Tag Archives: Europe

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.

Emergency Alliance Consultations Are Needed To Map A Common Response To The Coming Soviet Crackdown In The Baltics

(Washington, D.C.): The Center for Security Policy today called for immediate alliance consultations aimed at providing powerful disincentives to potential Soviet repression in the Baltic states, including developing a common, punitive response to such repression should it occur. In particular, the West must selectively use its economic, financial and technological leverage to affect events in the Soviet bloc.

Toward this end the United States should act immediately and unilaterally to signal its concern over the possibility of such a crackdown: Remove from the agenda of the upcoming Baker-Shevardnadze meetings in Wyoming (on September 19-20) the planned agreement to form a joint U.S.-Soviet economic working group. This senior negotiating group is intended to catalyze a series of American economic and financial concessions to the USSR. The indefinite deferral of any such discussions would get Moscow’s attention; it might even save Baltic lives and help to advance the prospects for greater freedom in the Captive Nations.

Frank J. Gaffney, Jr., the Center’s director said, "Moscow has put the Baltic peoples on notice: Their present demands for basic human liberties and political freedoms are unacceptable to the Soviet government. In extremely strong language, the USSR has directly threatened the Captive Nations if they do not desist in their agitation for independence."

For example, the Soviet Communist Party Central Committee, at the behest of the ruling Politburo, has said the following (emphasis added):

  • "The fate of the Baltic peoples is in serious danger. People should know into what abyss they are being pushed by the nationalist leaders."

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  • "The consequences could be disastrous for these peoples if the nationalists manage to achieve their goals. The very viability of the Baltic nations could be called in question."

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  • "A real threat of a civil conflict and mass street clashes…has arisen."

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  • "The situation that [has arisen] calls for…resolute, urgent measures to clean the perestroika process in the Baltic republics from extremism, destructive and harmful tendencies."

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  • "The CPSU Central Committee urgently calls on…all those who cherish their homeland, peace and national accord to realize the full extent and reality of impending disaster…."

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  • "Developments [in the Baltics] affect the vital interests of the entire Soviet people, our entire socialist motherland."

 

"At a similar moment in 1981, the United States and its allies engaged in high-level consultations aimed at charting a course for collective action in the event the Soviet Union intervened in Poland, as then appeared imminent," Gaffney noted. "There is reason to believe that such discussions — and the prospect they raised that the threatened Soviet intervention would result in severe economic repercussions — were instrumental in preventing that action. While President Bush has properly urged the Soviet Union to exercise restraint, this is far less than was done in 1981 and, unless matched by concerted alliance action, will surely prove inadequate."

Over last weekend, the Center released a paper entitled Fifty Years of Tyranny: The Intolerable Legacy of the Nazi-Soviet Agreements of August 1939. This paper calls upon the Soviet Union to renounce the historical basis for the USSR’s seizure of the Baltic states — the notorious 1939 Hitler-Stalin Non-Aggression Pact. It also urges Moscow to accede to the demands of the people of Latvia, Estonia and Lithuania who yearn for rights they have been denied for five decades.

Gennadi Gerasimov, the Soviet spokesman, however, made it clear that the statement issued by the Central Committee has the full authority of President Gorbachev and the Politburo. It evidently was accompanied by at least two phone calls made by Gorbachev personally to Lithuanian Communist Party chief Brazauskas, warning him to terminate the activities of nationalist "extremists."

"Far from showing that glasnost and perestroika have real force and effect in the Soviet Union, the Soviets have revealed in their latest, highly publicized threats aimed at the people of the Baltic states that the heavy hand of Brezhnev remains at the helm of the USSR," Gaffney said.

Gaffney added, "Unless leaders of the West take timely and concerted action to show that there will be real costs for Stalinesque behavior toward the Baltics — as was done in 1981 the responsibility for the coming Soviet crackdown will be widely seen to lie partly in the democratic nations, who chose to do nothing."

Poland: The Unchanging Face Of Communism And What The West Should Do About It

It is widely believed that the unthinkable has happened — a non-communist government, borne of the popular will, is being allowed peacefully to supplant the communist autocracy that has misruled Poland for over forty years. The reaction in much of the democratic West is understandable, namely to provide economic, financial and technical assistance long withheld from the oppressive regime that used military rule to maintain control over the restive Polish people.

In theory, such assistance would have two objectives: First, it would be aimed at improving the chances that Solidarity’s representatives will succeed in this ambitious undertaking. Second, it would reward the communists for giving up power, a signal to other, less "reform-minded" totalitarians elsewhere in the Soviet bloc that they, too, can reap similar returns by following the Polish Communist Party’s lead.

The Present Polish Reality

Unfortunately, the reality of the present Polish situation is much more complex and far less certain than this popular perception suggests — with profound implications for Western policies toward assisting the democratic movement there. Consider the following:

  • At this writing, the "non-communist" government is under great pressure to retain communists in most, if not all, of the key cabinet posts.

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  • In addition, the non-communist prime minister and his cabinet officers are subordinate to Poland’s communist president, Wojciech Jaruzelski. He retains the power to dissolve the government and the parliament at will and, should he choose to do so, to return the country to martial law.

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  • Moreover, the key bureaucratic positions below the cabinet level in virtually all of the agencies of the Polish government will probably continue to be held by the communist nomenklatura, the party apparatchiks whose commitment to the system that installed them and sustains them is unflagging.

 

For these reasons, the ability of the Solidarity-led faction in the government to effect the sorts of wholesale economic — and further political — reforms the Polish situation necessitates is, at best, unclear. Indeed, the real and continuing limits on the democratic elements’ freedom of action suggest that the communists have no intention of permitting either themselves or their stultifying policies to be displaced.

These portentous circumstances tend to support the view that President Jaruzelski, in partially acceding to demands for a greater role for Solidarity in the Polish government, may have a very cynical purpose in mind — to exploit the non-communists’ ability to obtain access to foreign credit and investment without having to undertake the kinds of reforms that would otherwise be required. By sharing responsibility on these terms with the democratic opposition, Poland’s communists can share in any economic successes that might result but, more importantly, it can also ensure that the opposition is fully implicated in the hardships and privation that will accompany any move to resuscitate the economy. Inevitably, Solidarity’s perceived complicity in escalating prices and inadequate consumer supplies could do much to help Jaruzelski discredit the independent trade union movement in Poland — while at the same time reinvigorate the weakened communist party.

If Solidarity is to avoid this fate — and if there is to be any hope for Poland’s economy — it must be able to eliminate the centralized planning mechanism with all its attendant inefficiency and waste, dramatically reduce the bloated nomenklatura, and be relieved of the burden imposed by the exploitative, colonial demands of the Soviet Union. These should also be conditions for Western assistance to the Poland.

