INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 05644455
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 38
• Document Creation Date: December 28, 2022
• Document Release Date: August 28, 2018
• Case Number: F-2017-01874
• Publication Date: May 16, 1986

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Directorate of
Intelligence
International
Economic & Energy
Weekly (u)
16 May 1,86
Secret
're
DI IEEW 86-020
16 May 1986
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Copy 83
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International
International
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Economic & Energy Weekly
16 May 1986
iii
Synopsis
1
Perspective�Libya: Wrestling With the Economy
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3
UN Special Session on African Economic Problems
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East Germany: Steady Economic Course for 1986-90
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Spain: High Unemployment Continues
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15
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LDCs: Impact of Changes in US GSP
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19
Briefs Energy
International Finance
Global and Regional Developments
National Developments
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
i Secret
DI IEEW 86-020
16 May 1986
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�Sespat-
International
Economic & Energy Weekly (u)
Synopsis
1 Perspective�Libya: Wrestling With the Economy
Libyan leader Qadhafi is facing increasing economic pressure as a result of the
weak oil market and the confrontation with the United States.
3 UN Special Session on African Economic Problems
The United Nations Special Session on African economic problems scheduled
for 27-31 May in New York will provide a major forum for African countries
to continue their dialogue with the international economic community. In our
judgment, the African request for debt relief and additional economic
assistance would require significantly more aid than international organiza-
tions and non-African donors are planning to extend.
7 East Germany: Steady Economic Course for 1986-90
Economic policies and goals for 1986-90, released at the 1 1 th Communist
Party (SED) Congress last month, continue the course of recent years that has
produced comparatively rapid growth, by East European standards, and
prompted public praise from Soviet leader Gorbachev.
11 Spain: High Unemployment Continues
Spain's unemployment rate�now about 22 percent�is the highest in Western
Europe, and there is little prospect for any short-term improvement. We do not
anticipate any major repercussions over the near term from high unemploy-
ment, however, because the political opposition is weak and the thriving
underground economy provides an important safety valve.
15 LDCs: Impact of Changes in US GSP
Recent modifications in the US Generalized System of Preferences (GSP) has
raised concern among beneficiary countries that restrictive trade measures
such as the GSP modifications will soon stem their export expansion and
economic growth.
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�Secret�
International
Economic & Energy Weekly
16 May 1986
Perspective Libya: Wrestling With the Economy
Libyan leader Qadhafi is facing increasing economic pressure as a result of the
weak oil market and the confrontation with the United States. Additional
losses in oil revenues would force Tripoli to make difficult and risky political
choices this year. At current export levels, Libya loses about $30 million per
month for each one dollar decline in oil prices. Conversely, if Tripoli holds
prices at $14 per barrel, every 100,000-b/d drop in oil exports costs the regime
$42 million per month. the regime may need to cut
imports by half, which would have to include both civilian goods and military
equipment, magnifying already unprecedented domestic grievances over the
regime's economic mismanagement. Declining oil revenues also will hinder
Tripoli's ability to repay $4 billion in arrears owed to major trade partners.
The declining cash flow is intensifying an already worrisome deterioration in
living standards. The quality of health care and education, hallmarks of
Qadhafi's revolution, has fallen sharply. Food lines are growing longer and
consumers more contentious. Hoarding has become a way of life for most, and
a thriving black market has evolved despite government efforts to suppress it.
The regime is attempting to consolidate its control over the economy by
halving the number of government ministries. This, however, will not solve the
problems of an inept bureaucracy and inappropriate regime policies, and could
further isolate the regime from the general populace.
Libya probably will be able to maintain, or even increase, oil production as
long as Tripoli can retain foreign expertise and its European oil markets. Oil
exports have not been significantly affected by the slump in international oil
demand and even jumped by about one-third last month. This surge probably
was a one-time effort to empty crude oil storage tanks Tripoli considered
vulnerable to attack, rather than an indication of improved market conditions.
The pattern of Libyan oil exports, however, has changed since the imposition
of US sanctions. Exports to West Germany are down by more than one-third,
while exports to refiners in Spain, Italy, and Turkey have remained strong.
The continuation of low oil prices could create some long-term problems in
Libya's petroleum industry. Spare parts shortages are cropping up, probably
because Libya does not have the cash to import them. Moreover, oilfield
development projects and drilling programs have been cut.
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The US airstrikes have not yet caused a significant exodus of the foreign
workers. the regime has avoided hostile actions
against foreign nationals and is providing special protection to US and British
citizens. Some US oilworkers have left Libya, but as many as 400 could be
there at any given time. The fear of future military action has nevertheless
prompted large numbers of dependents to leave and could still result in the de-
parture of additional workers.
Tripoli has responded to West European actions against Libyan diplomats by
randomly expelling small numbers of British, Spanish, Italian, and other
foreign workers and diplomats. The slowdown in the economy gives Tripoli
leeway to draw down the foreign work force, but Libya remains heavily
dependent on foreign expertise to operate its economy, especially the oil sector.
The Tokyo Economic Summit declaration probably will have only a small
impact on Western countries' economic relations with Libya. While the
summit participants were relatively forthcoming in condemning Libyan sup-
port for terrorism, any policy response is likely to come mainly in the form of
stricter antiterrorism measures at home or reduced diplomatic ties. Most
Western governments still oppose economic sanctions for a variety of reasons,
including a belief that sanctions are ineffective, an unwillingness to lose
business, a concern about setting potentially troublesome precedents, and a
fear of Libyan retaliation.
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Seek ct�
UN Special Session on African
Economic Problems
The United Nations Special Session on African
economic problems scheduled for 27-31 May in
New York will provide a major forum for African
countries to continue their dialogue with the inter-
national economic community. On the basis of US
Embassy we do not expect real
progress toward resolving major issues such as
Africa's debt crisis or the rehabilitation of regional
agriculture. In our judgment, African requests for
debt relief and additional economic assistance
would require significantly more aid than interna-
tional organizations and non-African donors are
planning to extend.
Pre-Session Maneuvering
The Special Session�the first to address the eco-
nomic problems of a particular region�comes as a
result of a lobbying effort by African countries and
the Organization of African Unity (OAU). It also
reflects international recognition of the severity of
Africa's economic situation, particularly south of
the Sahara.
The African countries have seized the initiative by
having a document, prepared by the OAU with
input from the United Nations Economic Commis-
sion for Africa, made an official working document
of the Preparatory Committee for the session. This
ensures its availability to delegations during and
after the session. This working document advocates
the implementation of a medium-term economic
recovery program�Africa's Priority Program for
Economic Recovery, 1986-90�adopted by the
OAU last July.
The African document is politically controversial
because of its reference to the Sahrawi Arab
Democratic Republic (SADR), the disputed territo-
ry of Western Sahara, where rival claims by Mo-
rocco and the Polisario liberation movement remain
3
unresolved. Morocco has protested the inclusion of
the SADR in the document and at one stage
threatened to sabotage the Special Session by
preventing a final consensus, should the OAU-
prepared paper become a formal UN document at
the session. To help head off a conflict, the Prepa-
ratory Committee is submitting its own working
paper to the Special Session. The African countries
will, however, play a role in the preparation of this
paper. According to diplomatic sources, the Afri-
cans have tabled, as the proposed Special Session
declaration, the UN Program of Action for African
Economic Recovery 1986-90, which substantially
repeats the presentation of the African position
paper submitted to the Preparatory Committee.
African Proposals
The participants in the session generally agree on
the causes of Africa's economic crisis and on the
necessity for economic reforms, according to diplo-
matic sources. The African position paper acknowl-
edges the need for structural reform throughout the
region. This position is similar to current thinking
in OECD countries and multilateral institutions
such as the African Development Bank, the IMF,
and the World Bank. The European Community's
position paper on the Special Session also empha-
sizes the importance of structural reform to cope
with the economic crisis.
The African states, however, are proposing a new
set of relationships between Africa and the interna-
tional community based on a principle of "co-
responsibility." Under this principle, massive eco-
nomic support for the region would be reinforced
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by African efforts to mobilize domestic resources
and efficiently use them in effecting economic
adjustment. Coresponsibility would be a major
feature of the implementation of the OAU's
1986-90 Priority Program. The non-African partic-
ipants in the Preparatory Committee have not
endorsed this principle so far, but the European
Community has suggested possible areas for coop-
eration between Africa and donor countries in
trade and economic aid.
