USSR, EASTERN EUROPE, AND CHINA; OUTLOOK FOR GROWTH AND CURRENT ACCOUNT BALANCES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000200310002-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: March 6, 2012
• Sequence Number: 2
• Publication Date: January 4, 1982
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000200310002-0
USSR, EASTERN EUROPE, AND CHINA:
OUTLOOK FOR (WPH AND CURRENT ACCOUNT BALANCES
Soviet Economy Division
Office of Soviet Analysis
National Foreign Assessment Center
Central Intelligence Agency
4 January 1982
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USSR, Eastern Europe, and China:
Outlook for Growth and Current Account Balances
At the end of the first year of the Eleventh Five-Year Plan
period (1981-85), the Soviet economy was beset with serious
problems. Soviet GNP grew approximately 2 percent last year, the
third consecutive year with growth at 2 percent or less. Soviet
industry experienced its worst performance in the postwar period;
industrial output in 1981 grew about 2 percent. At the same
time, overall farm output was some 10 percent below that attained
in 1978, the last peak year for agricultural output. Most
significantly, the Soviets experienced their third consecutive
poor grain harvest in 1981. Because record amounts of
agricultural commodities had to be imported, Moscow's hard
currency position deteriorated. Persistent food shortages,
together with increased prices for luxury goods, left many Soviet
consumers with less on their tables in 1981 and less in their
pockets.
The response of the Soviet leadership to growing economic
difficulties has been cautious and conservative. The Supreme
Soviet ratified a revision of the 11th Five-Year Plan last
November that made few changes in the original goals approved a
year ago. Despite current problems in agriculture and industry,
most of the reduced output goals still fall within the range of
the original 1981-85 targets--though nearer the lower end. Many
of these targets are clearly unattainable. The one action taken
in the direction of more realistic planning was the scaling back
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of planned investment expenditures by some 4 percent, probably to
make the 1981-85 plan consistent with available investment
resources. Hampered by investment cutbacks and labor supply
constraints, Soviet planners are counting on productivity gains,
with some assistance from resource conservation efforts, to
provide practically all of the growth in agricultural and
industrial output in the current five-year plan. Labor
productivity growth continues to slide, however, and no new
measures likely to be effective have been suggested by the
leadership to reverse the trend.
After building up a substantial foreign exchange cushion in
the previous two years, the USSR was hit in 1981 by a soaring
agricultural import bill and soft oil prices in its Western
markets. As a result, the hard currency trade deficit reached an
estimated $6 billion, more than double the 1980 deficit. The
current account (excluding arms sales) was in deficit to the tune
of $4.2 billion, up from $500 million in 1980. We expect
continued large agricultural imports and little or no growth in
exports to result in another large trade deficit in 1982.
Moreover, the Soviet payments position probably will continue to
deteriorate over the next several years as domestic oil
requirements run ahead of increments to production and export
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Bulgaria
Bulgarian economic performance rebounded somewhat in 1981,
and GNP rose by about 3 percent, in comparison with a small
absolute decline in 1980. The key factor was the agricultural
sector, as grain output--down sharply in 1980--approached record-
setting levels. According to official statistics, industrial
production grew at a rate of 6 percent during the first nine
months of 1981 with all sectors except construction and mining
meeting plan targets. Nevertheless, in the medium term, growth
rates are likely to decline because of chronic problems with
labor scarcity, sluggish labor productivity, and inefficient
central economic planning. Growing Soviet reluctance to supply
Sofia's increasing needs for raw materials and energy may further
impede growth in the next few years. The 1981-85 plan targets
confirm the outlook for slower growth and indicate a continued
emphasis on heavy industry, although the consumer sector
reportedly will receive more attention than in the past.
In 1981 Bulgaria is expected to register a trade surplus of
$400 million--a $700 million deterioration compared with the $1.1
billion surplus -in 1980. .This primarily results from a
deterioration in Sofia's terms of trade with the other socialist
countries. Sofia's balance of payments position will become a
more critical constraint in the next few years since it will
become more difficult to maintain its present trade surplus with
the West. Hard currency imports will have to increase to
compensate for the expected reduction in future deliveries of raw
materials and energy from the USSR.
