
the assumption of constant market shares): a slowe! awn in exports of
agricultural products (from 10% in the period 1957-59 to 1965-67 to
between 4.7% and 5.6% by 1980), less marked declines for mineral fuels
(from 8.2% to 7.2%-7.1%) and other minerals and metals (from 10.8% to
7.1 %-7.7%), and almost the same high rates of growth for engineering
products (from 15% to 13.7%-14.1%) and other manufactures (from 10.2%
to 10.7%-11.1%).2 The differences between the two sets of estimates reflect
the fact that the UN study considers only demand factors; in the present
memorandum (and its predecessors) supply factors are also weighed. This
on the whole favors countries with the most rapidly growing manufacturing
industries, which are (generally) the less developed countries.
Hungarian Trade Network Model
The Hungarian projections of CEMA trade with major areas, prepared
in Hungary's Institute for Economic and Market Research, were made with
a three-dimensional trade matrix for major commodity groups in 1955,
2. Projecting past changes in shares of the market raises the estimated rates for agricultural
products, fuels, and other materials to about the past rates. Such a projection seems less realistic
on the demand as well as on the supply side.
18
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1960, and 1965, using UN data and the RAS methods.3 The flows projected
by this method "take into account the shares of world trade in the base
period as well ss the estimated dynamic growth of the marginal vectors,"
together with various assumptions introduced as to changes in commodity
structure, economic integration in Western Europe, changing trade
elasticities, and overall trade trends by major areas. The authors forthrightly
recognize the limitations:
The application of structural coefficients gained by ex post
computations of periods 5 to 15 years before the projection
period is a rather inaccurate method in certain respects. It
implies the unrealistic assumption that the factors influencing
the trade flows, besides the dimension and substitution effects,
will not be different from those between 1955 to 1965. It
would be obviously much better to forecast individually or
systematically the changes in the structural coefficients, but
for doing this, more research, experiments, and information
would be needed.
The projections made, however, hold up quite well for 1965-70, giving
only slightly higher rates than those actually achieved (12% per year for
exports, instead of the 14% achieved; 13% for imports, instead of the actual
12%).4 A very sharp deceleration is projected for exports in 1971-75, with
a rate of growth of only 7.5%, a much sharper decline in the rate than
the range of 7.5% to 10.5% (for Eastern Europe alone) in the present
memorandum. The slowdown projected in the Hungarian study reflects
abrupt declines in growth rates for exports of fuels, raw materials,
machinery, and other manufactures. For the two latter categories, such
declines appear out of line with recent developments, and the estimates
differ from those in the present memorandum.
The study also projects a slowdown in the growth of imports, to a
rate of increase of about 10%. This rate is probably high because the
projection does not take into account the debt burdens. In fact, the study
projects even more rapidly growing deficits than implied in the present
projections,5 but without drawing any conclusions.
3. A. Nagy and E. Torok, Two Trade-Flow Models for the Analysis and Projection of International
Trade, Part 1: Model A, Trade Network of Six Regions and Six Commodity Classes,
St/ECE/MATHECO/1, Vol. 1, 16 August 1971.
4. Actual as well as projected figures include the USSR, but projected figures differ, first, in
that the imports reflect Western export figures rather than Eastern import statistics and, second,
in that Yugoslavia, Greece, Spain, and Turkey are included as partners, along with the dev.;luped
West.
5. The deficits shown in the Hunaar,an study are not directly comparable with those calculated
for the present study, not only because they cover the USSR as well but also because they reflect
We,:tern export statistics, which seriously understate East European and Soviet imports.
