COMMENTS ON THE OECD REPORT ON EASTERN EUROPE'S TRADE PROSPECTS WITH THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000303620001-2
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: September 15, 2009
• Sequence Number: 1
• Publication Date: November 25, 1985
• Content Type: MEMO

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25 November 1985
MEMORANDUM FOR: Karen Ware
East Europe Division
Office of Eastern Europe and Soviet Affairs
Deptartment of Commerce
STAT
Chief, East-West Regional Branch
East European Division
Office of European Analysis
SUBJECT Comments on the OECD Report on Eastern Europe's
Trade Prospects with the West
1. We agree with the OECD Secretariat's observation that
Eastern Europe's improved trade performance in 1984 contributed
to a resurgence of Western creditor confidence in the region that
allowed increases in lending at rates and terms favorable to
Eastern Europe. The Secretariat's paper is correct in
pinpointing buoyant Western deamnd as a major contributor to
Eastern Europe's good 1984 performance and rightly notes that the
region remains highly dependent,on swings in Western economic
cycles. The paper correctly concludes that East European trade
problems have not been surmounted, as poor East European trade
performance for the first half of 1985 aptly demonstrates. (U)
2. But we believe the paper is overly optimistic about the
medium-term outlook for East-West trade. The paper sees growing
interest by the East Euorpean countries in joint ventures with
Western partners and the purchase of technology licenses. It
fails to mention, however, that Eastern Europe offers few
incentives to attract Western business partners and that even the
financially sound countries remain reluctant to spend foreign
exchange on imports of Western capital goods. Priority uses of
foreign exchange remain debt servicing and maintaining hard
currency current account surpluses to boost creditworthiness.
(U)
3. The paper fails to address other obstacles that are
likely to hamper East-West trade. A significant issue is the
Soviet Union's stiffening demand for more and better quality
goods from its East European partners in exchange for continued
deliveries of Soviet oil and raw materials. Recent declines in
most of Eastern Europe's trade deficits with the Soviet Union
suggest that Moscow is serious about decreasing its subsidization
of the East European economies. Meeting these demands could
reduce the volume of goods available for export to the West.
Other obstacles that may limit Eastern Europe's export potential,
and thus East-West trade, include slowing Western economic STAT
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growth, increasing Western protectionism, and intensified
competition
from the NICs (Newly Industrialized Countries). (U)
Comments on Specific Sections of the Paper
PART I
General Assessment
Para 2: We disagree that "emphasis placed by the East
European countries on the key role of intra-CEMA trade" reflects
"economic necessity." In our opinion, Soviet pressures and the
underlying weaknesses of the East European centrally planned
economies are more powerful forces. (U)
Para 3: The improved East European financial climate
reflects not only the countries' success in improving their trade
position since 1982, but also the lack of better lending
opportunities for Western commercial banks elsewhere. (U)
Para 4: Seems overly optimistic about the outlook for East-
West trade. We suggest substituting some comments regarding the
above-mentioned difficulties Eastern Europe will face in trying
to expand exports and trade despite their efforts to attract
Western business through cooperation and joint ventures. (This
comment also applies to para. 39) (U)
Part I: Intra-CEMA Economic and Trade Relations
Para 12: We believe the statement that the Soviet Union
seems ready to abandon fixing the price of oil on the bais of
average world prices in incorrect. The CEMA Executive Committee
announced in January 1985 no change in the pricing formula for
1986-90. (U)
Para 25: We do not believe that Romania imported 1 million
tons of oil from the USSR for hard currency. (U)
Para 26: We believe the method used here to estimate
quantity of Soviet oil exports to Eastern Europe is extremely
fallible, because:
special long-term agreements exist whereby countries
purchase oil at low prices in exchange for investment in
the USSR (e.g., Czechoslovakia's long-term agreement for
5 mmt of oil at low prices).