The African states also propose the establishment
of a followup mechanism to monitor the implemen-
tation of the OAU Priority Program on a continu-
ing basis. According to US Embassy reporting,
however, statements by Western government repre-
sentatives in the Preparatory Committee reject the
proposal for new mechanisms and unanimously
endorse the use of existing institutions to imple-
ment followup measures.
Upping the Financial Ante
The African countries are seeking a sizable in-
crease in developed country aid and debt relief. The
Africans estimate in their position paper that im-
plementation of their 1986-90 economic recovery
program would require $128 billion in new financ-
ing, of which $83 billion would be raised domesti-
cally. This leaves an external resource gap of $45
billion, or $9 billion annually, to be financed by the
international community. This $9 billion would be
in addition to the current approximately $20 billion
in annual net financial flows to the continent
(South Africa excluded), according to OECD data.
The OAU request for financial assistance goes even
further. The African position paper describes the
annual debt servicing burdens of $15-25 billion as
unsustainable. To obtain relief the paper proposes:
� Converting all official development assistance
(ODA) debts and interest obligations to grants.
This would provide relief of $3-5 billion a year,
according to the paper.
� Consolidating all non-ODA official debt due
during 1986-90 into long-term loans repayable
over 30 to 40 years on concessional terms with a
10-year grace period. This would produce savings
of $4-6 billion a year.
� Reducing interest rates on commercial debt and
consolidating debt service payments for repay-
ment over several years. The gains here cannot be
estimated at this time, because the reduced inter-
est rates and the extended repayment periods are
not specified.
Requests Unlikely To Be Met
The size of the African request for additional
financial assistance is well beyond the range of
current aid proposals for the region. The African
proposal exceeds by far the additional $2.5 billion
annually that the World Bank estimates Sub-
Saharan Africa still needs under a regime of
economic adjustment. Moreover, the external fi-
nancing mechanisms for Africa for the rest of the
decade are already in place for the most part. For
example, the IMF's $3 billion Structural Adjust-
ment Facility has already been set up through 1991
with no further enlargement contemplated. The
World Bank is sounding out its membership on a
$12.5 billion replenishment of the International
Development Association, its concessional arm.
This replenishment contains a $1.5 billion Special
Fund for Africa that is the same size as that of
1985. European Community members favor the
World Bank proposal, and we do not anticipate that
bilateral official donors, already working under
tight domestic budget strictures, will radically alter
their aid policies to favor Africa further at the
expense of other regions. The OECD, for example,
forecasts the growth in its bilateral assistance
worldwide at an average of 2 percent per year for
the foreseeable future, implying much less aid for
Africa than the Africans are asking for in 1986-90.
In our judgment, although African states�who
feel they have greater influence in UN forums-
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Sarrat
will try to gain political capital from the Special
Session, they have little leverage to push the inter-
national community to promise massive additional
aid or support potentially costly followup mecha-
nisms. The Special Session will put Africa's eco-
nomic needs in the public spotlight again, but we
believe any aid increases will continue to be pur-
sued through the established multilateral financial
institutions and bilateral relationships, mechanisms
acceptable to Africa's major donors.
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�Seeret�
East Germany: Steady Economic
Course for 1986-90
Economic policies and goals for 1986-90, released
at the 11th Communist Party (SED) Congress last
month, continue the course of recent years that has
produced comparatively rapid growth, by East Eu-
ropean standards, and prompted public praise from
Soviet leader Gorbachev. East Germany's goals are
ambitious in light of its serious resource con-
straints, cutbacks in investment in recent years, and
uncertainties surrounding Soviet trade demands.
Moreover, the regime has probably wrung out most
of the easy improvements in economic performance
through organizational restructuring and tighter
management. Nonetheless, East Berlin has a good
chance of meeting its goals, especially if its mod-
ernization program continues the gains in produc-
tivity and efficiency achieved in recent years.
Recent Performance
After a sharp slowdown in growth in 1982 associat-
ed with austerity measures to avert financial crisis,
the economy has recovered to become, by most
measures, the most successful in Eastern Europe.
We estimate that, after stagnating in 1982, GNP
growth rebounded to 3.2 percent in 1984 and 2.4
percent last year. The government claimed sizable
gains in labor productivity and declining produc-
tion costs. The chronic hard currency trade deficits
of the 1970s became surpluses in 1981-85, and East
Berlin sharply reduced its ruble trade deficits with
Moscow. At the same time, the East Germans built
hard currency reserves to at least $5.9 billion by
September 1985, according to Bank for Interna-
tional Settlements data, by far the highest of any
East European country.
The 1986-90 Directive
The regime's satisfaction with its economic
achievements and prospects was plain at the SED
Congress, and the party reaffirmed the 10-point
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"economic strategy of the 1980s" promulgated at
the 10th Congress in April 1981. Overall, party
leader Honecker's address was markedly more up-
beat than Gorbachev's remarks in East Berlin and
the soul searching of the Bulgarians at their con-
gress in March. The SED called for growth rates
that are among the highest in Eastern Europe.
Goals for produced national income are in line with
those of recent years although industrial production
is to grow slightly less rapidly. The regime is
counting on productivity gains of over 8 percent per
year to provide 90 percent of growth.
Industry. The regime will continue to push strongly
the development of its comparatively high-technol-
ogy industries�robotics, computers, electronics,
and machine building, for example�in the interest
of greater efficiency and labor savings. At the same
time, the East Germans will phase out production
of high-cost, labor-intensive products. The govern-
ment also is emphasizing production of consumer
goods, which apparently are destined for export as
well as domestic use.
Energy. The economy will continue to rely heavily
on domestically produced lignite, which already
accounts for over 70 percent of primary energy
consumption. Production costs, however, are rising
sharply as shallow beds are exhausted. With Soviet
oil deliveries capped, East Berlin will have to boost
lignite production above the 312 million metric tons
mined in 1985 to keep industrial output growing
and support East Berlin's policy of electrifying
industry and the rail lines to conserve liquid fuels.
Using more lignite, however, will exacerbate the
country's already serious air pollution problem.
Although world energy prices are down, the East
Germans remain committed to this costly energy
"independence" program.
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East Germany: Selected Economic
Indicators, 1981-85
Growth in Produced GNP Growth b
National Income a Percent
Percent
Growth in Industrial
Production a
Percent
Growth in Retail Sales a
Percent
6
a Official East German statistics.
b CIA estimate.
C Preliminary.
309118 5-86
Industrial Productivity
Growth a
Percent
Hard Currency Trade
Balance b
Billion US $
2.0
Agriculture. East Germany hopes to keep agricul-
tural output on the rise. In 1984 the government
introduced major organizational changes and fi-
nancial incentives for farm managers and "cooper-
ative peasants," which apparently contributed to
consecutive record grain harvests in 1984 and 1985.
If East Berlin can reach its goal of 12 million tons
of grain by 1990, it would be able to reduce imports
further and conserve hard currency. As a result,
prospects for US grain exports to East Germany,
which were sharply reduced in the early 1980s,
could remain poor.
Investment. The plan directive contained a signifi-
cant increase in badly needed investment spending
but was vague about how it will be allocated. East
Berlin cut back investment sharply in 1982-84 as
part of its effort to avoid financial crisis, but did
not begin to increase investment until late 1985,
well after the end of its financial problems. We
suspect that the bulk of projected average annual
spending of a record 69.2 billion marks�up from
50.5 billion marks in 1984�will be devoted to
high-technology industry, machinery, electronics,
chemicals, energy, and pollution control. We also
expect the continuing need for industrial modern-
ization to lead to somewhat higher imports of high-
technology capital goods from the West.
