INTERNATIONAL ECONOMIC & ENERGY WEEKLY 15 APRIL 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200020009-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: January 10, 2011
• Sequence Number: 9
• Publication Date: April 15, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
15 April 1983
DI IEEW 83-015
15 April 1983
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International
Economic & Energy
Weekly
15 April 1983
1 Perspective-OPEC: Crossing the First Hurdle
3 Briefs Energy
International Trade, Technology, and Finance
National Developments
13 Nigeria: Further Economic Deterioration
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
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International
Economic & Energy
Weekly
Synopsis
Perspective-OPEC: Crossing the First Hurdle~~ 25X1
Buyer acceptance of British National Oil Company's recent minimal prices
reduction and lack of retaliatory cuts by Nigeria and other OPEC members
have firmed spot crude prices and renewed optimism that stability is returning
to the oil market. Despite some signs that the decline in consumption has
abated, however, it will take a sustained rebound in oil demand to underpin the
present pricing structure and prevent some OPEC members from cheating
Nigeria: Further Economic Deterioration
Japan: Unusual Deficit Dilemmas
Tokyo has had little trouble covering budget deficits so far, but problems could
develop in the future because of refinancing needs. Prime Minister Nakasone
has no clear plan to close the existing $58 billion financial gap, and large defi-
cits are likely to persist through the end of the decade.
Portugal: Coping with Financial Shortfall
Portugal's chronic international financial problems have become a major
preoccupation of the country's policymakers. Whatever the makeup of the
government formed after the partiamentary election on 25 April, the severity
of the imbalance probably will force it to implement further austerity
measures and to renew negotiations with the IMF for a standby loan.
China's increased public stress on its aligment with the Third World highlights
the importance of Chinese economic as well as political ties to developing
countries. Recent Chinese policy statements show that Beijing expects to
increase its share of Third World markets, where China's favorable trade
balance partially offsets the cost of Western imports.
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International
Economic & Energy
Weekly
15 April 1983
Perspective OPEC: Crossing the First Hurdle
Buyer acceptance of British National Oil Company's recent minimal price
reduction and the lack of retaliatory cuts by Nigeria and other OPEC
members have firmed spot crude prices and renewed optimism that stability is
returning to the oil market. Despite some signs that the decline in consumption
has abated, however, it will take a sustained rebound in oil demand to
underpin the present pricing structure and prevent some OPEC members from
cheating.
Higher-than-anticipated oil sales in several major consuming countries have
helped support the price structure and reverse market psychology. Oil sales in
France and Italy rose by 5 and 3 percent, respectively, in February, and
preliminary data indicate US consumption in March approximated year-
earlier levels-in part reflecting increased gasoline sales prior to the 1 April
The apparent rebound in oil consumption may reflect an end to destocking at
the secondary level. The mild winter and prospects of oil price declines
probably caused consumers to run down stocks to minimum levels. Primary
stocks were also being depleted rapidly. US commercial inventories reportedly
fell by 2 million b/d in March-well above the normal rate-and stocks in Ja-
pan declined by 300,000 to 400,000 b/d during January and February. If
companies believe that prices have stabilized and revert to a normal pattern of
inventory accumulation, oil demand could rebound by about 2-4 million b/d in
Willingness by OPEC members to abide by the March agreement despite
production levels that are in some cases below allowable ceilings has helped re-
verse market psychology. OPEC crude output in March averaged about 15.3
million b/d against the new quota of 17.5 million b/d:
? Iran has kept prices in line with the official benchmark, and reduced spot
sales of oil; production has fallen to about 2.4 million b/d.
? Nigeria has decided to maintain its prices despite the United Kingdom's
recent 50- to- 75-cent-per-barrel price drop; March production of about
900,000 b/d was 400,000 b/d below their ceiling.
? Saudi Arabia allowed production to fall to 3.3 million b/d in March,
400,000 b/d below February's level. Even output below the 3-million-b/d
level in early March did not appear to shake Riyadh's resolve to support the
new price structure.
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OPEC has also benefited from non-OPEC producer pricing actions. The
minimal drop in UK prices avoided a direct confrontation with OPEC, and
most major British customers have at least temporarily accepted the new
prices. Most other non-OPEC producers have made only minor price correc-
tions and probably will not initiate cuts large enough to trigger a new round of
lower prices.
Despite current signs of stability in the oil market, the key to OPEC's ability to
maintain prices will depend upon a sustained rebound in oil consumption.
Should sharp declines in oil consumption return and continue well beyond
midyear, the likelihood that some members will cheat on the agreement will
increase:
? Nigeria continues to have critical revenue problems.
? Iran and Libya also have large foreign-currency requirements and neither
were supportive of last year's OPEC agreement.
? Venezuela already appears to be setting the stage for producing above its
quota. The American Embassy reports that Caracas will no longer be
making its weekly crude oil production figures public and, according to a
knowledgeable source, will probably continue to produce at about 2 million
b/d-300,000 b/d above its assigned quota.
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Energy
Spot Oil Market Spot oil product prices increased sharply in late March and early April, raising
Trends the value of a barrel of crude oil to refiners by about $1.50. Spot product prices
in the Rotterdam market now indicate a barrel of Arab Light is worth about
$27.50 while Bonny Light is worth $28.90 per barrel. Most spot crude prices
also firmed this week, with Arab Light prices now about equal to the official
price of $29 per barrel. Although crude oil trading still remains relatively
light, firming spot product and crude prices indicate that market psychology is
reversing and surplus inventories are nearing depletion. If OPEC can maintain
discipline on prices and production levels, spot crude prices could continue to
firm in coming weeks.
Yield Official Spot Yield
25.54 30.00 28.00 26.79
27.53 30.00 29.00 28.87
Iranian Oil Iran currently is abiding by its OPEC production quota of 2.4 million barrels
Policy per day, but sales may decline during the next few months unless Tehran offers
discounts. Several of Iran's customers-such as Japan-are threatening to cut
back on oil contracts being negotiated this month if Iran does not make
additional price reductions. Tehran recently cut its official crude price to $28
per barrel for Iranian Light-only $1 below the Arab Light benchmark, in
contrast to the $3 per barrel discount offered before the OPEC agreement.
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At the new price and production level, Tehran's oil revenue will total $1.6
billion per month. Although this is about $500 million per month less than Iran
was receiving before the agreement, it is still slightly more than needed to
maintain current import levels. Iran is likely to abide by OPEC production
guidelines during the next few months and maintain a tough line on prices. It
probably will grant small discounts, however, to compensate for high freight
and insurance rates in the war zone. The Iranians recognize the risks of a
downward price spiral if members fail to adhere to the agreement.