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Czechoslovakia
In 1981, real GNP rose by less than 1 percent as the economy
continued to be plagued by lagging labor productivity, energy
shortfalls, and transportation bottlenecks. Zero growth is
likely in 1982 and prospects are poor for any significant
improvement in the domestic economic situtation over the next few
years. Recognition of their domestic and external constraints
led Prague to adopt sharply reduced economic goals for 1982. The
regime hopes that the "Set of Measures," implemented at the
beginning of 1981, will increase productivity, but these reforms,
so far, appear to be working poorly and will not have much of an
impact.
Czechoslovakia ran a small hard currency current account
deficit in 1981 and will run another deficit of about $300
million next year. The country needs Western technology to spur
productivity, but the regime's conservative borrowing and
investment policies have kept trade with the West at a modest
level and will keep hard currency trade in rough balance in
1982. Trade with CEMA as a percentage of total trade is expected
to rise. Reduction of Soviet exports of energy and possibly of
other raw materials could force Prague into heavier reliance on
the West. But prospects for a substantial increase in exports of
Czech manufactured goods to earn the needed additional hard
currency are not good.
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East Germany
While East German growth rates have slowed in recent years,
the GDR is still outpacing most other East European economies.
In 1981 real GNP grew an estimated 2.6 percent, similar to the
previous year, but in 1982 real GNP is expected to grow by only 2
percent. Production was affected by problems with lagging
productivity growth and by the loss of key imports from Poland--
particularly coal and sulfur. These problems, combined with a
worsening balance of payments position and rapidly rising debt,
will probably lead to slower growth during the next few years.
Trade with the West--particularly with West Germany--is
vital to the East German economy and receives increasing high
level attention. But in spite of East Germany's continuing
efforts to increase exports, the hard currency trade deficit
widened to $1.5 billion in 1981. Hard currency debt grew to over
$12 billion in 1981--second only to that of Poland in Eastern
Europe. East Germany's hard currency current account could even
deteriorate further in 1982, especially if Western demand remains
sluggish and if announced limitations on Soviet exports of raw
materials-to-the GDR as well as the Polish crisis force the
country to turn more toward world markets. On the bright side,
West German Chancellor Schmidt agreed in December to an extension
of the "swing credit," essentially an interest-free West German
credit. It is unlikely, however, to lead to substantially
increased trade with West Germany.
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Hungary
A disappointing year in agriculture combined with continued
concern over the external accounts held economic growth in 1981
to 1 percent. The growth of real GNP in 1982 should remain about
the same, in large measure because of the regime's austerity
program aimed at restoring external financial equilibrium.
Industrial production should rise only slightly in 1982, while
agricultural output may rebound from lower than expected grain
production in 1981. Continued emphasis for the next few years on
maintaining balance in the external accounts will hold down both
economic growth and improvements in living standards. Hungarian
efforts to foster efficiency through increased use of
profitability criteria and expanded enterprise autonomy will have
little impact on economic growth. These measures, however, may
enhance international competitiveness. To date, though,
implementation of the reforms has been slow, in large part
because of bureucratic resistance to change.
Hungary's hard currency current account was in deficit by
$0.6 billion in 1981 and is likely to improve only slightly in
1982. Continued economic austerity should enable Budapest to
keep its current account under control for the next few years.
Admission to the IMF in 1982 will provide a financial safety net
against unexpected shocks.
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Poland
Poland's economic crisis deepened in 1981. GNP dropped at
least 14 percent in 1981 compared with 1980 and industrial output
fell by more than 13 percent--mainly because of shortages of
imported and domestic raw materials, shorter working hours, work
stoppages, and greater absenteeism. The one bright spot in the
Polish economy in 1981 was agriculture, where the grain and most
nongrain harvests were favorabe. Nevertheless, Poland will still
experience shortages of many basic foods, especially meat, in the
state marketing system in 1982, due to continued production
shortfalls of some goods, excess demand and hoarding.
