THE ASSESSMENT OF COMMUNIST ECONOMIC PENETRATION

Created: 12/1/1959

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CIA HISTORICAL REVIEW PROGRAM RELEASE AS SANITIZED

TITLE: The Assessment of Communist Economic Penetration

AUTHOR: Edward L. Allen

VOLUME:

STUDIES IN

INTELLIGENCE

A collection ol articles on ihe historical, operational, doctrinal, and theoretical aspects ol intelligence.

All statements of fact, opinion or analysis expressed in Studies in Intelligence arc those of

the authors They do not necessarily reflect official positions or views of the Central intelligence Agency or any other US Government entity, past or present. Nothing in the contents should be construed as asserting or implying US Government endorsement of an article's factual statements and interpretations.

support the eco-

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OF COMMUNIST

Edward L. Allen

What the Soviets callaeeful competition" with the West, particularly Sine-Soviet Bloc trade and develop meal aid to underdeTeloped countries, hasew challenge to the West and, from our own professional viewpoint. Imposed new tasks upon economic mtelligence. The Increases in Bloc trade have been spectacular., Soviet trade with underdeveloped countries Iser cent; total Soviet trade with the West Iser cent. Further, the Bloc last year goter cent of Egypt's trade,er cent of Iceland's,er cent of Afghanistan's, and nearlyer cent ofIt succeeded tnubstantial share of tbe trade of Syria, Burma, Iran, Turkey and Ceylon.

VJS. Organization lor Cold War Economic Intelligence

It became clear to us three years ago that the USSRmembers of the Bloc had embarked upon aof economic penetration. At that time, weinternal organization to provide the essentialto government policy-makers. As the Blocand the magnitude of the threat became clearer, weour list of consumers far beyond the executivethe government. It was Important to keep not onlyInformed, but also Influential business groups andIn general. The Soviet economic challenge, inof our Director, Mr. Allen Dulles, had become the-.-

serious challenge our country has faced In peacetime

The pattern of coordinated reporting Is now well established. ince Februaryorking group under the EconomicCommittee has turnedetailed report every

Communirf Economic Penetration

two weeks. This working group is composed olthe Department of State. CIA, the

tlon Administration, the military services, and theof the Treasury, Commerce and Agriculture.there is an analytical summary every six months, andquarterly report to the President's Council onPolicy. The full organizational structurethis Intelligence effort Is Illustrated In the chart on

This organizational arrangementechanism for combining the political, military and economic facets of Soviet penetration activities. Although there is no rigid division of labor between agencies, there are obvious areas of primacy of Interest. The Department of State, for example, bears the primary responsibility for political analysis, while theof Defense prepares all estimates on Illicit trading in Bloc arms.

roader basis, an annual National Intelligenceis produced which covers not only the magnitude, impact and intensity of Bloc penetration activities, but also relates these activities to the capabilities, motivations and internal policies of the Soviets.

Characteristics of Bloc Aid Programs

We haveumber of common characteristics in the Bloc aid programs for underdeveloped nations. First ofomposite prescription is applied on an Integra leda line of credit,1 assistance and training, and ir. mostommitment to long-term trade. The provision for payment by means of its own commodities has great appeal to an underdeveloped nation, particularly one which is having difficulty In marketing exportable products at adequate prices.

Secondly, the Soviet program Is almostreditInterest rates4 per cent.begins after the project Is completed.usually proratedyear period. Our Westernrates are higher, but our repayment terms are oftenrunning from SOears.

Third, the Soviet program usually covers only the foreign exchange costsroject, leaving the balance to be financed from internal resources. Western development loans have

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Commvnisf Economic Penetration

assisted through various devices with some ot the Internalrequirements.

Fourth, Bloc economic credits are usually related todevelopment. They are granted for sugar mills, cement plants, and textile mills rather than for sanitation, sewage, or housing development.

Fifth, these Industrial programs are aimed at Increasing the public or socialized sector ot the economy, rather than the private or free enterprise sector. Thus the Russian-built Indian steel mill at Bhilaiovernment-owned plant, whereas the American-built plant at Jamshedpurrivately owned expansion of Tata.

