COPING WITH OPEC SURPLUSES A GLOBAL PERSPECTIVE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79B00457A000600070001-0
• Release Decision: RIPPUB
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• Document Creation Date: December 9, 2016
• Document Release Date: March 23, 2001
• Sequence Number: 1
• Publication Date: August 1, 1977
• Content Type: REPORT

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Confidential
Coping with (JPEC Surpluses
.A Global Perspective
Confidential
ER 77-1039'8
August 1977
C 0
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
Classified by 015319
Exempt from General Declassification Schedule
of E.O. 11652, exemption category:
?SB(1), (2), and (3)
Automatically declassified on:
dots impos~i61? fo d~fermins
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Coping with OPEC Surpluses
A Global Perspective
Cerairal Intelligence Agency
I?irectorate of Intelligence
Summary
The foreign payments problems created by
the 1974 price hike imposed by the Organiza-
tion of Petroleum Exporting Countries (OPEC)
have diminished over the past three years and
will continue to do so through 1980 if real oil
prices do not increase much. OPEC's current
account surplus is now running at about US $40
billion a year compared with the record $73
billion in 1974. Because of the rapid inflation in
prices of goods and services other than oil, the
burden posed by the OPEC surplus now equals
less than 5 percent of non-OPEC exports after it
had climbed from 1 percent in the early 1970s
to 11 percent in 1974. We expect that by this
measure the burden will drop to roughly 2
percent in 1980.
Policymakers in some countries nonetheless
still find that payments problems are a serious
restraint to economic growth. While most coun-
tries took the accessary and often difficult steps
to adjust, others discovered they were unable to
do so mainly because of domestic political and
economic weaknesses. Ire fact, a major impact
of the OPEC-generated crisis was to surface or
sharply intensify these fundamental weaknesses.
Our review of non-OPEC countries indicates
that while most less developed countries (LDCs)
are no more constrained by balance-of-pay-
meats problems now than they were before
1974, many developed countries 'have experi-
enced striking changes in their payments posi-
tions. After years of surpluses or easily manage-
able deficits, developed countries, especially in
Western Europe, now have large deficits. The
change means that policymakers in these coun-
tries will have to reevaluate their perceptions of
how to balance their economic growth and
payments goals.
Altogether, we identified 22 countries whose
foreign payments positions could generate con-
cern between now and 1980. The list, of course,
will change as time passes and unforeseen events
develop. For example, Argentina is not included
because measures taken over the past few years
have corrected the worst of its payments
problems; erratic policies or increased political
instability could quickly alter this situation.
Similarly, India's currently favorable situation
largely reflects excellent weather and could turn
around quickly.
The size of the current account deficits that
each cowltry will actually be ablf~ to manage
through 1980 will depend mainly on its export
potential and how each government and its
creditors view the nation's economic and politi-
cal prospects. A country's debt burden will
While the Department of Treasury agrees with many of the individual
conclusions stated, it believes that OPEC payments surpluses are likely to
continue to be a major obstacle to achievement of a sustainable world
payments pattern and should remain a matter of grave concern to
policy-making officials. Treasury believes that the highly aggregated
projections presented understate the difficulties facing the system.
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continue to be a factor of secondary impor-
tance. Lenders have been and are willing to
provide funds to a country with a heavy debt
burden if they believe it has good growth
prospects. On the other hand, little will be lent
to a country with a small debt if the lender
lacks confidence in that country.
Among the countries with potential problems
discernibbe at this time, France, Canada, Spain,
and Brazil will have to run large current account
deficits ($3 billion or more annually) through-
out the period to achieve economic growth
rates that approach those of the 1960s. From
an economic and financial point of view, they
have the wherewithal to do so. The three
developed countries have low enough foreign
debts to manage such deficits while Brazil's
market and export potential is sufficiently
bright to attract the necessary foreign capital.
Their ability to nm large deficits will depend
much more on political factors.
France's payments problems could be pushed
into the critical range by a leftist coalition
election victory in 1978, which almost certainly
would trigger large-scale capital flight and a loss
of foreign investor confidence. The ability to
overcome these difficulties would depend on
the delineation and the timing of policies set by
the new government. If the coalition pursued its
relatively moderate avowed program, capital
outflow would ebb though businessmen would
still hesitate to make new investments. The
economic problems would be especially severe,
however, i.f policy differences among the coali-
tion members led to legislative immobility and
massive uncertainties.
Although Canada has obtained large amounts
of private foreign capital in recent years, Que-
bec separatism and other contentious political
issues may interrupt this flow. Some elements
in the international banking community are
already taking a close look at investment in
Canada.
Spain faces the difficult task of moving from
a dictatorship to a democracy while coping with
strong separatist movements. The task could be
complicated by the need to undertake austerity
measures to bridle the country's high inflation.
Spain does, however, possess a dynamic econo-
my and a fairly large and prosperous middle
class to help it through the transition.
Although Brazil's political situation now
seems firm, the process of choosing a new
president combined with continuing inflation
problems poses some threat to this stability.