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Study cf Hungary's Imports Tlirouglt 1975
Perhaps the most interesting of the three studies is one that projects
changes in the ;;hares of Hungary's imports, from Communist countries and
from the West, in inputs into final demand.6 A summary comparison shows
the imports as a percent of total (direct and indirect) inputs in 1959, 1968,
and the trend projected to 1975, as follows:
Ruble Imports
Dollar Imports
Total Imports
1959
1968
1975
1959
1968
1975
1959
1968
1975
Fixes: capital
investment
13.1
16.9
18.8
5.4
7.3
10.0
18.5
24.2
28.8
Export
11.5
11.8
13.0
8.5
10.8
11.6
20.0
22.6
24.6
Change in
stocks
5.9
9.7
10.6
4.2
11.3
9.1
10.1
21.0
19.7
Consumption
7.3
10.7
11.1
6.3
9.7
12.6
13.6
20.4
23.7
Total final
demand
9.5
12.2
13.1
6.4
9.5
11.6
15.9
21.7
24.7
These shares of imports as inputs into final demand, it should be noted,
reflect dollar and ruble values converted, not at the official exchange rate
(then 11.74 forints to $1), but at the rates actually used in pricing imports
in the domestic economy under the 1968 economic reform (40 forints to
I ruble and 60 forints to $1). These rates come much closer to reflecting
relative purchasing po Ne; than the official exchange rate. They do not
seriously distort the relative utility to Hungary of ruble and dollar imports
of manufactures, least of all in the case of machinery, although they
somewhat overstate the relative value of dollar imports of raw materials.
Ruble prices for manufactures are substantially higher and the quality is
generally inferior. Paul Marer of Indiana University, who has made the most
careful study of the question favors the general use of differential conversion
rates in comparing Eastern Europe dollar and ruble imports.7
As the tabulation shows, inputs of "dollar imports" - imports from
all Western countries - into consumption and investment increase much
faster than those end uses of GNP, and about the same trend as in 1960-68
is projected for 1969-75. Imports from the West drop, on the other hand,
as shares of total inputs into exports and into changes in stocks. Overall
6. Ostvan Orszagh, "A Gazdazag importlgenyessegerol" (Import Demands of the Economy)
Kulgazdasag, No. 5, 1972, pp. 336-346.
7. See, for example, Paul Marer, Estimates of Intrabloc and East-West Foreign Trade Prices in
Ecst Europe, IDRC Occasional Paper (Bloomington, Indiana University, 1972).
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dollar imports are shown continuing to grow faster than ruble imports as
-a result of their rapidly increasing shares of total inputs into consumption
and investment.
Furthermore, the share of imports used as direct inputs into final
demand, although low in past years, especially for dollar imports (only 20%
and 26% were used as direct inputs in 1959 and 1968, respecti\ ), is
:nevertheless growing rapidly, again especially in the case of dollar imports
(the share rising to 34% in 1975). Presumably this shift is accounted for
by rapid increases in imports of plant and equipment. In 1968, about
two-thirds of all inputs of imports into investment were direct imports.
The share is even higher for imports from the West and seems to be rising.
Dollar imports have also been increasing rapidly as a share of inputs into
the chemical industry, light industry, and food industry, but not into the
investment goods industry, which is supported largely and increasingly by
imports from Communist countries.
The Hungarian article has been overtaken by events. By 1971, imports
from the West had already risen by 81% over 1968, while final demand
had risen by only about one-third. Thus the actual increase in the share
of dollar imports in inputs into final demand - more than one-third -- was
greater than the increase of 22% projected by 1975. Machinery imports
from the West still contributed somewhat less than the projected share of
inputs into fixed capital investment - which also rose rapidly in 1969-71 --
but the contribution of dollar imports to consumption was already larger,
and the contribution to increases in stocks may have risen rather than fallen.
Hungary has avoided a sharply deflationary policy in the wake of the
large trade deficit in 1971, but the future is somewhat uncertain. A small
drop in imports from the West was planned for 1972 and probably will
be achieved. A fair growth in dollar imports in 1973-75 -- 8% to 9% per
year -- would be needed to regain and maintain the reliance on dollar
imports reached in 1971. The leadership may perhaps be satisfied with a
slower rise in imports of Western machinery, while absorbing the large
imports made in recent years. Inventories will be drawn down. But a further
rise in reliance on dollar imports that feed industry and go ultimately into
consumption still seems likely. An annual increase of about 7%-8% per year
in 1971-75 would appear sufficient. As pointed out in this memorandum,
however, Hungary can easily manage for some time to import still more
from the `.Vcst without fearing payments difficulties.
The moral is that even well-made projections based on past trends
can be wide of the mark. In this case, actual developments have deviated
by moving much faster than projected, as has happened in the case of other
projections of Fast-West trade.
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