WEEKLY SUMMARY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A011400040001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 24
• Document Creation Date: December 21, 2016
• Document Release Date: January 31, 2008
• Sequence Number: 1
• Publication Date: July 16, 1976
• Content Type: SUMMARY

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Iq
State Dept. review completed
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Secret
Weekly Summary
DOS review completed
Secret
Cl WS 76-029
No. 0029/76
July 16, 1976
N2 1423
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SUMMARY, issued every Friday o ning by the
*rent Intelligence, reports and onciiyzes sigrtifi-
nents of the week through noon,. on Thursday. -it
includes sraaterirai coordinated! with or prepared
ice of Economic Research, the Office of Strategic
{Office of Geographic and C'ortographic
e Directorate o= Science and Technology,
CONTENTS
1 Middle East
Lebanon; Jordan
2 Africa
Kenya-Uganda;
Ethiopia;
5
FTAI; Cuba - Ca
Islands
Europe
pe Verde
8
Portugal; EC Sum
USSR; CEMA
Western Hemisphere
mit; Italy;
Peru; Argentina
8
International
World Rice Production
12 Iraq: Intentions Toward Syria
16 Debate Among Developing Countries
18 India: The Improving Economy
20 Mexico: Economic Policy
Comments and queries on the contents of this
publication are welcome. They may be
directed to the editor of the We I
Summary,
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SECRET
LEBANON /-~
Christian and Syrian forces this week
continued to press their military advan-
tage against their Palestinian and
Lebanese leftist adversaries as the scene
of heavy fighting shifted from the Beirut
refugee camps to the northern and eastern
parts of the country. The latest leftist and
Palestinian reverses have prompted
Palestinian leader Yasir Arafat to agree
to meet with Syrian leaders on July 16 in
Damascus. Increasingly at odds with his
Lebanese leftist allies and disheartened by
the failure of the other Arabs to put effec-
tive pressure on Syria to stop its offensive
against the fedayeen, Arafat may be
ready to attempt to negotiate a cease-fire.
The Christians-pushing farther
beyond the traditional line dividing Chris-
tian and Muslim territory-linked up
OC(
with the Syrians encircling the Muslim-
controlled port of Tripoli and claim to
have captured the city's principal source
of fresh water. There are indications that
Damascus sent perhaps as many as
several thousand additional troops into
northern Lebanon last weekend, although
this has not been confirmed.
Syrian forces also began their
long-threatened assault on Balabakk, the
only remaining leftist stronghold in the
Bekaa Valley not under Syrian control.
By midweek, Syrian forces had breached
the city's defensive perimeters, and fierce
fighting was going on inside the town
itself. In Beirut, fighting continued in the
usual confrontation areas, including the
Palestinians' Tall Zatar camp, where a
small number of defenders continued to
hold out.
Continuing resupply problems have
become a key bone of contention between
Arafat and his leftist allies. Late last
week, both Arafat and leftist leader
Kamal Jumblatt appealed urgently to
other Arabs for military assistance.
Egypt, Iraq, and Libya have been supply-
ing arms to the Palestinians and leftists
for some time now.
The Egyptians also urged the Arab
League to supply the Arab military con-
tingents already in Lebanon-they are
from Syria, Libya, Sudan, and Saudi
Arabia-with heavier arms so they could
intervene directly in the fighting rather.
than act simply as a peace-keeping mis-
sion. The Arab foreign ministers, who met
again in Cairo on July 12-13 on the
Lebanese crisis, quickly shelved the Egyp-
tian proposal in favor of several vaguely
worded resolutions that only underscored
the league's continuing inability to play an
effective role in Lebanon.
Syria did agree at the meeting to pull
back forces from Sidon, and Syrian
troops have subsequently withdrawn to
positions beyond Jazzin to the Bekaa
Valley. The move is probably another of
the Syrians' tactical concessions,
however, designed primarily to finesse the
Egyptians and ward off further Arab
pressure. The gesture may also have been
intended to make it easier for Arafat to
open negotiations with Damascus without
appearing to be capitulating to Syrian
demands. (A fuller discussion of Syrian
strategy vis-a-vis the Palestinians begins
on Page 9.)
The Israelis,
meanwhile, continue to
take a relatively relaxed attitude toward
Syrian actions in Lebanon. Defense
Minister Peres, a hard-line conservative,
indicated last week in private that Israel
was prepared to tolerate a consolidation
of Syrian control in Lebanon, reflecting
the Israelis' present satisfaction with
Syrian-Christian cooperation against the
Palestine Liberation Organization. At the
same time, however, Israeli leaders con-
tinue to have nagging suspicions about the
long-term adverse effects for Israel of
Syria's military presence in Lebanon.
Both Prime Minister Rabin and Foreign
Minister Allon have repeatedly expressed
concern that Syria could ultimately seek
an accommodation with the Palestinians
that would leave the Christians isolated
and free the Palestinians to resume their
operations against Israel.
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King Husayn this week designated
Mudhir Badran, head of the royal court,
to succeed Zayd Rifai as prime minister,
minister of defense, and minister of
foreign affairs. Rifai apparently resigned
voluntarily and probably will remain as
an influential unofficial adviser to the
King.
Badran is a political and economic con-
servative from Jordan's East Bank.
Although he has only tenuous ties to the
area's current tribal leadership, he will be
considered by the King's traditional sup-
porters to be an improvement over Rifai,
who tended to neglect army and Bedouin
interests.
Badran has held a variety of military,
intelligence, and civilian posts. He is not a
powerful politician or personality,
however, and almost certainly will be a
much weaker prime minister than Rifai.
The change will be welcomed by Crown
Prince Hassan, whose political influence
declined steadily during Rifai's three
years in office. In fact, Hassan's position
will probably not be significantly
strengthened, although he may make new
efforts to persuade the King to temper his
support for policies promoted by Rifai.
Hassan can be expected to push for a
cT
reduction in Jordan's commitment to
cooperate with Syria and for an improve-
ment in relations with Egypt and Saudi
Arabia and against any far-reaching
agreements with the Soviets.
Although Rifai has been closely iden-
tified with the Jordanian decision to dis-
cuss an air defense deal with the Soviets,
there is no evidence that his resignation is
0
direct y rela e to 7ordan's recently
renewed efforts to secure Saudi funding
for a US system. Riyadh will be gratified,
however, by Rifai's departure from office.
Rifai's inability to deal effectively with
the Saudis has long been a major impedi-
ment to successful negotiations.
Husayn visited Saudi Arabia on July 4
and 5, presumably to brief the Saudis on
the results of his visit to the Soviet Union
last month and to explore the possibilities
for an increase in funding for a US
system.
KENYA-UGANDA
The danger of military conflict between
Kenya and Uganda as a result of Israel's
use of Nairobi airport in rescuing
hostages held in Uganda receded
somewhat this week, although the armies
of both countries remain on alert. Con-
tinuing tensions between Nairobi and
Kampala were reflected in economic
harassment measures by the Kenyans,
reprisals against Kenyan nationals by the
Ugandans, and secret diplomatic under-
takings by both sides.
Neither side has made any significant
military moves for several days. The
Ugandan units near the border remain
reinforced; Kenyan forces are being kept
some distance from the frontier, under
orders to make no move that Amin might
construe as a provocation.
