INTERNATIONAL ECONOMIC & ENERGY WEEKLY 22 JULY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300020007-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: February 17, 2011
• Sequence Number: 7
• Publication Date: July 22, 1983
• Content Type: REPORT

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International
Economic & Energy
Weekly
22 July 1983
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22 July 1983
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International
Economic & Energy
Weekly F__]
22 July 1983
Perspective-LDC Financial Problems and OECD Economic Recovery
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
11 Key Debt-Troubled LDCs: Export Response to OECD Recovery
15 Israel: In the Aftermath of the Doctors' Strike
21 The Slowdown in Soviet Industry, 1976-82
25 Honduras: Fledgling Economic Development Put on Hold
Zimbabwe: Socialism and the Private Sector
directed to irectorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
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International
Economic & Energy
Weekly
Synopsis
Perspective-LDC Financial Problems and OECD Economic Recovery = 25X1
Western governments and financial institutions increasingly are pinning their
hopes on OECD economic recovery to solve many of the debt-troubled LDCs'
international financial difficulties, and, in turn, ease their political problems.
We are concerned, however, that OECD economic recovery will do little in the
near term to reduce-let along eliminate-such financial problems.F___1 25X1
Key Debt-Troubled LDCs: Export Response to OECD Recovery 25X1
The decline in exports of debt-troubled LDCs exports during the OECD
recession directly contributed to their deteriorating financial positions and
impaired their ability to manage their debt. While exports will pick up as the
OECD recovers, we do not believe that they will rebound as strongly this time
as they did during the last recovery.
The Israeli Government will have to contend with a foreign exchange crunch,
rising unemployment, and triple-digit inflation over the next few years. Faced
with a difficult economic situation, Israeli politicians will look to the easiest
way to deal with the problem-asking the United States for increased aid on
better terms.
The Slowdown in Soviet Industry, 1976-82F--] 25X1
In trying to revive Soviet economic growth the new leadership under General
Secretary Andropov must contend with mistakes in investment planning, raw
material and energy constraints; and transportation bottlenecks. Although
industrial growth in 1983 probably will be above 1982's low 2.2 percent, a con-
tinued downward drift in industrial growth and productivity is likelyF_~
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Honduras: Fledgling Economic Development Put on Holdl 25X1
Since the start of 1980, the weak global economy, regional turmoil, and
restrictive government actions have taken their toll on the Honduran economy.
With security conditions likely to remain tense through 1984, Honduras is
unlikely to attract enough financing to prevent a decline in economic activity.
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Despite Prime Minister Robert Mugabe's self-styped commitment to Marx-
ism-Leninism, he has pursued relatively benign policies toward the Zimbab-
wean private sector since he came to power three years ago. We believe that, so
long as Mugabe is in power, however, Zimbabwe will continue to tolerate a
mixed economy but that his political commitment to improve the living
conditions of blacks and to expand government into mining, manufacturing,
and farming will retard economic growth, even after drought conditions ease
and demand for minerals picks up.
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International
Economic & Energy
Weekly
22 July 1983
Perspective LDC Financial Problems and OECD Economic Recovery 25X1
Western governments and financial institutions increasingly are pinning their
hopes on OECD economic recovery to solve many of the debt-troubled LDCs'
international financial difficulties, and, in turn, ease their political problems.
Industrial country economic expansion and associated LDC export rebounds
are supposed to provide the influx of foreign exchange needed for the LDCs to
pay off their debts, increase their imports, and resume the economic progress
of the past two decades. Indeed, with the OECD economic recovery now
beginning, some financial observers are claiming that such solutions are not far
off.
We are concerned, however, that OECD economic recovery will do little in the
near term to reduce-let alone eliminate-the debt-troubled LDCs' financial
problems. We calculate, for example, that it would take roughly an average of
5-percent OECD real growth per year over the 1983-85 period to return LDC
exports by late 1985 to the growth path experienced in the 1970s.
To date, the major debt-troubled LDCs have improved their payments
positions only because their imports have plunged. Over the past year, for
example, their imports dropped nearly 30 percent. On the export side, the
decline in sales probably has tapered off, but their exports have not yet picked
up and probably will not until 1984. Even then, export gains will be limited. As
long as this is the case, the debt-troubled LDCs probably will have to continue
to restrain imports to avoid renewed deterioration in their financial situations.
In the absence of an export rebound, Third World leaders will face an
increasingly difficult choice between maintaining austerity programs aimed at
improving payments positions and policies designed to preserve political
stability. The IMF austerity programs have not been popular, but they have so
far averted financial collapse. The austerity programs already on the books are
cutting into living standards. In both Mexico and Brazil, for example, workers
will see their real earnings fall noticeably this year. In many debt-troubled
countries, the inability to get needed imports has slowed domestic production,
threatening jobs and cutting income even further. Third World governments
have been willing to accept these costs in part because they believed that over
time the need for severe demand management policies would ease as exports
rebounded. As the economic and political cost of austerity grows, a realization
that export sales will not provide early relief will challenge the resolve of Third
World leaders to stick with the current programs.
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If the troubled debtors stay the present course, increased austerity will almost
certainly aggravate LDC domestic economic and political problems. Living
standards will continue to decline in many of the debt-troubled LDCs,
increasing the risks of serious social unrest in some; protests against IMF-
mandated austerity already have erupted in Argentina, Brazil, Chile, and
Peru. In addition, the inability to obtain raw materials and capital equipment
may translate into lower economic growth potential later in the decade.
Faced with international financial difficulties and domestic social unrest,
Third World leaders increasingly may seek to remedy their situations by
shifting their attention to international bargaining tables. Attempts to redress
their problems through discussions rather than the marketplace are nothing
new for the LDCs, but we expect that pressures for negotiated solutions will
increase. The debt-troubled LDCs, facing growing internal political pressure,
probably will maneuver for greater market access, guaranteed market size,
commodity price and export income stabilization funds, export credit guaran-
tee facilities, and structural changes in international institutions.
Even if Third World nations go this route, the prospect for an early solution to
their financial problems is quite slim. The gains they might make at the
negotiation table most likely will be limited and only realized over time. This
approach, however, may yield more on the political front. To the extent that
leaders in the debt-troubled LDCs are able to project an image of Third World
solidarity and shift the blame for lower living standards to the industrial West,
they may be able to at least limit the potential for serious internal unrest.
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Energy
OPEC Ministers OPEC's semiannual ministerial conference in Helsinki this week reaffirmed
Maintain Quotas the organization's crude oil production quotas and prices established last
and Prices March. According to press reports, the ministers chided Nigeria for producing
approximately 150,000 b/d above its 1.3-million-b/d quota for the second
quarter, but generally appeared willing to accept assurances by Lagos that it
will abide by the ceiling in coming months. The most contentious issue was se-
lection of a new OPEC Secretary General, with both Iran and Iraq pressing
their candidates. The meeting adjourned without a decision, however, and the
ministers reportedly are now looking for a compromise candidate. Several
ministers publicly raised the possibility of an emergency meeting in the fall
should demand for OPEC oil rise significantly above the 17.5-million-b/d
production ceiling, a possibility many industry analysts see occurring by late
summer. Current OPEC crude oil production is slightly below 17.5 million
b/d.
Ottawa Moves Ottawa last week announced plans to increase east coast offshore oil explora-
Unilaterally To tion, in one case without the cooperation of the Newfoundland government.
Develop East Coast Oil The billion-dollar program calls for the drilling of 22 wells over the next three
years-at least four will be drilled by Mobil in the Hibernia oilfield, which is
estimated to contain 1.8 billion barrels of oil. In addition, the federal
government will provide a drilling permit to Petro-Canada, the state-owned oil
company. This is the first time in the two-year-old jurisdictional dispute
between Ottawa and Newfoundland over control of offshore resources that an
exploration and drilling program will begin without the consent of both parties.
Moreover, by awarding Petro-Canada a lease in the potentially oil-rich South
Hibernia field-an area in which Newfoundland's crown oil corporation had
planned to initiate the province's exploration effort-Ottawa has made it clear
that it intends to control offshore development. The two private companies
involved in the new program, Mobil and Paddon, will continue to operate with
the permission of both federal and provincial authorities, however.
The major issue that has prevented federal-provincial agreement is the pace of
development of Newfoundland's offshore oil and gas resources. Ottawa favors
rapid development to assure the security of Canada's oil supply, but New-
foundland wants a more measured development. Newfoundland Premier
Peckford apparently has been obstructing an agreement in the hope that a
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Conservative government, more amenable to provincial demands would win
the next federal election. As a result of Ottawa's recent initiative, however, the
development of Newfoundland's offshore resources will be well under way-10
new rigs will be in the area by December 1983-before the election, which
must be held by March 1985.
Mexican-Venezuelan Mexico and Venezuela last Sunday announced they will continue to provide 10
Oil Facility Extended Caribbean and Central American countries with up to 80,000 b/d of oil each
under concessionary terms. Only 20 percent of the cost of oil, however, will be
financed by the donors rather than the earlier 30 percent, while the interest
rate on the credit-granted as a five-year loan-was doubled from 4 to 8
percent. The initial credit can still be converted to a 20-year loan if used to fi-
nance energy development projects but the interest rate was tripled to 6
percent.
Some beneficiaries have expressed concern about the new terms. Because
recipients' payments are based on official Venezuelan and Mexican prices, it
would be cheaper to purchase oil on the open market if spot market prices fell
dramatically. The participating countries have never taken their full allotment
of oil because of domestic recessions and difficulties in refining heavier
Mexican crude. In 1982 Mexico and Venezuela provided approximately
120,000 b/d of oil and $450 million in credits under the facility.
