Safeguarding US Equities While Aiding Poland And Hungary

Tomorrow, the U.S. House of Representatives will consider H.R. 3402, the Polish and Hungarian Democracy Initiative of 1989. This legislation was hastily drafted and adopted 35-0 by the House Foreign Affairs Committee on 11 October 1989. Like many such initiatives, it is borne of noble intentions and fraught with significant defects and enormous potential liabilities for the American taxpayer.

Worse still, as presently drafted, Congress would offer large-scale economic and financial assistance to Poland and Hungary without sufficient conditionality. As a result, H.R. 3402 could jeopardize a momentous opportunity to establish that, in exchange for generous U.S. assistance to Poland and Hungary, the United States requires tangible progress on the part of the recipients toward reducing the costs of Western security and effecting the transformation of centrally planned economies into ones operating on free market principles.

As the United States struggles with its own budget deficit (notably, including the $16 billion deleted yesterday from federal spending for FY1990 in accordance with the Gramm-Rudman-Hollings amendment), it is incumbent on the federal government to get maximum benefit from the funds entrusted to it by the American people. This paper identifies areas where H.R. 3402 departs from this sensible principle — and specific corrective steps needed both to ensure that aid to Poland and Hungary is properly applied and to create maximum incentives for structural change in those countries.

H.R. 3402: An Invitation to An Economic Binge at U.S. Expense

While the price tag of the Polish and Hungarian Democracy Initiative is advertized to be $837 million in direct spending, the actual total taxpayer liability could well exceed $3 billion in debt forgiveness and as a result of ill-advised precedents affecting debt obligations to the U.S. government. The following are among the sweeping concessions proposed by this legislation:

  • $200 million (FY 1990) for the "urgent stabilization of the Polish economy," which may include balance of payments support. This amount is "in addition to amounts otherwise available;"
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  • Eximbank is authorized to incur up to $200 million of contingent annual liability for loan principal under the trade credit insurance program for Poland;
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  • No less than $125 million (FY 1991) for Poland under the Agricultural Trade Development and Assistance and Food for Progress programs;
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  • $200 million (FY 1990-1992) to fund a Polish-American Enterprise Fund ($160 mn) and an Hungarian-American Enterprise Fund ($40), beneficiaries of which are to be determined by unspecified individuals simply designated as "congressional leadership;"
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  • $5 million (FY 1990-1992) to provide technical assistance to Poland and Hungary for "labor market reforms" and "to facilitate adjustment" during those countries’ economic reform transition periods. This sum is intended to support programs for "unemployment insurance," "labor-management relations," "occupational safety and health protection," "employment security," "observance of internationally recognized worker rights," among others;
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  • $10 million (FY 1990-1992) for technical training for private sector development in Poland and Hungary, "in addition to amounts otherwise available;"
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  • $6 million (FY 1990-1992) for Peace Corps programs in Poland and Hungary;
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  • Unspecified amounts of U.S. agricultural commodities can be made available "to generate local currencies" in Poland to advance agricultural development;
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  • $3.5 million in anticipated lost U.S. duty revenues as a result of a grant of eligibility for Poland under the Generalized System of Preferences (preferential tariff treatment on Polish exports to the U.S. market);
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  • $6 million (FY 1990-1992) for project feasibility studies in Poland and Hungary;
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  • $12 million (FY 1990-1992) for educational and cultural exchanges;
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  • $10 million (FY 1990-1992) for scholarships and educational loans for Polish and Hungarian students studying in the United States. Loans are to be forgiven for students returning to their home countries.
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  • $8 million (FY 1990-1992) for the implementation of science and technology agreements with Poland and Hungary.
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  • $12 million (FY 1990-1992) for the support of "democratic institutions and activities" in Poland and Hungary;
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  • $10 million (FY 1990-1992) to fund environmental projects in Poland and Hungary through the Environmental Protection Agency;
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  • $30 million (FY 1990-1992) to retrofit a coal-fired commercial powerplant in Krakow, Poland; and
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  • $6 million (FY 1990-1992) for medical supplies, hospital equipment, and medical training in Poland.