Kenyan military officers seem confi-
dent that a Ugandan ground attack would
soon grind to a halt. Nairobi believes
Uganda is short of fuel, that Kampala's
military equipment is poorly maintained,
and that Amin's army does not have the
will to fight. The Kenyans, with virtually
no air defense, are more concerned about
an air strike from Uganda. Kenyan claims
that a number of Libyan Mirages were
sent to Uganda following the Israeli raid
on Entebbe airfield remain unconfirmed.
Nairobi has denied Amin's charges that
Kenya has imposed a total blockade on
goods destined for landlocked Uganda.
The Kenyans halted rail shipments of
aviation fuel to Kampala for five days,
but agreed to permit a small delivery on
Claims in the Nairobi press that 250
Kenyans living in Uganda have been
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killed by local security forces are no
doubt exaggerated, but there have been
some killings and other acts of reprisal.
There is no hard evidence that systematic
and officially sanctioned reprisals are
under way, but at the very least the Ken-
yans are probably considered fair game
by undisciplined Ugandan soldiers or
other Ugandans.
On the political front, neighboring Tan-
zania has indicated it would not receive a
Ugandan delegation whose purpose was
to seek assurances of Dar es Salaam's
neutrality in case of war between Uganda
and Kenya. The Tanzanians have no love
for Amin and have given sanctuary and
limited aid to anti-Amin exiles since
Major Mengistu Hailemariam, the first
vice chairman of the ruling military coun-
cil, is directing a new purge of suspected
military opponents, including officers who
have played a major role in the regime.
The purge seems likely to increase opposi-
tion within the armed forces to the council
and to Mengistu personally.
On July 13, the council announced the
execution last weekend of 19 persons for
alleged antigovernment and criminal acts.
The list included General Getachew
Nadew, the chief martial law ad-
ministrator and armed forces commander
in Eritrea, and Major Sisay Habte, the
third-ranking member of the council.
Both officers were accused of coup plot-
ting.
The other 17 persons executed were
businessmen and civil servants accused of
crimes ranging from hoarding foodstuffs
to negligence of duty; they are apparently
being made scapegoats for the council's
economic policy failures and mismanage-
ment. The announcement also said a
member of the council had been arrested
and two others had fled Addis Ababa to
avoid arrest. There are indications that
additional council members may be
arrested soon.
None of the victims of the purge is
known to have been actively plotting
against the government. Both Getachew
and Sisay, however, had ties to dissidents
in the armed forces, and both reportedly
had urged the council to moderate the
radical leftist policies advocated by
Mengistu and his faction. The troops
commanded by Getachew in Eritrea are
war-weary and impatient with the coun-
cil's inability to find a political solution to
the long conflict with secessionist
guerrillas.
Mengistu may have suspected Sisay, an
air force officer, of collusion witl25X1
members of the air force who recently
demonstrated serious discontent with the
council. Some air force officers and
enlisted men went on strike in late June
over the council's military tactics in
Eritrea. 25X1
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SEGHtT
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The troops in Eritrea, members of the
division that guards the border with
Somalia, and air force personnel
reportedly all sent similar lists of demands
to the council in recent weeks. They called
for a dissolution of the council, the
restoration of civilian rule, and a peaceful
settlement of the Eritrean conflict.
The US consul in Asmara has received
reports that the troops in Eritrea are
angry about Getachew's execution. C
military officers in
ri rea have been meeting since they
learned of Getachew's death to discuss a
move to oust the council. The officers are
said to be in touch with military units in
other areas.
A determined effort by dissident units
to move troops to Addis Ababa to oust
the council might well succeed. Relatively
25X1 few units still guard the capital, and many
of their members probably would not
FTAI
Tribal fighting flared last weekend in
the French Territory of the Afars and
Issas, further complicating French efforts
to bring about an orderly transition to in-
dependence.
According to some reports, clashes
between Afar and Issa tribesmen-
traditional enemies-began as skir-
mishes between the Afar-dominated
National Independence Union, which
is headed by local government pres-
ident Ali Aref Bourhan, and the pre-
dominantly Issa opposition party, the
African People's Independence League.
Serious rioting erupted after Issas at-
tacked the Afar-inhabited quarter in
Djibouti, the capital. At least 13 people
were killed-most of them reportedly
Afars-and 50 _injured before police
restored order.
During the outbreak, Issas attacked
and burned the home of Ali Aref's
brother. Issas hold Aref responsible for
denying them full participation in the
territory's politics and economy.
Last month representatives of the union
and of the league and other opponents of
Aref-meeting under French
auspices-agreed in principle to form a
coalition government and to support
changes in the territory's electoral laws
that would give the Issas and other ethnic
Somalis greater representation in the
political process. The union represen-
tatives signed the-agreement over the ob-
jections of Aref, whose support within the
party has declined sharply over the past
year.
The resurgence of tribal hostility may
make it difficult for the union and the
league to continue their collaboration.
Aref will probably try to convince the
Afars that they need his continued
leadership to protect their interests
against the league. If he succeeds,
territorial politics will again become
polarized, considerably reducing France's
chances of creating a government strong
enough to withstand Somali pressure to
annex the territory.
'Cuba - Cape Verde Islands May Establish Air Link
Cubana Airlines may be planning to
add the Cape Verde Islands to the
itinerary of its twice-weekly commercial
air service to Africa. A protocol for an
agreement for an air link between Cape
Verde and Cuba was signed in Praia,
capital of the Republic of Cape Verde, by
civil aviation officials of both countries,
according to the Angolan domestic radio
on July 9. The protocol must be ratified
by the two governments, but this is likely
to be little more than a formality.
Cubana's two weekly flights to Africa
now leave Havana Tuesday and Saturday
evenings and stop off in Barbados,
Guinea, and Sierra Leone before arriving
in Luanda-the turn-around point-26
hours later.
The preparations for adding the Cape
Verde Islands to the itinerary suggests
that Havana sees for itself a continuing
role in their political and economic de-
velopment-a role significant enough to
require better access to the area. The
Cubans used the islands as a refueling
point on s veral occasions durin the
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SECRET
Angola-based insurgents of the
Southwest African People's Organiza-
tion, which seeks Namibia's independence
from South Africa, appear to be
operating more aggressively along the
Angola-Namibia border. They are also
penetrating deeper into Namibia.
Last week a guerrilla band killed an
Ovambo tribal policeman and members
of his family at their home near the
Angolan border, then killed a farmer in a
nearby village, and seized a school teacher
whom they took back to Angola. Accord-
ing to the South African commissioner
general for Namibia, nine more Ovambos
were abducted by other guerrilla bands
last week. It was the highest toll of
SWAPO killings and kidnapings within a
single week.
Prior to these incidents, the insurgents
had killed at least 20 civilians and 8 South
African soldiers since last July. Most of
the civilian victims were Ovambo leaders
or other tribal members who collaborated
with the South African administration.
The insurgents, also predominantly
Ovambos, continue to seek out such
targets. The policeman killed last week
was a bodyguard for the chief minister of
the Ovamboland government established
by Pretoria in 1973.
South African authorities have con-
firmed that a ten-man guerrilla group
from Angola crossed the southern border
of Ovamboland last month and entered
the copper mining area around Tsumeb,
where all but two were killed. This is the
deepest known penetration by a group of
this size.
250 Miles
0 2 50 K il a mote ra
Portuguese people had repudiated the tur-
moil fomented by the Communists and 25X1
their sympathizers during the months
when these groups exerted an exaggerated
influence on government policy. He said
there is a place for responsible political
opposition in Portugal, but stressed that it
must be to a government and not to the
concept of democracy.