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S&T. The regime is strongly committed to making
improvements in science and technology the engine
of future economic growth, but the party shed little
new light on the new five-year plan for S&T that
Honecker promised last June. The plan directive
highlights microelectronics, computers, computer-
aided design and manufacturing systems, flexible
manufacturing systems, nuclear power, and bio-
technology as priority areas. The party reaffirmed
its S&T cooperation with the USSR and CEMA
through the year 2000. Premier Stoph emphasized
improved cooperation between East German re-
search institutes, the universities, and the industrial
combines. To increase the effectiveness of the R&D
effort, the combines will directly pay for and
supervise economically important research. Hon-
ecker also announced a new science curriculum for
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-Seemt.
East Germany: Economic
Goals for 1986-90
Average annual percent growth
(except where noted)
Produced national income b
1986-90
1985
Plan
1985
Actual a
4.4 to 4.7
4.4
4.8
Industrial production b
4.1 to 4.4
4.3
4.5
Productivity in industry
8.3 to 8.5
7.1
8.4
Unit production costs in
industry
-2.2
-2.7
-2.2
Unit consumption of raw
materials
-4.0
-2.8
-3.5
Personal monetary income
3.9 to 4.1
4.0
3.9
Retail trade turnover
3.9 to 4.1
4.0
4.2
Investment per year (billion
East German marks)
69.2
56
62
Grain production per year
(million metric tons)
11.8 to 12.0
10.7
11.6
New or reconstructed housing 212.8
units per year (thousand units)
203.1
212.2
a Plan and actual performance data are not exactly comparable
because historical data exaggerate real economic growth by includ-
ing inflation and some double counting. Plans, by contrast, do not
purposely incorporate such biases.
b Using Western accounting practices, we tentatively estimate GNP
and industrial production growth in 1985 to have been 2.4 percent
and 2.2 percent, respectively. Western accounts usually yield lower
growth rates because they remove distortions of turnover taxes in
prices and include such "nonproductive" sectors as housing and
government that generally grow more slowly than industrial output.
The Consumer. The plan calls for comparatively
slow growth in consumer-related goals, and we
expect only modest increases in real personal con-
sumption. Price increases for "luxury" goods prob-
ably will account for most of the projected increase
in retail sales, but the state will continue to heavily
subsidize prices of basic goods and services, such as
bread, milk, rents, and public transportation. Tacit-
ly admitting nagging shortages, Honecker reiterat-
ed the need to assure availability of the "1,000 little
things of everyday life" and announced expanded,
more "consumer-friendly" retail store hours. The
party increased marriage and maternity benefits,
apparently to try to increase birth rates and stem
the continuing population decline. Although hous-
ing construction will continue at current rates, the
9
regime expects housing shortages to be eliminated
by 1990. We believe these measures are likely to
keep consumers generally mollified and allow the
government to convince the populace that harder
work will be rewarded by a better standard of
living-a key to its efforts to boost productivity.
Trade. Key aspects of trade plans were not re-
vealed, but it appears that the growth of foreign
trade will slow considerably from the rates of
recent years. The Soviet-East German plan coordi-
nation protocol signed last October called for annu-
al increases of only about 3 percent over the 1985
level-down from double-digit rates in the early
1980s. Similar trade growth was projected with
other socialist countries, which, with the Soviet
Union, account for about two-thirds of overall East
German foreign trade. Although the leadership was
vague about trade with the West, we expect East
Berlin to keep its policy of maintaining modest
hard currency trade surpluses, meaning that the
overall growth of this trade would depend largely
on East Germany's ability to export. Nevertheless,
we expect the composition of trade with the West to
shift somewhat toward imports of high-technology
capital goods; East Berlin is creditworthy enough to
be able to obtain long-term financing for its tech-
nology needs. Commerce with LDCs may stagnate,
however, given continuing Third World debt prob-
lems and East Berlin's unwillingness to extend
more credits to several trade partners seeking to
reschedule existing loans.
Several factors could hamper achievement of these
trade growth targets:
� Despite a signed protocol, the USSR could ask
for more manufactured goods or cut resource
deliveries, possibly including oil, as happened in
1982. The Soviet economy must cope with declin-
ing oil export revenues, and East Germany is a
high-quality producer within CEMA.
� The value of Soviet exports to East Germany
could fall well below plan as the CEMA price
formula begins to reflect lower world oil prices.
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� The falling world price of oil should cut hard
currency earnings from refined oil exports.
� The impact of the Soviet nuclear accident re-
mains unclear. It could reduce the Soviets' small
electricity deliveries, increase pressures on Mos-
cow to cut coal and oil shipments, and force more
East German reliance on domestic and Western
energy sources. Greater use of lignite, however,
could require additional Western equipment to
control emissions and shift investment allocations
somewhat.
Economic Management. The Honecker regime has
made clear that it is pleased with its basic economic
structure and that no major organizational changes
or "reforms" are in the works. The East Germans
give little indication of feeling pressure from Gor-
bachev's calls for improvements in Soviet Bloc
economic management and performance. We ex-
pect East Berlin to continue to tinker with the
economy as it strives to "perfect" the management
system. A reform of industrial goods prices to
improve economic decision making is possible in the
late 1980s, but tight central control will remain a
hallmark of the East German economy.
Outlook
Although the growth targets are the lowest for a
five-year plan in decades, they are ambitious in
light of East Germany's serious resource con-
straints, low investment of recent years, delays in
modernization, and uncertainties surrounding Sovi-
et demands. The organizational improvements of
recent years have exhausted the easy fixes to
improve efficiency and productivity, and East Ber-
lin's ability to keep growth strong remains problem-
atical. The regime's S&T push probably is its best
bet, but the East Germans must do a better job of
putting technological innovations into practice.
Nonetheless, the East Germans seem to have the
best economic management skills among the East
Europeans, and they will probably be able to keep
growth comparatively high by regionwide stan-
dards.
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Spain: High Unemployment
Continues
Spain's unemployment rate�now about 22 per-
cent '�is the highest in Western Europe, and there
is little prospect for any short-term improvement.
Structural rigidities in the labor market�particu-
larly Madrid's strict labor laws�are a major hin-
drance to job creation. High wages produced by
post-Franco collective bargaining arrangements
and high nonwage labor costs mandated by the
state also have eaten into company profits and have
made employers reluctant to increase their work
forces. We do not anticipate any major repercus-
sions over the near term from high unemployment,
however, because the political opposition is weak
and the thriving underground economy provides an
important safety valve.
Dimensions of the Problem
Spain experienced the sharpest rise in unemploy-
ment in Western Europe between 1973 and 1985.
During this period, the unemployment rate soared
from 2.4 percent of the labor force (280,000 peo-
ple)�about one percentage point below the West
European average�to 22 percent (2.9 million peo-
ple), more than double the average. Joblessness is
particularly high among women and the young.
Long-term joblessness is also a problem�the share
who had been unemployed for more than one year
climbed to over 54 percent in 1984; those unem-
ployed over two years rose to 29 percent. Although
total employment increased last year for the first
time since 1974, it is still 18 percent below the 1974
level. More than 2 million jobs have been lost and
fewer people are employed now than in 1964.
Industrial employment has shrunk 30 percent since
1974 while agricultural employment has fallen by
40 percent
'The official figure does not take into account those employed in
the underground economy. We estimate actual unemployment is in
the range of 16 to 17 percent�still one of the highest in Western
Europe.
11
Spain: Comparative Unemployment
Rates, 1973-85
Percent
25
Spain
Western Europe a
0 1973 75
80
a western Europe excluding Spain.
309124 5-86
Causes
85
Spain's unemployment problem stems in part from
external causes. The two oil price shocks of the
1970s hit Spain hard because of its above-average
dependence on imported oil, and the subsequent
world recessions decreased Western demand for
Spanish goods. Average annual real GDP growth
dropped from 7.3 percent in 1960-74 to 1.6 percent
in 1975-83, the sharpest drop in the OECD. Mean-
while, as West European governments began to
limit the number of migrant workers, the escape
valve of emigration began to close; between 1975
and 1983, about 270,000 Spaniards returned home.
Secret
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vt C
Spain: Comparative Real Unit Labor
Costs in Industry, 1973-84
Index: 1970 100
160
140
120
100
1
80 1973 75 80
I 814
Spain
Selected West
European
countries a
a Trade-weighted average based on shares of world exports
in 1980. Selected countries include Belgium, Denmark, France,
Italy, the Netherlands, United Kingdom, and West Germany.