Japanese Nuclear A wide-ranging program to correct operating and safety problems at nuclear
Power Performance power plants has enabled Japan to significantly boost its load factor at nuclear
power plants in recent years. Last year, for example, the 65.8-percent load
factor was the highest in 11 years and was exceeded only by West Germany
among major reactor operators. We believe such favorable experience gained
in operating nuclear power plants will significantly strengthen Japan's compet-
itiveness as a potential nuclear reactor exporter-a move Japan is known to be
considering for the late 1980s or early 1990s. Even if Japan forgoes the nuclear
reactor export market, high nuclear plant load factors will help to reduce oil
demand by the electric power generation sector.
Indonesia Signs Pertamina-Indonesia's state oil company-has signed its first two produc-
Production-Sharing tion-sharing contracts of 1983 with foreign operators. French companies Elf
Accords Aquitaine and Total-Cie Francaise des Petroles (CFP) initially paid Pertamina
$1 million for the right to explore blocks on the Indonesian island of
Kalimantan. Elf plans to spend over $40 million on oil exploration and
development over a six-year period and has agreed to pay additional bonuses-
$5 million for oil production over 50,000 b/d from its new block and another
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$10 million for levels over 75,000 b/d. CFP's contract calls for nearly $50 mil-
lion in exploration during the first eight years. CFP has agreed to a three-tier
bonus system-$5 million for output levels over 50,000 b/d and subsequent $5
million and $6 million payments for oil production, from its new concession
exceeding 100,000 b/d and 200,000 b/d, respectively.
France Electricite de France (EDF) has announced plans to decommission some 2,684
Decommissioning megawatts (MW) of electric generating capacity by the end of 1985. The
Electric Power Plants installation of new nuclear-electric generating capacity, however, will more
than offset the closure of 26 small inefficient generating units. Moreover,
recent reductions in long-term electricity demand forecasts indicate that
France can accelerate plans for decommissioning all old and inefficient
generating capacity. Although EDF currently forecasts that all electric
generating plants under 125 MW will be decommissioned by 1987, we believe
this goal can easily be attained by 1985. In addition, current plans to
decommission all plants under 250 MW by the early 1990s probably will be
accelerated a few years, thereby making way for the scheduled increase in
more modern nuclear-electric capacity late in this decade.
New Thai Petroleum Bangkok's modifications over the past year of petroleum concession contracts
Exploration Rules are discouraging oil and gas exploration in Thailand. Bangkok has added to
traditional contracts, which already require tax and royalty payments, a
production-sharing clause and a provision giving the Petroleum Authority of
Thailand the first opportunity to purchase petroleum under a pricing formula
fixed by the government. Two US energy companies last month withdrew from
negotiations for concessions because of these more restrictive clauses, accord-
ing to the local press. Marathon Oil dropped out of a consortium seeking a con-
cession in the Central Plains because it wanted to be able to sell any oil it
found at the world price. Amoco had earlier withdrawn from the consortium
for the same reason. At about the same time, Texas Pacific refused to
participate in a government-arranged venture in the Thai-Malaysian Joint
Development Area in the Gulf of Thailand because of the rigid production-
sharing scheme being introduced for the joint venture.
Polish Bank The US Embassy in Warsaw reports that Western bankers and Polish
Rescheduling Government officials have almost reached agreement in principle on resched-
Agreement Near uling the nongovernment debt for 1983. The Poles softened some of the terms
they originally demanded from the bankers by offering to reduce the length of
the rescheduling from 16 years to 12 years and the percentage of recycled
interest payments from 75 percent to less than 60 percent.
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Another round of talks probably will take place early next month to wrap up
the agreement. The Poles appear to be making more concessions than the
bankers in the discussions. An agreement with bankers on rescheduling will
increase the pressure on Western governments-which plan to hold a meeting
in Paris on 29 July-to proceed with rescheduling talks with the Poles soon.
Payments Begin on Mexican authorities are moving up repayments to foreign suppliers because of
Mexican Supplier the lighter than expected participation by Mexican firms in the government's
Credit Arrearages scheme to reduce private-sector supplier-credit arrearages.
To pay off escrowed balances, Mexico City will remit
some $185 million on the fifth business day in September to foreign suppliers
and the remainder on the fifth working day in March 1984. Participation in
this debt rescheduling scheme was low because of (a) insolvency or illiquidity of
many Mexican firms, (b) reluctance of foreign creditors to go along with the
plan, and (c) some direct debt reductions by Mexican firms with access to
foreign exchange. Financial authorities also announced that a new program
will be developed soon to help those Mexican firms that did not participate in
the first program.
Yugoslav Debt Sources of the US Consulate in Zagreb say Croatia probably will not be able
Repayment Problems to pay almost $300 million in debt due this month and next month, which will
test Yugoslavia's new centralized system for ensuring repayment of foreign
debts. Under measures passed by the federal assembly three weeks ago, the
National Bank is obligated to cover the debt and attach Croatia's foreign
exchange earnings. Croatian authorities, who were among the strongest
regional opponents of the system, have asked that a federal ban on the export
of oil, oil derivatives, natural gas, and chemical fertilizers be lifted to give the
republic a better chance of repaying the debt.
The National Bank is likely to act before Western banks sign a financial aid
agreement next month, in'order to establish the confidence of Western lenders
in the new repayment mechanism. The government probably will be reluctant
to take all of Croatia's hard currency. It also is unlikely to lift the ban on stra-
tegic exports, because domestic supplies are tight
Global and Regional Developments
EC Seeking Following the meeting on Monday of the EC Foreign Affairs Council, British
Withdrawal of US Foreign Secretary Howe outlined to the press a three-step response to the US
Steel Measures decision to curb specialty steel imports. The Community initially is to push for
GATT consultations with the United States later this month aimed at having
the US measures withdrawn, and, if this approach fails, the EC plans to seek
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Cuba To Be Adversely
Affected by Nickel
Certification Agreement
compensation under GATT provisions.
Howe told reporters that an orderly marketing agreement has not been ruled
tory actions are likely.
The Foreign Secretary may have raised hopes that the steel decision would be
rescinded by telling his colleagues that views within the US Government are
"less than unanimous." He also stated that US officials seemed sensitive to
European concerns. The Foreign Ministers at this point probably are expecting
some compromise to emerge during GATT consultations. Failing this, retalia-
In recent years Japan has been among the four largest non-Communist
importers of Cuban nickel. Agreements with France and Italy on nickel
certification have been in effect as of 1981 and 1982, and discussions are under
way with the Netherlands and West Germany. Havana will be hurt most by
these agreements after 1985, when a new nickel plant will double the volume
of Cuban nickel available for export to the West.
National Developments
Developed Countries
Canada Restructures Canadian Fisheries Minister Pierre De Bane on 4 July announced Ottawa's
Newfoundland Fishing intention to unilaterally restructure Newfoundland's fish-processing industry.
Industry The federal government and provincial authorities had neared agreement on a
joint program this spring but it foundered in late May when Newfoundland
Premier Peckford refused to accede to the permanent closing of three plants.
Under Ottawa's new plan, Newfoundland's three largest fish-processing
companies-all currently insolvent-will be merged into one company with 15
operating processing plants. Ottawa will invest $61 million in the new
company giving it at least 51-percent control; the Bank of Nova Scotia, the
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Canadian Development Corporation-another government agency-and pri-
vate investors will hold the remaining equity in the firm. Three of the six
processing plants presently shut down will be reopened, putting 1,200 people
back to work, but the other three plants will be closed permanently. It is
estimated that the federal package will protect a total of 16,000 jobs in the
province. Although most fishing industry officials are pleased with the infusion
of new capital, some of them are concerned that New England fishermen will
protest the federal plan as a subsidy and seek to impose countervailing duties
on imports of fish from Newfoundland.
Less Developed Countries
New Brazilian Brasilia's announcement last week of tighter austerity policies has opened the
Austerity Measures way for a reconciliation with the IMF and other foreign creditors but is
provoking hostility in labor and political groups. The new measures limit
automatic increases in wages, rents, and mortgage payments to 80 percent of
prevailing inflation, link supplementary wage increases more firmly to produc-
tivity, and allow some companies to negotiate wage contracts. Interest rates for
bank loans will be reduced. In addition, the administration recently cut public
spending, increased taxes, adjusted prices, and reduced credit subsidies. The
austerity policies have enabled Brazil to reach an agreement with the IMF for
release next month of a delayed loan disbursement. The agreement will
facilitate a further extension of repayment on a $400 million short-term loan
from the Bank for International Settlements.
The prospect of a severe decline in real wages may provoke further strikes and
demonstrations. The government is politically more vulnerable with President
Figueiredo out of the country for medical treatment, but senior officials in
Brasilia are likely to continue the austerity program. By partially curtailing
indexed wage increases, Brasilia probably can obtain some short-term relief
from spiraling prices. More restrictive fiscal and monetary policies will be
needed, however, for more lasting effects.
Bangladesh Crop Bangladesh grain production this year will reach 16.2 million tons-nearly all
Prospects Bright rice-and will surpass last year's harvest of 15.1 million tons, according to
estimates of the US agricultural attache in Dhaka. The increase will more
than match population growth despite a smaller area sown to grain. Production
improved primarily because of favorable weather but also as a result of an ex-
pansion of irrigation facilities and increased fertilizer use. Nonetheless, Dhaka
will still need to import roughly 1.5 million tons of grain this year, down from
last year's record level of 2.1 million tons.