His remarks were enthusiastically
received by the representatives of the par-
ties that had supported his campaign for
the presidency-the Socialists, the cen-
trist Popular Democrats, and the conser-
vative Social Democratic Center. The
Communists, unhappy over their exclu-
sion from the new government, sat
solemnly through the speech.
Early indications are that Eanes intends
to leave most political matters to Socialist
leader Soares, whom he will soon appoint
prime minister. Eanes' own priorities
appear to lie in using his position to
mobilize support for the minority govern-
ment Soares is expected to name next
week.
PORTUGAL / ~ fO
General Antonio Ramalho Eanes was
sworn in on July 14 as Portugal's first
freely elected president in nearly 50 years,
officially marking the end of more than
two years of oftentimes turbulent military
rule.
In his inaugural address, Eanes asserted
that, by his election to the presidency, the
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SECRET
EC SUMMIT
The EC heads of government made
significant progress on several outstand-
ing issues-most notably direct elections
to the European Parliament-at their
summit meeting in Brussels on July 12
and 13. Much remains to be done,
however, before their decisions can be
translated into concrete-achievements.
Agreement on the allocation of seats in
a 410-seat European Parliament removed
the greatest obstacle to holding direct
elections, which now are scheduled for
May or June, 1978. The decision should
give a major impetus to efforts by Chris-
tian Democratic, Liberal, and Social
Democratic parties within the EC coun-
tries to organize into groups and develop
common platforms on European issues in
preparation for the elections. Talks on the
many complex legal and procedural
problems that remain will continue at the
EC foreign ministers' meeting in Brussels
next week.
Britain and Denmark maintain reser-
vations on certain election procedures.
They may seek Community permission to
continue the current practice of appoint-
ing delegates to the parliament, while
agreeing to adopt uniform voting
procedures before elections are held again
in 1982. The summit decision must also be
accorded legal standing, and several
possibilities now being con-
sidered-ratification by member-state
parliaments, for example-may prove
troublesome for some, especially France.
The EC leaders issued a declaration on
terrorism, instructing their ministers to
draft a convention on the prosecution and
extradition of terrorists, particularly when
hostages are involved. West Germany,
with support from the UK, has been
pushing hard for a convention in the hope
it will act as a springboard for new efforts
both within a larger European context and
at the UN.
The Nine, acknowledging that "urgent
and determined" efforts must be made to
harmonize EC economic and monetary
policy, decided that a meeting of EC
finance ministers-originally set for
September-should be held next week.
Discussions will center on the current
economic situation and a recent Dutch in-
itiative for monetary reform.
The Nine were unable to reach formal
agreement on the question of Community
and smaller EC state representation at
big-power summits. The larger states
promised, however, to consult with the
Dutch Premier and President of the EC Council Den Uyl greets
President Giscard and Chancellor Schmidt at the EC summit
"little five" before accepting such in-25X1
vitations and not to make decisions there
on matters affecting the Community.
ITALY
President Leone asked Giulio Andreot-
ti on July 13 to try to sort out the
post-election political tangle and form
Italy's next government. Andreotti's job
was made more difficult by dissension
within the Socialist Party which led to the
resignation of the Socialists' top
leadership early this week.
Andreotti may attempt to form a
smaller, more streamlined cabinet, in-
cluding some Christian Democrats who
have not served in previous cabinets, as
well as some technicians. Andreotti
appears to recognize that his party,
perhaps faced with its last opportunity to
head the government, must be prepared to
take decisive steps to prove that it can
govern effectively.
The Christian Democrats are faced
with the obstinate refusal of the Socialists
to return to the government, and
reportedly have been considering the for-
mation of a minority government to see
them through the next few months. The
resignation of Socialist Party Secretary
De Martino, as well as the 30-member
party directorate could foreshadow
changes in the Socialist outlook that
might have some effect on the government
negotiations. In any case, Andreotti will
have to wait until the new Socialist Party
leadership is chosen to pursue his talks
with that party.
Meanwhile, the Christian Democrats
appear to be moving toward closer
cooperation with the Communist Party.
Their aim is to work out a series of
parliamentary compromises with the
Communists that would enlist their sup-
port for specific government programs,
while at the same time denying them a
formal role in the government. The Chris-
tian Democrats have already made un-
precedented concessions by ceding the
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Communists the presidency of the
Chamber of Deputies and seven lesser
parliamentary posts. The Communists are
also likely to receive chairmanships of
several of the less sensitive parliamentary
committees.
In exchange for such concessions, the
ristian Democrats hope the Com-
munists will be satisfied with an indirect
role in the legislative process. This would
take the form of a programmatic accord
in which the Communists could review the
government's legislative proposals and
submit counterproposals. Should such an
accommodation ultimately emerge, the
Christian Democrats would probably con-
tinue to insist that there is a distinction
between the majority and the opposition,
but that distinction would be blurred
significantly.
The exact nature and extent of the
cooperative arrangements to be worked
out by the Christian Democrats and Com-
munists may be influenced by the out-
come of the leadership struggle in the
Socialist Party.
USSR 47_~q
Our early July estimate of the Soviet
grain crop is 195 million tons, the same as
our mid-June estimate. A crop of this size
plus imports already purchased would
allow the Soviets to recoup some of the
losses in their meat and livestock program
after last year's shortfalls.
Crop conditions in most of the winter
grain area continue unusually favorable.
Greater-than-normal losses last fall and
winter, however, will restrict the winter
grain harvest to an estimated 45 million
tons. Prospects for spring grains generally
remain good at an estimated 150 million
tons, second only to the record 1973
spring grain crop of 159 million tons.
West of the Urals, conditions are almost
uniformly good; conditions east of the
Urals are uneven due to localized showers.
Soviet domestic grain requirements this
year depend on the planned rates of
growth of livestock herds, meat output,
and grain stocks. Additional demand
could come from Eastern Europe, es-
pecially Poland.
A grain supply of 210 million tons in
the 1977 crop year-assuming a 195-
million ton harvest and imports already
contracted for-would allow the USSR to
restore the quality of bread and other
grain products to normal levels, increase
meat output by about 800,000 tons in the
second half of 1976, and slowly increase
livestock inventories. Much higher levels
of grain imports would be required for
large increases in grain reserves, livestock
herds, and grain exports to Eastern
Europe.
So far this year, the Soviets have
bought about 14 million tons of grain for
delivery beginning this month. This in-
cludes 6.9 million tons from the US, 4.2
million tons of which applies to the So-
viet commitment to buy at least 6 million
tons. for delivery in the year beginning
next October. In addition, the Soviets
have bought 2 million tons of soybeans, in-
cluding 1.5 million tons from the US.
The Soviets have given no hint on
further purchases during the balance of
the crop year, but balance-of-payments
considerations could be critical. Grain
and soybean purchases so far in 1976
amount to nearly $3 billion.
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CEMA 5- 6 "cz
Heads of government from all the
CEMA countries except Cuba-which, as
usual, sent a deputy premier-met in East
Berlin from July 7 to 9. The participants
renewed efforts to expand collaboration
by agreeing to draft five new "target
programs" for cooperation through 1990.
Long-term planning among CEMA
members has always been difficult, and
progress will probably be slow.
The target programs apparently will
deal with the sectors of fuel, energy, and
raw material development; consumer
goods production; machine building;
agriculture; and transportation. Moscow
may have been behind this new round of
planning, calculating that the economic
difficulties of the East European countries
would make them more disposed to com-
promise.
Romanian Prime Minister Manescu
pressed-apparently without success-for
a separate target program that would
focus on accelerated growth of the
less-developed CEMA countries.