Italy, Sweden, Denmark, Finland, and New
Zealand have decided to slow growth of GNP to
reduce current account deficits to what they
consider more acceptable levels. Their govern-
ments, however, may well have to shift policy
courses as they alternately encounter political
pressures for higher growth and the reality of
enlarged current account deficits. In these five
countries, efforts to maintain employment and
social benefits have been instnamental in mak-
ing their exports less competitive as production
costs outpaced those of their major competi-
tors.
Peru, Zambia, Zaire, and Jamaica do not have
much room for maneuver, and they will end up
with small deficits and low GNP growth. Private
lenders and international institutions are insist-
ing that these countries take steps to correct
fundamental economic problems, actions that
will depress economic growth. If they fail to
take external advice or default on their foreign
debts, they would not be able to borrow the
necessary funds to pay for the imports needed
to achieve or maintain economic growth.
The Philippines, Turkey, and Morocco, with
their poor export potential, may soon be unable
to finance the large current account deficits
needed to maintain a rapid economic pace.
The other listed countries have their own
peculiar difficulties. How well Egypt manages
will depend on the availability of Arab funds
and Cairo's ability to support risky economic
reform programs. The size of Israel's deficit will
be determined mainly by the amount of foreign
aid that it receives. South Africa's position will
hinge on the intensity of outside attacks on its
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racial policies. If pressures continue to mount,
Pretoria is likely to react by reducing its
dependence on foreign capital, thereby braking
the economy. Portugal will require perhaps $0.5
billion to $1 billion a year in official capital to
help overcome the effects of the political
turmoil of 1974 and to maintain a moderate
rate of economic growth. Chile should be able
to develop at a reasonable pace and raise
sufficient foreign private capital to cover both
its la?ge debt service burden and a current
account deficit reaching $500 million by 1980.
Austria, whose problems are largely cyclical in
nature, should be able to gradually reduce its
current account deficit to a manageable level
while achieving an acceptable rate of GNP
growth.
On balance we think there continues to be
sufficient flexibility in the international finan-
cial system to handle these levels of deficit
financing. The International Monetary Fund's
(IMF) special fund may be called on to help
with adjustment assistance when particularly
troublesome strains arise. Among the countries
we have identified as having potential payments
problems, only a few face acut,; economic
slowdowns.
The greatest risk is a contagious economic
slowdown in Western Europe. If isolated coun-
tries elsewhere go into an economic tailspin, the
global picture would be little affected. Nine of
the countries, however, are in Western Europe
where recessions can spread more quickly be-
cause the region's economies are so integrated.
The situation could be especially troublesome if
both France and Italy are involved. An econom-
ic downturn in the next few years would come
at a particularly bad time for the continent.
Unemployment is expected to remain high
because of demographic factors, and France,
Italy, and Spain will be contending- with unset-
tled political conditions.
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CONTENTS
Introduction
1
The Size and Distribution of the OPEC Surplus
2
Trends in Overall Size
2
Distribution of the Current Account Deficits
3
Summary Projections to 1980
6
Regional Distribution
7
The Problem Countries
9
Identification-More than Arithmetic
9
Country Profiles
9
Political Determinants
14
Outlook to 1980
14
Manageable Deficits
14
Prospects for Individual Countries
15
Large deficits
15
Reduced deficits and slow growth
15
Small deficits and slowgrowth
16
Large deficits financed by official capital flows
16
Growing payments problems
16
The special cases
10
Implications for World Economic Stability
17
Beyond 1980
17
Appendix A: Prospects for the Current Account Balances
of Individual Problem Countries
19
Appendix B: Supporting Statistical Tables
43
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Coping with OPEC Surpluses
A Global Perspective
Introduction
This paper assesses the problem non-OPEC
countries face in meeting their goals for econo-
mic growth while managing their large OPEC-re-
lated current account deficits. Inflationary pres-
sures and foreign payments problems in many
non-OPEC countries have made it much more
difficult for policymakers to take measures to
overcome high rates of unemployment and to
make use of idle productive capacity. Their
predicament stems in large part from the
ongoing adjustment to the massive increase in
OPEC oil prices in 1973-74.
Nonetheless, by historical standards the
world economy has adapted well to higher oil
prices. Before World War II, dislocations of even
lesser magnitude led to widespread financial
defaults, rampant protectionism, and economic
depressions. Because of better economic coop-
eration among countries, a more efficient inter-
national monetary system to channel funds to
deficit countries, and the greater ability of
individual countries to manage their economies,
these calamities have been averted. Countries
now rarely default on their foreign debts or
introduce highly protectionist policies. They
now solve payments problems mainly by direct-
ly and indirectly slowing economic growth,
hoping to reduce the demand for imports. This
process, ,however, always contains the danger
that restraints on demand will trigger a global
economic slowdown within a system that is
now highly interdependent.