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Hungarian Industrial Hungary this month decentralized the Csepel Iron and Metal Works, a large
Reform industrial complex in Budapest, into 13 enterprises. Csepel presently employs
about 20,000 workers and produces roughly $500 million worth of goods
annually. This latest reorganization continues Hungary's recent efforts to
improve efficiency through the breakup of trusts and the reduction of
administrative bureaucracy:
? Each of the 13 enterprises will be authorized to allocate funds and resources
independently.
? The firms will handle their own planning, product development, and
marketing.
? Managers will be appointed for a specified term and their ratings and
retention will be based on their unit's financial performance.
? The central management staff will be reduced from 270 to 58 employees.
? A strongly centralized decisionmaking structure will be replaced by a newly
established board of directors supported by groups of experts to present
Csepel's declining performance over the last seven years and its inability to
service debts make it an attractive candidate for reform. The company's
physical location on an island near Budapest suggests it could become a
convenient microcosm to study reforms applicable to other large enterprises.
Though enterprises in Csepel worked independently from 1968 to 1972,
Hungarian reformers probably hope this latest restructuring will be successful
enough to encourage changes in other industrial sectors.
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Key Debt-Troubled LDCs:
Export Response to
OECD Recovery '
The decline in exports of debt-troubled LDCs
during the OECD recession directly contributed to
their deteriorating financial positions and impaired
the LDCs' ability to manage their debt. While
exports will pick up as the OECD recovers, we do
not believe that they will rebound as strongly this
time as they did during the last recovery. This
OECD recovery probably will be more moderate
than the last, and LDC exports will also be held
back by the structural economic changes that have
taken place in the last decade. Indeed, we doubt
that many of these LDCs will be able to regain
their prerecession export growth rates. Consequent-
ly, they most likely will have to constrain imports,
creating domestic political economic strains and
weakening the OECD recovery.
Burgeoning Debt Problems: The Role
of the OECD Recession
LDC debt problems have mounted steadily over the
past two years. For 15 key debt-troubled LDCs,
total debt rose from $215 billion at the end of 1979
to $352 billion by yearend 1982.2 A key factor in
the recent inability of most of these countries to
manage their debt has been the drop in their
exports since 1980. Taken as a group, total exports
of these countries fell from $138 billion in 1980 to
$125 billion in 1982, roughly a 10-percent decline.'
'The 15 countries examined are: Argentina, Brazil, Chile, Costa
Rica, Ecuador, Indonesia, Ivory Coast, Kenya, Mexico, Morocco,
'Data presented in this article were obtained from IMF statistical
publications.
Key Debt-Troubled LDCs: Million US $
Changes in Total Export Earnings
Annual
Average
1976-80
1981
1982
Total
17,744
-928
-12,173
Argentina
1,013
1,122
-1,520
Brazil
2,293
3,161
-3,118
Chile
655
-765
-84
Costa Rica
98
29
-158
Ecuador
304
36
-403
Indonesia
2,961
354
-2,545
Ivory Coast
391
-607
-651
Kenya
138
-206
-157
Mexico
2,533
3,813
2,197
Morocco
185
-55
-324
Nigeria
3,750
-7,015
-3,148
Peru
521
-643
-25
Philippines
689
-86
-686
Venezuela
2,052
904
-1,431
Zaire
161
-970
-120
Nearly all of these countries have experienced
export declines:
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? Foreign sales by Chile, Ivory Coast, Kenya, 25X1
Morocco, Nigeria, Peru, the Philippines, and
Zaire began falling in 1981; by 1982, these
countries together had lost nearly $16 billion in
export sales.
25X1
? Argentina, Brazil, Costa Rica, Ecuador, Indone-
25X1
sia, and Venezuela joined the export decline in
1982. In one year, these countries together lost $9
billion in export sales.
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? Only Mexico had not experienced a decline in
total export sales; even it, however, witnessed a
dramatic slowdown in export growth. Between
1978 and 1981, Mexico's exports rose at a 50-
percent annual rate; since early 1982, sales have
risen only 15 percent
The marked shift in export trends has been an
important, perhaps the key, factor in the debt
problems of these countries. We estimate that had
their exports continued to grow in 1981-82 at the
1976-80 trend, the total in 1982 would have been
$50 billion higher than it was. In contrast, higher
world interest rates added only $15 billion to these
countries' debt service payments during 1980-82.
OECD Recovery and LDC Export Response
Generally, the debt-troubled LDCs' exports to the
OECD have risen during past OECD expansionary
periods-but not until roughly four quarters after
economic recovery has begun. During the 1975-78
recovery, for example, exports to the OECD from
the currently debt-troubled LDCs rose only 1 per-
cent in the first four quarters of recovery even
though real OECD GNP expanded almost 6 per-
cent. After three years of expansion, however,
exports by these LDCs were up by 35 percent ($16
billion) while OECD real GNP had increased less
than 15 percent
This time around we believe the prospects for
export growth are less favorable. On the agricul-
tural front, excessive supplies probably will con-
strain OECD import demand and hold down prices.
Similarly for most industrial raw materials, large
OECD stockpiles, excess LDC capacity, and struc-
tural changes that reduce input requirements are
likely to limit OECD demand and dampen price
increases. Oil exports will be hurt by the weak oil
market and flat oil prices. Manufactured goods, on
the other hand, represent a more stable export
product, and several of these countries have in-
creased their manfactured exports.
Secret
22 July 1983
Key Debt-Troubled LDCs: Percent a
Changes in Exports to the OECD
1976
1st Qtr
1977
1st Qtr
1978
1st Qtr
Total
1.0
38.4
-4.1
Argentina
12.6
61.7
8.8
Brazil
-7.4
54.5
-8.0
Chile
4.5
16.8
25.8
Costa Rica
8.0
38.7
-3.1
Ecuador
-3.9
53.0
20.7
Indonesia
20.1
32.8
0.1
Ivory Coast
0.1
91.6
20.3
Kenya
-5.5
90.5
-2.6
Mexico
19.0
33.4
19.8
Morocco
-20.5
11.5
4.4
Nigeria
12.8
35.5
-28.5
Peru
-21.8
28.4
-5.0
Philippines
- 29.5
36.0
12.9
Venezuela
-12.2
21.1
-14.8
Zaire
-12.3
58.9
2.7
Change in OECD real
GNP
5.6
4.0
3.4
While LDC export sales have not yet picked up, we
believe these countries' export declines have ta-
pered off. OECD-wide industrial output bottomed
out in November 1982 and has risen since. Any
significant upturn in these countries' exports to the
OECD, however, will not occur immediately. If
anything, the export rebound may lag even more
than past experience would suggest, since high
interest rates, low commodity prices, and rising
protectionist trends, coupled with slack conditions
in the raw materials' markets, may dampen any
export pickup in the early stages of recovery
As a result of the lagged response of LDC exports
to the OECD economic turnaround, the remainder
of 1983 and the first half of 1984 probably will be a
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Key Debt-Troubled LDCs:
Estimated Changes in Exports to the OECD
Past Performance
During OECD Recession
Projected Performance
During OECD Recovery
Average
1981
1982
1983
1984
1985
Annual
1971-80
Average
-5.6
-6.5
3.1
13.0
18.2
21.7
Argentina
-0.9
-2.1
-15.6
13.4
14.9
13.6
Brazil
5.7
-0.7
-1.4
14.0
19.7
19.3
Chile
-17.9
3.0
-6.4
13.5
18.5
15.8
Costa Rica
-0.8
-6.0
-2.0
10.6
15.1
14.6
Ecuador
11.1
-15.5
6.9
14.7
21.2
21.2
Indonesia
3.2
-14.6
-1.7
18.1
26.6
37.5
Ivory Coast
-18.6
-7.9
-0.5
8.6
12.1
18.5
Kenya
-19.7
-4.8
5.1
10.7
15.2
20.1
Mexico
20.9
10.6
16.5
20.1
29.4
27.9
Morocco
-14.2
-2.2
-1.6
9.8
13.9
17.6
Nigeria
- 28.9
-13.4
5.7
13.0
18.5
45.3
Peru
-10.5
-3.3
7.8
11.7
16.6
14.4
Philippines
-1.3
-9.0
-1.7
11.8
16.9
18.0
Venezuela
9.3
-20.4
14.3
13.1
18.8
25.5
Zaire
-21.5
-11.7
21.8
12.6
16.1
15.5
Change in OECD real GNP
1.5
-0.3
2.0
3.7
4.0
3.3
difficult period for debt-troubled LDCs. Our esti-
mates indicate that even if OECD real economic
growth averages an annual rate of 2.8 percent
during the four quarters of 1983-a rate that
would yield year-to-year real growth of 2 percent-
the aggregate exports of the 15 countries this year
will be barely higher than last on a year-over-year
basis. In this case, over half the countries would
have lower OECD sales this year than last. Mexico
and Venezuela are the candidates most likely to
expand their exports to the OECD this year; both
export oil to the United States and should benefit
from increased US industrial activity.
The Longer Term Outlook
If OECD economies continue to expand through
1985, the export picture of the debt-troubled LDCs
will begin to improve. With approximately 4 per-
cent a year OECD growth in 1984-85, we estimate
that their exports to the OECD will rise about $40
billion by the end of 1985, a 40-percent increase
over the 1982 export low of $102 billion and
roughly a 25-percent increase over the 1980 peak of
$113 billion. We expect that all of these debt-
troubled LDCs will see some rebound in their
exports to the OECD.