Bucharest maintains that Romania is less
developed and thus qualifies for special
benefits-a contention Moscow rejects.
The Romanians were able to get fre-
quent references into the communique
pointing to the necessity of equalizing
levels of economic development. The
communique claims that the five specific
programs will in effect compose a
generalized plan of accelerated growth for
the less-developed countries. This
language provides Bucharest with enough
ammunition to keep the issue alive.
The conferees took special pains, in the
wake of the Polish riots, to project an
aura of business-as-usual, but there was
probably some candid discussion of East
European economic problems and
prospects for further consumer unrest.
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PERU
A brief military rebellion last week by
a rightist army general, while easily
put down, is symptomatic of the dis-
harmony within the Peruvian military
over the future course of the revolution
and the regime's leadership and
policies.
The rebellion on June 9 was sparked by
an open clash between leftist Prime
Minister Jorge Fernandez Maldonado,
the army commander, and General Carlos
Bobbio Centurion, a conservative who has
been working with like-minded officers in
the army and navy to deflect a leftward
drift in government policy.
After an argument that had both
ideological and personal aspects, Fer-
nandez Maldonado, with President Fran-
cisco Morales Bermudez' concurrence,
decided to remove Bobbio from his
post as commander of a training center
near Lima.
Bobbio resisted, and a brief battle en-
sued at the center. Bobbio gave up the
fight when it became clear he had no im-
mediate support. He has since been
retired, and all military commands have
publicly condemned his action.
Fernandez Maldonado is at least the
short-term winner, having eliminated an
important conservative voice from army
ranks, but his problems are not over. He
must still contend with bitter opposition
from the navy, he can expect little help
from the air force, and most important,
there is some uncertainty about the
leanings of various key subordinates in
the army.
By itself the navy can do little more
than serve as a catalyst--perhaps, for ex-
ample, making good on its most recent
threat to set to sea in protest against Fer-
nandez Maldonado. This might spur a
significant contingent of army dissidents
into action. For the moment, however,
rightists in the army, having lost in Bob-
bio their best available spokesman, must
regroup around new leadership.
President Morales Bermudez will
benefit only briefly from the show of
loyalty accorded him after last week's
rebellion.
He must still contend with mili-
tary disunity and mounting economic
problems. His civilian finance minister
reportedly intends to resign if he fails
to obtain a crucial stopgap loan during
his current visit to US banks. The de-
parture of this minister would raise
further questions about the effec-
tiveness of the President's leadership.
ARGENTINA
Argentina's military government has
checked the country's runaway inflation,
but at the expense of deepening the
economic recession.
The monthly inflation rate dropped
from 38 percent in March to under 3 per-
cent in June, chiefly as a result of
restraints on wages and cuts in govern-
ment spending. More than 60,000 govern-
ment employees have been fired as part of
the government plan to reduce the budget
deficit by 75 percent in 1976.
Real wages, which peaked a year ago,
are now at their lowest point in over a
decade. With 1960 as the base year at 100,
real wages last month dropped to 63,
compared with 210 for June 1975.
Economy Minister Martinez de Hoz has
permitted only one 15-percent wage hike
since the junta came to power, while
prices nearly doubled before inflation was
checked.
Businessmen are beginning to complain
of declining demand, and the government
will now try to expand purchasing power
but at a measured pace. In particular, the
regime will attempt to stimulate foreign
and domestic investment.
As production begins to revive, the in-
flation rate is likely to rise again. The jun-
ta's first concern will be to see that infla-
tion does not again get out of hand.
c 6 - c 2-
WORLD RICE PRODUCTION
We estimate a record world rice harvest
ranging from 335 to 340 million tons for
the current crop year, 4 percent above last 25X1
year's record crop. Almost every Asian
country, except China and Vietnam, is ex-
pecting a larger crop this year, and
production outside Asia is expected to be
up by I I percent.
Rice available for export in 1976 should
reach nearly 10 million tons-over 30 per-
cent more than was exported last year.
This volume is probably about 2.8 million
tons more than importers will want to
buy, leaving some major ex-
porters-including the US, Pakistan, and
Thailand-with large carry-over stocks.
Record domestic harvests will enable
many major rice importers, such Is
Korea, Bangladesh, and the Phi
India, Indonesia, and Sri Lanka, which
must import large quantities this year,
will benefit from increased availability
and lower prices.
The 24-month decline in world rice
prices can be expected to continue
through most of 1976. The extent will de-
pend on stock rebuilding policies, con-
sumption levels in the major importing
nations, and prospects for the 1976 fall
harvest. World stocks may be rebuilt to
levels held prior to the rice shortages of
the 1973-74 crop year.
The US Department of Agriculture es-
timates US rice supplies available for ex-
port in 1976 at almost 3 million tons and 25X1
forecasts that total exports will be 1.8
million tons, down 17 percent from last
year's record level.
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Syria appears intent on keeping up its pressure on the
Palestinians and leftists in Lebanon until it gets the settlement it
wants. Damascus believes it must deal decisively with the
Palestinians before political talks can be organized looking
toward negotiation of a new modus vivendi between contending
Lebanese factions.
6 _51- (~' ~~
Syria-Palestinians: Pressure in Lebanon
Syrian tanks near Zahle 4 A
Syria appears determined o continue
its military pressure on Palestinian and
leftist forces in Lebanon until leaders of
these groups accept or are forced to ac-
quiesce in a political settlement on terms
favorable to Syria.
If Palestine Liberation Organization
chairman Arafat were to agree now to
make significant concessions, Damascus
probably would settle for Palestinian
adherence to past Lebanese-Palestinian
accords regulating fedayeen activity in
Lebanon and would allow the PLO to
continue to operate as an independent but
weakened organization.
If fedayeen forces persist in challenging
Syria's armed intervention, however,
Damascus is likely to attempt to limit
sharply the Palestinians' independent
military capability.
Syria would also attempt to force the
PLO under its political control and to
encourage Palestinian leaders to replace
Arafat with a leader or group of leaders
willing to accept accommodation with
Syria.
Despite Palestinian claims this week
that Syria has agreed to pull back from
Lebanon's cities-a promise probably in-
tended to buy time-Damascus believes
that it must deal decisively with the
Palestinians before it can force the Leb-
anese to work out a political settlement.
The Lebanese Christians, who are
receiving both moral and material support
from Syria, are eager to cooperate in this
approach and may even seek to keep the
fighting going after the Syrians have
achieved their military objectives.
Lebanese leftists remain obstinate and
will continue to pose a major political and
security problem for Damascus. If
Palestinian military involvement ended,
however, the leftist forces could not con-
front Syria alone or prevent establishment
of a Syrian-backed government.
Syrian President Asad is working with
the Christians to consolidate Syrian or
Christian control of most of Lebanon with
the exception of leftist- and fedayeen-con-
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trolled quarters of the major port cities
and portions of the south. The fedayeen
would be restricted to these areas and to
the Palestinian refugee camps.
Following this, Asad presumably would
join with powerful Christian leaders in
forcing President Franjiyah to resign and
would encourage president-elect Sarkis to
resume negotiations toward formation of
a new government and a new Lebanese
security force.
We believe Damascus expects, and is
prepared, to keep several thousand Syrian
troops in Lebanon for the indefinite future
to support Sarkis' efforts.
Military Strategy
Syria withdrew its lightly armed com-
mando forces from the immediate Beirut
area late last month. This move, however,
did not represent a decision by Syria to
reduce its military pressure on the
Palestinians.