Finally, the ald-and-trade deals are Independent of military pacts. Non>Conimurilst underdeveloped countries receive Bloc military and economic assistance without entanglementloc military alliance. This practice disarms many; It lends at least surface credence to the Soviet line that "there Ishere but us peace-loving Russians" as the military and economic technicians pour in.

Sources of Information on Bloc Economic Aid

We have encountered rather formidable difficulties inclosely the magnitude of Blocstnnc to underdeveloped countries. It is true that considerableIs usually available from open sources regarding the amounts of non-military assistance which Bloc countries promise to deliver. Soviet agreements, in particular, are widely publicised, especially when large lines of credit areIt has been trumpeted to the world that Afghanistan0 millions credit and5 millions credit from the USSR. More important for our purposes, the actual texts of many of the major agreements have been officially released.

Even when no value figures axe announced, Information available through attach* reports usually permits us tothe approximate total cost and the foreign exchange component of an economic assistance agreement. Reportsthrough overt or covert channels from Westernfirms who have commercial contacts In underdeveloped countries can also provide such data. The cost of therefinery Czechoslovakia is building In Syria, for example.

Communrjf Economic Penetration

was estimated in part on the basis *

estern corporation whose bid on the project

^wTaw thus confident that our estimates on promised

oorrJc assistance are fairly accurate. We believe we are withjer cent of the correct total figure and no more thaner cent in error lor individual countries.

The confidence we have in our estimates of Bloc perjorrruince on assistance agreements is considerably less, and so far we have published estimates of only the minimum mmat assistance actually provided. Such estimates are of some value, but they are an inadequate basis for pressing questions. In particular, they do not enable us to SsEsedne the amount of indebtedness or the rate of loan

amortizationountry receiving credits from the Bloc. The major difficulty in assessing the implementation of Bloc

assistance agreements Is finding sources of raw mformaUon.

It is exceptional for officials in underdeveloped countries to be

iscussing Soviet projects with US. attaches Debt

statements and ministerial reports of recipient countnes are

occasionally helpful. But In general we must rely onor shipping notices and clandestine reports oncomtruc-

Uon progress Clandestine reports are also our most valuable

source oTtne numbers, competence, and activitiesc

technicians assigned to aid projects. We feel the need for

much more information on what success the Soviets are having

In getting accepted as the representatives of peace andand the real champion of underdeveloped countries.

Special Problems with Bloc Arms Deals

Estimating the value of military assistancegreater difficulties than estimatingThe publicity attending the signature of anassistance agreement Is notably absent facaseagreements- The military estimates must beon descriptions of Individual shipments or othercontained in many discrete military attache and

destinehe resulting estimate, of units ofare converted to value terms by applying Bloc prices to the Items in question. If they are known to sera instances we have had to use the DS. prices for comparable items In

Communist Economic Penetration

order lo arrivealue estimate. We consequeuUy believe that although our estimates In terms of equipment units are reasonably accurate, those In terms of value may be In error byer cent or more.

Tbe most troublesome consequence of ourvalue estimates Is Inability to determine withfinancial indebtedness to the Bloc of those countriesBloc militaryeliable detenninatlonamount of cotton Egypt, for example, Is shippingin repayment for the arms It has received from thebe signiflcant mteUigence, Buthe casethe inaccuracy of our evaluations is compounded bythat some of the arms deUvered have been obsoletesoldiscount, and some of them apparentlygiven without charge. Moreover, some small portionarms shipped to Egypt and Syria have been sent on toin other areas, and we are not certain whopay for

Sources of Information on Trade

CoUectlon of data on Bloc external trade is considerably simplified by the fact that most non-Communist countries Issue periodic reports on the value and pattern of their foreign commerce and we therefore do not have to depend onsources. Statements Issued by Bloc countries, as well as Information obtained through clandestine collection,means of cross-checlnhg sources. When there arebetween estimates made on the basis of official non-Communist compilations and tbe statements of Blocwe do not automatlcaUy assume that the Communists are lying.