Canadian Gas Price Mexico's gas export revenues will fall sharply this year as its US customers cut
Cut Threatens purchases and Mexico lowers prices to meet Canadian gas price cuts. On
Mexican Earnings Monday, Canada announced it would cut gas prices for US customers by 54
cents to $4.40 per thousand cubic feet (tcf). Earlier this month, US customers
informed Pemex they would reduce purchases of Mexican gas from 300 to 180
million cubic feet per day, the minimum allowed under the current contract.
Pemex officials have told US Embassy officers that they will probably match
the Canadian price reduction as well as other discounts that Pemex believes
Ottawa is likely to offer within the next month. Even with these price
reductions, US buyers probably will not resume previous purchase levels of
Canadian and Mexican gas in the short term.
Othe price would have to be about $3.50 per tcf to compete with US
domestic gas and other alternative fuels in the current soft energy market. As
a result, we expect Mexican gas export revenues to fall by at least $100 million
from the $470 million earned last year.
Rome Increases Rome has increased excise taxes on petroleum products to prevent oil price
Petroleum Taxes declines from being fully passed on to consumers. The government has totally
offset price decreases on gasoline for private motor vehicles to encourage
conservation. To boost sagging industrial production, Rome has only partially
offset price declines for diesel oil used in commercial transportation, while
heavy fuel oil price drops are being fully passed on. Officials expect $320
million in revenues this year from the tax increases and plan to use part of the
proceeds to pay the difference between the "political price" agreed to for
Algerian natural gas and the market price. Parliamentary approval of the
natural gas price agreement has been stalled by debate on providing Italy's
state energy agency, ENI, with an estimated $400 million in subsidies over the
next three years. A parliamentary decision to use the fund's resources to
subsidize ENI for the high-priced Algerian gas should pave the way for a final
conclusion of the long-delayed Italian-Algerian gas accord.
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International Trade, Technology, and Finance
Developing Country Total arrearages on LDC external debts-both public and private-nearly
Payments Arrears tripled during 1982. 34 IMF member countries 25X1
Up Sharply accumulated payments arrearages of $18.7 billion in 1982; in 1981, 35 were in
arrears by only a total of $7.1 billion. Africa dominated the group with 21
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and Turkey eliminated their payments arrearages during 1982.
countries, followed by 10 Latin American LDCs. For the first time several
larger and more developed countries emerged with sizable arrears in 1982,
namely Mexico and Argentina with outstanding payments of $10.0 billion.
Nigeria reportedly incurred large arrears as well. Jamaica, Senegal, Somalia,
Developing Country External
Payments Arrears
Year Nu
Cou
mber of
ntries
Sudan
1,752
Mexico
8,278
Peru
1,142
Romania
2,341
Costa Rica
643
Sudan
2,283
Zambia
582
Argentina
1,758
Ghana
505
Costa Rica
1,224
Zaire
498
Zambia
910
Tanzania
342
Ghana
590
Turkey
320
Tanzania
415
Guinea
163
Sierra Leone
278
160
Togo
168
993
Other
455
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Jamaica Fails Jamaica failed to satisfy the IMF's March performance target and probably
IMF Targets will either undertake substantial fiscal and exchange reforms to keep the
three-year Extended Fund Facility (EFF) agreement on track or try to
negotiate a new standby arrangement. Kingston fell at least $100 million short
of the net international reserve target last month in addition to overshooting
the ceilings on domestic credit and debt arrearages. IMF officials are pressing
Kingston to further cut the budget, greatly expand the parallel exchange
market, or both. Should Jamaica hesitate to take corrective measures, the
1981 agreement with the IMF could collapse altogether. The IMF already is
considering a two-year standby arrangement that would carry less stringent
performance criteria but would stretch the $165 million remaining under the
EFF over a two-year period.
National Developments
Developed Countries
Israeli Government Under considerable pressure from exporters, the Israeli Government last week
Assists Exporters established a $140 million fund to promote exports and moved to reduce
exporters' outlays by reducing national insurance payments and premiums for
exchange rate insurance. The measures were enacted under emergency
regulations and will be in effect for 90 days; a Finance Ministry official hinted
to the press that legislation to extend the regulations will be presented to the
Knesset after it reconvenes on 2 May. While helping exporters, Finance
Minister Aridor demonstrated his determination to hold the line on the budget
deficit by imposing a 1-percent levy on the purchase of foreign currency to
generate revenue for the export-promotion fund. A Finance Ministry official
told a US Embassy officer that the government is resisting calls to restrict im-
ports because of its commitments to free trade and because of the fear of
retaliation from Israel's trading partners. While these measures may provide
some help to exporters, we do not expect any substantial gains in export
earnings as long as Aridor continues his policy of slowing the depreciation rate
Successful Modest settlements accepted last week by two major unions probably will set
West German the pace for limited pay increases in West Germany and help stimulate
Wage Negotiations sagging export industries. Despite labor support last month for a minimum pay
increase of 4 percent, the large Metal Workers Union and Chemical Workers
Union-which -represent 25 percent of all West German workers under
contract-have agreed to only a 3.2-percent wage increase. The current
inflation rate is 3.5 percent. Most unions usually follow the precedent
established by the powerful metal industry. A stagnant economy and record
unemployment, which topped 2.5 million workers in February, have weakened
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the unions' bargaining position. Accepting the modest increase would mean
that, for the third year in a row, West German workers will take a cut in real
wages if price rises remain at the current level. The settlement should slow the
increase in labor costs and help offset the upward pressure on the price of West
German exports resulting from the revaluation of the mark in March.
Poor Economic The economic summit this week of government, union, and business leaders
Outlookfor was set against the most gloomy economic outlook in recent years. The new
Australia government last week predicted that inflation will climb to more than 12
percent in the fiscal year beginning this July and that the unemployment rate
will remain above 10 percent through 1986. The pessimistic forecast may
provide Prime Minister Hawke with justification for backing away from
campaign promises to fund a jobs program and cut taxes. During the
campaign, Hawke promised to bring business and labor together to reach a
consensus on dealing with inflation and record unemployment. Hawke is
increasingly concerned about the projected $8-9 billion budget deficit in 1984,
however, and he is reluctant to implement a jobs program. At the same time,
he is under pressure to increase trade protection.
Australian Government Citing a lack of sufficient economic benefits to Australia, the new Labor
Rejects Foreign government has rejected the first two foreign investment proposals made since
Investment Proposals it assumed office on 11 March. A proposal by a US firm to acquire full
ownership of a leading Australian distributor of industrial plastics was turned
down as was a proposal by a Japanese firm to purchase land to build several
hundred vacation homes. The decisions are consistent with the Labor Party's
policy of eliminating exceptions to the requirement that Australians control at
least 51 percent of any foreign investment venture. The former Fraser
government had been lax in enforcing the domestic equity requirement, which
became an issue during the recent election campaign.