Poland Must Accept No Substitutes: Real Change is Needed

In accordance with such a prescription, the Mazowiecki government must have the wherewithal and the latitude to implement the following structural changes:

  • Massive privatization of the Polish economy, including key heavy industries, mining and agriculture;

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  • The reallocation of priority resources away from the military sector and unproductive COMECON endeavors to the destitute civilian economy;
    • An important and visible feature of this reallocation process would be the conversion of extensive military infrastructure to civilian production — particularly weapons production dedicated to supplying Soviet end-users;

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    • The Polish government should commit to disengage gradually from COMECON and formulate a realistic program to wind-down its participation in that wasteful economic community;

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  • Sharp reductions in the responsibilities and privileges of the entrenched government bureaucracy which continues to manage the vast majority of industrial and mining operations of the country;

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  • Rejection of communist control of the Ministry of Finance which currently funds political, economic and military activities within Poland and abroad that are inimical to prospects for Polish economic recovery; and

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  • Implementation of comprehensive measures designed to address Poland’s chronic environmental hazards.

 

The Soviets’ Critical Role

The Soviet Union can play a possibly decisive role in Poland’s efforts to implement such a program. It can do so in several ways. Most obviously, it must signal a willingness to tolerate such systemic experimentation and reform. Poland must be assured that it will be able to take such steps as are necessary to effect its economic recovery without fear of renewed Soviet interference or intervention.

The USSR can also take more tangible steps — steps that will greatly increase the chances for Poland’s recovery. As it now stands, there have been no commitments made by either the Soviet Union or Poland’s other COMECON partners to relinquish or greatly reduce their "bleeding" of Poland’s priority resources and manufactured goods. Similarly absent has been any evidence that Moscow would be willing to contribute hard currency credits, loan guarantees and debt relief to accompany Western economic and financial assistance to Poland.

The Soviets have, compared to the West, been relatively stingy with their financial assistance to Poland (e.g., no effort made to reduce prices charged for Soviet oil or to cut claims on higher quality Polish exports — goods that might otherwise be sold in hard currency markets, etc.) since the onset of the crisis in March 1981. This is the more ironic insofar as the Soviet Union bears the single greatest responsibility for Poland’s present economic crisis.

The Soviet Union has served as the model of the autarkic command economy that East bloc countries like Poland have traditionally been forced to emulate. It has also contributed to Poland’s bankruptcy by its repeated demands that the Poles increase their participation in COMECON, the Soviet bloc’s economic community, in high technology and trade cooperation. Total trade turnover between Poland and Soviet bloc (COMECON) countries amounted in 1987 to $35.7 billion — nearly twice the $20.1 billion run up in 1980. During the corresponding period, Poland’s trade with developed countries actually dropped from $12.6 billion to $10.2 billion. These figures indicate that the Polish economy may, ironically, be being further absorbed into Soviet-controlled CMEA economic relations — despite the West’s policy of "differentiation," whose stated aim is to "wean" Eastern Europe away from the Soviet orbit.

The Soviet Union’s refusal to date to accept responsibility for its part in creating Poland’s economic crisis or to take steps to alleviate the crisis is a potentially important indicator of Soviet intentions. Indeed, its apparent attitude that bailing out failed East bloc economies is an exclusive responsibility of the West is of a piece with the Soviet effort to "internationalize perestroika," i.e., to off-load or "restructure" the financial obligations of its impoverished allies and client-states from Soviet books to Western balance sheets while maintaining ultimate political and military control.

Necessary Elements of a Plan for Helping Poland

As the Bush Administration and Congress consider future steps in responding to dramatic events in Poland (and elsewhere in the Soviet bloc), it is imperative that American and Western policies be governed by a recognition that undisciplined economic and financial assistance to Poland will have unintended and undesirable repercussions both for the Poles and for the American taxpayer.

Instead, such assistance should be tailored to advance true reform in Poland even as it minimizes the prospects for yet another "false start" on Poland’s road to radical political and economic reform. This will require ending the communist system’s — and the nomenklatura’s — stranglehold on industry, mining, and finance. It should also entail steps to deny the Soviets a financial "free-ride." At the same time, a concerted effort should be made to limit Western taxpayer liabilities and to ensure that pro-Western developing countries are accorded no less favorable treatment.

Key features of such a plan should be:

  • The new Polish government must be committed to — and capable of implementing — a program of fundamental economic and political transformation. If it is, Western nations should agree on clearly enunciated goals — and specific milestones for achieving these goals — upon which coordinated disbursements of funds from various sources (e.g., bilateral government loans and credit lines, World Bank co-financing, IMF loans, etc.) will be made contingent.

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    It is crucial that these milestones be publicly identified and debated prior to any "new money" flows so that the West is engaging in a transparent and measurable process of economic assistance. In addition to economic criteria, these milestones should also encompass expanded democratic pluralism and the institutionalization of individual freedoms, including private ownership and transferability of property.

     

  • The Western democracies should also seek to secure Soviet agreement to provide Poland with hard currency credits and/or credit guarantees for projects and trade transactions with Western suppliers along with substantial debt relief. In this way, finite IMF/World Bank and commercial bank resources can be husbanded to meet the enormous claims of the developing world.

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    To meet the Soviet Union’s substantial financial responsibilities for Poland, the allies should also urge that Moscow set aside a multi-billion dollar collateralized hard currency account (e.g., funded by pledged oil and gold-generated revenues) to cover Western creditors in the event of future Polish arrearages under the new program. The allies should insist that the Soviet Union cut its oil prices for Poland and that Warsaw be excused from large Soviet/COMECON projects, either underway or contemplated, particularly in the energy and high-technology fields.

     

  • All Western financial assistance measures intended to stimulate Polish reforms — such as IMF support, Paris Club rescheduling and debt relief, OPIC coverage and GSP eligibility — must be fully reversible in the event of subsequent political crackdowns, financial default, or other missed milestones.

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  • A firm alliance agreement is required at the outset of these new initiatives to insulate Western taxpayers to the maximum extent possible from the consequences of potential default or successive debt reschedulings by Poland. In particular, a financial aid package for Poland should avoid transferring credit risk from private commercial banks to Western governments and taxpayers as a way of covering and thereby encouraging loans from private credit markets.
    • Western government creditors should, in all cases, be accorded equal or pari passu treatment with private bank creditors in debt rescheduling negotiations, which is not now the case.

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    • The terms and conditions of any further Paris Club reschedulings for Poland should be publicly debated before they are finalized to avoid the current subordination of taxpayer claims to those of Western commercial banks. Otherwise, the West is in jeopardy of creating additional precedents for mechanisms whereby preferential economic and financial treatment is provided to Soviet bloc countries.

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  • Even "reforming" Soviet bloc countries should obtain no more favorable terms on or access to Western financial flows than those offered fledgling democracies in the developing world.
    • Preferential arrangements for Poland could reduce the prospects of Mexico, Venezuela, the Philippines and other countries from receiving adequate debt relief and new money flows.

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Conclusion

As they are asked once more to assume substantial financial exposure to assist the more destitute regimes of Eastern Europe, Western taxpayers should keep in mind one fact: the current economic crisis in Poland has been deepened by undisciplined Western largesse over the past fifteen years or more. The temptation to respond again to Eastern regimes’ liberalization half-steps with renewed, imprudent capital and technology flows would amount not only to throwing good money after bad; it will likely retard political and economic reform in Poland and elsewhere.