It was designed primarily to dispel
growing Arab criticism of Damascus'
direct attacks on the Palestinians. The
level of Syrian military activity in most
other areas of Lebanon has increased
significantly in the past week.
Additional Syrian troops are entering
the country. The US embassy in
Damascus recently estimated Syrian
troop strength in Lebanon at ap-
proximately 18,000 men.
The recott it
Christian phi anti I1 Z
al-Basha bales irn camp?s in Beirut
began as the Syrians were withdrawing
from the city and more than offset any
reduction in Syrian military pressure on
the Palestinians.
Most of the Syrian forces that had been
stationed in Beirut returned to Syria, but
more heavily armed Syrian units located
near Sidon, in the Bekaa Valley, in
northern Lebanon, and in the central
mountains intensified their attacks on
Palestinian and leftist forces.
Syrian forces this month joined with the
Christian militias in reopening the road
connecting the isolated, predominantly
Christian city of Zahlah with the more
secure Christian area in the central moun-
tains. This will facilitate the resupply of
Christian forces directly from Syria.
In the near term, Syria presumably will
avoid the heavy ground combat that
almost certainly would be required to end
fedayeen control of portions of the major
cities.
Such a campaign would result in
numerous casualties, damage the morale
of the Syrian army, and fuel renewed
criticism of Asad at home and in the Arab
world. Syrian naval, air, and ground
forces will in any case be capable for the
most part of preventing regular resupply
of leftist and fedayeen forces.
Continued Buildup
There is no evidence that Damascus
feels it can or must withdraw its troops
from Lebanon. Palestinian forces con-
trolled by Syria-the Palestine Liberation
Army and the Saiqa fedayeen
group-have proved unreliable substitutes
for regular Syrian units, and Damascus
has no confidence that any Arab League
contingent can play a useful role.
If the Palestinians do not seek a
negotiated settlement quickly, Asad is
likely to increase the military pressure.
The Syrians and Christians probably
would seek first to prevent any substantial
movement into or between fedayeen-con-
trolled areas, hoping that the Palestinians,
lacking resupply, would soon exhaust
their stockpiles of arms and ammunition.
4"^--llowing or failing this, Syrian and
re a their shelling of fedayeen areas and
try gradually to constrict the fedayeen-
controlled areas of the three major cities.
This strategy would be based on the ex-
pectation that the fedayeen would decide
ultimately to make significant political
concessions rather than risk total destruc-
tion.
Damascus might at times respect calls
for cease-fires to gain time for resupply
and regrouping but appears willing to pur-
sue its fight with the Palestinians until it
has sharply limited the fedayeen's in-
dependent military capability. Syria
would not, however, want to bear the op-
probrium of having completely destroyed
the fedayeen movement.
Syrian forces may seek to establish
effective control of all movement in and
out of Palestinian camps and in the ex-
treme case might attempt to relocate cer-
tain fedayeen military camps to isolated
areas of the country where Damascus
could monitor all arms movements and
military operations.
A system of controls almost this severe
has been in effect in Syria for some years
and has virtually eliminated unauthorized
fedayeen military activity.
Political Pressures
Damascus obviously also hopes that it
can force political concessions by under-
mining Palestinian and wider Arab back-
ing for Fatah and for Yasir Arafat. Syria
has mounted an intensive propaganda
campaign to convince Palestinians that
Fatah-not Syria-is acting against the
Palestinians' best interests in Lebanon.
Damascus has been willing to cooperate
with Arab League and third party media-
tion efforts to the extent necessary to head
off effective opposition to Syria or sup-
port for the Palestinians.
The Syrians charge that Fatah has
violated the charter of the Palestine
Liberation Organization by attacking
other Palestinian groups and the forces of
another Arab state. Damascus has sought
to demonstrate that its Lebanese policy is
backed by leaders of the civilian Palesti-
nian organizations represented in the
PLO. Syrian spokesmen have also played
up Syria's recent support for the
Palestinians in the UN and other inter-
national forums.
Syria's propaganda thus far appears
designed primarily to inhibit greater sup-
port for Arafat and his Fatah colleagues,
but its accusations that the Fatah-
dominated PLO leadership is violating the
organization's charter come close to
questioning the leadership's right to con-
tinue in office.
It would be only a small additional step
for Damascus to prompt a pro-Syrian
Palestinian leader to call for a new
meeting of the Palestine National Coun-
cil, the PLO's parliamentary arm, to elect
a replacement for Arafat as chairman of
the PLO.
A meeting of the council is in fact over-
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due. The group theoretically convenes
every year, but it has not met since June
1974. Although the chairman of the coun-
cil has publicly declared his support for
Damascus' Lebanese policy, it is doubtful
that a majority of the group would vote to
replace Arafat.
The most likely result would be an open
split of the PLO into pro- and anti-Syrian
factions. If the Syrian-Palestinian con-
frontation continues for much longer,
Damascus may conclude that even this
would work to Syria's benefit.
If Arafat continues to refuse to seek ac-
commodation with Syria, Damascus
probably will work both to unseat him as
head of the PLO and to undermine his
position in his own Fatah organization.
Syria would like to eliminate Fatah con-
trol of the PLO, but, failing that, would
hope to reduce Fatah's preponderant in-
fluence.
Damascus presumably will continue for
a time to work against Arafat indirectly
and gradually, preferring that Arafat be
forced out by other Palestinian leaders
rather than directly by Damascus. Syria
probably would support a pro-Syrian
leader who is not a member of one of the
fedayeen groups or would support a group
of leaders drawn from pro-Syrian and in-
SEC
Page 11 WEEKLY SUMMARY
dependent fedayeen groups.
Fedayeen Successors
The most likely Syrian choices for a
successor to Arafat would include:
Misbah Budayri, commander of the
Palestine Liberation Army; Khalid
Fahum, chairman of the PLO's National
Council; Abd al-Muhsin Abu Mayzar, ex-
iled West Bank leader and member of the
executive committee of the PLO; Zuhayr
Muhsin, head of Saiqa; or possibly Khalil
Wazir, a top-ranking Fatah leader with
long-standing ties to Syria.
There is little chance that Wazir, a
founder of Fatah, would move against
Arafat and attempt with Syrian backing
to seize control of both Fatah and the
PLO.
It is not impossible, however, that
Fatah leaders-who on important issues
do make some decisions as a
group-might decide that Arafat has
failed them in the Lebanon crisis and
should be replaced, but only by a reliable
Fatah member with an established ability
to deal with Damascus.
Such a person, they might calculate,
could reach accommodation with Syria
yet preserve the independence of the PLO.
Wazir would meet these qualifications
even though he is not charismatic and his
radical ideas on fedayeen tactics make
him unpopular with the Saudis and the
other Persian Gulf Arab states that sup-
port the Palestinian organizations.
Salah Khalaf-head of Fatah's Black
September Organization, Arafat's unof-
ficial deputy in Fatah, and a personal op-
ponent of Wazir-would not be a likely
choice for Damascus.
Khalaf took charge of Fatah's an-
ti-Syrian operations in Lebanon during
Arafat's recent extended absence and has
threatened to carry out subversive ac-
tivities inside Syria. He probably would
be Egypt's choice to head the PLO in any
post-Arafat period.
Faruq Qaddumi, the PLO's de facto
foreign minister and Fatah's represen-
tative on the PLO executive committee, is
a much less powerful figure, but he is a
possible compromise choice for all par-
ties.