Less Developed Countries
Mexico's New Mexico announced last week a comprehensive program to help business reduce
Private-Sector Debt debt arrears by rescheduling private foreign debt. Under the program the
Rescheduling Plan government is pushing firms to reschedule their foreign debt over six to eight
years with a minimum three-year grace period. After agreement is reached,
the firms will have access to foreign exchange at subsidized rates for debt
repayment. A new government trust fund, FICORCA, will administer the
program, but the restructured loans-at IMF insistence-will not be guaran-
teed or become a liability of the public sector.
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We believe many foreign creditors will agree to enter into debt rescheduling
discussions rather than continue demanding repayments that many Mexican
firms cannot meet. Even so, while complicated public-sector rescheduling
exercises are under way, we expect the much smaller private-sector debt
rescheduling efforts to take a back seat. As a result, we do not expect that the
talks will be completed by the envisaged 25 October 1983 deadline.
Mexican Inflation Citing continuing high inflation and recent cuts in government subsidies, labor
and Labor Demands leader Fidel Velazquez last week called for an immediate hike in the minimum
wage. During the January-March period, official statistics show inflation
growing at an annualized rate of 140 percent. The government's move last
week to lower subsidies for some fuels and milk are strengthening labor's case.
The price of regular gasoline was hiked 20 percent, while the price of milk was
raised 25 percent. In the hope that responding to labor's demands will ease po-
litical tensions, we believe that the government probably will move the
promised 12.5-percent wage adjustment up a month or two from the July
schedule. This action, however, would rekindle private-sector fears that
President de la Madrid was slipping back to the anti-private-sector policies of
his predecessor.
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Revenue Shortfalls in Bahrain, expecting a 20-percent drop in oil revenues this year, is looking for
Bahrain and Qatar ways to deal with a forecasted 1983 budget deficit of at least $250 million. So
far, the government has decided both to reduce and stretch out capital
expenditures; it has extended its four-year plan to six years.
Bahrain could turn to its richer Gulf neighbors to cover a portion o the deficit.
Since 1980, Bahrain has received a combined total of about $150 million per
year from Saudi Arabia, the United Arab Emirates, and Kuwait.
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At the same time, with oil revenues down by about one-third from last year,
Amir Khalifa has announced that the Qatari Government will call for a 20-
percent cut in expenditures in the fiscal 1983/84 budget, which begins in mid-
$6 billion price tag.
budget, while continuing to fund social welfare programs and industrial
projects already in progress, probably will not provide for any major new
projects. The development of Qatar's North Field gas reserves-a potential
source of government revenue and a boost to Qatar's business community-
faces further delays because of the depressed LNG market and the projected
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Malaysia Signs
Large Loan
Agreement
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Kuala Lumpur has completed negotiations with Western lenders for a $550
million, eight- to 10-year loan. The loan, to be used for financing general
development, is Malaysia's first major borrowing this year. It carries a five-
year grace period for repayments, with portions tied to the LIBOR and to the
US prime rate. The interest rate spreads on the loan are slightly higher than
those on Malaysia's record $1 billion syndication in 1982.
relative to other LDCs.
Western banks were eager to participate
in the syndication because of Malaysia's excellent international credit rating
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Tanzania Tries To Tanzania has moved on several fronts to stem a severe economic decline
Slow Economic Slide caused primarily by a sharp drop in foreign exchange receipts from agricultur-
al exports and international assistance. To stimulate farm output, President
Nyerere has announced a National Agricultural Policy designed to open
commercial farming to private individuals and companies. In addition, Tanza-
nia last month reopened negotiations with the IMF for a one-year standby loan
agreement. The regime also is waging a massive crackdown on black
marketeering and government corruption in an attempt to restore trade-and
resulting tax revenues.
An early economic upturn, however, remains unlikely. The National Agricul-
tural Policy and Finance Minister Msuya's more flexible posture toward the
IMF are at odds with Nyerere's basic adherence to strict socialist economic
policies. Implementation of such changes, therefore, may be slow and ineffec-
tive. Moreover, market inequities and commodity shortages will continue and
probably will lead to renewed corruption and black marketeering once ,the
crackdown passes.
Trade Squabbles Mounting trade disputes are undermining the fragile structure of the Caribbe-
Weaken Caribbean an Community (CARICOM):
Cooperation ? Barbados floated its currency against the Jamaican dollar in February in
retaliation for Kingston's imposition of a two-tiered exchange rate that made
imports costlier in the Jamaican market. Trade between the two countries
has virtually halted since then.
? Trinidad and Tobago slapped a licensing requirement on all Jamaican
imports in March.
? Barbados, the main lender to CARICOM's Multilateral Clearing Facility,
abruptly pulled out of the facility two weeks ago. Members, who arranged
credits and settled trade accounts ,in local currencies through the facility,
now will have to use scarce foreign exchange instead.
Jamaica's manufacturers already are feeling the pinch-last year 80 percent
of Jamaica's $82 million in CARICOM exports were to Barbados and to
Trinidad and Tobago. The outlook for a quick, resolution of the conflict is poor.
According to US Embassy reports, Jamaica, struggling to meet IMF perfor-
mance targets, is more likely to expand its new exchange system-or even
devalue-than to retreat.
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Hungarian Joint Budapest has recently liberalized rules governing joint ventures in an effort to
Ventures gain greater access to Western technology and boost hard currency earnings.
Although joint ventures have been permitted in Hungary for 10 years, high
taxes, limited currency repatriation possibilities, and strict operating codes
have discouraged potential Western partners and resulted in only 10 joint
ventures, of which only four are still operating. Under the new legislation, joint
ventures between Hungarian and Western firms will be considered foreign
legal entities with offshore status. Among the new privileges to be granted
such ventures are:
? Exemption from most regulations on profits, investments, and wages.
? Freedom to purchase production equipment and materials used in goods for
reexport without paying import duties.
? The opportunity for Western partners to own the majority of shares in
banking and service companies affiliated with the venture.
? Ability to raise credits from Hungarian or foreign sources and to dispose of
hard currency assets
Although the new system still maintains some financial and currency controls,
the combination of a more open business climate and the low wages and
relatively high technical skills of the Hungarian labor force may attract some
foreign capital. In a January deal between Zyma of Switzerland and the
Hungarian Biogal Pharmaceutical Works, Hungary obtained access to $2
million worth of sophisticated equipment and a 50-percent share in profits by
contributing plant space, 20 employees, and locally available equipment.
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Nigeria: Further Economic Deterioration
The weak market and Nigerian oil's lack of price
competitiveness with similar North Sea and Libyan
crudes caused oil production to plummet in the first
two months of this year to the lowest levels since
the end of the 1967-70 civil war. Output in this
period averaged only about 70 percent of the 1
million b/d on which the budget is based and was
less than half that produced in the same period in
1982. Production by mid-February had dropped to
430,000 b/d-one-fifth of capacity. Pressure on
Lagos to lower the cost of its oil intensified follow-
ing the decision by the British on 18 February to
reduce prices by $4 per barrel. President Shagari
responded two days later by cutting Nigeria's oil
prices by $5.50 per barrel and raising profit mar-
gins for oil companies operating in Nigeria by 25
percent to $2 a barrel. The US Embassy in Lagos
reports that these moves boosted output to just
under 1 million b/d. An industry source has indi-
cated that Nigerian production is falling once
again, however, and will probably average 900,000
Adjusting to Reduced Revenues
b/d for March.