Policymakers have tried somewhat different
methods of limiting economic growth in order
to reduce their current account deficits. Fiscal
and monetary restraints combined with an
incomes policy are used most often..[n the case
of countries whose goods and services are not
competitive in international markets, their cur-
rency values have been allowed to decline under
the present system of managed floating ex-
change rates. While the impact of devaluation
on exports tends to be felt gradually, the
country almost immediately must accept lower
economic growth as a result of the higher
domestic price paid for imported goods. LDCs
and smaller developed countries often restrict
imports directly, although these conl:rols may
not slow growth as much as other policies in
countries having a fairly sophisticated economic
structure. For example, Brazilian entrepreneurs
have responded by producing import-competing
goods.
To judge how well non-OPEC countries are
coping with the impact of the OPEC surplus on
their economies, the paper first repori:s the size
of the OPEC surplus and the distribution of its
mirror image deficits among non-OPIEC coun-
tries. Next, it considers the impact of inflation
on the burden of these deficits. The trend in the
size of the surplus=whether in nominal or real
terms-is important because the surplus could
grow so large that even the strongest economies
would have difficulty in managing their deficits
while it could shrink to a level that no longer
exerts much disruptive influence. The distribu-
tion of the deficits indicates which countries
may be having the most severe problems.
The paper then deals with the crux of the
payments problems created by OPEC'--whether
countries with large current account deficits can
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live with them. After all, the OPEC surpluses
remain in the international monetary system,
being deposited or invested in one or another
non-OPEC country. But the ability of individual
countries to attract these funds varies consider-
ably.
We therefore identify a list of countries that
have restrained or might have to restrain growth
so as to reduce current account deficits. In
doing so, we look at both the statistics regard-
ing debt burden and at the perceptions of
policymakers and creditors. The paper then
discusses how these countries are likely to fare
in 1977-80. Finally, the prospects beyond 1980
are reviewed briefly.
The Size and Distribution of the OPEC Surplus
Trends in Overall Size
The OPEC current account surplus has now
stabilized. After sharp gyrations reflecting the
initial price rise in 1974 and recession-depressed
demand in 1975, the surplus was $40 billion' in
1976 and is expected to remain at roughly the
same level in 1977. Since its peak in 1974, the
surpltts has declined by about 45 percent (see
OPEC Figure 1
Current Account Surplus as
a Percent of Non-OPEC Exports
li
table 1). The decline reflects increasing OPEC imports and a faltering demand for OPEC oil
_ which resulted from the global economic slow-
tThe current account balance includes goods, services (inelua- down. Between 1973 and 1977, the average
ing reinvested earnings), and private transfers. annual rate Of growth of GNP in the developed
Including goods, services (including reinvested earnings), and private transfers.
Preliminary.
western Europe (including Yugoslavia), US, Japan, Australia, New Zealand, South Africa, and Israel.
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countries will probably be less than one-half the
rate attained during the 1960s.
Since 1972, moreover, the rapid pace of
world inflation and continued expansion in
world trade have eroded the real impact of the
OPEC surplus. Between 1972 and 1976 the
dollar price deflator for the trade of non-OPEC
countries climbed by 80 percent, while trade
volume increased by 20 percent. The inflation
and rising volume of exports, combined with a
declining OPEC surplus after 1974, reduced
markedly the burden shouldered by non-OPEC
countries, as measured by the relative impor-
tance of the surplus (and conversely the defi-
cits) to non-OPEC trade. For example, the
OPEC surplus as a percent of non-OPEC exports
jumped from 1 percent to 11 percent in 1974
but slipped back to 5 percent in 1975 arld
1976 (see figure 1).
Zflere, and in other comparisons, the non-OPEC countries d.o
not include the Communist nations. Therefore the OPEC
surplus is not equal to the deficits of the non-OPEC countries
discussed in this paper (see table 1).
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The high rate of inflation has also favored
debtor nations at the expense of lenders.
Despite the considerable increase in non-OPEC
LDC borrowing in recent years, this group's
outstanding real debt increased by only about
one-fourth between 1972 and 1976 while nomi-
nal debt nearly tripled.3 The ratio of annual
debt obligations (principal repayments plus
interest) to exports has remained roughly con-
stant.
Distribution of the Current Account Deficits
If the current account deficits caused by the
OPEC surplus were shared widely, non-OPEC
payments problems would be min:irnal. But a
relatively few countries ended up absorbing the
bulk of the surplus (figure 2). Moreover, in
1976 these same countries had to offset an
3.See appendix table B-3.
Smaller Developed Countries: Current Account Balances '
Billion US $
Annual
Average
Table 2
Major Developed Countries: Current Account Balances '
Billion US $
Annual
Average
1970-72
1975
1976 2
Total ...................
14.2
22.8
7.9
United States s ..
1.4
21.2
8.6
Japan ...............
5.0
- 0.4
3.9
West Germany .
2.1
7.5
6.8
France .............
0.8
1.1
- 4.8
UK ...................
2.0
-2.8
-1.1
Italy .................
2.5
0.9
-1.7
Canada ............
0.4
- 4.7
- 4.3
' Including goods, services (including reinvested earnings), and
private transfers.
s Preliminary.
a The US current account figures include reinvested earnings
from direct investments ko conform with the IMF definitions used
for all countries. Official U5 data do not include these flows. In
1974-76, US direct investment income reinvested abroad minus
foreign direct investment income reinvested in the US amounted to
a net inflow of $6 billion per year. If these earnings are excluded,
the .1976 US current account surplus in 1976 would be $2.5 billion.