Over the 1984-85 period we expect Mexico to do
the best of the 15 debt-troubled countries. Its
relatively high share of manufactured exports,
which we believe will do best in this recovery, and
its large share of exports destined for US markets
will benefit Mexican export sales, as will Mexico's
rising oil production capabilities. Mexican export-
ers should also benefit from the depreciation of the
peso vis-a-vis the dollar. A healthy performance,
however, will depend on exporters being able to get
the foreign inputs needed for production
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We believe Costa Rica, Ivory Coast, Kenya, and
Morocco will do the least well of the 15 LDCs.
Each relies on agricultural products for a signifi-
cant share of export earnings, and we do not expect
that agricultural prices will rise as they did during
the last recovery. Expanded plantings and excessive
stocks may even perpetuate the existing depressed
prices into 1985.
We do not believe that the export recovery will be
strong enough to put the debt-troubled LDCs back
on their prerecession growth path. The 16-percent
average annual growth in exports we project for
1984-85 will be well below the 22-percent average
annual increase experienced during the 1970s.
Chile, Peru, and Zaire, however, could attain ex-
port growth in 1984-85 comparable to that which
occurred during the 1970s. These countries are
likely to benefit if copper prices rebound as OECD
construction and industrial activity accelerate. The
medium-term export potential of three of the major
oil exporters-Indonesia, Nigeria, and Venezue-
la-will depend heavily on conditions in the uncer-
tain oil market. We think it most likely that oil
prices will remain relatively stable over the next
few years but they could nosedive if Iran and Iraq
attempt to reenter the market in a large way.
Under these conditions Mexico and Ecuador would
also suffer.
A stronger than expected recovery would be neces-
sary to help many of these LDCs get back on their
prerecession export growth path. It would take, for
example, OECD growth of 3.5 percent in 1983, 5.2
percent in 1984, and 5.4 percent in 1985 for these
LDCs, as a group, to achieve the rapid export
growth to which they were accustomed during past
expansionary periods. If, as is more likely, OECD
growth is only 2 percent in 1983, reaching such
export performance would require more rapid
growth later-about 6 percent a year in both 1984
and 1985. In the past decade the strongest OECD
back-to-back annual performance was only a little
over 4 percent a year.
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Israel: In the Aftermath of
the Doctors' Strike
The recent doctors' strike reflects the fundamental
economic dilemma facing the government-Israelis
have come to expect steadily increasing living
standards despite serious inflation and balance-of-
payments problems. Although consumers fared
well last year, public apprehension has been grow-
ing in recent months because of accelerating price
increases and the spectacle of the doctors' hunger
strike for better pay. The Israeli Government will
have to contend with a foreign exchange crunch,
rising unemployment, and triple-digit inflation over
the next few years. Since Prime Minister Begin
does not understand economic issues, it will be
difficult for any finance minister to get the support
from Begin that could be crucial in implementing
an effective austerity program. Faced with a diffi-
cult economic situation, Israeli politicians will look
to the easiest way to deal with the problem-asking
the United States for increased aid on better terms.
Background
Until last year, the Begin government successfully
satisfied the key economic expectations of the
Israeli public:
? Real GNP increased at an annual rate of 3.8
percent during 1978-81, while private consump-
tion grew at a 6.0-percent annual rate.
? Real wages increased at an annual rate of 8
percent.
? The unemployment rate ranged from 2.9 percent
to 5.1 percent, a level approaching the upper
limits of public tolerance.
This record was achieved at the cost of:
? An acceleration of inflation from 42 percent in
1977 to triple-digit levels in the past four years;
prices rose a record 133 percent in 1980.
? An increase in the balance-of-payments deficit
for civilian goods and services from $1.3 billion in
1977 to $3.2 billion last year.
Recent Developments
Against a backdrop of near-record inflation, declin-
ing exports, and falling GNP, consumers last year
continued to fare well, mainly because they are
insulated by a pervasive system of indexation.
Apprehension about Israel's economic future has
been growing in recent months, however, because
of accelerating price increases and the spectacle of
the doctors' hunger strike for better pay. Recent
polls indicate support for Finance Minister Aridor
is at its lowest level since he took office two years
ago, and unhappiness over the economy, as well as
with the Army's continuing presence in Lebanon ?
and Begin's lack of zest, has contributed to a
decline in support for Begin's Likud bloc. F__]
Real GNP fell 0.2 percent last year-the first
decline since 1953-and the outlook for this year is
not much better. This poor performance is at least
partly due to slumping exports, which have been
hurt by Aridor's policy of slowing the depreciation
rate of the shekel and by the worldwide recession.
For the first half of this year, commodity export
receipts are 6 percent below the already depressed
levels of the same period last year.
When inflation threatened to set another record
last fall, Aridor adopted a policy of holding price
increases on government-controlled commodities to
a relatively modest 5 percent a month. He also
slowed the depreciation rate of the shekel in order
to slow the rise in import prices. Nevertheless,
prices have risen at an annual rate of 126 percent
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Civilian Goods and
Services Balance
Billion US $
Secret
22 July 1983
during the first half of 1983, and the 13.3-percent
increase in the consumer price index in April was
the largest monthly increase ever recorded. F_
In recent months, Aridor has attempted-with
mixed success-to impose new taxes to pay for
additional government outlays:
? A $50 tax on Israelis traveling abroad went into
effect on 1 April to help pay for higher family
allowances and increased aid to religious schools.
? A 1-percent levy was imposed on the purchase of
foreign currency to provide funds for a new
export promotion program.
Aridor, however, withdrew a proposal to impose a
0. percent levy on checking account withdrawals
to elp cover the cost of keeping Israeli troops in
Lebanon after it became clear that the proposal did
not have sufficient cabinet support. In our view,
Aridor has turned to new taxes not only to keep the
budget deficit from increasing but to raise the
"fiscal conscience" of his cabinet colleagues.
Although the foreign exchange costs of the invasion
of Lebanon were estimated at $350 million by the
Israelis, Israeli balance-of-payments data suggest
that the hoped for increase in financial support
from abroad did not materialize. For the first time
since 1976, unilateral transfers-such as West
German reparation payments and United Jewish
Appeal donations-declined, dropping by $162 mil-
lion to $1.4 billion. Although sales of Israeli bonds
rose $39 million last year, in part because of a
reported new bond issue offering competitive inter-
est rates, Aridor had hoped the increase would be
on the order of $200 million. In recent years, the
Israeli Government has increasingly looked to com-
mercial borrowing, particularly short term, to help
cover the financial gap-$4.9 billion in 1982.' The
US Embassy reports that Finance Ministry offi-
cials admit that short-term borrowing last year
allowed an increase in foreign exchange reserves.
'The financial gap is the sum of the civilian goods and services
deficit, self-financed military payments, and debt repaymentF
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Civilian goods and services balance
-2,504
-2,121
-2,169
-3,200
-3,900
Exports
8,030
9,791
10,439
10,165
9,725
Goods
4,759
5,798
5,903
5,573
5,250
Services
3,271
3,993
4,536
4,592
4,475
Imports
10,534
11,912
12,608
13,365
13,625
Goods
6,769
_7,326
7,250
7,352
7,500
Services
3,765
4,586
5,358
6,013
6,125
Self-financed military imports
250
_ 250
-424
174
-104
Military import payments
1,420
2,018
1,483
2,295
1,930
US military assistance
1,170
1,768
1,907
2,121
2,034
Debt repayment (medium- and long-term)
893
1,025
1,152
1,525
1,635
Financial gap
3,647
_3,396
2,897
4,899
5,431
Sources of financing
4,085
_3,684
3,042
5,242
5,397
Unilateral transfers
1,400
1,474
1,584
1,422
1,530
US economic assistance
980
_ 785
785
785
785
Israeli bonds
414
_ 450
518
557
580
Other capital including net short-term
borrowing
1,240
968
118
2,434
2,502
a Estimated.
b Projected.
Declining exports, combined with increasing im-
ports, will probably add another $700 million to the
civilian goods and services deficit this year, pushing
it to $3.9 billion. Because traditional sources of
foreign exchange-US aid, transfer payments, and
Israeli bond sales-are unlikely to increase enough
to cover the larger deficit, the Israeli Government
will again look to commercial bank loans to avoid
drawing down foreign exchange reserves. We agree
with the US Embassy's judgment that one of the
key unknowns facing Israeli officials is the impact
of current uncertainties in international financial
markets on bankers' attitudes toward Israel.I
The Doctors' Strike and Israeli Wages
strikes led to piled-up garbage on the streets.
The doctors' strike threatens to unravel the public-
sector wage agreement signed late last year. Aridor
has been trying to convince the Histadrut-the
large labor organization-to agree to wage re-
straint in an attempt to prevent real wages from
increasing and adding to inflationary pressures. But
Histadrut officials-believing that no Israeli gov-
ernment can afford to let unemployment rise above
current levels-have rejected Aridor's ideas. Aridor
was forced by Begin, according to press reports, to
give in to the Histadrut on both a public-sector
wage agreement late last year and a new cost-of-
living formula early this year after public-employee
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Despite Finance Ministry claims to the contrary,
the new cost-of-living formula will add to inflation-
ary pressure this year because accelerating price
increases will be reflected in wage adjustments
sooner. Quarterly cost-of-living adjustments will
now be based on the increase in the consumer price
index during the previous three months instead of
the quarter-to-quarter change in prices. As before,
the wage adjustment will equal 80 to 90 percent of
the price increase. Moreover, we believe that as
long as the Histadrut can negotiate additional wage
gains at the industry and plant levels, labor will be
in a position to bargain for additional wages to
compensate for inflation.