309127 5436
Internal causes also played a major role in boosting
Spanish unemployment. After Franco's death in
1975, the newly legalized trade unions pressed for
large real wage gains in the face of rapidly acceler-
ating inflation. As a result, total real labor costs
jumped 66 percent between 1974 and 1982�about
double the average European rate�while produc-
tivity grew only 28 percent. Firms saw their unit
labor costs soar and found themselves unable to
compete either with their West European counter-
parts or with the newly industrialized countries
whose competitiveness in traditional sectors such as
footwear, steel, and textiles cut into Spain's export
markets.
While real wages have moderated in the last
several years, government social welfare policies
have kept total labor costs high. Employers' contri-
butions to social security represent 21 percent of
total labor costs in Spain�the highest share in
Secret
Western Europe after France. In addition, the
ceilings on wages subject to social security contri-
butions encourage employers to lean toward more
highly skilled, higher paid workers, while the lower
social security tax rates on overtime pay have led
employers to extend work hours rather than hire
new workers.
Rigid labor laws inherited from the Franco era also
have played an important role in Spain's inability
to create jobs. They make it virtually impossible for
an employer to lay off workers without reaching an
agreement with the government or one of the main
labor unions. As a result, employers are reluctant to
hire new workers even in prosperous times because
any future dismissals would be costly and time
consuming. The labor laws have particularly affect-
ed small, labor-intensive private firms and have
pushed many of them into the underground econo-
my.
Government Efforts
Center-right governments of the early 1980s imple-
mented a number of measures aimed at holding
down unemployment, but they were largely unsuc-
cessful. The Workers Statute of 1980 introduced
more flexible temporary contracts, reduced allowa-
ble overtime, raised the minimum working age, and
established a mandatory retirement age. Under the
National Employment Pact of 1981, the trade
unions agreed to a cut in real wages in exchange for
the promised creation of 350,000 new jobs through
increased public investment and fiscal incentives.
Implemented in a piecemeal fashion, these mea-
sures did not prevent the unemployment rate from
rising above 16 percent by the time the Socialists
came to power in 1982.
The Gonzalez administration has placed more em-
phasis than earlier governments on promoting wage
moderation and labor market flexibility to boost
employment. It succeeded in persuading the Social-
ist General Union of Workers to accept a slowdown
in real wage increases for 1985 and 1986 through
the Economic and Social Pact. It has also limited
12
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�Se
Labor Rigidities
Three types of layoffs are officially permissible:
� For an individual layoff, the case is first present-
ed for arbitration under the Ministry of Labor. If
agreement cannot be reached, the case goes to the
courts. If approved, a severance payment is usu-
ally required equal to 20 days' pay per year of
employment to a maximum of one year's salary.
If disapproved, the employer must readmit the
worker or pay him 45 days of salary per year of
employment to a maximum of 42 months' salary.
� For a collective layoff the employer must obtain
approval from the Ministry of Labor. If approved
temporarily, the "Salary Guarantee Fund"
makes up the difference in income received from
unemployment compensation, and the firm is
required to rehire these workers at the same
salaries. Permanent collective layoffs require the
same severance payments as do individual
layoffs.
� For layoffs resulting from industrial restructur-
ing, workers who have not been released through
early retirement have the choice of either receiv-
ing a severance payment as well as unemploy-
ment compensation for up to 18 months or
surrendering their severance payment to an "Em-
ployment Promotion Fund." The Fund provides
redundant workers with improved unemployment
benefits, while retraining them for new opportu-
nities.
employers' obligations to pay indemnities for laid-
off workers, stepped up training programs for
youths between 20 and 25, and put youths on their
parents' social security benefit plans, thus allowing
employers to hire young workers without making
social security payments. Restrictions on temporary
contracts have also eased: they now may have a
duration of up to 3 years and can be used by
employers launching new activities or products.
13
The Socialists' efforts, so far, have been no more
successful than those of their predecessors: since
1982, 600,000 jobs have been lost, and the unem-
ployment rate has risen by 6 percentage points.
Part of the reason lies in government efforts to
modernize and restructure industry. Madrid's in-
dustrial reconversion plan will have eliminated
about 82,000 jobs by the end of 1986, while
measures to boost investment in capital equipment
have encouraged Spanish firms to reduce their
work forces and shift to more capital-intensive
methods of production. More important, however,
the government has done little more than tinker
with the rigidities in the labor market. While there
is pressure to move Spanish labor legislation closer
to the EC norm, the process of dismissing unneces-
sary workers remains highly regulated and costly.
Outlook
An improved economic performance in 1986�
resulting from more vigorous growth in the Europe-
an Community, modernization policies, and lower
oil prices�will not be enough to reduce unemploy-
ment. We expect the jobless rate to stay near 22
percent through the end of this year. With GDP
growth projected at 3 percent, the economy will not
be able to absorb much more than about half of the
120,000 people who will enter the job market this
year, and only a small percentage will be able to
emigrate to northern Europe. Agricultural employ-
ment will undoubtedly continue to fall, while ser-
vices and industry�in the midst of restructuring�
probably will not pick up the slack. EC entry will
contribute to the problem in the near term as
Spanish tariffs are dismantled and relatively ineffi-
cient industries are exposed to European competi-
tion. The government is not likely to budge from its
austerity course and adopt expansionary measures
to boost employment. Moreover, the long-overdue
reform of Spain's rigid labor laws has been post-
poned at least until after the national elections in
June.
�Semi
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-Soczet.
The Underground Economy
Spain's underground, or "black" economy�
employers not registered with the government and
employees not covered by social security�is thriv-
ing. Madrid estimates that the black economy
accounts for more than 25 percent of all economic
activity and employs between 600,000 and 800,000
people. The black economy is particularly strong in
textiles and footwear where officials estimate that
30 percent of "unemployed" textile workers and 40
percent of "unemployed" shoe workers hold jobs.
Spain's shoe production, for example, increased 50
percent between 1981 and 1984, while official
employment in the industry fell by 50 percent.
Many small firms go underground to escape the
restrictive labor laws and excessive social security
taxes. They typically declare bankruptcy and then
resume production without notifying the authori-
ties. Employees benefit not only from the jobs, but
also, in many cases, by collecting unemployment
compensation from the state. These small work-
shops usually act as suppliers to larger, legal
companies.
Implications
We do not anticipate major political or social
repercussions from continued high unemployment.
Prime Minister Gonzalez faces a weak and frag-
mented opposition, and opinion polls indicate that
he will have little trouble winning reelection on 22
June. Despite resistance from labor over his wage
policies and from business over the neglect of labor
reform, we do not expect the Socialists to suffer
much as long as the only alternative is the right-
wing Popular Alliance. Although authorities have
decried the evils of the black economy�poor work-
ing conditions, lack of labor legislation, and evasion
of taxes�they will probably tolerate it as a safety
valve that provides at least part-time work for
many on the unemployment rolls and keeps social
tensions down.
�SEM-
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�Seefet�
LDCs: Impact of Changes
in US GSP
Recent modifications in the US Generalized Sys-
tem of Preferences (GSP)�a program under which
LDC exports to the United States are accorded
favorable tariff treatment�has raised concern
among beneficiary countries. The changes are put-
ting increased economic pressures on a number of
LDCs that are dependent on GSP trade for a
significant share of GNP. These major beneficia-
ries fear that restrictive trade measures such as the
GSP modifications will soon stem their export
expansion and economic growth.
Recent Trends and Modifications
US GSP duty-free imports more than quadrupled
over the past decade, rising from $3.2 billion in
1976 to $13.3 billion in 1985 as shown in the
following tabulation:
Billion US $
1976 1978 1980 1982 1984 1985
Imports 3.2 5.2 7.3 8.4 13.0 13.3
Last year GSP imports accounted for 40 percent of
total US imports from GSP beneficiary countries.
More than 3,000 products from 140 developing
countries and territories are granted US GSP
benefits. The top five beneficiaries in 1985, howev-
er�Taiwan, South Korea, Brazil, Mexico, and
Hong Kong�accounted for almost two-thirds of
US GSP imports.