Indeed, the West should learn an important lesson from the Polish experience: the deeper the economic crisis in communist countries, the greater the prospect for systemic political and economic reform. As a result, Solidarity’s ability to obtain the authority and the means to effect such fundamental reform in both sectors may be determined in part by the judiciousness with which Western nations agree to provide assistance before the non-communist elements in Poland are able to secure such power.

It should also be self-evident that Western democracies should withhold the expansion of economic and financial ties with other East bloc countries (e.g., the Soviet Union, Hungary, East Germany, Czechoslovakia and Bulgaria) until at least a comparable degree of political and economic power is enjoyed by non-communist elements as is the case in Poland. Indeed, the Polish case demonstrates the wisdom of refraining from the sort of bail-outs often recommended by those in the West motivated by such considerations as sentiment, short-term trade or domestic political benefits unless and until an actual transfer of political and economic power takes place.

The only hope for genuine reform in the Soviet bloc is the adoption by the United States and its allies of security-minded policies designed to increase greatly the discipline and transparency of all Western economic, financial and technology transactions with the USSR and Eastern Europe. Poland is the place to start.

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1. This paper is an update to an earlier Center analysis entitled, The Bush Administration Rescue Plan for Poland: Shooting Ourselves in the Wallet? and an op. ed. by Roger W. Robinson, Jr. derived from that paper which appeared in the Wall Street Journal on 19 April 1989.

Center For Security Policy Highlights Constraints Facing Solidarity-Led Government In Poland

(Washington, D.C.): The Center for Security Policy today welcomed the expected confirmation of Tadeusz Mazowiecki as the first non-communist prime minister in Poland in over forty years. As it did so, however, the Center released a new report, entitled Poland: The Unchanging Face of Communism and What the West Should Do About It. This analysis highlights major constraints that need to be addressed to ensure Solidarity’s ability to extract Poland’s economy from its present chaotic condition and calls for a coordinated, measured and disciplined Western response to the emerging Polish situation.

"The Mazowiecki appointment is a signal development, one which marks a new milestone on the road toward fully reenfranchising peoples of the Soviet bloc involuntarily deprived of their right to self-governance," said Frank J. Gaffney, Jr., director of the Center. "It does not, however, represent the final and irreversible installation of democracy and a free market — developments that alone hold hope for Poland’s political and economic survival."

The Center remains concerned about the effect of the Polish Communist Party’s retention of the key positions in the new, "non-communist" govemment. These positions include the powerful presidency and ministries of defense (the armed forces) and interior (the police and intelligence apparatuses). They may also involve control of such other crucial portfolios as those of the ministry of finance, the deputy prime minister, foreign affairs and the govemment-controlled media. This distribution of power clearly leaves in the hands of discredited communists the wherewithal to terminate the democratic movement and economic recovery at will. At the very least, these mechanisms will almost certainly serve as a debilitating check on noncommunist parties’ ability to effect fundamental changes in Poland’s economic system.

"Without basic, systemic change — for example, the elimination of the command system and collectivization, paring back the massive nomenklatura (numbering close to one million), the replacement of its worthless currency and relief from the colonial demands of the USSR — Poland is doomed to continued privation," Gaffney added. "Only by establishing a market economy, and a truly democratic political process conducive to its efficient operation, can the Poles enjoy the sort of freedoms and standard of living to which they aspire."

Unfortunately, unless the West follows the prescriptions for Polish aid laid out in the Center’s analysis, it runs the risk in responding to current events in Poland of retarding, rather than advancing, such fundamental, systemic change there. Under present circumstances, should Western countries rush to supply the Polish government with new credits, debt relief, trade benefits, and technology — particularly in ways that run counter to prudent business practices and sound national security policy — this assistance could serve merely to prop up the existing communist-dominated political and economic system and stymie pressure for its ultimate transformation.

Black Day On The Black Sea For US Interests

(Washington, D.C.): Washington’s Center for Security Policy today took sharp issue with the efforts of an unofficial contingent of Americans who, in league with Soviet officials, are undermining the U.S. government’s stance on a vital element of the United States’ deterrent force — the nuclear-armed sea-launched cruise missile (SLCM).

"With yesterday’s ‘experiment’ in the Black Sea, the Natural Resources Defense Council (NRDC) has once again engaged in its own, freelance diplomacy with an organization of the Soviet government, the Soviet Academy of Sciences, to the detriment of American security interests and to the advantage of the USSR’s anti-nuclear propaganda campaign," said Frank J. Gaffney, Jr., the Center’s director.

"These are the same two organizations that cooked up the bizarre visit by several Congressmen two years ago to the illegal Soviet radar at Krasnoyarsk," Gaffney added. "The American participants in that extravaganza were used to advance the Soviet Union’s wholly specious line that this radar did not violate the 1972 ABM Treaty."

Gaffney said, "Now, the self-appointed American verification experts associated with the NRDC have involved themselves in another carefully orchestrated effort whose character is, in the final analysis, essentially political, not scientific."

Sven Kraemer, Deputy Director of the Center and former Director of Arms Control in the Reagan National Security Council observed that, if anything, the Soviet-NRDC "experiment" revealed the intractable problems inherent in SLCM arms control: "The Soviets carefully orchestrated the whole affair, apparently including dry runs on the tests for days before the Americans showed up. They took the absurd step of stripping the ship on which the monitored cruise missile was located of competing radiation sources, such as other warheads. The Soviets also strictly controlled where the Americans could place their monitoring equipment and ensured that the equipment used could not penetrate through the deck of the ship or — for that matter — through lead shielding that might be placed in a launch-tube."

"In short, the effect of this Potemkin exercise is to trivialize the real and insoluble problems of cruise missile verification," Kraemer summarized. "Worse yet, it encourages the public to believe that significant and ill-advised constraints can be placed upon a vital American weapon system on the basis of trust in Soviet good intentions."

The Center for Security Policy believes that sea-launched cruise missiles contribute in a highly cost-effective manner to the survivability and effectiveness of the U.S. strategic deterrent. Interestingly, enhancing these qualities is supposed to be an objective of a future START agreement, too. As the Soviet-NRDC "experiment" makes clear, however, no means has yet been found to devise verifiable limits on SLCMs. Consequently, the United States must maintain the latitude to deploy its sea-based cruise missile force flexibly and, therefore, eschew unverifiable arms control agreements inconsistent with such practice.

The Bush Administration Rescue Plan For Poland: Shooting Ourselves In The Wallet?