Damascus would be pleased that Qad-
dumi's accession would leave the PLO
weaker; Egypt would be relieved that the
organization had not fallen under the full
control of Damascus; Fatah leaders
presumably would be satisfied that a
member of their group, but not one of
their personal rivals, had taken charge.
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Although Iraqi purposes are, as usual, difficult to fathom,
the month-long buildup along the Syrian frontier is most likely
intended to counter Syrian pressure on the Palestinians and lef-
tist groups in Lebanon. Another purpose may be to incite Presi-
dent Asad's domestic rivals to move against him.
Iraq: Intentions Toward Syria
Iraq has maintained for over a month
an unusually large military force in the
western part of the country along the
main routes leading to the border with
Syria. The Iraqis have used the buildup to
exert pressure on Syria, but the paucity of
information available to us on the inner
workings of the regime makes it difficult
for us to judge how far Baghdad is
prepared to go.
We still believe the Iraqis began to con-
centrate their forces to relieve Syrian
pressure on Palestinian and leftist groups
in Lebanon and to incite domestic
enemies of Syrian President Asad to move
against him.
Neither objective has been attained so
far, but continuing signs of dissatisfaction
in Syria with Asad's Lebanon policy un-
doubtedly are encouraging Iraq to keep
its forces near the border. As long as they
remain there, there is the danger of con-
flict, if only by miscalculation.
Prospects for Conflict
We envisage at least two situations in
which Iraq might be tempted to take the
risk of a military incursion into Syria:
? If a Syrian group moving to seize
power appeared more amenable to
working with Iraq than is Asad.
? If Damascus seemed on the verge
of a Ri~ilatirilfe P*stinian-leftist
forces in Lebanon. Baghdad would
hope that Damascus would withdraw
units from Lebanon rather than shift
even more forces from the Golan
Heights to meet the Iraqi advance.
Iraqi forces now on the border out-
number the Syrians four to one.
Baghdad, in any event, would be reluc-
tant to go it alone. It would try in advance
to line up diplomatic support from the
other Arab states. Libya's Qadhafi would
almost certainly cheer any effort by
Baghdad to protect the Palestinians
against Syria.
Iraq probably calculates that the other
Arab states would, at the very least, press
Damascus into mediation before any skir-
mishing between Syrian and Iraqi forces
could get out of hand.
The Department of State/INR believes
it unlikely that Iraq would move into
Syria to prevent the defeat of the
Palestinian-leftist forces in Lebanon for
fear of one or more of the following con-
sequences:
? The probability of defeat at the
hands of the Syrians.
? The likely strong opposition of
Saudi King Khalid, who would also
enlist the Shah of Iran.
? The possibility of Iranian military
pressure along the Iraqi border.
Curbs on Baghdad
Troop morale is one important con-
straint on Iraqi behavior. Many of the
Iraqi soldiers sent to the Syrian border
have been away from their home gar-
risons for a month or more. Troops
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bivouacked in the southwest are subjected
to a hostile desert environment in which
maximum daily temperature exceeds 38
degrees celsius (100 degrees Fahrenheit).
There were signs of strain between the
Iraqi army and the ruling Baath Party
leaders early this year, and strong man
Saddam Husayn is probably wary of
further antagonizing the military.
Relations between Saddam and the
armed forces-never very close-worsen-
ed last January when he had himself ap-
pointed to the rank of lieutenant general,
despite the fact he had had no prior
military experience.
Baghdad has been angling for some
time to make political capital of
Damascus' efforts in Lebanon. As early
as mid-February-over a month before
Syrian regular forces openly intervened in
Lebanon-the Iraqi Baath Party's
newspaper warned Damascus that the use
of Syrian military forces against
Palestinians and Lebanese leftists "could
not be passed in silence."
Libyan Prime Minister Jallud unwit-
tingly provided Baghdad with a justifica-
tion for the move it may have been in-
tending to make. In mid-May, Jallud
shuttled between Lebanon, Syria, and
Iraq on a mission having two objec-
tives: the reconciliation of Syrian-Iraqi
differences and the arrangement of a
truce in Lebanon.
At the end of his diplomatic swing,
Jallud claimed to have succeeded in the
former. Syria, according to Jallud, had
agreed to join with Libya, Iraq, and
Algeria in a hard-line political front and
military alliance against Israel.
Iraq seized upon Syria's alleged agree-
ment to the Jallud proposal to order over
half of Iraq's combat units toward the
Syrian border, ostensibly en route to the
Israeli front. With great fanfare, Iraqi
President Bakr paid tribute in a Baghdad
ceremony to troops described as having
been mobilized to perform their "national
duty."
Having set the scene, Baghdad
countered Damascus' refusal to allow
Iraqi units to enter Syria by charging that
the Syrians had broken their pledge to
Jallud to form a military front against
Israel.
The Syrian rebuttal makes clear,
however, what Jallud probably did not tell
Baghdad-that Damascus was demand-
ing the prior fulfillment of an array of
conditions that would have taken years to
implement even if Damascus actually in-
tended to follow through.
Old Quarrel
The tension between Syria and Iraq has
historical roots in the deep personal enmi-
ty between leaders of the rival wings of the
international Baath Party who rule in
Baghdad and Damascus. Saddam Hu-
sayn, the present leader of the faction that
rules in Iraq, came to power in 1968; Asad
has headed the faction dominant in Syria
since he staged a successful coup in 1970.
Baghdad has been free to focus on the
Asad regime since early last year when it
inflicted a decisive military defeat on
rebellious Kurdish tribesmen after strik-
ing a deal with Tehran that ended Iran's
support for the Kurds.
Shortly after the Iran-Iraq accord was
signed in March 1975, Saddam Husayn
reportedly commented privately that
Baghdad, freed of its entanglement with
the Kurds, could now turn its attention to
Damascus.
Baghdad's meddling in Syrian domestic
affairs has noticeably increased over the
past year. Baghdad has made no effort to
conceal its ultimate objective; an Iraqi
minister, interviewed in April by the
Washington Post, admitted that Baghdad
had made a policy decision in early 1975
to use all means, including subversion, to
hasten Asad's downfall.
Lebanon Angle
Baghdad apparently believed that the
introduction in early April of large
numbers of Syrian regular forces into
Lebanon would both elicit strong
criticism from the other Arabs and trigger
serious domestic unrest in Damascus.
On April 10, Baghdad abruptly cut off
oil to Syria, forcing Damascus to
purchase elsewhere at much higher prices
the high-quality crude it needs to meet its
military and commercial requirements.
Damascus has been retaliating by sup-
porting a new group of dissident Iraqi
Kurds; this drew a sharp diplomatic
protest from Baghdad in mid-May.
In Lebanon, moreover, Syrian-con-
trolled forces have in recent months fired
on the Iraqi embassy and ambassador's
residence, burned the offices of two
Baghdad-financed newspapers, and at-
tacked a Palestinian guerrilla unit sup-
25X1
25X1
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Despite the success of the developing states at the Nairobi
conference last May, they are likely to find it harder to main-
tain unity as talks with the industrialized states become more
specific. At that point, many will be moved to defend national
and regional interests.
Debate Among Developing Countries
Many of the developing states are in-
clined to attribute their success at the UN
Conference on Trade and Development in
Nairobi in May to the unity of their
negotiating caucus, the Group of 77. Ef-
forts to maintain that unity at a number
of meetings later this year will be strained
by what some members perceive as a need
to defend individual and regional interests
on the questions of raw materials and debt
problems.