As a result of changes in the US GSP this year, on
1 April duty-free import privileges were lifted for a
wide range of products imported from GSP
15
beneficiary countries.' These modifications become
effective for the year beginning 1 July 1986 and
remove $839 million worth of goods from free
treatment because they accounted for more than
half of US imports of the products. Access also has
been denied for another $2.4 billion in goods
because of the US "graduation" policy.2 On the
other hand, some products where there is no
comparable US product were added to the GSP
list, and Micronesia, Greenland, and Hungary were
added to the list of GSP-eligible countries.
Hardest hit by the new GSP changes will be
Taiwan, Hong Kong, South Korea, Singapore, and
Mexico. Collectively, these five LDCs are being
denied duty-free status for $2.8 billion worth of
products�some 35 percent of their GSP exports to
the United States. Argentina, Chile, Brazil, Israel,
Peru, and Zambia also are being denied redesigna-
tion on a wide variety of products.
Reaction to 1985 US GSP Modifications
According to Embassy reporting, even before the
most recent changes in the US GSP, some develop-
ing countries were already expressing opposition to
' A review of product eligibility is performed annually as directed
by the Trade Act of 1974 in order to update changes to the GSP.
During an annual review, interested parties (private industry and
governments) can petition for the addition or removal of products
from the program. A general review of the US GSP, mandated by
Congress in 1984, is performed as necessary to review the competi-
tiveness of all beneficiary countries. As a result of either the general
or the annual review, the "competitive need" limits will be lowered
for products where a beneficiary country is determined to have
demonstrated enough economic strength to compete without GSP
benefits.
'As products from the more advanced beneficiary developing
countries become competitive in the United States, these products
are exempted or "graduated" from the program. Graduation is
based on a beneficiary's level of development, competitiveness in a
product, and the overall economic interest of the United States
�Secret--
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(b)(3)
(b)(3)
(b)(3)
(b)(3)
(b)(3)
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What Is GSP?
A total of 20 OECD countries provide preferences
under unilateral GSP programs to developing
countries. Currently about 140 countries, including
South European or Mediterranean countries, cer-
tain centrally planned economies, dependent terri-
tories, and countries not belonging to the United
Nations, are accorded beneficiary status. Under
these programs, preferences are generally available
for all manufactured and semimanufactured prod-
ucts, with exceptions being allowed for imports
that compete with products of "sensitive" sectors
in OECD countries.
The US GSP is a program that permits duty-free
entry into the United States of allowable products
from eligible developing countries. Implemented by
the United States on 1 January 1976, the primary
objective of the GSP is to promote LDC economic
development and diversification of trade.
Individual GSP imports have resulted in signifi-
cant increases in import penetration of US markets
for several different commodity groups such as
agricultural products, forest products, chemicals,
minerals and metals, and miscellaneous manufac-
tures. GSP imports, however, have not resulted in
significant increases in the overall import share of
the US market. On a sector-by-sector basis, the
growth of GSP imports relative to total imports is
small.
Although the benefits of the US program have
encouraged increased LDC exports in certain sec-
tors, several factors limit the extent of market
penetration: the limited product coverage; the se-
lective nature of the GSP program, which excludes
import-sensitive commodities; periodic program re-
views and "graduation"; and constraints imposed
by limited technology, manufacturing capacity,
basic infrastructure, skilled labor, and capital in
many GSP beneficiary countries.
the program of graduation, asserting that despite
solid economic performances in some areas, they
remain underdeveloped and need trade preferences.
Many of the countries interpret the recent GSP
modifications as yet another example of the inter-
national trade environment becoming increasingly
unfavorable to export-oriented developing coun-
tries. Some, such as Singapore and Malaysia, com-
plain that they are innocent victims of internal
protectionist pressures in the United States.
The ASEAN countries are particularly concerned
about what they perceive as the recent lack of US
support for them on important trade issues. In
addition to the GSP modifications, ASEAN is
troubled by the failure of the United States to
support the prices of tin and rubber in the face of
sharp declines. According to Embassy reporting,
The members of the Association of Southeast Asian Nations are
Brunei, Indonesia, Malaysia, the Philippines, Singapore, and
Thailand.
Secret
the group is also worried about US efforts to
renegotiate a tougher Multifiber Arrangement
(MFA). Thailand, in particular, feels that it has
been unjustly injured by the rice export price
provisions of the US Farm Act and that Washing-
ton is using GSP as a mechanism to pressure
Bangkok into making concessions on market access
and intellectual property rights. Outside of
ASEAN, Taiwan fears that the general review
could result in even more of its exports being
graduated from the GSP.
Implications
In general, US GSP modifications could cause the
LDCs to become less flexible in bilateral negotia-
tions, especially in the areas of investment, intellec-
tual property rights, market access, the new GATT
Round, and the upcoming MFA renegotiation.
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Major US GSP Beneficiaries, 1985
GSP
Exports to US
(Million US $)
GSP Exports as Share of
a Share of Total Country's
Exports to Total Exports
the US
Percent
Total
11,803
Taiwan
3,221
35.8
10.5
South Korea
1,655
44.3
7.7
Brazil
1,278
62.4
6.3
Mexico
1,239
20.6
4.6
Hong Kong
1,208
32.4
5.1
Israel
748
79.8
13.7
Singapore
674
32.3
6.2
India
286
84.9
4.0
Yugoslavia
273
93.8
5.3
Thailand
235
78.8
4.1
Argentina
226
64.7
5.0
Philippines
219
50.8
3.8
Malaysia
190
43.5
1.3
Portugal
185
81.1
3.5
Peru
166
87.8
6.7
a GSP exports derived from US trade statistics.
Moreover, major LDC debtors such as Mexico are
likely to view cuts in GSP eligibility as inconsistent
with US encouragement of structural economic
reforms to foster export expansion and diversifica-
tion. In our judgment, cuts in GSP access may add
fuel to arguments of domestic forces in debtor
countries that oppose liberalization of their govern-
ments' economic policies.
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Seerct
Briefs
Energy
OPEC
Production Update
OPEC crude oil production averaged 18.7 million b/d in April, an increase of
1 million b/d from March levels. Saudi Arabia, Iran, Kuwait, and Indonesia
accounted for the rise. The Norwegian oil strike took 900,000 b/d off the
market for most of the month, which contributed to a temporary increase in
OPEC market share despite the end of the winter heating season. Low OPEC
prices also crowded out some non-OPEC producers, particularly Mexico and
Egypt. Sharply lower prices have also caused underlying demand to increase
somewhat compared with the same period last year.
OPEC: Crude Oil Production, 1986
Million bid
Quota
First
Quarter
March
April
Total
16.0
17.8
17.7
18.7
Algeria
0.66
0.6
0.7
0.7
Ecuador
0.18
0.3
0.3
0.3
Gabon
0.14
0.2
0.2
0.2
Indonesia
1.19
1.3
1.2
1.3
Iran
2.30
2.3
2.1
2.4
Iraq
1.20
1.7
1.7
1.7
Kuwait a
0.90
1.2 (1.0)
1.3 (1.1)
1.5 (1.3)
Libya
0.99
1.0
1.0
1.0
Nigeria
1.30
1.5
1.7
1.7
Qatar
0.28
0.3
0.3
0.3
Saudi Arabia a
4.35
4.5 (4.3)
4.3 (4.1)
4.6 (4.5)
UAE
0.95
1.3
1.4
1.4
Venezuela
1.56
1.6
1.6
1.6
a Amount in parentheses excludes production from the Neutral
Zone, whose output is divided between Saudi Arabia and Kuwait
and included in their country quotas; the Neutral Zone has no
production quota of its own.
19
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Spot Oil Market
Developments
Saudi Arabia
Keeps Pressure
on Oil Market
Spot oil prices have firmed over the past several weeks. Key North Sea and US
crudes are selling for $13.60 and $15.90 per barrel, respectively, up as much as
$4 per barrel from early April lows. World average prices are approximately
$15.50 per barrel. Although oil demand is showing signs of increasing in
response to low prices, a number of supply factors are likely to keep the lid on
prices during the next several months. The 900,000 b/d of Norwegian
production is back in the market following the end of the three-week oil
workers' strike. According to press reports, Mexico hopes that its new, more
competitive pricing system will boost exports by 200,000 b/d. In addition,
Saudi Arabia's recent decision to offer discounts on its netback contracts has
been followed by price cuts on term contracts by both Abu Dhabi and Oman.