We believe that Nigeria's ability to raise its pro-
duction to 1.3 million b/d specified in the latest
OPEC agreement will depend on how flexible
Lagos is with its pricing policies. The government
has stated publicly that it will match price cuts
implemented by the United Kingdom and Norway,
producers of North Sea crude and Lagos's principal
non-OPEC competitors. Nigeria is reassessing its
oil sales policies as well.
Any additional decline in oil prices would make the
adjustment process more painful. A fall to $20 per
barrel, for example, would cost roughly an addi-
tional $3 billion in export revenues. To offset this
loss, Lagos would have to decrease import growth
by 50 percent. We believe that a reduction of this
magnitude would have serious repercussions for the
modern sector of the economy. Capital and inter-
mediate goods constitute the bulk of Nigeria's
imports-nearly 75 percent of the total, according
to our estimates.
Nigeria's foreign reserves are slightly more than $1
billion-roughly one month's worth of imports at
the current rate-and only about $1.7 billion re-
mains undisbursed on previously arranged credits.
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Nigeria has been looking for bilateral assistance to
help fill the gap.
JShagari may be forced to go
to the IMF for help sooner than he would prefer or
to implement even harsher austerity measures.
the;
government is trying to round up $2 billion in new
bank loans, but with no success thus far.1
The US
Ambassador to Nigeria reports that Lagos wants to
arrange as much financing as possible before re-
sorting to IMF borrowing and its associated condi-
tions.
[Nigeria will
have to agree to channel most new bank loans into
paying off its $5-6 billion in commercial arrears.
In the meantime, government austerity measures
are having an increasingly severe impact on the
economy. US Embassy reporting indicates that
import restrictions are taking their toll on the
.availability of raw materials and manufactured
goods. The automobile assembly industry is one of
those hardest hit by the lack of spare parts. The
Peugeot factory in Kaduna stopped production for
two weeks because parts were unavailable and
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15 April 1982
one-third of the normal rate.
France will not extend additional credits until the
$240 million owed for past deliveries is paid. The
Volkswagen plant in Lagos periodically closes for
several days at a time, and production now is only
The economic slowdown has boosted unemploy-
ment sharply in the urban areas.
urban
unemployment may be as high as 30 percent,
double what it was a year ago. Various Nigerian
labor and industrial organizations estimate that
last year at least 45 firms closed or laid off
employees, displacing between 50,000 and 150,000
workers. the expul-
sion of illegal aliens from Nigeria earlier this year
created 55,000 job vacancies at the ports and in
construction, but in our judgment many of these
positions have not been filled because of the down-
turn in economic activity, the accompanying slump
in demand for services, and the reluctance of
Nigerians to accept low-paying positions.
Austerity has had an impact on essential consumer
imports as well. In an effort to maintain imports of
rice-an urban dietary staple-at normal monthly
rates of 60,000 to 70,000 tons, Nigeria is switching
from its traditional rice supplier, the United States,
to lower quality, less expensive Thai rice. Bangkok
also is offering favorable credit terms.
the US
Embassy in Lagos reports that Thailand has cap-
tured nearly two-thirds of the Nigerian market. US
sales of corn and wheat, which account for the bulk
of Nigeria's imports of these commodities, also
have fallen. According to US Embassy reporting,
flour mills are operating at 50 to 70 percent of
capacity, and new licensing regulations have cut
down on the volume of corn imports.
Tough Decisions Ahead
In our opinion, the Shagari government is increas-
ingly concerned about preventing the deteriorating
economy from becoming a major issue in this
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summer's elections, now scheduled to begin
6 August. According to recent Embassy reporting,
prices of staple foodstuffs-particularly rice, yams,
chickens, and palm oil-have risen by 65 percent
since January. Although there has been little eco-
nomically inspired unrest thus far, press reporting
indicates work stoppages are spreading among such
groups as employees of state governments and
petroleum workers. Local distribution of petroleum
products has already been disrupted in several
cities. These developments come at a time when the
election campaign is getting into full swing and
could provide Shagari's opponents with ammuni-
tion.
In the absence of an unanticipated sharp increase
in oil sales, we believe Shagari's economic options
are limited.
? Additional austerity measures would probably
spark labor and public unrest, particularly if they
contained across-the-board salary cuts for civilian
government workers. Reductions in the military
payroll are unlikely because of the administra-
tion's hope to avoid antagonizing the Army dur-
ing the sensitive election period. Further cuts in
imports will only compound the problem of busi-
ness closings and rising urban unemployment.
? Going to the IMF will require a devaluation and
other structural adjustments in the economy. A
devaluation, however, would further strain al-
ready scarce foreign exchange resources and
boost inflation. Such a move-particularly if
accompanied by debt rescheduling-would likely
be cited by Shagari's opponents as the most
graphic sign yet that the government has squan-
dered the country's oil wealth.
It is our judgment that the economy will be one of
Shagari's most worrisome problems between now
and the elections. An increasing preoccupation with
winning the election probably means that he will be
less interested in keeping close tabs on financial
developments. As a result, we anticipate that the
government will do what it can to maintain imports
of essential consumer goods and make timely pay-
ments on medium- and long-term debt, especially
interest. Lagos also will continue to seek new
credits on international financial markets or, if not
successful, add to its already sizable volume of
commercial arrears. We believe that the Nigerians
will avoid a public appeal for IMF assistance,
although we cannot rule out the possibility that
they will sound out the Fund privately as to what
conditions would be required.
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Japan: Unusual Deficit Dilemmas
Japanese officials are deeply concerned over the
size of the government deficit. Tokyo has had little
trouble covering budget deficits so far, but prob-
lems could develop in the future because of refi-
nancing needs. Prime Minister Nakasone has no
clear plan to close the existing $58 billion financial
gap, and large deficits probably will persist through
the end of the decade. We believe Tokyo will be
forced to offer more attractive terms on govern-
ment issues in order to continue financing its
deficits through domestic capital markets.
Small Government but Big Deficits
As a share of GDP, Japan has the smallest govern-
ment among major industrialized countries. This
statistic, however, masks a fivefold rise in govern-
ment outlays since 1970, generated by Tokyo's use
of fiscal stimulus to pull the economy out of a series
of recessions. General account spending now is
equal to about 18 percent of GDP compared to 11
percent in 1970.