According to the US Embassy, Aridor had been
unwilling to give the doctors, who have demanded a
100-percent salary increase, much more than the
22 percent granted in the public-sector agreement
because he feared that government employees will
demand a similar raise. Press reports state that
Begin finally forced Aridor to agree to binding
arbitration with the doctors after hearing that two
severely injured children were turned away from
hospitals. Aridor had vigorously opposed arbitra-
tion, claiming that arbitrators had no right to make
government policy.
The Finance Ministry projects that doctors' pay
will probably increase by 60 percent, adding $255
million to government outlays, according to a press
report. Aridor has publicly stated that he will
finance higher doctors' pay by reducing other
expenditures. The Embassy reports that some peo-
ple believe he would like to take the cost out of the
budgets of those ministers who failed to support his
approach to the doctors' strike. We do not believe,
however, that the Cabinet will approve significant
Aridor will be hard pressed to prevent other groups,
from achieving similar gains, in our view. Israel
Kessar, Deputy Secretary General of the Hista-
drut, told an Embassy officer that the Histadrut
wants to dampen wage expectations and delay
presenting new demands as long as possible. The
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22 July 1983
Embassy reports that, before the strike, union
leaders had privately said they were willing to
accept a settlement for the doctors in the 35- to 40-
percent range without demanding similar increases
for their members, but media speculation that the
settlement could reach 60 percent has brought
pressure from the rank and file for a more militant
stance. We believe Histadrut leaders will,have to
try to accommodate these demands.
Underlying the wage struggle is an egalitarian
ethic that has been a cornerstone of Israeli policy
since the establishment of the state by emigres
from countries where Jews were discriminated
against. For example, Israeli television broadcast
until recently almost exclusively in black and white,
necessitating the purchase of expensive equipment
to "erase" the color from programing purchased'
abroad, because color television was believed to be
elitist. The policy was changed only after most
Israelis purchased color television sets in order to
watch color broadcasts from Jordanian TV.
So that no group of workers obtains an "unfair"
salary advantage over others, Israel's wage patterns
are based on a series of interrelated agreements.
For example, various finance ministers have op-
posed raises for teachers, even though there is a
consensus that they are underpaid, because engi-
neers' wages are directly linked to those of teachers
and technicians' pay is linked to the engineers, and
so forth. Kessar told an Embassy officer that he
wants to delay presenting new wage demands be-
cause he is concerned that disruption of traditional
linkages among various groups could lead to chaos
in the labor market. A government official told a
US Embassy officer earlier this year that this wage
linkage, along with frustrating anti-inflation poli-
cies, results in labor market inefficiency.
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Reducing social welfare spending would also run
counter to movement toward an egalitarian society.
These expenditures, which account for 40 percent
of the government's budget, include outlays for
education, pensions, investment incentives for de-
velopment areas, and various subsidies. Aridor has
tried to make cuts in this portion of the budget, but
cabinet ministers with their own constituencies to
protect have successfully blunted his efforts. Debt
servicing-at 35 percent-of outlays cannot legally
be reduced, and defense-at 25 percent-is unlike-
ly to be cut as long as Israeli and Syrian troops
We believe the Israeli Government will have to
continue to contend with a foreign exchange
crunch, rising unemployment, and triple-digit infla-
tion for the next few years. Because rising unem-
ployment holds the greatest potential for creating
political problems for the government, policymak-
ers would probably act relatively quickly to deal
with an increase in joblessness, especially since
elections are required by the fall of 1985. Balance-
of-payments problems, on the other hand, are not
as visible as rising prices or laid-off workers, and
many voters do not understand the issues. Thus,
Israeli politicians will probably postpone any signif-
icant austerity program until dwindling foreign
exchange reserves leave them no alternative. The
pervasive indexation system will allow politicians
the luxury of decrying rising prices while avoiding
the political costs of doing something about them.
The policies required to deal with one problem
could easily exacerbate the others. An austerity
program to deal with the balance-of-payments situ-
ation or to fight inflation would lead to even higher
unemployment. Expansionary policies designed to
deal with unemployment would push prices up and
lead to a deterioration in the balance of payments.
Aridor's current shekel policy is an example of this
problem; while designed to reduce the inflation
rate, it is aggravating the balance-of-payments
situation through its impact on trade.
The Begin government has yet to demonstrate a
determination to tackle its economic problems. An
austerity program announced by former Finance
Minister Hurwitz in late 1979 fell apart a few
months later as the Cabinet thwarted his efforts to
cut government spending and inflation soared. Be-
cause Begin does not understand economic issues
and takes little interest in the economy, it will be.
difficult for any finance minister to get the support
from Begin that could be crucial in implementing
an effective austerity program. In the few instances
when Begin has involved himself in economic policy
disputes, he has taken the politically expedient
path. As a result, we believe economic policymak-
ers will probably delay major policy adjustments as
long as possible.
Implications for the United States
Faced with a difficult economic situation, Israeli
politicians will look to the easiest way to deal with
the problem-asking the United States for in-
creased aid on better terms. Additional assistance
would allow the Israelis to postpone dealing with
their balance-of-payments problems. It could en-
able the government to pursue expansionary poli-
cies to deal with rising unemployment. In addition,
US aid is cheaper than commercial borrowing and
probably enhances Israel's ability to borrow com-
mercial funds.
If US economic aid remains at current levels, we
estimate Israel will need roughly $1.5 billion a year
in new commercial credit, primarily from US
banks, to avoid drawing down foreign exchange
reserves. Bankers may be reluctant to provide this
additional credit, however. Many reportedly are
already concerned about Israel's mounting foreign
debt, growing civilian goods and services deficits,
and accelerating inflation. This attitude will be
reinforced if they perceive that Israel remains
unwilling or unable to take the measures needed to
deal with its economic problems. Strains in the US-
Israeli relationship that threatened to limit Wash-
ington's willingness to come to Israel's rescue in a
financial pinch would make bankers even more
reluctant.
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If additional US aid and commercial funds are not
sufficient to ameliorate Israel's balance-of-pay-
ments situation, Israeli policymakers will be forced
to implement austerity measures. An austerity
package that increased unemployment and sub-
stantially reduced living standards could cause
serious political problems for the Begin govern-
ment. Israeli officials might then be tempted to use
the United States as a scapegoat for the country's
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The Slowdown in Soviet Industry,
1976-82
In trying to revive Soviet economic growth, the new
leadership under General Secretary Andropov must
contend with mistakes in investment planning, raw
material and energy constraints, and transportation
bottlenecks. Industrial growth, which has been
decelerating since World War II, slowed unusually
sharply during 1976-82. Annual growth in industri-
al production averaged over 9 percent during the
1950s, 6.4 percent during the 1960s, and 5.9
percent in 1971-75. In 1976-80 the annual rate was
only 3.2 percent, and it slowed to 2.4 percent in
1981-82.
Even more dramatic was the slump in productivi-
ty-the efficiency with which combined inputs of
capital and labor are used. Despite strenuous ef-
forts, the Soviets have been unable to halt this
deterioration, and factor productivity declined at
an average annual rate of 1.2 percent during 1976-
82. Prospects for reversing the decline in the 1980s
are not good. Although industrial growth in 1983
probably will be above 1982's low 2.2 percent, a
continued downward drift in industrial growth and
productivity is likely.'
The Turning Point
The surprising slowdown, which occurred within
about 18 months in all of the 10 major branches of
industry, was precipitated by the government in
1975 when it decided to follow a new strategy for
economic growth. Output gains were to depend
mainly on improved efficiency; in the past, most of
the, growth in output had been achieved simply by
massive increases in new plant and equipment and
mobilizing more workers.
' This paper rests largely on a series of industrial case studies by the
Office of Soviet Analysis.
The decision was implemented vigorously in
1976-the first year of the new five-year plan-
through a sharp cutback in the rates of growth
planned for total new fixed investment and for
industrial output. The planners evidently believed
that, if they reduced the pressure for ever greater
output for a while, the industrial sector could raise
its efficiency and improve the quality of its prod-
ucts, paving the way for an upsurge in industrial
growth rates in subsequent years.
The new strategy threw into sharp focus serious
shortcomings in the investment process, and these
played an important role in the industrial slow-
down. Along with slowing investment growth, the
strategy concentrated on renovating existing plants
rather than building new ones. The scramble for
allocations that ensued severely weakened the gov-
ernment's control over investment projects. A re-
allocation of investment in midplan (to finance a
crash program to develop energy in West Siberia)
made matters worse. The results were an upsurge
in the volume of unfinished construction, a large
falloff in additions to capacities, and many useless
renovations that increased neither capacity nor
efficiency. In general, the replacement of old ma-
chinery with new, more efficient types moved no
faster than before.
Converging Constraints
Aside from these mistakes in investment planning,
industrial growth was seriously damaged by the
convergence of three critical constraints, which
Soviet policy failed to head off. The first, and
possibly most decisive, was a growing shortage of
several key raw materials-iron ore, steel, lumber,
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Growth in Outputs, Inputs, and Productivity in Soviet Industry
-Output
-input
-Productivity
-9
I I I I I 1
-9
-6
-9
-6 1 1 1 t I I i I
-9 1971 75
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-6 1 1 1 1 1 1 1 1 1
9 1971 75 80 82a
-6 1 1 1 1 1 1 1 1 1
-6 -9
-6 1 1 1 1 1 1 1
-9 1971 75 80 82a
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and nonmetallic minerals. These and other short-
ages developed largely as a consequence of the
emphasis on producing intermediate and final prod-
ucts to the relative neglect of investment in raw
materials production. In particular, the planners
had failed to take adequate account of the rapidly
growing share of investment needed simply to offset
depletion in the extractive industries. Growth of
output of extractive raw materials, which had been
slowing for many years, fell sharply after 1975.