Saudi oil production in April increased to about 4.6 million b/d�some
300,000 b/d more than in March. To encourage a further increase, Riyadh is
offering some customers discounts of more than one dollar per barrel for
purchases in excess of levels in April.?
This response to customer threats to buy other
OPEC oil at lower prices will probably help undercut the recent modest
increase in spot market prices. Riyadh clearly intends at a minimum to sustain
its current market share and, in order to keep pressure on OPEC, may not
want the market to stabilize before OPEC's next ministerial session on 25
June. To increase production to as high as 6 million b/d, however, Riyadh
would have to lower prices by at least several dollars more, which might
encourage even Saudi allies to begin condemning its oil policy.
(b)(3)
(b)(3)
(b)(3)
Lower Norwegian The new labor government is willing to discuss ways of stabilizing the world oil
Oil Production market with OPEC officials, according to press reports. A growing number of
Considered prominent Norwegians, including Energy Minister Oien, support cooperation
with OPEC. According to US Embassy reporting, Ministry of Energy officials
have drawn up contingency plans to reduce production by as much as 200,000
b/d should a policy of output restraint be adopted. Low oil prices are expected
to contribute to a $4 billion current account deficit and to reduce by 70 percent
oil tax revenues, which last year totaled $7 billion. Oslo has already devalued
the krone and has announced that it will tighten fiscal and monetary policy.
Although the new government appears to be considering oil production
cutbacks, it is unlikely to act unilaterally. The government probably hopes that
positive signals from Norway might encourage other producers to consider
greater cooperation. (b)(3)
(b)(3)
Iranian Refinery
Damage Assessment
Iraq's air raid on 7 May may have severely
damaged the Tehran Petroleum Refinery. The facility, which provides more
than 35 percent of Iran's refining capacity, will be shut down for at least two
weeks and may not reach prestrike production levels for several months. One
of the refinery's two crude oil distillation units�representing one-half of the
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Secret
250,000-b/d capacity�appears to have been burned and possibly ruptured.
Major damage to the cooling towers has shut down one of two steam plants
needed to run the processing units, and significant pipeline damage also
occurred. The refinery is the largest supplier of gasoline in Iran. If one of the
distillation towers is critically damaged, replacement could take six months,
creating serious fuel shortages in Tehran and the heavily populated northern
areas. Iran's distribution system is not capable of handling the volume of
imports needed to offset a large loss in domestic production.
UK Gas Reserves London is unlikely to change its policy toward importing gas from Norway's
Estimate Sleipner field despite a downward revision in domestic gas reserves. This year's
Revised Downward Department of Energy review estimates that gas reserves are 50 billion cubic
meters less than was estimated last year. The new, lower gas estimate is in
sharp contrast to last year's, which was used as justification for London's veto
of the proposal by British Gas to purchase Sleipner gas. British Energy
officials, already concerned about the sharp drop in oil exploration occurring
because of low oil prices, appear unwilling to take any action that would
reduce North Sea gas development over the next few years.
Setback for The Chernobyl' accident is strengthening antinuclear sentiment in Yugoslavia
Yugoslav Nuclear and casts further doubt on plans to build four nuclear plants by the end of the
Program century. Last week the Republic of Croatia, questioning the need for nuclear
power and citing Chernobyl', removed any commitment to nuclear energy
from its development plan for 1986-90. This at least postpones plans for a $2.5
billion nuclear plant near Zagreb for which a US firm and the Soviets are
competing. Zagreb health authorities have recently demanded a ban on all new
nuclear construction. The Croatian decision reflects the growing debate over
Yugoslavia's nuclear program. Antinuclear proponents, including some promi-
nent party and republic leaders, argue that the program is economically
infeasible and technically unsafe and that existing energy sources should be
developed first. About 70,000 Serbian students have signed a petition against
nuclear power, and the Republic of Slovenia earlier reduced its commitment to
the Croatian plant. The Soviet nuclear accident could cause strains in bilateral
ties if Belgrade asks Moscow for compensation.
India Unable
To Meet Coal
Production Target
A recent coal strike typifies the problems New Delhi faces in meeting its
economic growth target. In a recent trend of joint union action, 700,000
miners responded to a call by Communist and democratic unions for a one-day
strike over industry hiring practices. Labor unrest, persistent power shortages,
underutilization of machinery and equipment, and transportation bottlenecks
make it unlikely that India will meet its coal production goal. Annual coal pro-
duction�currently some 150 million tons�must increase by 10 percent to
sustain the current five-year plan's projected yearly growth rate of 5 percent
for the economy. About 65 percent of the country's electricity is generated by
coal-fired thermal power, and electrical shortages are a major obstacle to
increasing productivity and output of exportable goods.
21 Sccrct
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International Finance
Banks To Consider
Romanian
Debt Rescheduling
Costa Rica's
Growing Debt
Problems
__s&1
/6 May 1986
Bankers and senior Romanian officials will meet in London next week to
discuss Romania's request that $260 million in 1986 commercial debt be
rescheduled The $260 million is the amount of
principal due on debts of $1.3 billion rescheduled in 1982 for payment between
1985 and 1988. Romania reportedly is meeting its interest obligations, and
officials have told that it will continue to do so. The banks
have little choice but to accede to the request. Romania already has deferred
payments on other commercial loans this year. The requested rescheduling,
however, probably will not fill Romania's need for financing this year, which is
likely to be at least $500 million, and Bucharest probably will have to request
additional refinancing later. The rescheduling request embarrasses President
Ceausescu and is a setback to his effort to pay off the debt quickly but
apparently does not signal a major departure from his prohibition on new
borrowing.
Costa Rica declared a temporary moratorium on foreign debt payments last
week, just days after defaulting on interest obligations to commercial banks.
The suspension follows the loss of $60 million in World Bank and IMF funding
earlier this year because Costa Rica failed to meet economic stabilization
criteria/
/President Arias, who took office the day after the moratorium was
announced, reportedly is committed to implementing reforms needed to win
the release of embargoed World Bank and IMF funds. Costa Rican officials
hope they can meet World Bank terms by late May, which could allow
renewed drawings by the end of June. Meanwhile, IMF officials say no new
standby arrangement is likely until August. Debt arrearages, which now
exceed $110 million, will grow by $50 million each month the moratorium
lasts.
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,.;ccret
London Approves
Sterling Commercial
Paper Market
USSR To Develop
Nicaraguan
Banana Fields
Argentine-Soviet
Trade Developments
The government is attempting to increase the role of London as an internation-
al financial center, but its latest action will complicate the conduct of
monetary policy. London is creating a sterling-denominated commercial paper
market to increase the ability of the City to compete against other financial
markets. Chancellor of the Exchequer Lawson announced last week that the
Banking Act will be amended to exempt commercial paper from the govern-
ment's definition of a deposit to allow more companies to raise funds directly
from lenders. Previously, only commercial banks were permitted to borrow
directly. To protect investors, the government will restrict borrowers to large
companies listed on the London Stock Exchange and to firms with assets of at
least $78 million. British financial institutions believe that companies in need
of short-term funds will no longer find it cheaper to borrow in US markets.
British economists are concerned that changes in the government's monetary
policy will be harder to discern because commercial paper, unlike bank
lending, will not be part of sterling M3.
Global and Regional Developments
Moscow reportedly offered to provide all necessary financial and technical
assistance to double Nicaragua's banana acreage, according to Embassy
sources. the USSR has already informed
Colombia and Ecuador it will end banana purchases from them in the near fu-
ture. Once the $25 million investment becomes productive�in a minimum of
two years�funds from banana sales are likely to be applied against Nicara-
gua's large and growing debt with the Soviets. Nicaragua's banana production
has declined one-third since the Sandinistas nationalized the Standard Fruit
plantations in 1981-82. Government figures indicate banana production will
fall again this year. r
Argentine officials are working to fulfill their promise to import $500 million
in Soviet goods over the next five years. Buenos Aires recently contracted to
purchase Soviet turbines for a hydroelectric project, the state-run gas company
has already received Soviet-made jeeps and trucks
In addition, evidence mounts
that the USSR is a front-runner in bidding to dredge the port of Bahia Blanca.