To help fund the government's increased spending,
Tokyo has let the tax burden edge upward. The
tradition of annual tax cuts ended in FY 1977, and,
with a highly progressive income tax system, indi-
viduals quickly felt the pinch of inflation-induced
bracket creep. Corporate tax burdens also in-
creased as the government began dismantling an
extensive system of special tax incentives, estab-
lished in the early 1950s to encourage investment.
Even so, revenue has not kept pace with expendi-
tures as slumping profits in the past few years have
limited the corporate income tax take.
Tokyo also abandoned a balanced-budget rule dat-
ing from the US occupation. In 1965 Tokyo started
floating "construction bonds" for specific public
works projects totaling about 1 percent of GDP.
Japan: General Account Revenues,
Expenditures, and Balances
i I I I I I I I I I I I
1970 75 80 82a83s
Fiscal year
The surge in government borrowing, however, be-
gan in 1975 when the government issued "deficit-
financing" bonds to cover current-as opposed to
capital-spending needs. The deficit immediately
widened to 3 percent of GDP and climbed to nearly
6 percent in 1979. Conservative fiscal policies
during the Suzuki and Nakasone administrations
reversed this upward spiral. Nonetheless, the
FY 1983 budget, which took effect on 1 April,
authorizes roughly $58 billion in bonds, equal to
about 4.5 percent of projected GDP.
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Current Impact and Future Worries
Despite the persistence of massive budget deficits,
the government has had little trouble financing its'
needs and has not crowded out the private sector.
In the wake of the 1973 oil crisis, private-sector
savings shot up to 20 percent of GDP. While
uncertainty stemming from the oil shock boosted
savings, it also reduced corporate investment. As a
share of GDP, investment fell from 25 percent in
the early 1970s to 15 percent in the later years of
the decade. The government deficit, moreover,
frequently' failed to absorb fully the pool of excess'
private savings, and Japan switched from a net
borrower on international capital markets in the
years prior to 1973 to a net lender since 1975.
6.65
1988
16.30
6.60
1989
17.29
8.10
1990
18.53
Annual redemption requirements averaged $4 bil-
lion through FY 1980 but rose to nearly $16 billion
last year.
Splits Over Solution
While agreeing on the desirability of eliminating
deficit-financing bonds, government and private-
sector leaders are split over the best way to reach
this goal. In general, Japanese bureaucrats want to
close the financial gap by boosting government
revenues
Japanese officials, however, remain worried about
funding future deficits. Japan's Economic Planning
Agency projects a slight decline in savings during
the 1980s. They believe that as the population ages,
the savings rate will trend downward. A more
immediate concern is the ability of the domestic
capital market simultaneously to fill heavy new
government debt requirements and refinance old
issues. Tokyo's heavy reliance on five- and 10-year
bonds has led to a bunching up of maturing issues.
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15 April 1983
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In line with their concern about "bracket creep,"
private-sector groups want spending cuts instead of
tax hikes. As examples of areas where cuts could be
made, the Keidanren-Japan's leading business
association-cites generous subsidies for rice farm-
ers and overstaffing at the Japan National Rail-
ways. The Administrative Reform Committee, ap-
pointed by the government in 1981 to suggest ways
to eliminate government waste, initially recom-
mended that Tokyo cut subsidies 10 percent across
the board and revamp government agencies. These
suggestions, however, were watered down in the
final report in March, probably reflecting the
political clout of vested interest groups
Nakasone's Program
Without a consensus on how to eliminate deficits,
Prime Minister Nakasone is confronted with pain-
ful policy decisions. Because of the current deficit,
influential bureaucrats in the Finance Ministry
oppose major fiscal stimulus as a way to spur
government revenue. With elections scheduled for
this summer, the Prime Minister is unwilling to
antagonize voters by proposing tax increases.
Nakasone lacks the political clout to get the Diet to
approve cuts in sacred-cow programs such as rice
subsidies and tax-free savings accounts.
Nakasone has managed a difficult balancing act in
the FY 1983 budget. On the surface, the budget is
austere-allowing only a 1.4-percent increase in
spending over last year's initial level. One Japanese
newspaper termed it a "window dressing budget,"
however, because transfers to local governments
were slashed 20 percent while spending in other
categories was allowed to rise. Some of these
transfers could be reinstated later in the year, when
Tokyo traditionally adopts a supplemental budget.
The economic stimulus package approved by the
Cabinet on 6 April fails to give any better indica-
tion of which way Nakasone wants fiscal policy to
move.
Rather than trying to spur domestic economic
activity by loosening fiscal policy, the package
recommends that favorable international economic
developments-such as falling oil prices and declin-
ing interest rates-be exploited. The US Embassy
in Tokyo believes the program will have limited
macroeconomic impact. Using our version of the
Economic Planning Agency econometric model, we
reached the same conclusion.
With the FY 1983 budget approved by the Diet
and the economic stimulus package announced,
Nakasone will not have to deal with the deficit
issue again until summer when the Diet is sched-
uled to debate a tax cut. Unions and other private-
sector groups want an income tax cut of roughly $4
billion. Finance Ministry officials will probably
continue to press for an $8-12 billion hike in
indirect taxes. At this point, we believe Nakasone
will opt for a neutral policy, where any indirect tax
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Bond Market Liberalization Imperative
Few Japanese foresee an imminent end to the
issuance of deficit-financing bonds. The Ministry of
Finance talks of eliminating them between
FY 1987 and FY 1991. Dai-Ichi Kangyo Bank is
even more pessimistic. Without a large tax in-
crease, the bank estimates it will take 19 years to
phase out deficit-financing bonds; with a tax in-
crease, 12 years.
As a result, we believe that Tokyo will have to
liberalize capital markets more rapidly than they
would prefer to meet deficit funding requirements.
Some Japanese blame recent moves in this direc-
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of the yen in 1982 and claim that Japan's ability to
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Unlike the United States, Japan does not auction:
off all government bonds. Most new issues consist,
of five- and 10-year bonds, which are underwritten
by a syndicate of domestic banks, security houses,
and insurance companies. After the syndicate and,
the Ministry of Finance agree on interest rates for
the monthly issues, syndicate members absorb the
bonds into their portfolios. While the security
houses are free to resell immediately the bonds to
the public, the city banks-which take about 30 ,
percent of the new issues-must wait at least 100;
days before they can do likewise. After one year
the city banks can sell government bonds to the
Bank of Japan, but the central bank's offered price
has traditionally been unattractive. The Bank is
prohibited from directly underwriting new issues.
To improve flexibility, Tokyo has made several
innovations in the system in recent years:
? 1978-Two- and three-year bonds were introduced.
Investors can purchase these bonds through a
tender system at market rates.
? 1980-Tokyo authorized private placements of
government bonds with the Saudi Arabians.