An early estimate of Soviet shipments of machinery and transport equipment to underdeveloped countriesor example, showed only abouter cent of the amount claimed by the USSR. This discrepancy, we ultimately concluded, probably resulted from Inaccurate itemhe recipient countries. Underdeveloped countries often haveor inexact customs procedures. Eventandard classification system is used, customs officials are frequently lax in establishing proper criteria to be used by their opcr-

SfififrtT

Economic Pcneirolion

a ting personnel Indian practices are particularly annoying

In this respect. In their official reports of commodity

Items accounting for as mucb as two-thirds of the value offrom the USSR have been listed in the unspecifiedcategory. Since among theajor Bloc customer, tbe errors in India'sreporting mayonsiderable effect on ourof total Bloc trade.

Other underdeveloped countries have similar bad habits. Most of them publish trade dataery leisurely fashion. None Is up to date in releasing statistics on commodities. No country Includes shipments of military Items in its reports. There Is also the usual problem of re-exports involving third nations, compounded In the Soviet case by the employment of brokers and trading fronts for sensitive transactions. Finally, countries which have multiple exchange rates, such as Egypt and Argentina, present particular difficulties when we attempt to evaluate their trade In terms of dollars. New Tasks for Intelligence

Thereeed for detailed performance information,the question of volume and money value, on Blocaid programs. Part of tbe Western effort innations is devoted to highlighting for these newly emerging countries the dangers of dealing with the Bloc, to pointing out the advantages of dealing with the West wherever possible. So we not only need to report that country xa cement plant from the Blocertain price, but also to report the plant's reliability, relative efficiency, and the quality of its product.

And It is not enough for intelligence to measureand performance in Bloc trade and aid.in addition, the Important task of anticipatingmoves, of pointing out where economic, militaryproblem areas are developing which could present

Bloc with opportunities for exploiting weaknesses. This must be done early In tbe game if Western policy-makers are to have an opportunity to move In first or to capitalise on some action of the Bloc.

Communist Economic Penetration

Both in the anticipation of future Bloc moves and in the detailed analysis of Bloc development aid performance toelieve that we in the intelligence held need toot more work.

Strategic Trade Controls

The other side of the economic cold war coin is the strategic trade control program. We In CIAajor role inthe interagency committee structure of the VS.with intelligence support for the development and enforcement of international and UA security exportagainst the Slno-Soviet Bloc. This Intelligence support consists primarily in estimating the significance of certain Western commodities, teclinology. and services to the warof the Bloc.

U.S. unilateral controls, as you are aware, are broader than the international ones, and require separate administration. There are therefore two major interagency committeesin the control of strategic exports, one dealing with problems of multilateral export controls and theirand the other with those of unilateral export controls. The CIA participates In an advisory capacity at each level of these committees up through the National Security Council, as Indicated by the dashed lines In the appended chart,

Reports on Bloc exports and imports are often useful In pointing to economic strengths or weaknesses in the Bloc, but one can easily exaggerate an apparent economic strength or weakness by relying solely on commodity trade data. The USSR, in particular, has sometimes exported machinery and equipment known to be to domestic short supply (rolling miiu and agricultural machinery, for instance) when such exports have been judged to be of net Soviet advantage. Similarly, in reviewing Soviet purchases from underdeveloped nations, It is prudent not to seize on every import of foodstuffs or Industrial raw materials as proof of economic weakness in respect to that commodity.

Commodity studies of Bloc foreign trade will rarely reveal anything more than specific short-term soft spots In thepattern. This type of information Is useful for trade control purposes, but it is inadequate as an indicator of the

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Communis* Economic Pcnefrofion

overall capability of the Bloc to achievebjectives In the cold war. The real capability of the Bloc Is revealed onlylose survey of Its economic structure and Its production and growth characteristics. The basic facts are0 billions of current gross national product for the USSR and tbegrowth rate of abouter cent In SovietKP ofillions for the European Satellites and ofillions for China.

Institutional characteristics, in particular the bilateralof Soviet trade, the Isolation of the Soviet price structure, and the inconvertibility of the ruble, may cause the USSR serious problems In Its future trade outside the Bloc, They have not seemed, however, toerious constraint so far.

To deterrnine Bloc economic weaknesses and strengths, and to estimate the Impact of the strategic trade control programhole, we look primarily to Soviet domestic production capabilities. The large and rapidly expanding productionof the USSR, complemented by tbe European Satellites and to an Increasing extent by Communist China, Is anindicator.

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