Moscow is responding positively to Buenos Aires's efforts. For example, the
two countries recently announced several joint mining ventures, with Soviet
investment to run between $5-20 million in each project. Moreover, the Soviets
have agreed in negotiations on a bilateral fishing pact to purchase Argentine
processed fish products equal to 20 percent of the Soviet catch from Argentine
waters, and to allow an Argentine official on board each vessel to verify
compliance. We believe that these commercial ventures will continue as long
as both sides find them mutually advantageous, but that spillover into the
political sphere will be minimal.
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Hong Kong Textile
Firms Moving to
Western Europe
Diet Debates
Japanese Aid Policy
Sccrct
A number of Hong Kong textile firms are moving their operations to the
United Kingdom and Ireland to take advantage of industrial development
incentives and to escape US quota restrictions and EC duties. Three textile
firms have relocated to northern England and one to Ireland, and four others
are looking for plant sites. In one case, a company received a British
Government grant that covered 40 percent of its capital requirement, allowing
it to establish a plant equipped with 40 Japanese-made knitting machines
while laying out only $3 million of its own. While production costs�
particularly for labor�in Britain and Ireland run 30 percent higher than those
in Hong Kong, they are offset by the benefits from circumventing quota
restrictions. In addition, Hong Kong manufacturers see overseas production
bases as a means of diversifying their assets before the colony reverts to
Chinese sovereignty in 1997.
National Developments
Developed Countries
Japan plans to double economic aid outlays by 1992, but recent Diet debates
suggest that disbursements to countries of strategic interest to the United
States will not be as large as earlier implied:
Tokyo generally will not extend new yen loans to countries in the
process of debt rescheduling. Thus, many Central and South American
countries will probably receive only minimal amounts of aid from Japan.
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West German
Economic Forecasts
Belgian Steel
Industry Continues
To Lose Money
West Germany's five major economic institutes released their joint economic
forecast shortly before the Tokyo Summit. The institutes foresee real GNP
growth of 3.5 percent this year compared with 2.4 percent in 1985, consumer
price inflation of only 0.5 percent in 1986, and a record current account
surplus of 60 billion DM ($27 billion at 2.2 marks per US dollar). The report
warns, however, that the low inflation rate may be the temporary result of
deutsche mark appreciation, and cautions the Bundesbank to avoid overshoot-
ing its monetary targets, as it did during the first quarter. They also urge the
Bundesbank to resist international pressures to cut interest rates. The insti-
tutes praise Chancellor Kohl for cutting government indebtedness, although
they chastise the coalition for not implementing subsidy reductions or tax
reform. Coalition spokesmen are citing the institutes' report as vindicating the
government's policies.
The continuing poor performance of the government-owned Cockerill-Sambre
steel company is complicating Brussels' efforts to reduce the large budget
deficit. The company lost $133 million last year and is predicting it will lose an
additional $100 million in 1986. The Walloon steel industry has undertaken a
major restructuring to improve its financial picture and reduce its dependence
on financial support from Brussels. Thus far, the work force has been reduced
by 5,000 people, mostly by early retirement, with an additional 2,000 expected
to leave the industry this year. Continuing financial losses will increase
pressure for even more drastic work force cuts. This, however, would add to the
burden on government finances, because Brussels pays the social security costs
of the early retirees. The government probably will resist calls to increase
financial support for Cockerill-Sambre and press the industry to continue with
its restructuring program.
Budget Troubles Budgetary problems caused by declining oil prices�oil revenues could be cut
Await New Norwegian by more than half this year�have already helped to bring down Norway's
Government center-right government and could shorten the life of the Labor government
that took office last week. Conservative Prime Minister Willoch resigned after
losing a vote of confidence when the Progress Party�on whose support the co-
alition relied�refused to accept a modest tax increase and sided with Labor,
who wanted the new taxes to be borne only by wealthier individuals. A flurry
of krone speculation prompted the new Brundtland government to devalue and
also announce intentions to impose fiscal and monetary austerity. The
announcement is probably intended to help stabilize the financial markets, and
the minority government may still search for policies more to its liking that
will pass Parliament. Brundtland will at least try to make the tax system more
progressive, but the Conservatives will challenge any proposals that are not
broad based enough to address the oil revenue decline. Thus the Brundtland
government may find as many obstacles to implementing new fiscal measures
as did the preceeding government.
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Secret
Austria To Cut
Federal Spending
Finance Minister Vranitzky wants to slash the federal budget deficit by 40
percent over the next five years, reducing it from its current 4.7 percent of
GNP to 2.8 percent. For starters, he has ordered all federal ministries to cut 20
percent from their 1987 budgets. Because entitlement programs, research, and
environmental expenditure are exempt, the move will yield less than a 3-
percent reduction in spending. To meet the longer term goal, Vranitzky says
entitlement programs also will have to be looked at�specifically agricultural
subsidies and social security. Debt service is consuming a rapidly increasing
share of federal spending�over 20 percent last year�and Vienna's room for
fiscal maneuver is disappearing. Political observers suspect that Chancellor
Sinowatz's socialist-liberal coalition may be planning a fall election and wants
to fend off opposition criticism of the deficit. The government probably will
await the outcome of the second round of the presidential election on 8 June
before deciding on the timing of the parliamentary election, which must be
held by April 1987.
Dim Economic Economic prospects for Northern Ireland are worsening amid fears that
Outlook for violence will heat up again over the summer. The US Consulate in Belfast re-
Northern Ireland ports that bankruptcies for the first quarter of 1986 were up 30 percent over
the same period last year. March unemployment, though down slightly from
the previous month, was 21.4 percent. A recent survey indicates that business
confidence has plummeted with the uncertain political climate, making it
extremely difficult to attract outside investors. British and Irish officials
almost certainly will point to the fragile economic situation to press Washing-
ton to continue encouraging US investment in Northern Ireland. They also will
push Washington to move more quickly on its proposed aid package and to at-
tach as few strings as possible. The British, in particular, will cite stringent re-
quirements proposed by Congress, such as the need to hire a minimum
percentage of Catholics workers, as major disincentives to foreign investors.
Israeli The Manufacturer's Association and Histadrut, the national labor federation,
Cost-of-Living signed a new two-year cost-of-living adjustment (COLA) agreement on 4 May.
Agreement Signed The previous accord�negotiated in July 1985 as part of the government's
austerity program�provided for an 80-percent adjustment for increases in the
consumer price index. Under the new accord, wages will be adjusted on a
sliding scale of between 70 and 90 percent, dependent upon the inflation rate.
If inflation remains relatively low�in the current range of 1 to 3 percent per
month�the new contract will reduce the frequency and amounts of wage
adjustments. The government plans to extend the new COLA agreement to the
public sector and to workers not otherwise covered.
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Secret
Less Developed Countries
Mexico's Mexico City's trade surplus during the first quarter of 1986 was about 60
Trade Performance percent lower than for the same period in 1985, according to preliminary
Weakens Mexican statistics, dropping from about $2.5 billion to less than $1 billion.
Most of the decline was caused by the more-than-50-percent reduction in
petroleum export revenues�from about $4 billion to less than $2 billion�
since early last year. As a result, total exports dropped by one-third, from $5.7
billion to $3.9 billion, more than offsetting the 10-percent drop in imports due
to a slackening in public-sector purchases.
Morocco's Morocco's controversial value-added tax has already run into problems. The
Value-Added Tax tax was introduced on 1 April as a replacement for fraud-ridden taxes on goods
Troubles and services. The primary point of resistance is wholesalers, who until now
paid taxes only on notoriously underdeclared profits. Many wholesalers are
slowing their activities in protest, causing serious problems for manufacturers,
whose stocks are piling up. Moreover, Rabat has done little to provide
technical guidance on VAT procedures, which is hurting compliance by those
wholesalers willing to accept the tax. The lack of independent qualified
accountants is complicating matters further. Anticipated dramatic wholesale
and retail price hikes, however, have yet to materialize�to the relief of the
Hassan government. Many government officials had worried that any increase
in inflation, coming on top of an already-declining standard of living, could
provoke unrest.