 

Irresponsible Precedents

In addition to its authorization of the foregoing potpourri of preferential treatments, subsidies and outright grants, H.R. 3402 establishes a number of precedents that will surely prove both expensive to implement and difficult to deny other nations seeking U.S. assistance:

 

    "Generous Rescheduling"

First, the proposed legislation directs the U.S. government to urge all of Poland’s official creditors to "adopt and participate in a generous and early rescheduling program for debts owed by the Government of Poland." Total indebtedness, largely incurred by Poland’s communist government currently stand in excess of $39 billion.

Of this amount, no less than $2.3 billion is owed the U.S. government. $836 million(1) is in arrears — that is, due and unpaid for 90 days or more. The balance, however, is also unpaid; it can be described as technically "current" thanks only to repeated prior debt reschedulings. The last one occurred less than two years ago when Warsaw rescheduled its debts to the Paris Club of official creditors with a grace period extending through 1992 and repayments postponed until 1993-97.

 

    Waiving Eximbank’s Fiscal Responsibility Mandate

In addition to calling for a "generous rescheduling" of Poland’s debt, H.R. 3402 would authorize the U.S. Export-Import Bank to dispense with a fundamental requirement of Eximbank’s statute, namely that it obtain a "reasonable assurance of repayment" before making new loans to Poland. As a practical matter, such a waiver must exist before the Export Import Bank can make any further loans to Poland; under present circumstances Eximbank’s Board of Directors simply cannot assure its shareholders — American taxpayers — that a "reasonable assurance of repayment" can be obtained from Poland.

And with good reason. Eximbank loans made in 1985 for several meat-processing plants, copper-processing facilities, a turnkey chemical complex, a color-television tube plant, a glass funnel facility, a process computer used in steel manufacturing, and a tractor factory remain unpaid. Similarly, repayment of Eximbank loans made in 1986 for a satellite communication earth station and loans made in 1987 are also overdue.

Were Eximbank to ignore this fundamental principle of sound banking it would inevitably create a precedent that would greatly disserve an institution which already has $1.3 billion in arrearages — 75 percent of which are loans overdue for over a year. In the face of staggering costs to the American taxpayer stemming from the savings and loan bail-out and other liabilities, the idea of waiving "reasonable assurances" as a lending requirement can only be described as irresponsible.

Such as step would also damage larger U.S. national interests. After all, the United States is owed over $65 billion by other governments through foreign aid programs, military sales, the Commodity Credit Corporation, the Export-Import Bank, and other U.S. government programs. If a "reasonable assurance of repayment" is not required for Poland, it is inconceivable that other countries indebted to the United States will accept lesser treatment.

 

    Permanent OPIC Eligibility

H.R. 3402 also authorizes permanent eligibility of Poland and Hungary for Overseas Private Investment Corporation programs. The only previous OPIC exemption for a Warsaw Pact country was Romania, whose previous dalliance with reform has been supplanted by the most egregious Stalinist repression in the Soviet bloc. Congress accordingly repealed that waiver last year.

 

    Waiving Restrictions on Eximbank Lending to Communist Countries

This proposed legislation would, in addition, authorize a waiver of the Crane Amendment which prohibits Eximbank from lending to a country which either "maintains a centrally planned economy" or is "economically and militarily dependent on the USSR." It would, thereby, dispense with the previous basis under which Poland qualified for Eximbank loans, i.e., a presidential finding of "national interest." H.R. 3402 could thus open the door to such lending to communist countries allied with the Soviet Union even in the absence of a determination by the president that Eximbank financing is in the U.S. national interest.

 

    Waiving Foreign Aid Restrictions for Poland

Finally, H.R. 3402 waives all congressional prohibitions on the use of foreign aid funds for assistance to Poland. In this manner, it further invites invidious comparisons between the treatment afforded countries still party to a hostile military alliance and that provided friendly, democratic nations in the developing world.