Soviet statistics include reexports of middle-Eastern
oil, some of which may have gone to the CEMA-6
countries. (U)
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Part II: The East European Countries' Trade Policy
B. Finanical Trends
Para 35: While more East European countries have borrowed
on Western financial markets in 1985, not all have. Bankers have
been relatively eager to lend to the GDR, Hungary, Bulgaria, and
Czechoslovakia, but have been reluctant to lend to Romania, and
have refused to extend new credits to Poland. (U)
Bulgaria's credits so far this year are large by Sofia's
standards and, in our opinion, do indicate a significant
departure from the country's normally conservative borrowing
policy. (U)
Para 36: While the GDR's new stock of funds would allow it
to increase imports of Western goods substantially in the next
five-year period, these is no solid evidence that East Berlin
intends to do so. (U)
Para 40: We reiterate tha not all of the East European
countries have successfully borrowed from Western banks. The
Western creditors' willingness _t,o lend to Eastern Europe has
principally resulted from a lack of comparably attractive
investments elsewhere. We stress that it does not represent
renewed enthusiasm over Eastern Europe's trade performance. In
addition, we believe that if the region's trade balance continues
to slide in 1985 as preliminary data indicates, bankers will be
less eager to lend to Eastern Europe, particularly at the
favorable terms that they have extended so far this year. (U)
It is primarily Hungary's financial market policies which
have become more differentiated. (U)
C. Trade Position of the East European Countries in the First
Half of 1985
Para 42: East European member countries' statistics for the
first half of 1985 expressed in national currencies and then
converted to dollars do indeed show a worsening in the countries'
hard currency trade performance. (U)
PART II
Poland
The Polish hard currency trade situation continued to
deteriorate in the first 10 months of 1985 compared to the same
period last year. The surplus was $861 million--down form $1.4
billion last year--because exports fell about 2 percent in
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constant prices while imports rose by almost 11 percent. Besides
the poor. quality of the goods offered abroad, exports to the West
did not rise due to the regime's failure to implement a viable
pro-export policy. Enterprises still do not find it profitable
to export, but prefer to sell on the domestic market. (U)
Para 49: Coal exports to the West decreased about 17
percent in the first six months of 1985 compared to the same
period last year, causing a $100 million loss in potential hard
currency earnings. Polish coal prices in early 1985 on the world
market were roughly unchanged from last year. Although the
average price per ton of Polish coal remained lower than world
prices, the price for Polish coal rose about $1 to $2 per ton in
the second half of this year. (U)
Coal output should be measured in million tons rather than
million dollar tons. (U)
Para 50: The terms "export to" or "import from" "outside
the region" are unclear. Does this mean total hard currency
trade? (U)
Para 52: Poland does not plan to invest in those projects
which could lead to large increases in exports. Instead, many
outdated projects first started,in the 1970s are slated to be
completed in the next five years. Warsaw has not fulfilled its
plan to direct a third of total investments to the food industry
and the agricultural sector. Implementing such a program
eventually could lead to a decrease in those type of imports and
even an increase in exports. (U)
Romania
Para 53: We believe the sentence "Romania's closer ties
with the CEMA countries and the Soviet Union in particular have
much to do with its growing energy problem" could be re-worded.
Romania wants to develop closer ties with the Soviet Union, in
part, to receive more Soviet oil and gas. Starting next year,
Romania will reportedly receive crude oil from the USSR on the
same clearing account basis as the other East European
countries. Romania also is participating, like other East
European. countries, in joint investment projects such as the
Progress gas pipeline in exchange for additional gas
deliveries. (U)
We believe the figures of 1.8 million and 1.0 million tons
of Soviet oil are inaccurate. (U)
Hungary
Para 55: In regard to attaining this year's trade surplus
of $7 mil ion, Budapest revised forecasts to $300-350 million
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earlier this year. It is forecasting that the current account
might be. in balance this year, but recent data indicate that the
current account may slip into deficit. We stress, however, that
Hungarian trade is highly seasonal and that it always does better
in the second half of the year. (U)
The decline of exports of agricultural goods and traditional
manufactures can be attributed not only to negative price trends,
but als- to stronger foreign competition. Another important
factor accounting for poor trade results with nonsocialist
countries is the marked reduction of re-exported Middle Eastern
oil. (U)
The paper should mention that the nonconvertible currency
trade balance developed much as planned. Ruble denominated trade
is in surplus for the first time in more than a decade. (U)
Para 56: The new five-year plan will retard growth in
consumption and investment until 1988 because Hungary must
initially focus on restoring external equilibrium. During the
plan Hungary is expected to emphasize the technological upgrading
of its industry. Areas singled out for investment priority
include electronics, robotics, and biotechnology in addition to
those menitoned in the OECD draft. (U)
Bulgaria