The Bush Administration is expected imminently to announce a package of well over $1 billion in economic and financial benefits for Poland from the United States and multilateral organizations. It is reported to feature:

  • special assistance for Poland through a $250 million World Bank program and a $300 million disbursement under an International Monetary Fund (IMF) program;

    •  

  • special tariff exemptions for U.S. imports of Polish goods through the Generalized System of Preferences (GSP);

    •  

  • $250 million in U.S. trade financing through government guaranteed loans;

    •  

  • U.S. government-backed insurance and loans in support of American private investment in Poland, i.e., through Overseas Private Investment Corporation (OPIC) program eligibility; and

    •  

  • U.S. support for the rescheduling of $700 million (and eventually billions more) of Poland’s external debt in the Paris Club of government creditors.

In light of recent developments in Poland, the Bush Administration’s desire to foster greater freedom for the Polish people and encourage freer markets is understandable. Its planned initiatives meant to advance these objectives, however, are open to serious challenge on four grounds: the tasks expected of the International Monetary Fund; the new burdens likely to be imposed on Western taxpayers; the financial "free-ride" provided the Soviet Union; and adverse impact on U.S. interests in developing countries.

Problems With the Bush Administration Plan

Can The IMF Solve Poland’s Economic Crisis?: The most significant flaw in the Bush Administration’s new Polish plan is its call on the IMF to help solve Poland’s economic problems by serving as the enforcer of economic austerity and catalyst for Western investment there. What is actually required to salvage the Polish economy — namely, fundamental systemic reform — is, for all intents and purposes, outside the IMF’s mandate. Far from eliminating the present crisis, a traditional IMF-style approach will almost certainly not produce the desired economic transformation; it may, moreover, serve to introduce still more serious societal upheaval.

The principal reason for such a pessimistic assessment is that the IMF and World Bank are obliged in structuring their programs to take as a given the existing political and economic systems of prospective borrowers. Accordingly, where the IMF has been involved in the past with socialist countries, it has been unable to tie its assistance to the creation of genuine free-market economies. Instead, the International Monetary Fund is essentially confined in such lending to utilizing austerity-oriented adjustments — fine-tuning macro-economic policies — that amount to tinkering on the margins of failed economies. Examples include:

     

  • Successive IMF programs for Yugoslavia which currently has an annualized inflation rate approaching 1,000 percent.

    •  

  • Notwithstanding past IMF involvement, Romania remains a Stalinist command economy ravaged by collectivization and other inefficiencies.

    •  

  • Repeated IMF programs to which Hungary has subscribed since the early 1980’s — a nation that today has a level of per capita indebtedness even greater than that of Poland (on the order of a $19 billion gross hard currency debt burdening a population of roughly 10 million).

Like its sister socialist economies, Poland has previously experimented unsuccessfully with austerity measures unaccompanied by profound structural change. Although not implemented under IMF auspices, several of the methods typically utilized by the IMF have been tried at the urging of Western creditors. Notably, raising prices, holding down wages and similar measures provoked large-scale labor unrest — but not measurable improvement in economic performance — under the regimes of Gierek, Kania and Jaruzelski.

As yet largely untouched are the structural contributors to Poland’s economic stagnation, for example:

     

  • Key heavy industries (e.g., mining and manufacturing, shipbuilding, etc.) that remain state-owned and -controlled — a bottleneck that "workers self-management" cannot overcome;

    •  

  • Thousands of unproductive agreements between Polish and other Soviet bloc enterprises that waste precious resources under rigid, pre-set plans;

    •  

  • Disproportionate Polish investment in the military (approximately $14 billion annually in 1986, the last year for which such data is publicly available) and uncounted billions more to support the nomenklatura and a bloated government bureaucracy.

The foregoing does not gainsay the vital role played by the International Monetary Fund where its austerity measures and other macro-economic adjustments can work. Indeed, IMF programs have produced substantial and enduring economic progress in many developing countries — where there is viable private sector unfettered by excessive governmental controls. However, particularly in nations like those of Eastern Europe, where the burdens of ideological and institutional constraints are so pronounced, the utility of the IMF and its tools is exceedingly limited.

Are Western Taxpayers Going to Foot the Bill?: It is striking that the Bush Administration and the allies, in proposing these economic initiatives toward Poland, are calling for such steps only a few short years after the American taxpayer was obliged to pay in excess of a billion dollars to cover Poland’s de facto default on debt to the U.S. Export-Import Bank, the Commodity Credit Corporation, and other U.S. government-backed programs.

The economic implications for U.S. taxpayers of this latest bail-out scheme for Poland will be greater still for it comes in the midst of several, potentially staggering financial demands on U.S. tax revenues:

     

  • a probable $100 billion-plus price tag over the next ten years related to the savings and loan crisis;

    •  

  • an estimated $25-50 billion over the next five years from losses incurred in connection with the $1.3 trillion international debt crisis;

    •  

  • and possibly billions of dollars of lost tax revenue due to the failure of companies purchased under bank-financed leveraged buy-outs, following a rise in interest rates — or even a mild recession.

A substantial portion of these ominous taxpayer liabilities are the result of woefully inadequate discipline in government and commercial bank lending policies, both domestically and internationally.

Will the Soviets Get A "Free-Ride"?: As it now stands, the Administration is making no demands that Soviet hard currency credits, loan guarantees and related commitments accompany Western economic and financial assistance to Poland.

This glaring omission facilitates the Soviet Union’s effort to "internationalize perestroika," i.e., to off-load the financial obligations of its impoverished allies and client-states from Soviet books to Western balance sheets.

This is the more ironic insofar as the Soviet Union bears enormous responsibility for Poland’s present economic crisis.

     

  • It has served as the model of the autarkic command economy that East bloc countries like Poland have largely been forced to emulate.

    •  

  • The Soviets have long pressured Poland to increase its participation in COMECON, the Soviet bloc’s economic community, in high technology and trade cooperation.

    •  

  • Total trade turnover between Poland and Soviet bloc (COMECON) countries amounted in 1987 to $35.7 billion — nearly twice the $20.1 billion run up in 1980. During the corresponding period, Poland’s trade with developed countries actually dropped from $12.6 billion to $10.2 billion.

    • These figures indicate that the Polish economy may, ironically, be being further absorbed into Soviet-controlled CMEA economic relations — despite the West’s policy of "differentiation," whose stated aim is to "wean" Eastern Europe away from the Soviet orbit.

     

  • The Soviets have, compared to the West, been relatively niggardly with their financial assistance to Poland (e.g., no effort made to reduce prices charged for Soviet oil or to cut claims on higher quality Polish exports — goods that might otherwise be sold in hard currency markets, etc.) since the onset of the crisis in March 1981.

Will U.S. Equities in Developing Countries Be Jeopardized?: The industrialized West’s decisions aimed at assisting Polish perestroika coincides with the emergence of severe economic and political dislocation in Mexico, Venezuela, the Philippines and other developing countries — all of whom desperately need to make progress in implementing serious debt reduction and "new money" programs.

     

  • For too long, the West has, in some key categories, accorded Warsaw Pact borrowers preferential treatment (i.e., better credit terms and access to fresh credit flows) over those of Latin American and other democracies.

    •  

  • For example, the Polish government’s practice of paying interest on commercial bank loans while withholding interest payments to government creditors is a dramatic departure from practices agreed to in debt negotiations with non-communist countries.