Before the imposition of martial low, Warsaw did not expect
economic performance to improve in 1982. National income had
been scheduled to decrease again, and industrial production was
to stagnate. Now, even with the impositon of stricter controls
including the return of the six-day workweek, output may fall
below plan at least for the next few months if workers decide to
slow down production to register their unhappiness over martial
law. Beyond 1982, even the most optimistic Polish projections
-indicate that 1978 levels of economic activity cannot be reached
for a number of years. The imposition of martial law, continuing
worker resistance and uncertainty about the financial situation
make it difficult to forecast trends in output and the external
accounts in 1982.
Poland ran an $800 million deficit in 1981, which would have
been much larger had Warsaw been allowed to finance its desired
level of imports. Before the declaration of martial law, trade
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was expected to be in balance in 1982, largely for the same
reason. Debt relief agreed upon by Western governments and
commercial banks for 1981 covered much of Warsaw's 1981 debt-
service payments, eventhough a formal agreement on rescheduling
non-guaranteed debt has not yet been signed. A substantial
amount of new credits also was granted to cover unreseheduled
debt service and to finance the trade deficit. Negotiations on
rescheduling private and government debt and on new credits for
1982 have not yet started, and martial law has increased
uncertainty.
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Romania
Romanian GNP in 1980-81 grew at less than half the annual
rate recorded in the 1970s. In 1981 the increase was only 2.5
percent. Industrial production remained sluggish, with severe
lags behind plan in the extractive industries, chemicals,
transportation, and machine building. Agricultural output
rebounded little if at all from the sharp decline in 1980, in
part because of a late summer drought but also because of
pervasive inefficiency, reflecting years of neglect of the farm
sector by Bucharest. Consumers bore much of the burden of the
economic slowdown, with living standards stagnating--at best.
Continued shortages finally forced the regime to institute a
rationing program for some foods. Prospects for reversing the
slowdown are poor. The recently issued 1982 plan set many growth
targets below those in the 1981 plan, but these latest goals are
still unrealistically high. Some minor concessions were granted
to agriculture but the emphasis still remains on development of
the industrial sector.
Romania's current account deficit declined from $2.4 billion
in 1980 to $2.0 billion in 1981. Severe hard currency
difficulties will remain, however, for the next few years, in
part because of the need to import large amounts of oil. Exports
will be sluggish due to the poor market for petroleum products in
the West and Romania's domestic agricultural problems. Poor
quality will probably frustrate Romania's plans to significantly
increase machinery exports. Bucharest would like to ease its
hard currency problems by increasing the share of its trade with
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the rest of Eastern Europe. But CEMA countries, notably the
USSR, are not likely to provide Romania with significant
quantities of energy and raw materials at favorable prices. Thus
a sizable reduction in Romania's share of trade with the West is
not expected.
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Yugoslavia
While Belgrade's stabilization program has contributed to
slow growth in 1981, there has been little progress in providing
a lasting solution to major economic problems--high inflation and
poor export performance. Increasing shortages of intermediate
and raw materials began to take their toll on industrial
production in the last quarter of the year, holding the growth
rate to 4 percent in 1981 compared with 1980. A 4 percent
decline in agricultural output--due to a poor winter crop--kept
the GNP growth rate at about 3 percent, about the same as 1980.
The 1982 plan, emphasizing austerity, calls for continued slow
growth and for a rebound in agricultural production. The plan to
hold the inflation rate to 20 percent for the year appears
unrealistic, given the 1981 inflation rate of close to 40
percent.
The trend toward buying West and selling East continued in
1981: Yugoslav exports to the developed West declined by 2
percent in the first ten months of the year, while exports to
CEMA countries rose by 32 percent. To reverse this trend,
Belgrade must try to lower the domestic inflation rate, pursue a
more realistic exchange rate policy, and take other measures to
improve the competitiveness of its goods in Western markets.
Healthy earnings from tourism and workers' remittances in 1981
compensated somewhat for an increased trade deficit, and helped
to keep the current account deficit to about $2.3 billion for the
year. Highly ambitious export goals, coupled by severe import
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restrictions, are optimistically aimed at cutting the current
account deficit to only $500 million in 1982 but the trade
deficit is likely to be at least three times as high.