1970-72
1975
1976
Total .........................
- 0.5
-15.9
-19.7
EC: countries ........
0.9
2.3
-0.3
Denmark .......
- 0.3
- 0.6
- 2.2
Ireland .......,..
-0.2
-0.2
-0.5
Belgium ........
1.2
1.2
0
Netherlands ..
0.2
1.9
2.4
Other countries ...
-1.4
-18.2
-19.9
Spain .............
0.5
-3.5
-4.4
Norway ,........
-0.2
-2.3
-3.5
Sweden ..........
0.2
-1.1
-1.9
Israel .............
-0.4
-2.9
-2.3
Turkey ..........
0
-1.9
- 2.2
South Africa
- 0.9
- 2.5
- 1.9
Austria ......,....
- 0.1
- 0.3
-1.5
Finland .........
- 0.2
- 2.2
-1.1
Portugal2 ......
0.4
-0.7
-1.3
Greece ...........
- 0.4
-1.1
-1.1
New Zealand ..
0.1
-1.4
-0.7
Australia ........
- 0.3
0.1
-1.1
Iceland ..........
0
-1.0
0
Yugoslavia .....
- 0.1
-1.0
0.1
Switzerland
0.2
2.7
3.6
'Includes goods, services
private transfers.
Q 1972 only.
(including reinvested earnings), and
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Countries With. Current Account Deficits, 1976
OTHER
8.8
SWEDEN
1.9
SOUTH AFRICA
1.9
DENMARK
2.2
TURKEY
2.2
ISRAEL
2.3
NORWAY
3.5
CANADA
4.3
SPAT N
4.4
FRANCE
4.8
QTHER
8:3'
BANGLADESH OS ::
o.a
os
EGYPT
2.4
MEXICO
3.1
DEVELOPED COUNTRIES NON-OPEC LDCs
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i~r~c~c~ ~c~~
1970-72
Annual Average
1970-72
Annual Average
L_J
-8
additional surplus of $30 billion jointly accll-
mulatcd by 13 other non-OPEC countries.4
Ten countries accounted for more than one-
half of the combined deficits of non-OPEC
countries in 1976. 1n fact, four countries-Bra-
zil, France, Spain, and. Canada-had about 30
percent of the total. Roughly th.e same degree
of concentration prevailed in both the devel-
opeds and LDC segments of the non-OPEC
world.
The most striking changes occurred among
the 27 developed countries (see tables 2 and 3).
The combined total for those developed coun-
tries running deficits grew from $3 billion to
$38 billion between the early 1970s and 1976,
4We use 1976 current account data throughout the paper as a
benchmark in discussing a country's payment position. That
year is relatively normal compared with 1974 and 1975, which
reflect the immediate impact of the oil price rise and the
following deep recession.
SDevelopcd countries as defined for this paper are the OECD
countries, Israel, South Africa, and Yugoslavia.
1976
40 43
[)eveloped Countries
1976
1970-72
Annual Average
12 15
Q Overall Balance
- Countries with Surplus
Countries with Deficit
as can be seen in figure 3. At the other extreme,
tour countries-the US, West Germany, the
Netherlands, and Switzerland-greatly improved
their current account positions.
Among the more than 80 LDCs, a sharp
current account deterioration took place in
Brazil, Mexico, Peru, the Philippines, Egypt,
Syria, and Morocco (see table ~l). These seven
countries accounted for mare than three-
fourths of the $18-billion increase in LDC
deficits. The enlarged deficits of the three
Muslim countries were due to increased imports
financed by the much greater economic assist-
ance provided by the Persian Gulf nations. At
least seven LDCs ran current account surpluses in
1976-Argentina, Colombia, India, Taiwan, Ma-
laysia, and the two small oil-producing coun-
tries of Brunei and Oman.
Aside from the countries with current ac-
count surpluses and those with large deficits,
many countries have relatively smrvall and easily
manageable deficits. Most are LDCs; developed
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Non-OPEC LDCs: Current Account Balances'
Billion US $
Annual
Average
1970-72
1975
1976
l'otal ...........................
Brazil ...............
-7.7
-1.1
-34.0
-71
-22.0
-6.1
Mexico .............
-1.0
- 4.1
- 3.1
FgYPt ..............
-0.5
-2.4
-2.4
Morocco ..........
0.1
- 0.5
- LS
Peru .................
Negl.
-1.6
-1.1
Philippines ......
Negl.
-1.0
-1.1
Pakistan ...........
-0.5
-1.1
-0.8
Syria ................
Negl.
-0.6
-1.2
Bangladesh .....
N. A.
-1.0
- 0.5
Singapore ........
-0.6
-0.8
-0.9
South Korea ...
-0.7
-2.0
-0.3
Jamaica ...........
-0.2
-0.3
-0.3
'Thailand .........