    Permitting this arrangement to continue, in effect, subordinates Western taxpayers to private commercial banks when it comes to repayments on outstanding debt.

An Alternative Plan

Since the Bush Administration’s planned package of economic and financial assistance to Poland may have unintended and undesirable repercussions both for the Poles and for the American taxpayer, a different package of initiatives is urgently needed. An alternative plan should be implemented that is designed to advance U.S. and Western interests in true reform in Poland while: limiting taxpayer liabilities, denying the Soviets a financial "free-ride," defending equal — or better — treatment for developing countries and minimizing the prospects of yet another "false start" on Poland’s road to radical political and economic reform.

Key features of such an alternative plan would be:

  • Properly Utilizing the IMF

       

    • Massive privatization of the Polish economy, including key heavy industries and agriculture;

      •  

    • The reallocation of priority resources away from the military sector and unproductive COMECON endeavors to the destitute civilian economy;
      • An important and visible feature of this reallocation process would be the conversion of extensive military infrastructure to civilian production — particularly weapons production dedicated to supplying Soviet end-users;

        •  

      • The Polish government should commit to disengage gradually from COMECON and formulate a realistic program to wind-down its participation in that community;

      •  

       

    • Sharp reductions in the size of the bloated government bureaucracy and the expensive privileges enjoyed exclusively by the nomenklatura — as opposed to reducing further the living standards of ordinary Polish citizens.

      •  

    • Implementation of comprehensive measures designed to address Poland’s chronic environmental hazards.

       

    • It is crucial that these milestones be publicly identified and debated prior to any "new money" flows so that the West is engaging in a transparent and measurable process of economic assistance.

      •  

    • In addition to economic criteria, these milestones should also encompass expanded democratic pluralism and the institutionalization of individual freedoms, including private ownership and transferability of property.

    • Release of IMF funds should be withheld pending a demonstration by the Polish leadership over the next six-months of its willingness to implement fundamental reforms such as:

    If and when the Polish authorities demonstrate the political will to implement such a program, the alliance should agree on specific goals — and specific milestones for achieving these goals — upon which all disbursements of funds from various sources (e.g., bilateral government loans and credit lines, World Bank co-financing, etc.) will be made contingent.

    All Western financial assistance measures intended to stimulate Polish reforms — such as IMF support, Paris Club rescheduling, OPIC coverage and GSP eligibility — must be fully reversible in the event of subsequent political crackdowns, financial default, or other missed milestones.

     

  • Protecting Western Taxpayers

       

    • Western government creditors should, in all cases, be accorded equal or pari passu treatment with private bank creditors in debt rescheduling negotiations.

       

    • Interestingly, the finance ministers of several important U.S. allies (notably the United Kingdom and the Netherlands) object to such a transfer of risk to governments and taxpayers (including through the IMF and World Bank) that is a feature of the Brady Debt Reduction Plan for developing countries.

    • A firm alliance agreement is required at the outset of these new initiatives to insulate Western taxpayers to the maximum extent possible from the consequences of potential default or successive debt reschedulings on the part of the Polish government and associated enterprises.

    A financial rescue package for Poland should not transfer risks to Western governments and taxpayers as a way of covering and thereby encouraging loans from the commercial banks.

     

  • Ensuring that the Soviets Bear Some of the Costs

       

    • To meet the Soviet Union’s substantial financial responsibilities for Poland, the allies should also urge Moscow to set aside a multi-billion dollar collateralized hard currency account (e.g., funded by pledged oil and gold-generated revenues) to cover Western creditors in the event of Polish arrearages under the new program.

    • The Western allies should secure Soviet agreement to provide Poland with extensive hard currency credits for projects and other purposes requiring hard currency within Poland. In this way, finite IMF/World Bank resources can be husbanded to meet the enormous claims of the developing world.

    The allies should insist that the Soviet Union cut further its oil prices for Poland and that Warsaw be excused from large Soviet/COMECON projects, either underway or contemplated, particularly in the energy and high-technology fields.

     

  • Protecting U.S. Equities in the Developing World

       

    • Such an arrangement would reduce the prospects of Mexico, Venezuela, the Philippines and other countries being disadvantaged in their quest for serious debt reduction.

      •  

    • The terms and conditions of any further Paris Club reschedulings for Poland — a form of debt relief that should be withheld for the six-month trial period called for above — must be publicly debated before they are finalized.

      • Otherwise, the West is in jeopardy of creating additional precedents for mechanisms whereby preferential economic and financial treatment is provided to Soviet bloc countries.

    • Soviet bloc countries should obtain no more favorable terms on or access to Western financial flows than those offered fledgling democracies in the developing world.

 

Conclusion

New Western financial resources for Poland should be withheld if it becomes evident that the Polish government is engaged in provocations designed to undermine the credibility of Solidarity and other fledgling democratic organizations. In this connection, some observers believe that the Jaruzelski regime may be cynically offering the opportunity for expanded political participation to Solidarity and other such organizations at a time when radical economic restructuring will necessarily spawn economic hardship and fierce political resentment on the part of the Polish people. The predictable backlash could actually help Jaruzelski discredit the independent trade union movement in Poland — while at the same time reinvigorate the weakened communist party.

As they are asked once more to assume substantial financial exposure in order to assist the more destitute regimes of Eastern Europe, Western taxpayers should keep in mind one fact: the current economic crisis in Poland has been deepened by undisciplined Western largesse over the past fifteen years or more. The temptation to respond again to Eastern regimes’ liberalization half-steps with renewed, imprudent capital and technology flows would amount not only to throwing good money after bad; it will likely retard political and economic reform in Poland and elsewhere. The only hope for genuine reform in the Soviet bloc is the adoption by the United States and its allies of security-minded policies designed greatly to increase the discipline and transparency of all Western economic, financial and technology transactions with the USSR and its clients.

Alcatel’s Soviet Joint Venture: A Sale The West Cannot Afford To Make

Alcatel N.V., a French computer and telecommunications giant, intends to provide the Soviet Union with a 20-30 year leap forward in its telephone switching capabilities. The technology involved cost over $1 billion to develop and is extremely sophisticated; were the Soviets to obtain the associated manufacturing techniques — as envisioned in the Alcatel deal — the USSR’s military capabilities could be radically improved. For these reasons, the current rules governing technology transfers by Western nations to the Soviet Union prohibit such a transaction.

Unfortunately, the proposed Alcatel deal is but one example of the growing pressure to eviscerate sensible existing controls on technologies with dual (i.e., military and civilian) applications transferred to the Soviet bloc. Such pressure is the more ironic coming, as it does, on the heels of three major technology diversions which seriously damaged Western security interests — Toshiba’s illegal transfer to the USSR of manufacturing technology for producing substantially quieter submarine propellers; Imhausen’s sale of chemical weapons production equipment to Libya; and the continuing revelations unfolding over the sale by another French firm, Machines Francaises Lourdes, to the Soviet Union of advanced machine tools suitable for mass production of sophisticated military aircraft. All argue for greater — not less rigorous — controls on technology transfers.