Nigerian Financial officials, after talks with commercial and official creditors, told the
Economic Policy ruling military council last week that Lagos cannot obtain adequate debt relief
Under Pressure unless it devalues the currency and obtains an IMF agreement, according to a
source of the US Embassy. Other Embassy sources reported last month,
however, that President Babangida fears he could not survive the political
consequences of a devaluation.
'Deteriorating oil revenues and the poor prospects for a quick debt
rescheduling may provoke a comprehensive reassessment of economic policy.
Lagos has launched several abortive reforms in the past, however, and there is
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�sr
Indonesian Export
Promotion Efforts
Indonesia To Boost
Plywood Exports
little evidence that it has the requisite political will to change course. Whether
or not the government decides to pursue the recommended policies, debt
payments will probably slow significantly and a sharp economic downturn is
likely.
In the face of sharply depressed oil export revenues and a widening current ac-
count deficit, Coordinating Minister for Economics Ali Wardhana last week
announced a new economic package designed to boost nonoil exports. The most
significant element allows export-oriented producers�those exporting at least
80 percent of output�to purchase locally produced raw materials at interna-
tional prices or to import such raw materials without restrictions. We believe
this represents a dramatic concession by the government�import barriers
have traditionally raised raw material costs so high that many Indonesian
firms could not export. Nevertheless, overall improvement in nonoil export
growth is likely to be limited in the short term because corruption and other
market distortions remain a significant and costly impediment to improving
competitiveness.
According to projections by APKINDO, the Indonesian Wood Panel Associa-
tion, exports of plywood will exceed $1 billion in 1986�up from $796 million
last year when they accounted for about one-fifth of nonoil export earnings.
This reflects Jakarta's efforts to boost these earnings in the face of sharply
lower oil revenues. According to US Embassy reporting, the optimistic forecast
is based upon a recently revised plywood export allocation system and on
increased overseas marketing efforts by APKINDO. Producers failing to meet
government requirements to process domestic raw materials to increase
domestic value added will now lose their export quotas to other firms. In
addition, beginning 1 July, changes in plywood export price quotations will
eliminate excessive price cutting among Indonesian exporters. According to
APKINDO, this will encourage producers to pool their exports into larger
shipments, which could reduce freight costs by up to $5 per cubic meter,
thereby boosting cost competitiveness and revenues.
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Secret
Taiwan Shipyards
Use Wrong Materials
The state-owned China Shipbuilding Corporation (CSBC) has admitted using
the wrong steel plate in the first three 39,000-deadweight-ton containerships of
an eight-ship order from Yangming Marine Transport Corporation. Although
CSBC has offered to reinforce the ships at the cost of less cargo capacity, the
shipping firm has refused delivery unless CSBC offers a 20-percent reduction
in price. The buyer, which could have gotten the ships cheaper from Japan,
bought from CSBC at the insistence of central authorities concerned about
unemployment levels at Taiwan's shipyards. Because the first ship is scheduled
to begin service on 2 June, a resolution of the problem will probably come soon.
Nonetheless, CSBC�which has been operating in the red for several years�
will lose money on the deal. In addition, Taiwan has criticized the US firm�
hired by Yangming to certify that the ships were built to international
standards�that failed to notice the mistake.
Communist
Reorganization of the An official of the State Committee for Construction Affairs (Gosstroy) has
Soviet Construction confirmed to Embassy officials that changes in the construction sector are
Sector pending. As opposed to a new "superministry" like the recently created State
Committee on the Agro-Industrial Complex, the change would include giving
more power to Gosstroy. Indications are that this change will go into effect in
September, the same time a new chairman of Gosstroy is expected to be
named to fill the four-month-old vacancy. The failure to name a successor had
led to speculation that a reorganization was in the works. Moves toward
consolidating the construction sector would underscore the need for improved
quality and timeliness in the sector's performance to support Gorbachev's
industrial modernization plans.
Soviet Timber
Ministry Criticized
Chinese Barter for
Italian Auto Plant
A recent joint meeting of the Supreme Soviet commissions on industry and
environmental preservation sharply criticized the Ministry of Timber, Pulp
and Paper, and Wood Processing Industry for failures to meet production goals
and improve resource conservation. This is but the latest in a series of
criticisms leveled against the industry since last September and reflects
mounting pressure to meet the large domestic demand for timber and paper
products as well as export commitments. While timber production and
deliveries increased in the first quarter of 1986, much of the gain is
attributable to the mild 1985-86 winter. Minister Busygin has been severely
criticized in the past, and�given the current hard currency shortage�the
industry's failure to meet targets and earn more hard currency from exports
could result in his ouster unless he takes action.
The China National Automobile Industry Corporation reportedly has signed a
contract to swap commodities and handicrafts for a Fiat turnkey automobile
plant to produce small passenger cars, presumably for the private sector.
Because China apparently has problems letting foreign investors make money,
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let alone take it out of the country, the Italian firm apparently agreed to accept
goods in lieu of hard currency in the hope of penetrating the China market.
And, unlike the auto plants built with US, French, and West German
assistance, the Fiat deal makes no mention of a percentage
of production earmarked for export. The countertrade appears especially
attractive to Beijing because foreign exchange restrictions have limited the
purchase of US parts by the US-PRC joint venture jeep plant, causing a two-
month production shutdown. However, the Fiat deal may never reach fruition
because the central government�concerned about its already overcrowded
roads�may restrict private ownership of cars.
Chinese In a move aimed at boosting the authority of the Ministry of Nuclear Industry
Nuclear Ministry (MNI) over Chinese nuclear development, Beijing has made MNI's Vice
Consolidating Minister for Research and Production, Zhou Ping, full-time executive officer
Control of the Nuclear Power Leading Group�a key position for the implementation
of China's nuclear power policies. The Leading Group coordinates nuclear
policy under the direction of the State Council, China's highest level of
government. Zhou's appointment will give MNI more bureaucratic power to
enforce its decisions over other nominally equal ministries such as the Ministry
of Water Resources and Electric Power (MWREP), MNI's longtime rival in
the nuclear power field. Zhou's transfer underscores Beijing's determination to
change the direction of its nuclear energy program away from imports of
advanced Western technology toward small, locally produced, relatively
inexpensive nuclear power plants. Zhou's appointment should smooth the
transition as MN! absorbs MWREP's former responsibilities in China's
nascent nuclear power industry.
Secret
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Publications of Interest
Cuba: The Role of Commercial Companies (u)
Research Paper
19 pages
GI 86-10029C
In recent years, Havana has created a network of 85 to 100
commercial corporations�generally known in the Intelligence
Community as front companies�in Latin America, Canada,
Japan, and Western Europe. Through these firms, Havana has
routinely evaded the US trade embargo, acquired Western
computers and communications equipment, purchased modest
amounts of military supplies, and assisted the operations of its
intelligence services.
Intelligence Assessment
40 pages
ALA 86-10017
SOV 86-10020
8 May 86
The Cuban-Soviet Connection: Costs, Benefits, and Directions (u)
Strains in the Cuban-Soviet relationship over the last two
years�due to disagreements over Cuba's domestic management
and its foreign policy setbacks�represent a low point in a cycle
of discord and harmony dating from the 1960s. This time,
however, Soviet pressures for policy change come at a time when
Castro is less able to deflect Moscow's demands. We expect
growing Soviet influence over Cuban internal (particularly eco-
nomic) decisionmaking and greater Cuban subservience to Soviet
foreign policy dictates.
Research Paper
24 pages
GI 86-10028
N May NO
Liberation Theology: Religion, Reform, and Revolution (u)
Introduction to Liberation theology is a contemporary Catholic
doctrine advocated in the Third World and calling for a radical
restructuring of society on behalf of the poor and oppressed. It is
based on Marxist social analysis and is highly critical of US
development policies. It has helped motivate, organize, and
legitimize popular movements
31 Seerct
DI IEEW 86-020
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