-0.2
-0.6
-0.5
'Tunisia ............
0
-0.2
-0.3
'Loire ................
-0.3
-0.7
-0.1
Bahrain ...........
Negl.
-0.2
-0.4
Chile ................
-0.2
-0.6
Negl.
'I,ambia ............
- 0.2
- 0.6
- 0.1
Colombia ........
- 0.3
- 0.1
0.7
Ilong Kong ....
Negl.
-0.4
Negl.
Ivory Coast ....
- 0.1
- 0.4
- 0.2
Sri Lanka .......
-0.1
-0.2
Negl.
Argentina ........
- 0.3
-1.3
0.6
India ................
- 0.5
-1.5
0.6
Taiwan ............
0.2
-0.5
0.3
Malaysia ..........
-0.2
-0.2
0.7
Oman ..............
0.2
0.7
0.8
Brunei .............
0.2
0.9
1.0
CACM ~ ...........
-0.2
-0.7
-0.4
East Africa .....
-U.2
-0.4
-0.4
Other ...............
- l . l
- 4.5
- 5.3
countries tend to fall into the polar groups,
having either current account surpluses or large
deficits.
The Far Eastern LDCs have been most
successful in achieving a favorable payments
position despite the global recession in 1974-75.
With the exception of the Philippines, all the
Far Eastern LDCs now have a current account
position better than or at least equal to that of
the early 1970s. In Latin America and in Africa,
many LDCs with sizable quantities of export-
able coffee have been helped by the high coffee
prices. Argentina, after applying rather severe
austerity measures, has reached the point where
its payments position is no longer a major
constraint to economic growth. Buenos Aires'
problems, however, have usually had their
origin in political disarray; a reversion to that
condition could easily undermine its economic
gains. Finally, some non-OPEC LDCs-Tunisia,
Trinidad and Tobago, and Malaysia-are net
exporters of oil and have shared in the income
accniing from higher oil prices.
The economic prospects for the poorest
countries of southern Asia and sub-Sahara
Africa have not been materially affected by the
OPEC surplus. They have been able to maintain
sluggish economic growth by attracting enough
aid to finance the foreign exchange losses of $3
billion a year stemming from the higher cost of
oil imports and the lower exports caused by the
recession in developed countries. The increased
aid, mostly concessional, has been provided by
developed and OPEC countries in large part
through multilateral channels. Indeed some of
these least developed countries-particularly
Muslim states such as Syria, Pakistan, and the
Sudan-have gained on balance from the oil
price hike because they have been given large
amounts of OPF/C aid.
The low-income south Asian countries, fa-
vored by excellent weather for the crops in the
past two years, have had reasonably high
economic growth, less inflation, and greatly
improved foreign payments positions. India, for
example, ran a $600-million current account
surplus in 1976, its first in more than 20 years.
The position of these countries, however, could
change drastically as a result of a few bad
harvests.
Summary Projections to 1980
Through 1980 the OPEC surplus could drop
to about $30 billion under a plausible set of
assumptions regarding economic growth and oil
production in the North Sea, on the North
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Slope, and in Mexico.6 Chances are somewhat
greater that the surplus will top $30 billion than
fall below it. The projection's assumption that
oil prices rise at the same rate as the prices of
exports of industrial countries, although seem-
ingly reasonable, depends greatly on Saudi
policies.
During the next three years, OPEC states arc
likely to maintain sufficient pressure to keep oil
prices rising at least as rapidly as the prices paid
for imports. All of them except Saudi Arabia
and some of the smaller Arab states need the
increased revenue to maintain ambitious devel-
opment programs and to continue to improve
levels of living. Only Saudi Arabia has enough
excess production capacity to hold down oil
prices. So long as the Saudis continue to see
close relations with the US and the West as
being in their best interests, Riyadh is likely to
try to confine oil price increases to the same
rate that OPEC import prices go up. Price
increases beyond our estimate would increase
the OPEC surplus dramatically, however. If oil
prices, for example, were to climb l0 percent a
year while OPEC import prices continue to rise
by 6 percent per annum, the OPEC surplus
could reach $65 billion in 1980.
The other key assumption is that during
1977-80 GNP grows by 4.2 percent per year in
developed countries (compared. with 4.9 per-
cent per year during 1961-72) and by 4.5
percent per year in non-OPEC LDCs (compa.red
with 5.5 percent per year during 1961-72).
While developed-country growth at a rate less
than 4 percent a year would sharply reduce the
OPEC surplus, such a low rate over a sustained
period seems unlikely. For one thing, the
considerable unemployment implied would be
politically unacceptable. For the next few
years, the developed-country growth rates are
more likely to be above 4.2 percent, thus
increasing the demand for OPEC oil. As an
upper limit to the growth range, we use 5.5
bOn the demand side, oil consumption is not curtailed,
although its growth slows to 4 percent per year, compared with
7 percent from 1968-73, and on the supply side all available
non-OPEC sources are tapped.
percent a year, an expansion rate that the
Organization for Economic Cooperation and
Development estimates will be needed if most
developed countries are to reach full employ-
ment by 1980. For each one-tenth of a percent-
age point above 4.2 percent that GIMP increases,
the OPEC annual current account surplus in
1980 rises by about $1 billion. Therefore, if
GNP should grow by 5.5 percent per year, the
OPEC surplus would reach about $50 billion in
198 0.