As an upcoming issue, the Alcatel venture raises especially troubling questions:

  • Is such a wholesale upgrading of the technology base available to the Soviet Union in the West’s security and commercial interests?

    •  

  • Is this proposed venture representative of the approach our allies will take in the event the present controls on technology transfer to the Eastern bloc are relaxed?

    •  

  • Did Lawrence S. Eagleburger, until recently a member of the supervisory board of Alcatel, encourage this venture? Does he believe that such transactions are without consequence for Western security? Will he, as Deputy Secretary of State, recuse himself from future decision-making on this and similar East-West technology transfer cases as well as export control policy issues?

Recent Disasters Argue for Strong Export Controls

Time and again, the West has been shown the real dangers associated with undisciplined technology transfers to the Soviets and their clients. Three specific examples warrant mention:

Toshiba illegally exported to the Soviet Union sophisticated machine tools needed to manufacture advanced submarine propellers. This sale enabled the USSR to reduce dramatically the noise signatures associated with its undersea forces, making vastly more difficult the anti-submarine warfare missions of allied navies. The cost to the West of restoring the status quo ante is estimated to be in the tens of billions of dollars.

Prior to the exposure of this case, Japan’s Ministry of Trade and Industry routinely accepted at face value the documentation provided to them from industry. As a consequence, Japanese export licenses were regularly approved with little, if any, scrutiny. Adequate investigatory capabilities and enforcement measures were also sorely lacking. Despite the implementation of a host of measures to improve this situation, Japan is still without serious anti-espionage laws.

In West Germany, Imhausen transferred equipment associated with the manufacture of chemical weapons to Libya. While the security implications of this sale can only be surmised at this point, providing a state long associated with international terrorism and external aggression with such capabilities will surely prove inimical to Western interests. West Germany is getting good notices from the Administration for its belated willingness to tighten some export controls; it appears, however, that this will affect only trade in chemical and biological weapons-related materials — not the larger category of militarily critical goods and technologies. Others, including some members of Congress, are appropriately skeptical; they believe the accelerating pursuit of exports by West German industry to the Soviet bloc suggests that the FRG’s export control regime continues to lack credibility.

In a still-unfolding investigation, Machines Francaises Lourdes (MLF) of France (formerly Forest-Line) evidently transferred highly sophisticated machine tools to the USSR. These devices are compatible with extremely sophisticated manufacturing techniques for production of modern aircraft — particularly military aircraft.

Four of MLF’s principals have already been apprehended in connection with this probe; the four were identified as Soviet agents by the company’s former Moscow representative, Jean Paul Karcz. More alarming still is the fact that a fifth man, Michel Leger, has now been charged with espionage by French authorities. As an employee of France’s Federation of Electric and Electronic Industries, Leger was a key consultant with the Ministry of Foreign Affairs.

What is more, Leger participated directly as a French representative in meetings of COCOM(1). He reportedly was also involved in the official governmental reviews of items on the list of controlled goods and technologies. The potential repercussions are staggering should this espionage case confirm the compromise of sensitive COCOM procedures, deliberations and plans.

These episodes underscore the enormous security risks and costs to taxpayers involved in inadequate international and domestic controls on the transfer of militarily relevant technologies. They suggest that, if anything, the COCOM regime should be strengthened and complemented by redoubled efforts on the part of member countries to prevent dangerous technology transfers. Unfortunately, as the proposed Alcatel venture suggests, significant pressure is mounting to weaken rather than enhance such controls.

The Alcatel Deal

Europe’s largest telecommunications equipment manufacturer, Alcatel N.V., has recently announced plans to form a joint venture with a Soviet enterprise, Krashna Zarayato, to provide the Soviet Union with unprecedented digital switching capabilities. The deal envisions the direct sale of some of Alcatel’s most sophisticated computerized equipment used to route telephone calls — its top-of-the-line "System 12" digital exchanges. This technology cost one of Alcatel’s parent companies, ITT, more than $1 billion to develop.

Under the proposed transaction, the Soviet Union will procure outright sufficient System 12 machinery to handle the switching requirements of 250,000 telephone lines. Still more ominous is Alcatel’s intention to construct an assembly facility for System 12 equipment near Leningrad. It is estimated that this facility will be capable of producing switching systems capable of handling between 1-1.5 million telephone lines annually. This compares with Alcatel’s 1987 worldwide sales of System 12 capacity of 2.7 million lines.

In 1984, on the grounds that the USSR would shortly develop an indigenous capability to manufacture computerized telephone exchanges, the United States reluctantly agreed in COCOM to decontrol on September 15, 1988, the outright sale of certain computerized telephone exchanges to the Soviet bloc. Under this arrangement, however, the transfer of related manufacturing technology that would in any way facilitate the emergence of a domestic Soviet production capability for such switching equipment remains explicitly embargoed. Accordingly, assembly in the USSR of Western computerized telephone exchanges is currently proscribed by COCOM.

The reasons for COCOM’s unease about Soviet acquisition of this technology are not hard to appreciate. Even an improved civil telecommunications system has obvious dual-use potential. What is more, telephone switches have numerous applications in dedicated military command, control and communications equipment. The acquisition of related manufacturing processes can, moreover, be of enormous value to Soviet production of such hardware as missile subassemblies, fire-control systems, radar systems, and computers. This would be particularly true of the Soviets’ access under the Alcatel deal to component insertion equipment, instrumentation and testing devices and techniques. Moreover, if the Alcatel joint venture were approved, the precedent set in authorizing the transfer of key manufacturing processes to the Soviet bloc would unleash a flood of similar transfer requests.

Interestingly, it became clear in 1988 that the Soviets had failed to develop the anticipated indigenous capability to manufacture advanced telephone switching equipment. In light of the foregoing concerns, an effort was made to reverse the earlier COCOM decision to decontrol sales of such equipment. Regrettably, some member nations objected and the 15 September 1988 decontrol date was observed. Since the prohibition on sales of some switching equipment was lifted six months ago, however, only a handful of small deals have occurred, involving the export of computerized exchanges to Eastern Europe. All of these sales are dwarfed by the transactions envisioned by Alcatel.

Will Anyone Stand Up to Alcatel?

Alcatel N.V. is now the world’s second largest manufacturer of telecommunication equipment. It was created in early 1987 when ITT Corporation and France’s Compagnie General d’Electricite (CGE) merged their European telecommunications entities. Today, ITT holds a 37 percent stake in Alcatel, while CGE’s controlling interest is 61.5 percent. The firm is comprised of more than 250 companies in 80 nations; 90 percent of its 150,000 employees work in Europe, however, with roughly half of the total concentrated in France and West Germany.