Shortages of these critical inputs, along with deteri-
oration of their quality, began to limit growth of
production first in steel, forest products, and con-
struction materials, and then in the processing
industries themselves-chemicals, machinery, and
paper. In addition, poor harvests in 1975 and again
in 1979-82 led to raw material shortages in con-
sumer goods industries.
A second major constraint was in the supply of
energy. Although many years of debate over energy
development strategies showed some attention to
the subject, the planners apparently did not realize
how fast the problem was developing or the huge
resources that would be required to cope with it. As
fuel shortages began to plague the industrial sector
after 1975, the planners responded with conserva-
tion campaigns-largely unsuccessful-and the
crash program in West Siberia. Coal proved to be a
particularly serious constraint. Its worsening quali-
ty and reduced availability cut the production of
electricity, with power outages, brownouts, and
other malfunctions becoming more frequent and
adversely affecting most branches of industry.
In addition, the electric power network operated
under increasing strain as its reserve capacity
decreased-a consequence of past failures to add
new capacity. Unreliability in fuel and power sup-
ply became widespread, causing particular difficul-
ty in the severe winter of 1978/79 and again in
1981/82.
Rapidly developing bottlenecks in rail transporta-
tion proved to be a third serious constraint on
industrial growth and efficiency. Frequent failure
of the railroads to meet shipment schedules led to
intermittent plant shutdowns, production-line dis-
ruptions, and idle machines and workers. After
years of relative investment neglect and improper
investment allocations, the railroads finally neared
the point of breakdown. Freight density-the ca-
pacity of railroads to move freight with existing
lines and technology-increased by 27 percent in
1971-75 but essentially stagnated in 1976-80. The
leadership's growing concern over the worsening
transport situation was reflected in several decrees,
some increase in investment, and in 1982 the
dismissal of the Minister of Railroads and designa-
tion of a Politburo member to oversee the sector.
Other developments added to the difficulties and
took their toll on industrial growth:
Military priorities. The priority claim of the
military on production, fuel supplies, and trans-
portation is a permanent burden, and the strain
was worsened in 1979-82 by accelerated military
demands for Afghanistan and the Soviet response
to the events in Poland. The industrial slowdown
almost certainly played a role in halting the
growth in military procurement after 1975.
Changes in the rules of the game. Managerial
staffs of enterprises were burdened as never
before by frequent changes in the rules governing
incentives, with multiple campaigns to conserve
on everything at once, with orders to join one or
another large-scale experiment to test some new
working arrangement, with pressure to reorganize
or merge enterprises, and with accelerating de-
mands to set up auxiliary farms and (in heavy
industry) to produce more consumer goods. The
constant change in the rules increased uncertain-
ties and made incentive schemes less useful in
stimulating efficiency. The administrative over-
kill, coupled with the operational difficulties
faced by producers, almost certainly weakened
incentives for innovation. Finally, problems in
motivating and disciplining workers also were
evident-but whether they became more difficult
in this period is hard to assess.
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? Growing difficulties in planning. The ability of
Gosplan to forecast industrial growth with rea-
sonable accuracy became progressively worse
during 1976-82 for many key products as well as
for overall growth. By CIA measures, industrial
growth has failed to meet planned targets in
every year since 1973-and by growing margins.
? Foreign trade rigidities. Rigidities in the conduct
of foreign trade (five-year bilateral agreements in
CEMA trade and a financial conservatism that
blocked additional hard currency debt) limited
any effort to use imports to alleviate domestic
shortages.
Most of the developments that converged to slow
industrial growth and productivity during 1976-82
will continue to do so for the rest of the 1980s and
may intensify. According to the five-year plan,
industrial investment will grow more slowly in
1981-85 than it did in 1976-80, but industrial
output is to grow more rapidly-by 4.7 percent per
year instead of the 3.2 percent achieved in 1976-80.
Except perhaps for oil and gas, however, planned
investment will be insufficient to create the capaci-
ties needed to achieve that accelerated growth in
output. The current plan retains the policy of
devoting the bulk of new investment to renovating
existing facilities; this means, under Soviet condi-
tions, that much of it may be wasted, as apparently
it was during the last plan period.
Given the severity of the present imbalance be-
tween the supplies of raw materials and energy and
the capacities to produce finished goods, shortages
are likely to continue, and the quality of many raw
materials will probably deteriorate. In particular,
the likely slow growth of steel production will
constrain the growth of machinery and hence of
investment and perhaps also weapons production.
Good harvests, if they come, will raise growth rates
in the food-processing branch, but not much in
industry as a whole. The railroads will continue to
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22 July 1983
operate under severe strain; indeed, there is no
clear indication that the planners have even agreed
on how to address their accumulated problems.
Four other factors will add to industry's strained
situation: greatly reduced availability of labor as a
consequence of demographic factors; the continued
sizable priority claim of the military on materials,
investment, and transportation; accelerated pres-
sure on enterprises to economize on all resource
inputs simultaneously; and incentive schemes of
Byzantine complexity. Although the campaign re-
cently launched by Andropov to tighten worker
discipline may have favorable effects initially, such
tactics seem unsuited to the long-range task of
solving chronic productivity problems. Major sys-
temic reforms, which might provide a solution in
the long run, are not on the leadership's agenda as
yet. Even if launched, they would be unlikely to
boost industrial growth and productivity for many
years.
Sluggish industrial growth will slow the growth of
GNP through the 1980s. The Soviets will probably
adjust to this, as they have already in the past, by
dealing fairly evenhandedly with the three major
claimants-consumption, defense, and invest-
ment-allocating roughly similar shares of annual
GNP increments to each. Such "muddling
through" should enable them to maintain some
forward momentum for consumption, to continue
upgrading weapons capabilities, and to support
growth with additional investments. Alternative
strategies not only would be risky, but probably
could not even be carried out.
The Soviets also will continue to import technology
from the West to relieve shortages in critical areas
such as finished steel and oil and gas equipment.
However, the real growth in purchases will be
constrained both by slower growth of hard currency
earnings and by continued Soviet reluctance to pile
up debt to the West.
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Honduras: Fledgling Economic
Development Put on Hold
Since the start of 1980, the weak global economy,
regional turmoil, and restrictive government ac-
tions have taken their toll on the Honduran econo-
my. Low world commodity prices have reduced
export earnings and curtailed imports of consumer
and producer goods alike. High international inter-
est rates and the rapid buildup in external debt in
the 1970s have increased debt servicing require-
ments. Capital flight-in response to the deteriora-
tion in regional and domestic economic, political,
and security conditions-worsened the foreign ex-
change bind, particularly in 1980-8 1. At the same
time, the growing apprehension of international
lenders and the government's soaring budget defi-
cits financed by domestic borrowing have limited
the availability of credit to the private sector. As a
result, economic activity has slowed-the
1.2-percent decline last year was the first drop
since 1975-and the unemployment rate, now ap-
proaching 25 percent, according to US Embassy
reporting, has risen moderately.
If, as we expect, security conditions remain tense
through 1984, our calculations show that Honduras
will require up to $450 million in new foreign
financing in 1983 and over $500 million in 1984 to
support the 3-percent annual economic growth
necessary merely to hold per capita incomes fairly
steady. Even with projected balance-of-payments
support from the United States and the IMF,
however, Honduras is unlikely to attract foreign
financing of this magnitude. In these circum-
stances, we believe economic activity will decline
slightly again this year and perhaps stabilize in
1984.
The Economy Sputters, 1980-81
Honduras's economic boom and development drive
of the late 1970s stalled in the early 1980s, largely
because external factors turned negative. By 1981,
weakening commodity prices had curbed export
earnings, particularly for important coffee and beef
sales, while sharply higher petroleum costs sopped
up larger sums of foreign exchange. Meanwhile,
regional upheaval had started to scare off potential
foreign lenders and investors alike, had led to
increasing capital flight, and, by choking Central
American Common Market (CACM) trade,' had
further disrupted exports.
Domestic factors also began to squeeze economic
activity. Uncertainty over the outcome of the No-
vember 1981 presidential elections-the first in
nearly a decade-further undermined the business
climate. Moreover, the public-sector deficit bal-
looned as growth in trade and income tax receipts
slowed, and the government-trying to stave off
the threat of domestic unrest-undertook new
social programs, increased minimum wages for
public-sector employees, and helped to house and
feed Salvadoran and Nicaraguan refugees fleeing
internal strife. Rather than substantially expand
the money supply to close the deficit, the govern-
ment dipped heavily into domestic money markets,
further squeezing credit availability to the private
sector. As a result, real GDP growth fell from 2.8
percent in 1980 to less than 1 percent in 1981,
according to the latest official figures.
2 Honduras has gained fewer benefits from CACM than other
Central American countries. Sales to and purchases from CACM
countries generally account for less than 10 percent and 15 percent,
respectively, of Honduras's total exports and imports. Many of the 25X1
country's manufactured products, however, are sold regionally.
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Gross International Reserves
Million US $
Mining 2.2
Manufacturing
16.9
Even as the pace of economic growth slowed, the
balance-of-payments position deteriorated sharply.
Export earnings grew moderately in 1980, but
declined close to the 1979 level the next year as
commodity prices weakened. Imports were whip-
sawed in tandem; rising over 20 percent in 1980,
because of higher oil prices, public investment
expenditures, and extraordinary food purchases,
imports fell 6 percent in 1981. The decline came as
economic activity slowed, foreign exchange controls
were instituted, public investment outlays dropped
sharply, food imports declined, and petroleum pur-
chases fell in the wake of pricing disputes between
the government and Texaco-the country's only
refiner.
Investor and lender jitters and problems associated
with securing IMF funds curbed capital inflows.