At the same time, the radical members
of the Group of 77 will try to enlist sup-
port for their uncompromising approach
toward the industrialized states. We do
not expect the radicals to win out anytime
soon, but they could gain strength if the
talks between the rich and poor countries
break down.
The most important resolutions to
come out of the Nairobi conference from
the point of view of the developing states
were ones on commodity supports and the
debt problems of developing states. The
industrialized states, albeit with reser-
vations, agreed for the first time as a
group to begin talks on helping the
developing states in these matters.
Immediately following the conference,
a number of developing states expressed
dissatisfaction with the results. They
argued that the Groupof 77 should have
held out for a firm commitment and
timetable to implement a commodity
program; failing that, they should have
broken off talks and returned to the offen-
sive.
A more balanced view, recognizing that
the developing countries got as much, and
perhaps more, than they could realistical-
ly have expected, is now gaining in-
creasing acceptance.
Government officials of a number of
developing states from Asia, Africa, and
Latin America have in varying degrees
cited the agreement to begin talks as a
success. An attempt at a meeting of the
nonaligned coordinating committee to
brand the Nariobi conference a failure
was rebuffed.
Conflicts To Surface
Conflicting interests, both economic
and political, doubtless will surface.
Developing states that import raw
materials are becoming more aware that
the demands of raw material exporters to
tie their prices to those of manufactured
goods will be expensive for'them as well as
for the industrialized states. When talks
begin on these matters, the importing
states will want special concessions from
their partners in the Group of 77.
Differences will also arise in the area of
debt relief for developing countries. Those
states already engaged in fairly active in-
ternational commerce-primarily the
Latin American and some Asian
states-have come to rely on commercial
debt and will not want to jeopardize their
credit ratings by supporting demands for
the general debt moratorium that the
poorer developing states-mainly in
Africa and South Asia-are seeking.
Tensions over these issues are already
evident in the more frequent criticism of
the Organization of Petroleum Exporting
Countries. Jamaica, for example, has
openly criticized OPEC dominance in the
Paris Conference on International
Economic Cooperation, and the Indians
and the Brazilians have tried to out-
maneuver the OPEC delegates in the
Failure of the OPEC states during the
Nairobi Conference to use their $800-
million special aid fund to support the in-
tegrated program for commodities has
raised further doubts among many of the
developing states about whether OPEC
should have their support on other issues.
An-apparent OPEC decision to decrease
its share of the total contribution to the
International Fund for Agricultural
Development may also raise questions
among other developing states.
The potential for increasing the schisms
within the Group of 77 has apparently not
deterred Gamani Corea, the secretary
general of UNCTAD, from pressing for a
rapid start to the commodity talks called
for in Nairobi. Indeed, Corea may think a
rapid show of progress would tend to un-
ify the developing states.
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Debate on Tactics
Another basic debate among the
developing states involves the tactics that
should be used to pursue their demand for
a "new international economic order."
The more radical states, led by Algeria
and Cuba, which had the upper hand until
the special UN session on development
last September, have favored making ex-
treme demands and using automatic
voting majorities to force adoption of
their proposals by UN bodies.
These states have advocated the crea-
tion of new producer cartels and other
concerted efforts to compel the in-
dustrialized states to adopt their view of
how the world economic system should
function.
Other states advocate a negotiated ap-
proach and are pointing to the limited
progress in UNCTAD and other inter-
national bodies as evidence that this can
further the goals of the developing coun-
tries.
These states are concerned, however,
that continued differences among the in-
dustrialized countries on raw materials
issues will lend credence to the radical
view that the industrialized states will not
willingly concede any points to the
developing states.
The radical states will have oppor-
tunities to push their line at the summit
meeting of nonaligned states in Colombo,
Sri Lanka, next month and at a meeting
in Mexico in September to discuss
economic coordination among the
developing countries. To counter such ef-
forts, the more moderate developing
states will be looking for signs of progress
in any of a number of multilateral
meetings with the industrialized states.
The Conference on International
Economic Cooperation is one forum
where the moderate developing states can
make their case. Almost all the develop-
ing states are unhappy with the slow pace
of these talks, although interest may pick
up if current indications of a possible
breakthrough in the detailed talks to be
held this fall are borne out.
STANLEY by Murray Ball
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Only 19 of the 113 members of the
Group of 77 are represented in this forum,
and-some sign of progress is necessary for
the 19 to convince those states not
represented that these discussions are
worth pursuing.
The Multilateral Trade Negotiations
also will be looked to for indications that
a negotiated approach offers more
promise than confrontation. The develop-
ing states at this point are particularly in-
terested in concessions on tariffs for
tropical products and on a regime of
"special and differentiated" treatment in
the application of a general tariff reduc-
tion formula.
The preparations for the commodity
and debt talks agreed to in UNCTAD,
and to some extent the August session of
the Law of the Sea Conference, also will
provide opportunities for the moderate
developing countries to bolster their stand
The Indian economy has improved significantly in the year
since Prime Minister Gandhi assumed emergency powers,
primarily because of a bumper harvest. The upswing should
continue-provided the unpredictable summer rains
cooperate-but the longer term prognosis is not so bright.
The Indian economy has improved
significantly in the year since Prime
Minister Indira Gandhi assumed
emergency powers, primarily because of
good weather and the resulting bumper
harvest. The upswing should continue,
provided the unpredictable summer rains
cooperate.
The economic performance of the past
12 months and Gandhi's increased per-
sonal powers provide a unique opportuni-
ty to attack India's basic economic
problems. We see no sign that Gandhi is
prepared to pursue seriously this oppor-
tunity.
Shortly after proclaiming the emer-
gency, Gandhi announced a sweep-
ing economic and social reform program.
The proposals were mostly rhetoric, al-
though a few important results have been
achieved.
Mixed Results
Gandhi's drive against tax evasion has
led to increased tax receipts, and her
"voluntary" income disclosure scheme
has brought out some $2 billion in hidden
income and wealth. An "unofficial" ban
on strikes has been an important element
in the expansion of industrial production
India: The Improving Economy
since late 1975.
Gandhi has also taken steps to attack
some of India's longer term economic
problems. For the first time family-plan-
ning services are being emphasized in
rural areas, where they are most needed if
India is to make headway on population
control. New Delhi's arm-twisting of state
governments on interstate river disputes
has paved the way for long-needed irriga-
tion projects, although vast sums will be
required, and actual benefits are years
away.
The Gandhi government has not at-
tacked the major impediments to India's
economic growth: the low level of saving
and investment, and the lack of incentives
for agricultural and industrial production.
Land reform has not been pushed because
it would adversely affect a major political
faction within Gandhi's party.
Total net investment continues to be a
small percentage of gross national
product-some 1 l percent. Private invest-
ment has not revived, and foreign invest-
ment is at a very low level because of
government controls. The principal ex-
port industries are in the private sector
and are heavily taxed to help finance
public investment.
Agricultural output reached record
levels last year; good weather rather than
government policies has been responsible.
Last summer's unusually good monsoon
rains resulted in a record food-grain out-
put of 115 million tons, up from 101
million tons in the previous year. On a
per-capita basis, however, current grain
availabilities are slightly below the
previous high of 196 kilograms (about 400
pounds) in 1971.
The bountiful harvest, plus grain im-
ports of 7.4 million tons, have built up
buffer stocks to record levels, expected to
reach 12 million to 13 million tons by late
summer. New Delhi again has stocks suf-
ficient to keep food prices in check and to
carry the country through a poor crop
year without undue shortages. A bad
monsoon would have a pervasive in-
fluence on the entire economy, however,
and could wipe out the benefits of several
good years.
