NEED OF CZECHOSLOVAKIA FOR WESTERN ECONOMIC SUPPORT

Created: 4/8/1968

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Keel of Csechoslovakla for Western Econceaic Sutroort

hew leadership In Czechoslovakia probably will seek large-scale economic support from the West. The USSR aay furnish ahard-currency lean, which would provide adequate operating reserves. Czechoslovakia probably must turn to the West,or long-term helporhaulinn the economy^ The government will proceed cautiously. The new leadership' is anxious to avoidwith the USSR over foreign policy. It also distrusts Western political intentions. In oil probability, Czechoslovakia will first look for offers froa Western business firsts and international To support this effort, the government doubtless will seek improved relations with Western countries, including'West Germany and the US. At present, however, it would be politically risky forto seek large-scale aid from the West Ceraan government. And Czechoslovakia cannot expect help from the US so long as the war in Victr.or. is going on.

Possible Soviet Economic Pressure .

Soviet deliveries of materials to Czechoslovakia apparently have continued "on schedule during the recent political turmoil. Unlike Rumania, Czechoslovakia is utterly dependent on theseas pointed outzech radio eoraentator last week:

Let us not forget that among other differences between Czechoslovakia and Rumania, our cars run on Soviet gas, two out of three rolls are baked froraflour, and our gigantic metallurgical combines would cometandstillew days afterore supplies stopped. Nothing of the sort is happening here, as is cceson knowledge: cars arerolls are baked, and so forth.

The comentator went on to quote the minister of Foreign Trade, rrantisek haaousz, who said that Soviet crude oil (practically the entire supply of Czechoslovakia) had been coming in on time, that hard winter weather andshortage of trucks had sooewhat delayed iron ore ship=er.ts (two-thirds of Czechnd that the USSR had offered anOO tons of cotton to make up for shortfalls In Egyptian deliveries.

In all likelihood, the USSR will fulfill this year's conraitmenti; to Czechoslovakia and will agree to further increases in deliveries next year. It is clear that it would not be in Soviet interest to exert econceic pressure that would weaken the new government and lead

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to popular uprising. It oust be noted that theas nocandidate to sponsor lr. place of Dubcek.

The Seed for Short-Term Credit

tan if Soviet deliveries continue as expected, Czechoslovakia nay still vast irazedlate help with the balance of payments. The USSR, which has provided such help in the past, nay veil come through once againf it has not already done so.

Czechoslovakia's net reserves of gold and hard currency are very snail relative to the aire of Its hard currency trade, which ran at0 Billion Estimates of tho balance ofback toindicate that Czechoslovakia has not added slg-nificaatly to its reserves over the period. This conclusion is borne out by evidence that the USSR has cc several occasions extended short-tern credit to Czechoslovakia to relieve balance of payments pressure.

The hard currency position of Czechoslovakia improvedlightly easing the Czech short-tera payments position, nevertheless, the new leadership probably will ask the USSRubstantial line of new credit, so that Czechoslovakia can stop tradingand-to-mouth basis. There hasumor that Czechoslovakia asked for and wasarge hard currency loan from the USSR and East Germany at the Dresden Conference. Short-term difficulties have weakened the bargaining position of Czech foreign trade representatives, contributing to the unfavorable price and credit terms thathas had to accept.

Western European banks may perhaps be willing to help. Aeight West Cenata banks recentlyine ofsiate oank o; Hungary, to help underwrite^ thoforeign trade that Hungary is undertaking under Us

Czechoslovakia alto couldubstantial line of credit by reactivating its Membership ln the International Monetary Fund, as the government nay intend to cjo. fiecnoslcvakia belonged M'TM IMF until the end, when it was suspended for failing to supply the required fiscal information to the IM?. But the economic steps required to aeet minimum IMF requirements will take time, to which must be added the time for passing on Czech qualifications. Thus rejoining the IMF is not an answer to the immediate foreign exchange problems facing Czechoslovakia.