Alcatel’s nine-member supervisory board includes such political heavyweights as former Secretary of State Alexander Haig, former Common Market Commissioner Etienne Davignon, France’s former Post and Telecommunications Director Jacques Dondoux, and former West German Economics Minister Otto von Lamsdorff. Until his recent Senate confirmation, Deputy Secretary of State Lawrence S. Eagleburger also served on the Alcatel board.(2) (It is noteworthy that, following the ITT-CGE merger, responsibility for Alcatel’s export marketing of the System 12 switching equipment was given to Helmut Lohr, chairman of the company’s German affiliate, Standard Elektrik Lorenz. In January of this year — two days after he was named Alcatel’s senior vice president for development — Lohr was arrested on charges of embezzlement and tax evasion.)

Naturally, Alcatel has enormous political influence in many COCOM member nations. What is more, the potential value of the Alcatel transaction (estimated to be worth $1 billion over ten years) will ensure that powerful constituencies are mobilized to overcome (or circumvent) present COCOM prohibitions governing this sort of technology transfer. Specifically, proponents of the Alcatel joint venture will assail one of the most important COCOM agreements limiting such transfers, the so-called "no exceptions" policy adopted in 1980.

In fact, many U.S. allies have been restive under this policy since it was adopted in the early 1980s, at a time when the United States government began to strengthen technology security measures both at home and abroad. The policy provided that no exceptions would be made among the COCOM member countries to export to the Soviet Union technologies above a certain strategic level.

Some have mistakenly tied the adoption of the policy to the Soviet invasion of Afghanistan and have consequently pushed for a departure from the "no exceptions" policy in light of Soviet troop withdrawals from that country. While Soviet actions undoubtedly provided a political catalyst for COCOM’s action, it was — and remains — fully justified on the basis of prudent technology security policy.

Previous practices of "case-by-case" reviews of technology transfers have repeatedly proven to be utterly inadequate constraints on the hemorrhage of Western technology to the Soviet bloc.but the first, if one of the most brazen, of many coming assaults on COCOM’s present, sensible "no exceptions" policy. The Alcatel proposal, consequently, is probably

Recommended Actions

The substantial military significance of the Alcatel deal –like the appalling transactions that preceded it — argues strongly for a more robust COCOM regime, not a weaker one. In the face of the erosion taking place in allied commitment to technology security in general and, in particular, in the face of the mounting assault on the "no exceptions" policy, the United States should immediately undertake the following steps:

  • President Bush, like Ronald Reagan before him, should call for a ministerial meeting involving all COCOM nations to review the current state and future direction of Western technology security policy. Such meetings should become an annual event.

    •  

  • This meeting should be attended, however, not only by trade and economics ministers but also by those ministers responsible for national security (i.e., defense ministers). This step would symbolize the vital need to integrate security specialists into every level of decision-making about technology transfers to the Soviet bloc.

    • Incredible as it may seem, such integration occurs regularly today only in the United States and the United Kingdom, and occasionally in France.

     

  • In preparation for such a meeting, the Bush Administration’s strategic reassessment should squarely address the role played by COCOM and the steps needed to make it more effective.

    • Part of this assessment must address the legislative, administrative and regulatory measures that are required at home and in other COCOM nations to reinforce existing procedures governing strategic trade.

    It is also essential that the Administration quantify more precisely the multibillion dollar annual costs to both U.S. and Western taxpayers associated with lapses in COCOM discipline, circumvention of COCOM rules, and inadequate funding for export control mechanisms.

     

  • In the latter regard, Congress must become engaged.

    • To the extent that Congress has been outspoken in its criticism of the actions of Toshiba, Imhausen and others whose technology transfers have added new security burdens to those already borne by Western taxpayers, the legislative branch should prove a forceful ally in bringing about such corrective actions.

     

  • In the meantime, there should be no further deterioration permitted in the existing COCOM regime. In particular, there should be no modification of the "no exceptions" policy until this comprehensive review and ministerial-level, multilateral consultations have occurred.

    •  

  • Finally, the Alcatel case should be viewed as a key litmus test of the commitment that the Bush Administration — particularly Secretaries Baker, Mosbacher, and Cheney — will accord Western technology security and other aspects of the economic and financial security portfolio.

1. "COCOM" stands for the Coordinating Committee on Multilateral Export Controls. This organization serves on a voluntary basis to harmonize Western countries’ technology transfer policies. Member nations are: Belgium, Canada, Denmark, France, the Federal Republic of Germany, Greece, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Turkey, the United Kingdom and the United States.

2. In his Senate confirmation hearings held March 14-16, Eagleburger acknowledged receiving $30,000 in director’s fees from Alcatel in 1988. Although he denied any role by Kissinger Associates in promoting the sale, the client relationship Eagleburger maintained with Bell Manufacturing Company of Belgium (an Alcatel subsidiary) through Kent Associates was not explored in questioning. Eagleburger stated that as a future policy-maker, he would not approve the transfer of high-speed communications equipment to the Soviet Union.

 

*See Center director Frank Gaffney’s remarks on U.S.-Soviet Joint Ventures before the Technology Transfer Caucus of the House Republican Study Committee, 28 February, 1989.

Center For Security Policy Challenges Emergence Of Preferential Treatment Of Soviet Bloc Over Latin American Nations

The Center for Security Policy today issued a critical appraisal of the priorities of the Group of Seven industrialized countries in placing the economic and financial needs of the Warsaw Pact countries increasingly ahead of those of the Latin American debtor nations in certain areas. "We are finding a greater willingness by the industrialized nations to accommodate the financial requirements of our adversaries than to assist with the critical financial needs of democracies in Latin America," says Frank J. Gaffney, Jr., director of the Center for Security Policy.

In letters delivered to the finance ministers of the Group of Seven countries, the principal Latin American debtor nations, the IMF and the World Bank, the Center calls attention to the growing inequities in the industrialized West’s approach to funding Mr. Gorbachev’s perestroika and the financial requirements of the flegling democratic governments of Latin America.

Highlighting disturbing differences in treatment, the Center references a number of points, including: "Whereas Latin American nations are required to justify the uses of new borrowings rather rigorously, the majority of loans to Soviet bloc countries are untied, general purpose credits with few (if any) questions asked by banks concerning where the funds are going or how they are being used." Over ten other examples of dissonant treatment between the Latin American nations and the Warsaw Pact are cited.

In an accompanying White Paper on Economic and Financial Security: Gorbachev’s Perestroika and How the West Should Respond, the Center offers a blueprint for judging perestroika and makes recommendations for a coordinated alliance policy. One of those recommendations includes a "leveling of the economic and financial playing field between the Warsaw Pact countries and Latin American debtor nations."

Genscher’s Second Major Coup in Helsinki Negotiations Imminent: U.S. Set To Retreat On An East-West Economics Conference

(Washington, D.C.): Barring immediate
intervention by President-elect George
Bush and Secretary of State-designate
James Baker, the United States is about
to yield to accomodationist pressures
from West German Foreign Minister
Hans-Dietrich Genscher to hold a major
East-West economics conference in early
1990. The conference will be co-sponsored
by Soviet Bloc countries. This dramatic
concession will likely have severe
consequences for Western security.
Moreover, it stands in stark contrast to
long-standing U.S. opposition to a
similar North-South economics conference.