In any case, the real burden of the OPEC
surplus is likely to shrink through 1980. When
measured in 1976 dollars, the surplus falls by
45 percent-from $40 billion in 1976 to $23
billion in 1980 (our base-case projection). The
surplus as a percent of the exports of non-OPEC
countries declines from 5 percent to 2 percent.
In fact, the OPEC surplus would have to rise to
at least $65 billion to maintain the 1976 ratio
between the surplus and exports.
Regional Distribution
Developed countries are likely to gain most
from the expected decline in the OPEC current
account surplus through 1980. The current
account deficits of the non-OPEC LDCs prob-
ably will increase somewhat. Given our base-
case growth assumption (4.2 percenl: per year in
1976
Base
Case
Faster
GNP
Growth
Faster
GNP Growth
and Higher
Real Oil
Prices
OPEC
countries
40
30
5(1
65
Developed
countries
-12
0 to 10
-5 to -2(1
-15 to -30
Non-OPEC
LDCs
-22
-25 to -35
-25 to -4G
-27 to 1}2
Communist
countries
11
-7
-7
-7
Statistical
discrepancy
-3
0
0
0
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CONFIDENTIAL
the developed countries and 4.5 percent in the
non-OPEC LDCs) and constancy in the terms of
trade between the two regions, the non-OPEC
LDC deficit is expected to run anywhere
between $25 billion and $35 billion. The upper
end of this range approximates the amount that
non-OPEC LDCs could borrow without strain-
ing their credit worthiness. Depending on the
extent of LDC current account deficits, the
developed countries could register anything
from a near balanced current account to a
$10-billion surplus.
If world GNP grows at our assumed upper
limit of 5.5 percent per year, the developed
country deficits would remain at roughly the
1976 level rather than improve, as in the base
case. 'The non-OPEC LDC deficit. would increase
only slightly because the group's increased
imports of oil and other goods and services
would be nearly offset by expanded sales to
developed countries. Thus the developed coun-
tries would end up absorbing the bulk of larger
OPEC surplus.
This does not mean that non-OPEC countries
should pursue lower growth targets just to
reduce the OPEC surplus. For many countries
the larger current account deficits produced by
higher economic growth will not necessarily be
any more difficult to finance than the smaller
deficits created by lower growth. The increased
exports that generally go along with higher
economic growth help to keep down the debt
service burden of the deficit countries and
provide a more favorable atmosphere for in-
creased lending.
Moreover, although the economies of deficit
countries would still be restrained by foreign
payments problems, they would be able to
remove their growth restraints sooner or relax
them somewhat as a consequence of the more
rapid global economic growth pace. If the
economies of non-OPEC countries with favor-
able payments positions were expanding at a
faster clip, then deficit country exports would
accelerate. Unless the deficit countries control
their domestic demand, however, the higher
exports would be largely offset by the imports
needed to produce export goods and, more
'importantly, by the effect of rising domestic
incomes on purchases from abroad.
If, along with higher growth, oil prices rise by
10 percent per year while prices for other
traded goods and services increase by 6 percent
annually, the developed countries again absorb
most of the increment in the OPEC surplus
since they buy most of the oil. The LDC deficit
would be $2 billion more in 1980 in this
situation. Measured against expected exports,
the burden of current account deficits on
developed countries, when higher real oil prices
are combined with rapid growth, would not be
much greater in 1980 than at present.
Numerous shifts are likely to occur in the
current account positions of countries within
each non-OPEC region. Although these changes
cannot be predicted with any certainty given
the many forces at work, one fairly large shift is
highly likely: the current account positions of
the UK, Norway, and Mexico will improve with
their burgeoning oil production and exports.
Since most of this oil will be purchased by
developed countries, about one-half the $10-
billion to $20-billion base-case gain in the
developed country current account position
would go to these three nations. Further reduc-
tions in the deficits of those developed coun-
tries with deficits would have to come from
countries with surpluses, such as West Germany
and Japan. Using our high-growth scenario, if
the developed countries with deficits are to
have smaller deficits they will have to be at the
expense of reduced surpluses in non-OPEC
countries. But, as we have seen, we would
expect that in this higher growth mode these
surpluses would shrink. In our third case-high
growth combined with increasing oil prices-the
sum of the deficits of those developed countries
that have deficits would not fall much even if
all current non-OPEC country surpluses were
eliminated. The reduction in the surpluses of
those developed countries in a surplus position
would about offset the increase in the surpluses
of oil-exporting countries.
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The Problem Countries
Identification-Mare than Arithmetic
Many countries have large current account
deficits, but not all of them are in serious
difficulty. To identify the problem countries,
we use the criterion that payments problems
could be a major brake on economic growth.
The 22 countries listed below qualify under 1:his
standard-at least tentatively-and will be exam-
ined further to see whether they deserve to be
labeled as a problem country.