Fiscal Improvement
A series of tough anti-inflationary
measures taken in the summer of 1974, a
year prior to the emergency, have brought
prices under control. Wholesale prices,
which increased 26 percent in 1974, rose
only 3 percent in 1975, and thus far in
1976 are below last year's level. The
measures include:
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UPI
Billboard in New Delhi emphasizing goals of Gandhi's 20-point program
? a compulsory savings deposit
scheme for higher income levels,
? credit tightening,
? reduced public expenditures, and
? higher taxes.
India's foreign payments and official
reserves have improved considerably in
the past year. More realistic exchange
rates have led to a substantial increase in
remittances from Indians living overseas.
The rupee was delinked from sterling in
September 1975 and has been revalued six
times since then. The total appreciation of
the rupee related to sterling has been near-
ly 13 percent. In the six-month period
following delinking, reserves jumped $700
million to $2.2 billion, the highest level in
20 years.
India's trade deficit should ease slightly
in 1976, after three years of steadily
higher deficits. Between 1973 and 1975,
prices for three of India's most essential
imports-petroleum, food-grains, and
fertilizer-soared, although this was
offset partly by rapidly rising world
market prices for exports, especially for
sugar.
For 1976, food and fertilizer imports
will almost certainly be reduced; and oil
imports should remain constant. Exports
should improve again owing to higher
earnings from engineering goods, sugar,
tea, and iron ore.
Foreign Help
Despite these positive developments,
India continues to need foreign assistance.
The Aid to India Consortium will main-
tain its assistance at last year's level, and
large capital inflows are expected from
Iran for development of Indian iron ore
and aluminum production. India will also
continue to rely on concessionary credits
from Iran and Iraq for oil imports.
Industrial output increased about 6 per-
cent in the fiscal year ending on March
31, following three years of about 2-per-
cent growth. The improvement was due to
the excellent monsoon, labor peace,
greater labor productivity, and easing of
import and industrial licensing
procedures.
These factors, however, will not provide
sufficient economic momentum to attain
New Delhi's goal of 8- to 10-percent in-
dustrial growth for the current fiscal year.
The improved performance of the
economy during the past year is only
beginning to overcome the depressing
effects of several years of low economic
growth and inflation on Indian purchasing
power. As consumer demand picks up, the
current economic constraints on in-
dustrial expansion should ease.
Performance has varied widely among
different industries. Recovery in heavy in-
dustry has been led by the aluminum and
machine-tool industries, both up ap-
proximately 25 percent. Inventories have
risen rapidly, particularly in the coal and
steel industries, where public-sector firms
have been under government pressures to
increase output.
Textiles remain depressed because of
sluggish exports and a change in the
pattern of domestic demand-away from
coarser fabrics toward synthetics. The
jute industry is in difficulty because of
slack foreign and domestic demand.
Production of consumer durables and
automobiles is sharply down, the latter at-
tributable in part to the doubling of gas-
oline prices since 1973. Both industries
have been hurt by anti-inflationary
policies, which have severely tightened
commercial credit.
On balance, industrial activity should
continue its recovery. Given the expected
revival of consumer demand, output
should increase 5 to 6 percent this year.
Outlook
The short-term outlook is favorable.
The excellent harvest and, to a lesser ex-
tent, the upswing in industrial output,
have provided the momentum for another
good year. India's gross national product
should do as well as last year's 5-percent
increase.
The long-term prospects are less good.
Gandhi's new powers have given her some
breathing room to embark on realistic
long-range economic and social policies.
Sustained growth can be achieved by
reducing India's dependence on the an-
nual monsoon, which will require a her-
culean investment effort.
With regard to industrial development,
Gandhi's government has shown no in-
dication of moving away from policies
that in many ways have given India the
worst of two worlds-an excessively
bureaucratic form of socialism and an
overprotected and overregulated private
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President-elect Lopez Portillo has set ambitious social and
economic goals for his administration, but his range of options
in pursuing them will be narrow. In addition to restoring
private-sector confidence, an expansionary oil policy will be es-
sential.
Mexico: Economic Policy
Mexican president-elect Jose Lopez
Portillo, in a major speech before his elec-
tion on July 4, called on Mexicans to unite
in an "alliance for production" to increase
productivity and reorient output from
consumer to capital goods.
Lopez Portillo urged that economic
growth be accelerated, that the lot of the
large and growing number of poor be im-
proved, and that the government deficit be
cut. Although the goals are populist and
have led some observers to believe he will
follow President Echeverria's free-spen-
ding policies, he has on other occasions
given emphasis to the private sector and
has sought the advice of business leaders.
Over the long run, his programs for
both welfare and for increases in produc-
tivity can be achieved only by vigorous
development of Mexico's vast oil reserves.
Since the last devaluation of the peso,
in 1954, Mexico has earned a reputation
for financial stability and sustained
economic growth. In 1972, however, the
Echeverria government initiated an ex-
pansionary monetary and fiscal policy
that was aimed at relief for Mexico's poor
and at widening the role of the public sec-
tor.
The government's actions included sub-
stantial raises in money wages, bigger
welfare outlays, and a jump in govern-
ment payrolls. As a result of these policies
and the impact on Mexico of the global
recession, Lopez Portillo will inherit an
economy afflicted by:
? An enormous increase in federal
spending and in the federal
government's deficit.
? A rapid rate of inflation.
? Stagnating private investment.
? Slowing economic growth.
? A large current-account deficit.
? Greatly increased foreign in-
debtedness.
The goals set by Lopez Portillo run the
gamut from costly populist welfare
programs to incentives for the private
business sector. His administration will
confront a narrow range of options in pur-
suing these ambitious goals, since it will
face the immediate problem of regaining
financial stability. The critical element of
economic policy will be restoration of
private-sector confidence and investment
spending.
A turn-around in private in-
vestment-which has declined under
Echeverria's policies-will depend on a
more favorable business climate and
adequate long-term credit for the private
sector. To minimize inflationary pressure,
this credit policy must be accompanied by
increased private saving and reduced
government borrowing.
We expect Lopez Portillo to increase
credit to the private sector but not to woo
the business community by reducing taxes
and the state's role in the economy.
Another major requirement will be to
reduce the large public-sector deficit.
Lopez Portillo will probably pursue tax
reform and improvement in administra-
tion to prevent tax evasion in order to in-
crease government revenues. Revenues
will also increase as oil production rises.
More decisive restraint on government
spending and increase in labor productivi-
ty are necessary to hold the line on waste
and on the share of operating expen-
ditures in the budget. Lopez Portillo is
reportedly planning to achieve these ob-
jectives by a major reorganization of the
executive branch.
The new administration will be con-
fronted by a large external debt. Although
debt service is still manageable, the
government will have to shrink its
current-account deficit to assure con-
tinued credit-worthiness.
The prospects for Mexican exports are
exceptionally bright. Even if imports rise
fast enough to allow for an 8- to 9-percent
real increase in economic growth in the
next few years, Mexico will be able to
reduce drastically its current-account
deficit by rapid development of its
petroleum reserves.
An expansionary oil policy is essential
to carrying out in full Lopez Portillo's
economic programs. He apparently favors
a quick expansion of Mexican oil exports.
In contrast, a vocal segment of the Mex-
ican leadership feels strongly that oil
resources should be husbanded.
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