? February 1983-Ministry of Finance made first
private placement of 15-year bonds with Japanese
trust company syndicate. Yields are to be adjusted
annually, but resales are prohibited.
? April 1983-Japanese banks were given permission
to sell 10-year government bonds over the counter.
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pursue an independent monetary policy has been
restricted. They fear that further liberalization will
threaten the country's low interest rate structure.
Despite these qualms, Tokyo has little choice but to
let the government bond system become more
market oriented. The banks in the underwriting
syndicate have begun to balk over accepting large
volumes of low-interest government paper. In Feb-
ruary long-term government bonds were not issued
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15 April 1983
because the banks found the Ministry of Finance's
terms unacceptable. In March, the Ministry had to
edge up the yield to induce the syndicate to resume
purchases. Repeated episodes of this sort are likely
unless Tokyo changes its financing system, perhaps
by offering a wider range of maturities, market-
determined yields, and expanded access by other
financial institutions.
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Portugal:
Coping With Financial Shortfalls
Portugal's chronic international financial problems
have become a major preoccupation of the coun-
try's policymakers. Whatever the makeup of the
government formed after the parliamentary elec-
tion on 25 April, the severity of the imbalance
probably will force it to implement further auster-
ity measures and to renew negotiations with the
IMF for a standby loan.
Origins of the Deficit
Portugal has struggled with international financial
problems since 1977, when a current account defi-
cit of $1.5 billion compelled the Socialists to obtain
a $70 million standby loan from the IMF and a
$750 million credit from a consortium of 14 gov-
ernments. The adoption of an IMF-mandated sta-
bilization program and a 0.75-percent monthly rate
of depreciation for the escudo stimulated exports
and invisibles and swung the current account close
to balance by 1979. However, the turnaround in
Portugal's external position was short lived. Lisbon
loosened its monetary policy in 1980; this had the
desired effect of promoting investment and employ-
ment, but the added stimulus put pressure on
prices.
Lisbon responded by imposing price controls and in
an unconventional effort to minimize the effects of
such controls on an import-dependent economy, it
revalued the escudo by 6 percent. At the same time,
the monthly exchange rate adjustment depreciation
was resumed at a slower rate of 0.5 percent. The
reduced pace of depreciation was not enough to
offset Portugal's inflation rate. The resulting loss of
competitiveness, combined with the worldwide
downturn in trade, slowed export volume growth to
8 percent in 1980-down from 29 percent a year
earlier. At the same time, the exchange rate adjust-
ment prompted a 12-percent increase in the volume
of imports, and the trade deficit shot up to $4.2
billion. The invisibles balance was also affected;
tourism and worker remittances in 1980 grew at
about half the rates recorded in the two preceding
years. The current account deficit climbed to $1.3
billion, leading Portuguese officials to approach the
IMF for. a $1.5 billion medium-term Extended
Fund Facility-a request subsequently tabled when
Lisbon found the IMF's terms too stringent
Despite the growing current account deficit, Lisbon
pursued a relatively easy monetary policy during
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Trade balance -2,532 -2,408
Exports, f.o.b. 2,001 2,379
Imports, f.o.b. 4,533 4,787
Interest payments
142
387
Current account balance
-1,495
-826
Change in reserves
-359
103
3,550 4,575 4,089 3,997
6,182 8,781 9,251 8,927
536
733
1,099
1,319
-52
-1,258
-2,710
-3,315
68
-120
-190
-200
first-half 1981. Coupled with general economic
stagnation in Western Europe, this approach exac-,
erbated Portugal's economic problems. Consumer
price inflation jumped from 16.6 percent in 1980 to
20 percent in 1981, widening the differential be-
tween the Portuguese inflation rate and the average
OECD rate to over 9 percentage points. Neverthe
less, the Bank of Portugal failed to accelerate the
rate of depreciation, which contributed to a
3-percent fall in export volume. At the same time,
imports grew by 3.5 percent, creating a $5.2 billion
trade deficit. Other current account items once
again failed to offset the trade deterioration. Work-
er remittances declined for the first time by 3
percent, reflecting an awareness of Portugal's nega-
tive real interest rates, while high interest rates on
the Eurodollar market and the rapid expansion of
foreign borrowing raised interest payments by 50
percent.
Lisbon's current account woes continued last year
despite some improvement in the trade account.
Tighter monetary policy, together with import re-
strictions, helped to reduce imports by $300 mil-
lion. The return to a 0.75-percent monthly depreci-
ation rate in December 1981 and a 9-percent
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15 April 1983
devaluation of the escudo in June 1982 helped to
restore export competitiveness and to boost real
exports by 4 to 5 percent. Although the dollar value
of exports fell slightly last year, in terms of escudos
exports rose 26 percent, and the trade deficit
narrowed by approximately $200 million, accord-
ing to preliminary estimates. However, sharp drops
in worker remittances and tourism-which were
adversely affected by the recession in Western
Europe-coupled with rising debt service payments
reduced the invisibles surplus to only about $1.6
billion. The current account deficit thus widened to
approximately $3.3 billion.
While Portugal's recurrent balance-of-payments
deficits since the 1978 stabilization program are
attributable in large part either to mistaken govern-
ment policies or to worldwide conditions beyond the
government's control, a variety of structural defi-
ciencies have also come into play. Given its low
agricultural productivity and lack of natural re-
sources, Portugal must import 60 percent of its food
and 80 percent of its fuel. Since these items-
together with intermediate products for industry-
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comprise 80 percent of Lisbon's foreign purchases,
it has been difficult to curtail imports. Export
growth has been dampened because of Portugal's
concentration on low-technology goods, which have
encountered growing protectionist sentiment in
Western markets and stiffer competition from new-
ly industrialized countries. Moreover, foreign ex-
change earnings from tourism declined steadily
between 1980 and 1982, partly because of falling
investment in the tourist industry and comparative-
ly high hotel rates. In addition, the nationalizations
carried out during 1975 and 1976 have created an
overgrown and inefficient network of publicly
owned corporations with financing requirements
that have enlarged both the budget deficit and the
external debt.
External Borrowing
A significant portion of Portugal's current account
deficits over the last three years has been financed
by foreign borrowing. From 1979 to 1982, Portu-
gal's external debt nearly doubled to approximately
$13 billion-over half the country's GDP. Mean-
while, with interest rates and debt mounting, inter-
est payments more than doubled, reaching approxi-
mately $1.3 billion in 1982. As a share of foreign
exchange earnings, debt service payments, exclud-
ing the amortization of short-term debt, increased
from 16.8 percent in 1979 to about 25 percent last
year. Short-term debt more than doubled in just
two years, reaching $3.2 billion in 1981; of this
amount, publicly owned firms owed 85 percent.
Last year, however, the growth of short-term debt
slowed considerably because of government con-
straints on borrowing. Medium- and long-term
borrowing, which presently accounts for about 70
percent of total debt, grew more slowly than short-
term debt, rising from $5.3 billion in 1979 to nearly
$9 billion in 1982.