Increasing capital flight (especially as panicked
holders of other Central American currencies tried
to siphon their foreign exchange out of the region
through Honduras) merely amplified foreign pay-
ments difficulties. As a result, gross international
reserves fell for the first time since 1970, and, by
yearend 1981, Tegucigalpa only had enough for-
eign exchange to cover six weeks' worth of imports.
The January 1982 inauguration of a civilian, freely
elected administration headed by Roberto Suazo
Cordova led to a reorientation of foreign and
economic policy. The President entered office upon
a pledge of fiscal responsibility, a willingness to
negotiate with the IMF for desperately needed
funds, and a verbal commitment to "reprivatize"
the economy by reducing the role of the public
sector. Suazo was prodded by the IMF to adopt
measures to cut the budget deficit, and the admin-
istration undertook laborious negotiations with the
IMF that yielded about $110 million under a 14-
month standby and compensatory financing
package.
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Honduras: Foreign Financing Gap Million US $
Net transfers and -165 -213 -188 -215 -240
services
on Banco Financiera Hondurena, a large commer-
cial bank forced into liquidation in late 1980 by
mismanagement. US Embassy reporting indicates
that domestic business confidence soon grew as the
private sector responded to Suazo's initiatives.
The economic slowdown proved too deep-seated to
arrest quickly, and real GDP, according to the
latest official statistics, contracted 1.2 percent in
1982-the first decline since 1975, according to
IMF statistics. Real per capita income dropped
nearly 5 percent, and unemployment, according to
US Embassy reporting, approached 20 percent by
the end of the year. Construction activity was hit
hardest, falling 4 percent in real terms, as increased
government investment expenditures failed to offset
the worsening private-sector slump. Manufactur-
ing, cushioned in part by drawdowns of inventories
of raw materials and producer goods and by the
slight import substitution that came with tightened
import controls, dropped by only 1 percent. Agri-
culture was the only major sector to grow last year;
Financial gap -302 -432 -436 -335 -390 still, real value added, according to preliminary
Net direct investment 28 6 -4 -3 government data, expanded by little more than 1
Medium- and long-term 268 380 351 279 percent, even with good weather and high govern-
loans .
Net short-term capital, 31 -13 40 70
including errors and om-
missions
a Estimated.
b Projected, assuming 2-percent economic decline, low world com-
modity prices, and the maintenance of current backlogs of foreign
exchange applications.
With IMF financing in hand, Honduran officials
met with foreign bankers to begin rescheduling
some $120 million of costly commercial debt-the
legacy of the unbridled borrowing of the late 1970s
by public enterprises. The government also took
more control over future borrowing activities of
these entities. In another attempt to reassure lend-
ers, the administration settled outstanding claims
Fortunately for Suazo, the measures to cut imports
took hold well enough to yield an improvement over
1981 in Honduras's balance of payments. Export
earnings plummeted almost 15 percent, to $684
million, as restrictive international quotas and low
prices curbed coffee revenues as meat producers-
responding to low US prices-slashed sales, and as
nonagricultural exports continued to contract. In-
terest and amortization payments on external debt 25X1
added to the country's foreign exchange woes. A
25-percent drop in imports, however, resulted in a
small trade surplus, and the financial gap (current
account plus debt amortization) fell to a more
manageable $335 million.
Even so, Tegucigalpa had difficulties finding
enough financing to close even the smaller gap.
According to government statistics, official capital
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inflows increased only slightly, despite the disburse-
ment of $68 million under the IMF programs, and
$89 million from the United States, (including $35
million in supplemental funds under the Caribbean
Basin Initiative). In addition, according to official
figures, foreign lenders slashed disbursements of
medium- and long-term loans to the private sector
by 70 percent.
Logjammed import and foreign exchange applica-
tions, the sharp slowdown in purchases, and the
infusion of funds from the IMF and the United
States toward the end of 1982 relieved some pay-
ments pressure and allowed international reserves
to grow about 10 percent. As a result, by the end of
the year, the import cover had stretched slightly, to
the equivalent of two months' purchases. The short-
age of foreign exchange from official sources,
however, led to the appearance of a parallel mar-
ket.
Several factors worked to lessen the impact of
economic retrenchment on the Honduran consum-
er. The government, for example, propped up pri-
vate consumption somewhat through selective im-
port controls that favored purchases of raw,
intermediate, and essential consumer goods over
capital equipment. Moreover, the US Embassy has
reported that some locally produced items-espe-
cially clothing, processed foods, cosmetics, and
soaps and detergents-were, on a very small scale,
substituted for previously imported goods. Barter
trade also emerged. Despite the removal of price
controls on a wide range of goods, inflation re-
mained below 10 percent as the government kept a
tight rein on the money supply, demand declined
with the recession, and a good basic grain harvest
moderated food price increases.
Prospects Through 1984
Economic prospects through 1984 turn on the
maintenance of internal security in the face of
regional turmoil and, more importantly, the avail-
ability of foreign exchange and credit. Regional
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22 July 1983
turmoil presents three immediate threats to Hondu-
ran internal security:
? Increasing tensions along the Honduran/Nicara-
guan border, as Honduran-backed insurgents
seek to topple the Sandinista regime.
? Potential revolutionary spillover from El Salva-
dor, should Salvadoran guerrillas help Honduran
terrorists again.
? The security threat arising from the potential
actions of the small, but active, Honduran ex-
treme left, which is receiving substantial Cuban
and Sandinista support.
Although the risk of a sudden change is substantial,
on balance, we judge that the internal security
conditions in Honduras will remain delicate but
manageable well into 1984. Under these circum-
stances, we judge that foreign business confidence
will be shaky and that domestic business will
remain constrained by foreign exchange and credit
shortages. In the absence of much new private
investment, economic growth through 1984 would
be contingent on substantial increases in foreign
exchange aimed at easing the pent-up demand for
imports.
Depending on whether world agricultural prices
remain low or recover somewhat, we project that
total export earnings will be $650-710 million this
year and next, well below the $850 million high in
1980. Several factors, however, will continue to
damp export earnings somewhat over the next few
years.
? Storm damage in March could reduce banana
earnings more than 10 percent in 1983, according
to our calculations; unless multinational fruit
companies replant quickly, a significant increase
in export volume next year is unlikely.
? Coffee sales will be curbed by restrictive quotas
set by the International Coffee Organization
(ICO) and by the low prices received for non-ICO
exports.
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? Beef exports will continue to be limited by low
US prices.
? Sugar sales will be constrained by quotas set
under the International Sugar Organization; the
US quota, which is pegged above the world price,
however, will provide additional relief (estimated
at $7-8 million) after Nicaragua's quota is re-
apportioned in October.
? Manufacturing exports will remain crippled by
import shortages and the shrinking CACM
market.
Moreover, recent drought conditions in southern
Honduras could cut production of basic grains and
necessitate higher food imports this year.
At these export levels and with the continuation of
the current internal security situation, we calculate
that Honduras would require up to $450 million in
foreign financial support in 1983 and over $500
million in 1984 to support 3-percent economic
growth. Although financing requirements of this
magnitude are not particularly large compared to
other Central American countries, we believe that
Tegucigalpa can cover only about three-fourths of
the 1983 financial gap, barring unforeseen in-
creases in aid levels. We think Honduras could
obtain at least $40 million in new bank loans and
perhaps $300 million in aid, including:
? $58 million balance of payments assistance from
the United States this fiscal year.
? $75 million from other bilateral sources, if past
trends hold.
? $70 million under the IMF standby if the govern-
ment adheres to revenue, spending, and borrow-
ing targets.
? $100 million from multilateral institutions other
than the IMF.
Because the foreign exchange crisis will remain
severe, the Central Bank will probably continue to
administratively curb imports, build up arrears,
and perhaps tap its slender reserve cushion. In
these circumstances, more import suppliers could
begin demanding cash payments, and barter ar-
rangements could become more common.
Honduras: Western Official Million US $
Assistance Disbursed
Total
1978-811978
1979
1980
1981
576.6 127.8
127.3
154.8
166.7
Bilateral (ODA a and
OOF b)
217.6 35.9
43.7
56.1
81.9
United States
112.0 18.0
29.0
22.0
43.0
_
Canada
31.3 7.5
3.6
9.5
10.7
Japan
23.7 4.9
4.1
7.2
7.5
West Germany
16.3 3.4
3.5
4.9
4.5
United Kingdom
12.1 0.6
0.5
0.8
10.2
Other
22.2 1.5
3.0
11.7
6.0
Multilateral (ODA)
235.6 62.1
58.8
58.9
55.8
EC
16.7 1.7
3.2
4.6
7.2
IDA
44.7 8.4
5.7
17.7
12.9
IDB
117.8 45.1
29.4
19.0
24.3
Other
56.4 6.9
20.5
17.6
11.4
Multilateral (OOF)
123.4 29.8
24.8
39.8
29.0
a Official Development Assistant (ODA) is concessional in character
and contains a grant element of at least 25 percent.
b Other Official Flows (OOF), mainly export credits, usually are not
development oriented. If the funds are used for development, the
grant element is less than the 25 percent required for ODA.
Under these financial and security conditions, we
judge that the combined effects of bad weather and
continued import shortages could push economic
activity down as much as 2 percent this year.
Stagnation seems likely for 1984, barring a sharp
rebound in agricultural production.