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China
China's real GNP increased by 3 percent in 1981, with
agricultural output up 4 percent and light industry up 12
percent. The heavy industrial sector suffered a 5 percent
decline in production because of a planned cut in investment,
plant closings, and other measures intended to improve
efficiency. Stagnating energy production, which contributed to
this year's slowdown in economic growth, continues to be a
problem. The persistent budget deficit, inflation, and
bureaucratic resistance to new economic policies have also
created difficulties for planners. Heavy industry has begun to
recover from its slump, however, and the Chinese are aiming at 4
percent real GNP growth in 1982.
Beijing has curbed imports and is now boasting a current
account surplus, after experiencing financial problems in late
1980 and early this year. Preliminary statistics indicate that
exports may exceed imports by more than $1 billion by yearend.
Earnings from invisibles in 1981 will probably outpace
expenditures by about $500 million. By August 1981 the
burgeoning surplus had already boosted China's foreign exchange
reserves to a record $4.9 billion, almost double the $2.5 billion
held in December last year.
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TABLE 1
Communist Countries: Real GNP Growth Rates,
Estimated 1979-81 and Projected 1982
(in percent)
1979
1981
1982
USSR
0.8
1.3
2.0
5.0
Bulgaria
4.1
-0.2
3.0
2.0
Czechoslovakia
1.1
1.9
0.5
0.0
East Germany
2.9
2.6
2.6
2.0
Hungary
0.2
0.3
1.0
1.0
Poland
-1.9
-2.6
-14.0
N.A
Romania
4.3
1.0
2.5
2.0
Yugoslavia
7.0
3.0
3.0
3.0
China
7.0
6.2
3.0
4.0
Note: GNP estimates are based on Western concepts and
procedures.
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TABLE 2
Communist Countries: Hard Currency current Account Balances,
Estimated 1979-81 and Projected 1982
(billion US dollars)
1979
1980
1981
1982
USSR
Current Account
-0.2
-0.5
-4.2
-4.5
Trade Account
Non-monetary gold
-2.0
-2.5
-6.1
-7.0
sales
Invisibles and
1.5
1.8
2.0
2.5
transfers
BULGARIA
0.3
0.2
-0.1
0.0
Current Account
0.5
0.8
-0.1
-0.3
Trade Account
Invisibles and
0.7
1.1
0.4
0.0
transfers
CZECHOSLOVAKIA
-0.2
-0.3
-0.5
-0.3
Current Account
-0.9
-0.2
-0.2
-0.2
Trade account
Invisibles and
-0.8
0.0
0.1
0.0
transfers
EAST GERMANY
-0.1
-0.2
-0.3
-0.2
Current Account
-1.5
-0.9
-2.0
-1.5
Trade account
Invisibles and
-1.5
-1.0
-1.5
-1.2
transfers
HUNGARY
0.0
0.1
-0.5
-0.3
Current Account
-1.1
0.2
-0.6
-0.5
Trade account
Invisibles and
-.7
0.2
0.0
0.0
transfers
-.4
-0.1
-.6
-0.5
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wa.a a v,ra. a a caa.
(Continued)
Conmunist Countries: Hard Currency Current Account Balances,
Estimated 1979-81 and Projected 1982
(Billion US dollars)
POLAND
Current Account
-2.9
-3.0
-2.4
NA
Trade account
-1.7
-.9
-0.8
NA
Invisibles and
transfers
-1.2
-2.1
-1.6
NA
ROMANIA
Current Account
-1.7
-2.2
-2.0
-1.5
Trade account
-1.2
-1.5
-1.0
-0.5
Invisibles and
transfers
-.5
-.7
-1.0
-1.0
YUGOSLAVIA
Current account
-3.3
-1.9
-2.3
-1.5
Trade account
-6.6
-5.5
-6.3
-5.5
Invisibles and
transfers
3.3
3.6
4.0
4.0
CHINA
Current account
0.2
1.2
1.5
1.5
Trade account
-0.6
0.2
1.0
1.0
Invisibles and
transfers
0.8
1.0
0.5
.5
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