The Bottom Line: H.R. 3402 Amounts to Romantic Capitalism Run Amok

In its present form, H.R. 3402 represents a well-meaning but seriously misguided response to the desperate economic condition wrought by forty-plus years of communist misrule in Poland and Hungary. This proposed legislation offers preferential treatment to nations that remain part of a hostile military alliance and that participate actively in intelligence operations against the United States and its allies. The U.S. largesse it would provide is not made contingent upon either wholesale structural economic reform or continued progress toward true democracy — conditions that would appear essential to the future viability of Poland and Hungary.

Put another way, the sponsors of H.R. 3402 appear to believe political expediency dictates that the United States must abandon fiscally responsible lending practices. They would unconditionally open the U.S. treasury to bankrupt regimes that still militarily aligned with the Soviet Union, thereby shifting such liabilities from Moscow’s books to Western balance sheets with minimal cost to Soviet influence or control. In this manner, a moment of maximum U.S. leverage to encourage real change in Eastern Europe can be squandered. At the very least, it is a prescription for the diversion of limited funds away from pressing domestic and overseas spending requirements, even as new precedents are created that will further erode discipline in international lending.

Explicit Conditions on Aid to Poland and Hungary are Required

Lest H.R. 3402 have such unacceptable consequences, in addition to amendments required to correct deficiencies enumerated above, it is imperative that Congress establish clear legislative conditions on aid provided to Poland and Hungary. These conditions should, at a minimum, include:(2)

  • presidential certification that prospective beneficiaries of such aid and concessions are not:
    • engaged in the theft or diversion of proscribed Western technology (COCOM-controlled) either for their own purposes or on behalf of the Soviet Union or other Warsaw Pact countries;
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    • assisting Soviet or other Warsaw Pact espionage activities;
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    • harboring, providing safe-transit, or extending any other forms of support for terrorists or terrorist organizations;
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    • equipping, training or otherwise assisting third parties in the acquisition of chemical or biological warfare capabilities or means of delivering such weapons with ballistic missiles;
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    • diverting borrowed Western funds to finance external activities harmful to U.S. security interests; or
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    • violating or assisting others in the circumvention of arms control agreements.
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  • an express commitment from the Polish and Hungarian governments to massive structural reform in their respective economies and further progress toward genuine democracy, involving:
    • reallocation in each country of priority resources away from the military sector and unproductive COMECON endeavors to the destitute civilian economy;
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    • conversion of extensive military infrastructure to civilian production — particularly weapons production dedicated to supplying Soviet end-users;
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    • sharp reductions in the size of bloated government bureaucracies and the expensive privileges enjoyed exclusively by the nomenklatura — as opposed simply to reducing further the living standards of ordinary citizens;
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    • expanded democratic pluralism and the institutionalization of individual freedoms, including private ownership and transferability of property.
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Conclusion

In sum, there is merit to significant U.S. assistance to Poland and Hungary — in a disciplined and prudent fashion — to help catalyze further economic and political reforms. This exercise cannot proceed in a political vacuum, as now seems to be the case.

The executive branch and Congress owe it to the American people to take every step possible to avoid a "good money after bad" scenario in Poland and Hungary. It should be remembered that potential U.S. taxpayer losses in Poland alone already exceed $2 billion as a result of Warsaw’s payment crisis in March 1981.

It is also crucial that other less developed countries, particularly those in Latin America, not be victimized by blatant preferential treatment accorded reforming East European countries when the former are, in several cases, in equally desperate financial need and at least as firmly set on a course of painful economic sacrifice. With the Brady Debt Reduction Plan already facing mounting criticism by both commercial banks and developing countries, it is no time for the enthusiasm over Eastern Europe to prevent the United States from looking to its larger interests in promoting democracy and markets throughout the developing world.

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1. Of its total arrearages, Poland owes $31 million to the Agricultural Trade and Development Assistance Program; $632 million to the Commodity Credit Corporation; and $172 million to the U.S. Export-Import Bank.

2. These conditions are drawn from three earlier Center papers, The Bush Administration Rescue Plan for Poland: Shooting Ourselves in the Wallet?, No. 89-19, 16 April 1989; Firm Legislative Criteria are Required for Western Assistance to Eastern Europe, No. 89-P 39, 13 July 1989; and Poland: The Unchanging Face of Communism and What the West Should Do About It, No. 89-49, 24 August 1989.

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