Major Smaller Less
Developed Developed Developed
Countries Countries Countries
Canada Austria Brazil
Prance Denmark Chile
Italy Finland F,gypt
Israel Jamaica
New Zealand Morocco
Portugal Pcru
South Africa Philippines
Spain Zaire
Sweden Zambia
Turkey
Any list of this nature must be compiled with
a large dose of judgment. Although they had
large deficits in 1975 and 1976, the UK and
Mexico are excluded because rising oil exports
are expected to produce current account sur-
pluses by 1980. Pakistan and Bangladesh are
receiving sufficient aid to maintain their historic
growth rates, despite their larger deficits. Nor-
way's large deficit mainly reflects the substarl-
tial foreign investment in the North Sea oil
fields.
Several small countries, such as Zaire and
Jamaica, were added to the list of potential
problem countries because their deficits are
arge when compared with the size of thejr
economies. Egypt and Chile arc special cases.
Egypt was included even though its larger
deficit resulted from a sharp jump in OPEC aid.
Cairo faces scve:re payments problems in its
efforts to overcome decades of economic mis-
management. Although Chile's deficit was eljm-
inated in 1976, its heavy debt burden will
compete with imports during the next i'ew
years. The junta has not tried to ren,gotiate a
debt stretchout with its creditors since 1975
because it believes such requests will founder on
the question of Chilean human rights violations.
The list of course will change as time passes
and unforeseen events develop. For example,
Argentina is not included because measures
taken over the past few years have corrected the
worst of its payments problems; erratic policies
or increased political instability could quickly
alter this situation. Similarly, India's currently
favorable situation largely reflects excellent
weather and could turn around quickl}~.
Country Profiles
For a better understanding of the condition
of the 22 countries on our list we analyzed
several commonly used statistical measures of
payments difficulties. In each case, the trend
between 1970-72 and 1976 as well as the
current position was assessed. The summary
impressions are as follows:
? The current account position of 17 coun-
tries deteriorated sharply in real terms. Chile,
Zambia, Zaire, Jamaica, and South Africa
held their deficits in check by restraining
growth and therefore curtailing imports.
? The current account balance as a percent-
age of exports moved up sharply ire all coun-
tries except Chile, Zaire, Jamaica, Zambia, and
South Africa (figure 4), The percentage in
most developed countries rose from near zero
in the early 1970s to a range of between 5
and 30 percent in 1976. Israel and Turkey
had higher percentages-42 and 50 percent
respectively. Among the LDCs the percentage
climbed sharply in Brazil, Egypt, Morocco,
and Peru--where it topped the 50-percent
mark in 1976. In other LDCs on our list, it
stayed between 20 and 35 percent.
? The real external debt of nearly all listed
countries rose rapidly when compared with
the average for its group-developed or LDCs.
The exceptions were Chile and Zambia whose
real debt remained constant. West European
debt increased especially steeply because
large foreign borrowing is a new experience
for these countries.
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Ficlure 4
Current Account Balance as Percent of Exports of Goods and Services
Austria
Brazil
Canada
Chile
'Denmark
E9YPt
Finland
France
Israel
Italy
Jamaica
Morocco
New Zealand
.Pero
Philippines
Portugal
south Africa
Spain
Swederr
Turkey
Z~iire
'.Zambia
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CC>NFIDENTIAL
Figure 5
Ratio of External Debt to Exports of Goods and Services
Austria
$razil
Canada
Chile
Qenmark
E9yPt
Finland
Israel
Jamaica
Morocco
New Zealand
Peru
Philippines
Portugal
South Africa
Spain
Sweden
Turkey
Zaire
Zambia
205
215
Annual
Average
` 1970-72
. ~~~ 1976
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? The relative debt outstanding (the ratio of
the debt to exports) climbed in all of the
listed countries except Chile, Tsrael, Morocco,
and Turkey (figure 5). In most developed.
countries the ratio remained low to moderate
ranging from 15 percent for Austria to 100
percent for Denmark with most countries
clustering around 70 percent. Israel and
Turkey, however, had fairly high ratios of
165 and 150 percent, respectively. Among
t:he LDCs, the ratio falls mainly in the
200-300 percent range with Egypt exceeding
400 percent and Morocco, 7,ambia, and
Jamaica standing near 100 percent.
? The debt service ratio (the ratio of annuaa
debt amortization and interest to exports of
goods and services) also climbed sharply in all
rountrics except Egypt, Israel, Morocco, the
Philippines, Portugal, and Turkey. Among
the developed countries-except Israel (21
percent) and Spain (16 percent.)-the ratio
remained at 11 percent or less. The typical
LDC debt service ratio of most of our LDCs
ran to more than 30 percent. Brazil led with
46 percent. The average of non-OPEC LllCs
during the 1970s was 16 percent a year.
n The ratio of foreign reserves to imports
dropped sharply between the early 1970s and
1976 in all the countries except Chile,
Morocco, the Philippines, and Sweden (see
tables 6 and 7). But :if gold is vahled at tril)le
the official price of $42.22 per ounce
($126.66) the ratios of the developed coun-
tries on the list would have declined only
slightly.
