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Date: Thu, 10 Jul 97 21:46:38 CDT
From: rich%pencil@VM.MARIST.EDU (Rich Winkel)
Subject: Lenders worry at social costs of NATO expansion
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** Written 6:24 AM Jul 8, 1997 by in cdp:disarm.armstra **
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Lenders worry at social costs of NATO expansion

By Janet Guttsman, Reuter, 2 July 1997

WASHINGTON, July 2 (Reuter) - The specter of military spending is haunting the countries lined up to join the North Atlantic Treaty Organisation, raising eyebrows at the international bodies that are bankrolling economic reforms.

The International Monetary Fund and other lending organisations have made credits to would-be NATO members conditional on tough monetary and fiscal targets. The three top candidates -- Hungary, Poland and Czech Republic -- insist they can afford the commitments of NATO membership but some lenders fear military spending could ease out social spending.

"We cannot deny that we are worried,'' one Washington-based international financial source said. "If the military component is very large or there is a sudden increase there will be less money for social spending. But in the final analysis we cannot force governments to spend money one way rather than another.''

The IMF, which has long been worried about the impact of military spending on other economic needs, lends money for budget support rather than for specific projects. But last week it asked the United States not to encourage "unproductive'' military expenditure.

"The IMF staff urges the United States, together with other major countries, to administer their policies on military sales to developing and transition economy countries in a way that avoids encouraging unproductive expenditures,'' the IMF said in a review of the United States economy.

Western arms firms are already hawking their wares around Central and Eastern Europe, although the three top NATO candidates have not yet signed up for big military bills.

Brookings Institution analyst Wolfgang Reinicke said there was a risk former communist countries seeking to upgrade weapons systems before they join NATO would divert scarce resources toward NATO.

"Once they are publicly admitted the budgets will explode ... it does not make any sense at all,'' he said. "If you go to these countries as an investor they say that they are the safest countries to invest in, but when you go as a military analyst they say they need protection. They cannot have their cake and eat it.''

U.S. officials have put the cost of NATO expansion at between $27 billion and $35 billion to the year 2009 but say Washington would have to pay only $1.5 billion to $2 billion of that. Other estimates are up to twice as high.

The United States wants to exclude Romania and Slovenia from the first wave of NATO expansion, bringing in just the three former Warsaw Pact members that have made most progress on economic and democratic reforms. Military spending in Hungary, Poland and Czech Republic is currently 1.5 to 3 percent of gross domestic product and is not forecast to rise much, if at all, after they join the alliance.

The final decision on new members will be made at a NATO meeting in Madrid next week.

"Romania has this year, in the midst of an economic crisis and a major restructuring programme, increased military spending to make itself credible for NATO expansion,'' Anders Aslund, senior associate at the Carnegie Endowment for International Peace said. "It is logical if you want to show a commitment, to show that you really are prepared to sacrifice resources, but from outside it seems highly counterproductive.''

Copyright ( 1997 Reuters Limited.