Senator DeConcini, co-chairman of the
Congressional Helsinki Commission, along
with other members, has consistently
opposed this economics conference.

Such a step should immediately be set
aside pending an opportunity for
high-level review by the incoming
Administration and the Congress.

Facts and Discussion:

  • The United States has long
    opposed an FRG/Czech proposal for
    a conference on East-West
    economic and financial issues.

    • The US made a modest
      effort over the past
      several months to push a
      follow-on environmental
      conference as an
      alternative.
  • It has been learned, however,
    that Secretary Shultz has decided
    to accede to Genscher’s demands
    despite well-founded U.S.
    reservations.

  • As a result, the Conference on
    Security and Cooperation in
    Europe (CSCE) member nations are
    poised to agree to begin an
    economics conference to be hosted
    by the Bonn government as early
    as March, 1990.

  • While the United States did
    succeed in scaling back the West
    German proposal somewhat (for
    example, conference participation
    will not be at as senior a
    political level, as desired by
    the FRG; there will be no
    follow-on session in
    Czechoslovakia; and COCOM
    controls will not be on the
    formal agenda), the emerging
    framework for this conference is
    rife with dangers for Western
    security interests.

    • Indeed, the odds are
      great that a
      “runaway”
      process has been
      initiated which could
      lead to the dismantling
      of NATO’s most important
      economic and financial
      security programs.
  • Although Secretary Shultz
    reportedly made the decision to
    accept the FRG conference
    initiative early last week and
    immediately informed Bonn, other
    alliance partners were not
    officially notified for several
    days.

    • Canada, for one,
      reportedly remains
      opposed to the
      conference.
  • The modalities for the conference
    are still under discussion
    between the U.S. and the FRG. So
    far, it has been agreed that:

    • The conference will last
      three weeks (instead of
      the five weeks envisioned
      in the original
      proposal);

    • there will be no
      final report;

    • at least four
      substantive working
      groups will be
      established:

      • energy and raw
        materials conservation
        (potentially of great
        strategic benefit to the
        USSR)

      • environmental
        protection

      • agro-industrial
        production (possibly
        including biotechnology
        and other sensitive
        technologies high on the
        list of technologies
        whose transfer to the
        Soviet bloc is proscribed
        by COCOM)

      • and machinery for
        production of
        “durable and
        non-durable consumer
        goods” (which will
        afford the USSR and the
        FRG still other
        opportunities to attack
        NATO’s COCOM controls)
  • The U.S. apparently has also
    agreed to a fifth working group
    governing East-West financial
    relations at the urging of the
    FRG.

    • Topics would include
      financial instruments in
      East-West trade offered
      by the banking sector
      (such as bonds),
      bank-to-bank cooperation,
      and even ruble
      convertibility.

    • Further details are not
      yet available, but if the
      fifth working group is
      established it would
      represent a major new
      breakthrough for
      Genscher’s payola
      approach to Ostpolitik,
      sometimes referred to as
      “Economic
      Genscherism.”
  • This conference is, accordingly,
    a dubious — if not highly
    dangerous — enterprise for,
    among others, the following
    reasons:

    • Security: It comes at a time
    when the West should be using its
    economic and financial leverage to press
    for genuine, fundamental reforms in the
    Soviet system, not bailing out that
    system. The Senate has overwhelmingly
    adopted two resolutions since June, 1988
    regarding the urgent need for the
    Administration to achieve coordinated
    alliance policies on the national
    security dimensions of credit flows and
    guarantees to Soviet Bloc countries and
    their client States.

    • The proposed conference
      could easily undermine
      progress toward this
      goal. It could also
      jeopardize signed
      alliance agreements
      which, in effect, prevent
      undue West European
      dependency on Soviet
      natural gas supplies in
      the 1990’s and
      twenty-first century.

    • U.S. taxpayers are likely
      to encounter a
      multi-billion dollar
      annual cost in additional
      defense and foreign
      assistance spending
      should the next
      Administration fail to
      secure alliance
      cooperation in these
      policy areas.

    Precedent: Even if the outcome
    of the first conference appears
    innocuous, there are bound to be
    follow-on conferences at which the
    Soviets would be able to exercise more
    influence over the agenda — and the
    results.

    Negotiating Leverage: Even at
    this first conference, the Soviets are in
    a strong position to “whipsaw”
    Western countries who often come to the
    table with separate and competing
    agendas.

    Sovereignty: The United States
    is making a strategic error in agreeing
    to negotiate its policies in a forum in
    which non-NATO countries can influence
    strongly the policy outcome. These are
    matters that should remain in the NATO or
    U.S.-Soviet context.

    Dilution of Process: The CSCE
    negotiations are designed to achieve a
    balanced outcome in human rights, arms
    control, and political and economic
    cooperation.

    • Historically, it has
      proven exceedingly
      difficult to maintain
      alliance discipline on
      insisting on real and
      parallel progress in all
      three areas.

    • In particular, Western
      governments are
      susceptible to pressures
      (from the Soviets,
      domestic constituencies
      and Bonn) to accelerate
      economic and financial
      concessions even in the
      absence of what should be
      required progress in
      these other areas.

    North-South Relations. The
    high-debt less-developed countries (LDCs)
    and developing countries would be
    justifiably angry in regarding this
    development as an effort by the OECD
    countries to tilt the international
    economic and financial playing field in
    favor of the Soviet Bloc — leaving the
    LDCs and developing democracies even
    further out in the cold during the
    1990’s.

    • Almost all Soviet Bloc
      borrowers already receive
      substantially lower
      interest rates and more
      generous terms and
      conditions on loans from
      Western banks than, for
      example, Latin American
      debtor nations, not to
      mention government
      guaranteed credits.

    • The U.S. will pay the
      biggest political price
      for this lopsided
      approach because most of
      the large debtor nations
      are located in our
      hemisphere.

      • Indeed, the decision
      to proceed with the
      East-West economics
      conference begs the
      question: Where do U.S.
      economic and political
      priorities lie — with
      our massive economic
      interests in Latin
      America or in bailing out
      failed Warsaw Pact
      economies?

      Does the U.S.
      government now favor a
      parallel North-South
      economics conference?

Conclusion:

This major economic initiative comes
in the immediate aftermath of the
astonishing U.S. acquiescence to Soviet
and allied pressure to hold a CSCE human
rights conference in Moscow in 1991 —
another Genscher priority. Such an
economics conference would greatly
advance the Soviet economic and financial
offensive toward the West at a time of
seriously inadequate alliance policies on
the critical security dimensions
involved. The extent to which
Secretary-designate Baker was involved in
this decision is unknown, but it is
doubtful that he was uninformed — as
some reports indicated concerning the
human rights conference decision. The
Bush Administration wisely postponed
jumping into a new round of START
negotiations pending a comprehensive
reassessment. Given the similarly high
stakes, it should do likewise concerning
future economic and financial relations
with Soviet Bloc countries and their
client states.