The Keed for Long-Terra Loans and Foreign Investment

'1

Hi twenty years of Ccenunist rule the economic growth rate of Czechoslovakia has fallen far behind that of the Western European ecoconles. zechoslovakia was better offermany and Austria: now is is backward in comparison wit- eit.ier country"Czech economy has grown under Cccriur.iatj>ut less" 'rapidly than the West GTrmart'or Austrian and at nigher coat. the output of goods and services is inferior.by Western standards. It does not meet the demands of domestic consumers and foreign buyers.

These deficiencies are widely recognized in Czechoslovakia. Economists generally agree that the deficiencies can be corrected only by basic changes in institutions, practices, and policies, andassive infusion of Western technology and know-how. The economists have so

What the new leadership will do remains to be seen. Suchchanges obviously cannot be made overnight- But Czechoslovakia presumably will investigate the possibilities of getting large-scale Western help. Ota Sik, the leading reformer, recently stated that Czechoslovakia already was lookingarge foreign loane would not say ln what quarter or for hov large an aaount. According to clandestine reports, the government already has turned down one loansource and amount unspecifiedbecause of the political strings attached.

Very likely Czechoslovakia will for some time avoidfrom Western governments. As various Czech officials

Indicated, the new leadership recognizes that the USSR laon the matter of solidarity within the Warsaw Pact. reforms In Czechoslovakia are in themselvesto the Warsaw Fact allies, and it is obviously prudentCzech leadership to'go slowly in foreign affairs. InUSSR, East Germany, .and Poland have been concerned overthat would aove Czechoslovakia closer to diplomaticWest German, although they probably can only delay andsuch a .

Czechoslovakia probably will begin by seeking loans fromqrganlzations and by exploring the possibility of accommodating foreign investment and making more use of "Joint ventures" with Western businessmen. Among international organizations, the best bet would seam to be the LH?. ormer member, Czechoslovakia could perhaps got special consideration for re-admission. If re-admitted, it would be eligible to acquire drawing rights from the IMF and to apply to the

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World Bank for long-tern credit. ecent report suggestsnay be planning to approach the World

Possible US Action

The iimefilate possibilities for US action are United, as the goverr-nent of Czechoslovakia realizes. Hot only isopciunist country, it is also heavily involved in supplying arms' to Worth Vietnam and is both SJortli Vietnam's and Cuba's third largest trading partner.* The US government, therefore, is prohibited by_ lav from taking most of the stejs that could help Czechoslovakia-economicallygranting Most Favored Nation (Kr'fQ status, making or guaranteeing loans through the Sxp'ort-Import Bank, or offering-PL-^BQfl. Czechoslovakia undoubtedly would welcome the granting of MFJf status by the UStep in "normalizing"although-the Czech ecor.oay would gain little in the short, run. ercent of Czechoslovakia's trade with developed Western countries is with the US. Tne Czechs probablyven aore grateful to receive guaranteed credits andid if US help should become available.

Czechoslovakia has long demanded that the USillion in gold seized froa Czechoslovakia by the Germans in World War II. This gold, recovered by the Western allies at the end of World War II, was awarded to Czechoslovakia by the Tripartitefor the Restitution of Monetary Gold. France and the UK, the other two members besides the US, have agreed to the release of the Xazi-looted gold to Czechoslovakia. France had no significant clalrj aginst Czechoslovakia, and the UK early reached on agreement on its clains. The US, however, has substantial claitcs outstandingichiefly for property of US citizens nationalized by the Communistshich it has insisted.on settling as part of any over-all agreement on claims. The two issues have long been considered by the US to be inseparable.

* The USS3 is the- largest trading partner, Ccnnunist China second.

To complicate the natter, US representatives1 negotiated and initialed adraft agreement extremely favorable to Czechoslovakia. After review, this draft was rejected by the State Department. Negotiations were resumednd ir. November the USew proposal, on far less favorable terms. Although the proposed settlement would release to the Czechsillion in gold and giveetillion on other accounts, theof US claijRs and debt payments to be paid in the following seven years would run justillion. The Czechs have not responded to the US proposal officially. Individual Czech officials have reacted with indignation.

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