The section on Bulgarian economic performance (paragraphs
57-59) should open with a clearer statement of Bulgaria's current
economic problems. For example: After relatively good economic
performance in 1980-84, figures for the first half of 1985
suggest that Bulgaria will fall short of planned targets this
year. Shortfalls in agriculture and in key industrial sectors--
especially energy--have hurt overall economic performance. (U)
The report should clarify that the statistics on industrial
output, chemical output, and electric power production are
official Bulgarian statisitics. These statistics are upward
biased as is discussed below in the comments on the East German
section. Moreover, the Bulgarians have not yet reported official
grain harvest results. The statement that the harvest is down 30
percent on 1984 results is an estimate. (U)
Bulgaria's industrial and agricultural performance is not
the only problem affecting its trade balance. Pressure from
Moscow to balance trade and divert top quality industrial and
consumer goods from trade with the West to trade with the USSR,
and declining trade surpluses with important LDC partners also
have hurt Bulgaria's hard currency trade balance. (U)
It is currently unclear how Bulgaria intends to spend the
$450 million that it has borrowed this year. A part may go to
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restructure Bulgaria's modest debt and increase imports of grain
and coal. to rebuild stocks. In addition to financing expanded
investment in energy development and agro-industry, Sofia also is
likely to increase imports of Western capital equipment to
modernize its high-priority machine-building and electronics
industries. (U)
East German
Para 60: The highly favorable picture of East Germany's GNP
growth illustrates what we consider one of the sources of
excessive optimism about these economies. Such statistics for
most of the CEMA countries are seriously flawed in a way that
generally overstate rates of growth. The main causes for these
distortions relate to the well-known problems of disguised
inflation and changes in double counting
(U)
Czechoslovakia
We agree with the conclusions on Czechoslovak foreign trade,
trade policy, and investment priorities on the eve of the next
five-year plan. The following comments offer different emphasis,
give additional background on developments not covered in the
paper, and note some statistical discrepancies between data in
the TC/WP's paper and other sources. (U)
Para 65: The third sentence beginning with "In the first
six months of 1985..." notes that "trade with non-socialist
countries fell in absolute terms for both exports and imports
(down by 7.2 percent and 5.9 percent respectively)." According
to the PlanEcon Report for Czechoslovak Half-Year Performance
(Vol., No. 3, p.9), official trade statistics indicate that
export quantities for the first half of 1985 fell by 9.0 percent,
and import quantities fell by 7.8 percent for the period.
According to PlanEcon estimates of trade values (i.e.,
incorporating price changes), exports (fob) to non-socialist
countries during the first half of 1985 dropped by 14.5 percent,
and imports (cif) by 13.3 percent. We believe therefore that the
TC/WP's trade figures may understate the retrenchment of
Czechoslovak foreign trade with non-socialist countries for the
first half of 1985. (U)
The paper correctly notes the striking decline in
Czechoslovak trade with the LDCs; according to the PlanEcon
estimates cited above, the value of export to LDCs fell 19.7
percent in the first half of 1985 and imports fell by 17.7. This
decline is due to financial austerity in the Third World,
particularly in some Arab countries which had been large buyers
of Czechoslovak arms. (U)
STAT
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Para 66: The second sentence beginning "In particular..."
notes Prague's recent indication that it would consider joint
ventures "...apparently raises no problems of principle from a
legal standpoint..." The meaning of this sentence is obscure:
if it means no problems from the standpoint of Czechoslovak legal
principle, then we disagree with the assertion because Prague has
established fairly strict conditions for joint ventures:
-- foreign ownership is limited to a 49 percent maximum
share
alljoint ventures must be managed by Czechoslovak
citizens; foreigners are only allowed to serve as
executive deputies
-- remuneration and remittance of salaries abroad will be
subject to some limited
-- the approved "set of principles" for joint ventures
includes an explicit statement that "the joint venture
is not supposed to be an inherent part of the
Czechoslovak economic and planning sytem."
These regulations suggest that the regime's new tolerance for
joint ventures remains a controvesial measure taken only out of
necessity, and still poses considerable legal, political, and
ideological problems for Prague. (U)
Para 68: A sentence should be devoted to Czechoslovakia's
heavy commitment to increasingly costly joint investments in
Soviet energy and raw materials extraction projects. Coming when
the domestic Czechoslovak economy itself requires modernization
of its own obsolescent capital stock, such ventures tie up scarce
investment resources in projects with a dubious economic
rationale. (U)
Para 68: We question the statement in the fourth sentence
beginning "These new responsibilities..." that investments in new
chemical and light industries "could have a beneficial impact on
the whole Czechoslovak economy..." In our view, the
Czechoslovaks primarily are responding to Soviet demands for more
and better goods, particularly in the light industries; and the
domestic economy may not gain all that much from the new
investments. (U)
STAT
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