Efforts To Reduce the Payments Deficit
The strategy currently in place for remedying the
current account deficit is that of caretaker Prime
External Debt Debt Service Ratio
Billion US S Percent
0 1977 78 79 80 81 821 0 1977 78 79 80 81 82k'
Minister Balsemao. In short, the government is
trying to raise import prices and reduce real per-
sonal income. The provisional 1983 budget raises
the import surcharge from 10 to 30 percent. In
addition, it provides for stiff tax increases and price
hikes ranging from 15 to 30 percent for fuel,
electricity, and transportation. The Balsemao gov-
ernment has also issued wage guidelines that re-
quire firms and workers either to pay 60 percent of
any wage increase over 17 percent into the Social
Security fund or to purchase government bonds.
Lisbon expects these measures to cut real private
consumption by 1 percent this year.
Despite earlier proposals to reduce real public
expenditures in the 1983 budget, Parliament ap-
proved a 21-percent nominal increase. This implies
that real spending will remain constant. Although
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the government failed to constrain expenditures,
the increase in revenues held the budget deficit to
$1.6 billion, the same as in 1982.
In recent weeks, Lisbon has adjusted foreign ex-
change and monetary policies in response to recom
mendations from the IMF. The central bank has
devalued the escudo by 2 percent against a basket
of 18 currencies and raised the crawling rate of
monthly depreciation from 0.75 to 1 percent. The
revised rate more closely approximates the inflation
differential between Portugal and its major trading
partners and should help to maintain export com-
petitiveness. The Bank of Portugal simultaneously
increased interest rates by 4 to 5 percentage points.
Interest rates are now well above the inflation rate
for the first time in over a decade, which in
addition to slowing inflation may encourage work-
ers abroad to repatriate more of their earnings. In
addition, the central bank imposed monthly exter-
nal credit ceilings in an effort to slow the growth of
foreign debt. Excepting the size of the devaluation,
the measures are virtually identical to the IMF's
recommendations.
Enter the New Government. The direction of eco-
nomic policy probably will not change much even
if-as we expect-the Socialists win a plurality of
seats in Parliament in the 25 April election. In fact,
Mario Soares, who would become Prime Minister,
has proposed further austerity measures, such as
increasing the prices of subsidized goods. Soares
also has suggested a social pact among government,
business, and labor aimed at resolving Portugal's
economic difficulties. The implementation of an
austerity program of the sort Soares envisions
would require a reduction in real wages, a proposi-
tion that has already sparked labor unrest. Rail-
road and transport workers, for example, have
struck for one or two days each week for over a
month, demanding wage increases of 25 to 28
percent, far above the Balsemao government's offer
of 14 to 16 percent. For its part, the powerful
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15 April 1983
Communist-led General Confederation of Portu-
guese Workers-Intersyndical has vowed to increase
strike activity if the new administration does not
meet its terms.
A Smaller Deficit Likely Next Year
Even without the enactment of additional meas-
ures, the combined effect of reduced real purchas-
ing power and declining oil prices could cut imports
as much as $500 million, according to Embassy
estimates. Invisibles earnings, however, probably
will remain weak; low economic growth in Western
Europe and restrictions on the amount of money
French travelers can spend abroad make a rebound
in worker remittances and tourism unlikely. More-
over, the expansion of Portugal's external debt will
raise interest payments, even if interest rates fall.
Consequently, we expect the 1983 current account
deficit to approach $2.5 billion.
A sharper reduction of the current account deficit
would require more fiscal restraint than has been
evident in the past. The government overshot its
budget deficit target by at least $400 million in
1982, primarily because of rising interest pay-
ments, failure to control spending, and expendi-
tures on housing projects. Continued pressure in
these areas is likely to lead to a budget deficit of at
least $2.3 billion this year. Since the deficit is
financed mainly through money creation and exter-
nal borrowing, the government is likely to turn to
the international market this year for close to $1
billion, instead of the $650 million it projected in its
budget.
Prospects for Financing. Lisbon has encountered
resistance from bankers recently but should be able
to meet its foreign borrowing requirement. The
representatives of US banks involved in Portugal
have expressed concern about the country's long-
term prospects, but they are still willing to extend
credits, albeit at somewhat harsher terms. In view
of Portugal's uncertain political and economic out-
look, bankers want Lisbon to pay a higher spread
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over LIBOR than in the past. Official reluctance to
pay a wider margin caused the state-owned savings
bank to withdraw a $150 million syndication in
February. A similar loan sought by the public
utility company initially generated a weak response
from the international financial community; how-
ever, it was successfully syndicated at steeper
terms. Lisbon recently agreed to pay 0.75 percent-
age point over LIBOR for one tranche and 0.35 to
0.40 percentage point over the US prime rate for
the other in order to market a $300 million Euro-
dollar credit. Bankers are also insisting that the
Portuguese pay a slightly higher rate to roll over
short-term loans.
in addition to requesting new credits,
the government may ask that a portion of its short-
term debt be converted into long-term loans by the
end of this year. The Portuguese are postponing
presentation of a formal request, probably in the
hope of extracting more favorable terms once the
successor government announces a stabilization
program.
In the meantime, Portugal has adequate reserves to
avert a near-term crisis. Total reserves of nearly $9
billion are sufficient to meet the amortization
payments on medium- and long-term debt estimat-
ed at $1 billion and total interest payments of at
least $1.3 billion this year. However, the reserves
consist almost entirely of gold; foreign exchange
reserves cover only about two weeks of imports.
Lisbon has tried to avoid selling gold because of the
impression this would create abroad and probably
because it plans to pledge gold against loans. The
shortage of hard currency may be responsible for
the drawdown of demand deposits held with foreign
banks and the increased use of interbank credit
IMF assistance should be forthcoming after the
elections. Lisbon is working to arrange a $140
million compensatory financing facility to make up
for the shortfall in exports experienced in 1981.
Negotiations for a $1.5 billion standby loan have
not started because the caretaker government lacks
the authority to sign an agreement. However, the
Socialists have expressed their determination to
approach the IMF if elected, despite the possibility
that the degree of austerity this implies could
ultimately cut into their popularity.
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China: Economic Relations
With the Third World
China's increased public stress on its alignment
with the Third World highlights the importance of
Chinese economic as well as political ties to devel-
oping countries. Recent Chinese policy statements
show that Beijing expects to increase its share of
Third World markets, where China's-favorable
trade balance partially offsets the cost of Western
imports. The Chinese portray their policies as
enhancing economic cooperation among developing
countries-a description that seeks in part to com-
pensate for cuts in China's foreign aid programs
and to blunt criticism from developing countries
over China's increased competition for internation-
al assistance and markets.
