The 1.6 diesel block is great pumping 52 hp with non-hydrolic lifter head (where valve adjustment requires replacing shims) and 54hp on hydrolic one (requires no valve adjustment and from 1986 heads onwards).
I recently got a 1985 Jetta diesel with only 36,000 miles but with a bad engine and great original paint and body. The seller had removed the head and the block was cracked and did not want to spend any more (replacing an engine costs about $3,500 plus engine cost and there are few installer). I suspect that when installing, the head (with intake manifold attached) tilted or the head bolt was overtightned, resulting in a crack at the threads of the bolt facing the front passenger side. I removed the shortblock with trans attached. To do that, I jacked the car and placed the front tires on ramps and used engine holder bar (I bought that for $50 from an ebay seller). Removed the mounting bolts and lowered the engine to the floor by placing newspapers underneath as hanging chain length of the engine holding bar was altered. Once it reached the floor, I draged it out. Went to a junk yard and bought, as is (with no refund option), a core motor that when disassembling found to be cracked and no good and wasted $250. I was able to get a short block shell for 1985 from an e-bay seller for $130. I took it to a machine shop where it was checked for cracks, cleaned, measured, deglazed, line bored, etc, plus the crankshaft was balanced and polished with matching main and rod bearings (pistons were cleaned and connecting rods were balanced), all for $350. I primed and painted the block, installed the rings on the pistons, crank, new seals, etc. I had a problem with oil dip stick tube. I found that my 1985 was made in the transition model year, meaning it had some 1984 and 1985 parts. The dip stick tube for 1984 is short whereas one for 1985 is long and attaches to the injection pump, meaning the pump bracket is also different. Luckly, I was able to get a tube and bracket from a junk yard for about $80 (new tube is available at the dealer for about $90). I also noted that the head bolts required were 12 mm but the one that came with the original block were 11mm. I did not want to spend another $350 for a 12mm cylinder head. So using a round file, filed the cylinder head holes to accomodate the 12mm ones. I used Race Ware headbolts. I installed the pump, put new timing belt, and timed without using dial gauge (ensured that crank was at top dead center, cam was at right spot, and pump pin went thru correct hole). The engine runs very smooth with no smoke. After few miles, I noted a diesel leak at the back pump junction (facing right fender if you are driving the car). My research on this web site and VW Vortex noted that the cause was a dried O ring that happens due to change in the diesel fuel formulation. An e-bay seller had listed the O-ring size and I was able to locate a local seller of such ring. I got a viton O-ring for about $3 and installed it without removing the pump and that fixed the problem (rebuild would have involved removing the pump and costing atleast $150). The other problem is that there is a small oil leak between the mating surface of the transmission bellhousing and the engine. I suspect it is either the pan gasket or the crankshaft rear main oil seal or the seal carrier. I may have to remove the transmission again but do not feel like doing at present. Other than this, the car runs great. I also need to fix the door panels as the cloth/fabric are peeling due to age.
I did all the assembling including installing back myself with no helper. I am not a trained mechnic but learned by frequenting this web site, reading auto repairs manuals and of course by buying these diesels that exposed me to these problems. I always try not to spend much on these cars. I do this as hobby. And the 1.6 is a simple engine.