Although in most of the 22 countries the
international payments indicators have deterior-
ated since the early 1970s, there are clear
dil`ferences among them. The most striking
difference is between the West European states,
which only recently have been running large
deficits, and the LDCs. The LDCs are used to
coping with a heavy debt burden, and many of
them consider borrowing and growing debt as
essential to their economic development. Most
developed countries, on the other hand, had.
been net exporters of capital before 1974. They
now must adjust to their new role as major
borrowers.
While heavy borrowing is new to the West
European countries, it is normal for some other
developed countries. Japan was extremely suc-
cessful during the 1960s in obtaining large
amounts of foreign capital to sustain rapid
economic growth-despite a debt burden that
exceeded that of most LDCs.
Why these countries slipped into payments
difficulty can best be seen by comparing trends
in their foreign trade with trends in other
non-OPEC countries. Figure 6 shows that in 15
Table 6
Developed Countries: Reserves as a Share of
Imports of Goods and Services
Percent
Annual
Average
1970-72
1975
1976'
Potential Problem Coun-
tries
Austria . .......................
43
30
41
Canada ......................
25
12
15
llenmark ...................
13
6
7
Finland .....................
18
6
7
France .......................
28
12
23
Israel .........................
27
18
19
Italy _ .........................
30
14
28
New Zealand ...........
31
12
12
Portugal ....................
82
28
74
South Africa ............
19
8
16
Spain .........................
53
27
33
Swede^ ......................
13
11
13
'furkev ......................
60
19
22
Other Countries
Australia ....................
54
19
23
Belgium ....................
25
15
24
Greece .......................
27
15
22
Japan .........................
55
22
24
Netherlands ..............
22
16
27
Norway .....................
20
14
14
Switzerland ...............
76
70
lOEi
Uuiled Kingdom .....
18
6
9
United States ...........
20
11
2.5
West Germany ........
40
26
34
Yugoslavia .................
8
25
25
Average ~ ......................
30
16
26
' With gold valued at $126.66 per troy ounce or triple
the official price.
Based on total reserves and imports.
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of the 22 countries on the potential problem
list exports grew much slower than the average
between the early 1970s and 1976, indicating
that they were losing their share of the world
Non-OPEC LDCs: Reserves as a Share of Imports
of Goods and Services
Annual
Average
1970-72 1976 1976 '
market. The copper-producing countries of
Penl, Zambia, and Zaire fared the worst as
copper was one of the few commodities whose
real value dropped sharply during the 1970s. At
the other extreme, Brazilian and Spanish ex-
ports rose much more rapidly than the average.
In eight countries, imports increased much
slower than the global average, with Zambia,
Zaire, Jamaica, and Chile showing the smallest
growth. Eight countries-France, Spain, Brazil,
Potential Problem Coun-
tries
Brazil ......................... 50 38
Chile .......................... 21 22 27
Egypt ........................ 13 6 10
Jamaica ..................... 22 2
Morocco .................... 22 1.5
Peru ........................... 33 13 17
Philippines ................ 29 33 35
Zaire .......................... 22 6
Zambia ...................... 38 8
Other Countries
Argentina .................. 20 40 48
Bahrain ..................... 25 22
Bangladesh ............... 11 33
Bolivia ....................... 33 25
Colombia .................. 14 52 57
Cyprus ...................... 100 50
El Salvador .............. 33 25
Ethiopia .................... 33 60
Guatemala ................ 25 42
India .......................... 35 53 62
Jordan ....................... 150 56 67
Kenya ........................ 29 23
Malaysia .................... 44 53 57
Mexico ....................... 23 12 15
North Yemen .......... 50 140
Oman ........................ 50 l~~ix~~~~~~
"r. pobert A. Pastor
Senior Staff Member
`lational Security Council
executive Office Building
~ ~ ";r. Robert I-lormats
Senior Staff ~-lember
"tiational Security Council
executive Office Bui lding
~~ '?r. ~,1 i 1 1 i am G. Hyland
Senior Staff h-lember
~',etional Security Council
executive Office Quilding
i~ The Edonorabl e Charles L. Schultze
1 ^~:a i r:-nan
Wrunc i 1 of Lcononai c Advisers
executive Office wilding
~j^ T e ~ionorabl a r~Ji 1 1 i am 'r!ordhaus
i_~~nber
Council of Economic Advisers
Executive Office Euilding
i~'~r. ?eter G. Goul d
Special Assistant to the Chairman
Council of Econoric Advisers
Executive Office Eau i l d i ng
t~Er. Richard tad. HE~irnl ich
E)eputy assistant Special Pepresentative
for Industrial Trade Policy
Office of the Special Representative
for Trade Fde~;ot i at i ons
1300 G Street, AE. 1'J.
f~r. Geza E?ei:etekuty
~~ Office c:rf tlroc~ '~~~f~~~ial Representative for
Trade t~~:gcat ir7~:;cans
ExecUtivff Office ur~iilding
,-
3