At the 12th Party Congress in September, China's
leaders emphasized that Beijing expects trade to
play an essential role in China's economic develop-
ment. Although the United States and other indus-
trial countries continue to occupy the key positions
in Chinese trade planning, future plans did not
overlook the Third World. China's $6.0 billion
in exports to LDCs in 1981 constituted about
35 percent of all exports-and significantly, the
Chinese enjoyed a surplus of $4 billion that offset
their deficit with the developed countries.' On the
military side, in 1981 the Chinese signed contracts
for some $2.9 billion in arms exports to Third
World customers
China's Third World trade concentrates primarily
on the OPEC states and the newly industrializing
' In 1981 Chinese exports to Hong Kong were worth about $5.3
billion and Beijing had a $3.3 billion surplus. These figures are not
included in those above except for approximately $1 billion worth of
countries (NICs}-excluding Taiwan and South
Korea. The Chinese also consistently run small
bilateral surpluses that are significant in the aggre-
gate with the poorer developing countries.
The oil producers are key targets for China:
? Since 1979 China's exports to the Middle East
and North Africa have risen more than 60 per-
cent to $1.5 billion in 1981; a decline of imports
in 1981 from the region gave Beijing a $1.2
billion trade surplus.
? Most of China's 30,000 overseas workers are in
this area; the government's principal labor con-
tracting arm-the China Construction Engineer-
ing Corporation-maintains offices in Iraq, Ku-
wait, and North Yemen and plans another in
Dubai this year.
? The Chinese are targeting countries led by radi-
cal and conservative regimes alike as new mar-
kets; a new agreement with Libya will expand
investment and trade
? Finally, burgeoning Chinese arms sales are con-
centrated in the Middle East j
Chinese trade officials see good potential for in-
creasing trade with the NICs as well. Recent
developments support this conclusion:
? In 1981 Hong Kong reexported about $1 billion
in Chinese goods to other LDCs, mostly to the
NICs in East Asia, including Taiwan and South
Korea.
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? Beijing has almost doubled its total exports to
Singapore since 1979. In 1981 China exported
$735 million worth of goods while reducing im-
ports, leaving Beijing a surplus of more than $550
million.
? Exports to Brazil reached $360 million in 1981
and accounted for nearly 60 percent of China's
exports to Latin America.
In the poorer developing countries, Beijing is also
searching for markets:
? Beijing has an economic umbrella agreement
with each of the 45 African states with which it
has diplomatic relations. Total trade with Africa
was about $1.2 billion in 1982, probably lifting
China's trade surplus above the 1981 level of
$440 million.
? Two-way trade with Latin America hit $1.2
billion in 1981. China has reduced its imports
from Latin America, but continues to seek new
outlets for its products. In early November, for
example, Chile approved a new Chinese trade
center that will serve a number of other South
American countries.
Marketing Strategy
Chinese officials usually cite China's ability to
export low-cost intermediate-technology goods as
the key to China's penetration of Third World
markets. The Third World is a convenient market-
place for China's surplus industrial products, such
as electrical appliances and machine tools, that
have limited prospects in developed countries be-
cause of their low quality. The arms trade also
takes up excess productive capacity while helping
the Chinese to modernize their own military.
Beijing is clearly looking for rapid growth in its
trade with the LDCs. In public as well as unofficial
commentary, Chinese officials suggest that closer
ties with countries in Asia, Africa, and Latin
America could open a vast market for China's
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15 April 1983
goods. Moreover, the Chinese see a huge market
for projects involving the export of Chinese labor.
Beijing is looking closer at more direct involvement
in joint economic projects overseas. In September,
trade officials announced that while joint projects
with foreign investors are becoming more numerous
in China, the Chinese are now playing an investor's
role in the Third World, where they claim China
can offer an attractive partnership with its own
technical and managerial skills.
Foreign Policy and Economic Relations
We believe that China is trying to create a more
coherent political and economic policy that can
serve Chinese goals in the Third World over the
longer run. On the one hand, Beijing is singling out
the political value of new economic initiatives in the
Third World. China appears to be using economic
diplomacy in an attempt to woo the more radical
Arabs, such as South Yemen and Libya, away from
the Soviets. As for the moderate Arab countries,
the Chinese appear to regard stepped-up economic
relations with Saudi Arabia and Kuwait as the first
move toward diplomatic relations. Beijing also
hopes that its offers of increased trade will encour-
age Latin America holdouts to drop diplomatic
relations with Taiwan.
At the same time, Beijing is publicly burnishing its
identity as a leader in Third World affairs, building
on existing good will. The Chinese are highlighting
such areas as the exchange of technology and joint
economic projects, in part, to suggest that such
cooperation supplants the cuts in China's foreign
aid programs over the past few years. The Chinese
are also more actively counseling Third World
representatives to cooperate in international negoti-
ations and seeking to use a unified Third World
stand in international forums to their benefit.
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Beijing is stepping up its charges that the West is
paying less for commodities, charging exorbitant
interest rates, and erecting trade barriers to shift
the impact of the global recession to the Third
World. At the IMF meetings in Toronto last fall,
the Chinese backed a doubling of IMF quotas and
an increase in contributions to the International
Development Association for low interest develop-
ment loans. The proposal for lower tariffs among
Third World countries and the establishment of a
unified tariff structure for nonmembers also re-
ceived Chinese support at the "Group of 77"
meeting in New Delhi last February. At a meeting
of South-South Cooperation in Beijing this month
the Chinese reiterated support for these positions
and introduced other proposals for further coopera-
Competition With the Third World
China's competition with other Third World coun-
tries for Western markets complicates Beijing's
political relations with the developing nations.
China's efforts to increase exports while holding
down Third World imports have also produced
intermittent frictions. The Algerians complained
about the policy to Zhao Ziyang on his African
tour last month. Indian concerns that China's low
per capita income could give it some priority for the
World Bank's development funds and other soft
loan programs are also shared by many other Third
World countries.
China's response to these Third World concerns so
far has been relatively weak. We believe the
Chinese at this point may not judge the problem
sufficiently important to warrant greater attention.
Until now, Chinese trade competition has had the
greatest effect on the NICs in East Asia-South
Korea, Taiwan, Hong Kong, and Singapore.
Beijing hopes to replace these NICs as producers of
intermediate technology and labor-intensive goods
as they move into high-technology industries. As
far as these countries are concerned, the political
fallout from direct economic competition is not a
major Chinese worry. At the same time, China
appears to believe that it can publicly place the
onus for shortages in development funds available
to the Third World on Western reluctance to
increase contributions to the international financial
institutions rather than on Chinese claims on such
funds. In any event, by identifying themselves as a
member of the Third World, the Chinese are
sending the message that they intend to claim their
share of international markets and development
funds. In our view, this leaves little room for
Beijing to soften the effects of its trade or other
competition beyond the political palliatives and
limited economic initiatives that have already been
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