As a result, the unemployment rate almost certain-
ly will increase beyond the current officially esti-
mated 25 percent. Labor unrest could grow; some
strikes have been threatened already. Tensions
would be further exacerbated if recent drought
conditions sharply cut the production of basic
grains and sufficient food imports are not forth-
coming. Moreover, because the Agrarian Reform
Institute (INA) is strapped for the funds needed to
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Adult Literacy Population Growth Rates, 1970-80
Percent Average annual percent
Per Capita GNP, 1981
Us $
Infant Mortality Rate, 1981
Per thousand live births
154
expropriate land legally, peasants, as in the past,
could step up land invasions. Continued economic
deterioration also could undermine popular support
for the government-now strong in response to
recent Honduran/Nicaraguan border incidents.
Even if security conditions improved markedly and
for a sustained period of time, we still believe
economic recovery would prove difficult to attain
any time soon. We think that foreign business
confidence would revive only gradually, even if
improved security in Honduras occurred simulta-
neously with a regional trend. Moreover, we believe
the demand for foreign exchange would continue to
be high, and that financing would remain tight.
Import needs would increase as businessmen and
farmers began to replenish inventories of producer
inputs and replace wornout stock. Moreover, the
government would have little flexibility to cap the
overall rise in imports because our projections
already have assumed only small increases in con-
sumer purchases.
On the other hand a sustained deterioration in
domestic security would jolt the country's already
weakened economy, substantially boosting aid re-
quirements. Unless substantially higher aid were
forthcoming, we believe the government .would be
forced to retrench financially by increasing defense
spending at the expense initially of investment
projects, and later of social services. Moreover, we
judge that business confidence would dwindle and,
although many businessmen probably would try to
outlast the upsurge in violence, we think that the
flight of remaining capital would accelerate. In
addition to producer goods shortages, manufactur-
ing could be hit by terrorist-induced disruption
directed toward energy supplies and transport
routes. Insurgent harassment aimed at direct crop
damage and intimidation might be added to the list
of troubles plaguing agriculture. A deterioration in
domestic security also could pressure the military
to greater involvement in the political process and
possibly affect unfavorably the presidential election
scheduled for 1985.
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22 July 1983
Urbanization, 1980
Percent
3.5 36
Labor Force in Agriculture, 1980
Percent
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Private Sector I F-
Despite Prime Minister Robert Mugabe's self-
styled commitment to Marxism-Leninism, he has
pursued relatively benign policies toward the Zim-
babwean private sector since he came to power
three years ago. We believe that Mugabe recog-
nizes the crucial role of the private sector in the
economy and that he wants to avoid any severe
economic dislocations that might result from turn-
ing too quickly to socialism. Mugabe's government
has avoided imposing centrally dictated production
quotas, investment targets, or other trappings of
socialism on the private sector. In this environment,
the economy boomed during the first two years of
independence but slowed sharply in 1982 because
of global recession and a profit squeeze caused by
the government's unwillingness to ease price con-
trols in the face of rising wage costs.
We believe that, so long as Mugabe is in power,
Zimbabwe will continue to tolerate a mixed econo-
my but that his political commitment to improve
the living conditions of blacks and to expand
government into mining, manufacturing, and farm-
ing will retard economic growth even after drought
conditions ease and demand for minerals picks up.
A key indicator of a turn to more radical policies
would be the resignation of Mugabe's principal
economic adviser, Bernard Chidzero, who has
played a large part in keeping Zimbabwe's econom-
ic policies on a pragmatic course. In any case,
potential foreign investors will continue to hold
back, in our judgment, keeping economic growth
well below the rate that would be achievable if the
government gave greater incentives to private en-
terprise and if Mugabe moderated his rhetoric. We
estimate that economic growth, which will be near
'This article summarizes a forthcoming Intelligence Assessment of
the same title.)
zero this year, probably will reach no more than
about 3 percent in 1984, assuming good weather
and improved mineral exports.
Vigorous Private Sector
Private enterprise remains the backbone of the
Zimbabwean economy, accounting for roughly
three-fourths of the country's GDP, according to
our estimates. All agriculture, manufacturing, min-
ing (except coal), construction, tourist services, and
wholesale and retail distributing, and most banking
and other financial firms are wholly owned and
operated by private corporations or individuals.
There are about 15,000 private commercial farms
and ranches in the country, including 10,000 small-
scale farmers, according to a recent report from the
US Agricultural Attache for Zimbabwe. We esti-
mate that there are also about 1,500 privately
owned manufacturing firms and 7,000 to 8,000
retail establishments, including hotels and restau-
rants.
Many of the largest private firms are owned by
foreign corporations, and some are widely diversi-
fied throughout the economy. Union Carbide of the
United States, Turner and Newall and Rio Tinto of
the United Kingdom, and the Anglo American
Corporation of South Africa dominate Zimbab-
wean mining and minerals processing. Hoechst of
West Germany, Toyota of Japan, Dunlop and
Leyland of the United Kingdom, Heinz of the
United States, and many other foreign firms partic-
ipate in manufacturing. The British-based London
Rhodesia Company (Lonrho) is a conglomerate
with operations in many sectors. Most Zimbab-
wean-owned firms are small, but there are some
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Economic Performance Since Independence
Boom in 1980-81
The outstanding recovery of the private sector after
the disruption of the civil war years led the Zimbab-
wean economy to unprecedented real growth rates of
roughly 12 percent each in 1980 and 1981. In 1980 a
30 percent real growth in retail spending provided the
major impetus for the boom. It was spurred by sharp
increases in minimum wages, a reduction from 15
percent to 10 percent in sales taxes, and the assump-
tion by the government of tuition fees for primary
schooling. F__1
In 1981 the growth surge was led by a sharp rise in
agricultural production as a result both of excellent
weather and of increases in government-controlled
producer prices. Harvests of corn for marketing more
than doubled to a record 2 million tons, and wheat,
cotton, sorghum, and groundnut crops rose. Further
increases in minimum wages continued to stimulate
retail spending in the early months of 1981.F---]
The quick economic recovery during 1980-81 severely
strained the balance of payments. Demand for im-
ports of consumer goods, raw materials and compo-
nents for assembly in Zimbabwean factories, and
capital equipment and machinery pushed imports up
by more than 50 percent in 1980 and by 14 percent in
1981. Renewed demand for tobacco-Zimbabwe's
traditional export leader-was not enough to offset
the jump in merchandise imports, and Zimbabwe's
current account deficit expanded more than fivefold
during 1980-81 to $633 million. F___]
Stagnation in 1982-83
A continued decline in mineral earnings, drought, and
rising inflation put the brakes on private-sector ex-
pansion in 1982, reducing economic growth to about 2
percent despite a 28 percent increase in government
spending. The volume of manufacturing and mining
production dropped by about 2 percent each. In-
creased tobacco harvests and beef cattle deliveries, as
ranchers reduced herds threatened by a drought-
induced reduction in pasture, barely offset lower
sales of corn, sugar, cotton, and other crops.
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22 July 1983
The government was forced to cut foreign exchange
allocations to travelers and importers in each succes-
sive quarter in 1982 and to devalue by 20 percent in
December 1982 in an attempt to reduce the balance-
of-payments deficit. Sketchy data indicate that, de-
spite some success in reducing imports, the continued
fall in exports widened the current account deficit in
1982 to about $730 million. More short-term borrow-
ing was required in 1982 to maintain foreign ex-
change reserves, and by September 1982 the central
government's foreign debt had almost doubled com-
pared with two years earlier to $900 million.F__~
The economy is continuing to stagnate this year.
Domestic investment has all but ceased because of a
decline in the rate of return on investment
The droug
again cut farm production, and corn output is project-
ed to total only about one-third of the 1981 crop.
Reduced foreign exchange allocations, down by 25
percent for 1983 compared with 1982, according to
press reports, are keeping a lid on manufacturing
output. High prices, a continuing wage freeze, and
shortages of consumer goods because of the stringent
foreign exchange allocations to the manufacturing
sector are restraining consumer ~::::::7
The near-term outlook is not, however, entirely bleak
as we expect a moderate economic upturn next year.
The world economic recovery should begin to stimu-
late mining exports later this year. World Bank loans
totaling $175 million for electric power expansion
and for capital investment will bolster capital inflows.
A $325 million IMF standby agreement signed in
March 1983 and $60 million from the IMF s Extend-
ed Fund Facility also will ease balance-of-payments
constraints. If rains return to normal, we estimate
that improved harvests and increased mining and
manufacturing production will push economic growth
up to about 3 percent in 1984.
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exceptions such as Blue Ribbon Foods, which em-
ploys over 5,000 workers in its corn and wheat mills
and its vegetable oil, soap, and stock feed plants. F
A Cautious Approach to Socialism
The government's anticapitalist bias is rooted in the
private sector's association with everything that the
Zimbabwean liberation movements fought against:
white rule, racism, colonialism, imperialism, and
South African dominance. Mugabe's personal anti-
capitalist bias also has a strong puritanical flavor.
He regards capitalism's emphasis on individualism
as basically selfish and immoral and believes that
natural resources belong to all the people and
should not be controlled by private interests.F_
The goals of the Zimbabwean "revolution" remain
fairly amorphous, however, and the government's
reform program has thus far been modest in scope.
Harare's principal social and economic changes
have included raising minimum wages, providing
free health care for the poor, and instituting free
primary education. The government also has pur-
chased unused farmland to expand ownership by
black farmers and extended government control
over the marketing of minerals through the cre-
ation of a Minerals Marketing Corporation. Final-
ly, Harare has purchased a major or controlling
interest in a handful of individual businesses-a
major bank, the country's largest newspaper group,
a film production corporation, and Zimbabwe's
only coal mine. The government already owned the
country's railroads, airlines, and electricity produc-
tion and distribution facilities at independence. F-
The government's "Transitional National Develop-
ment Plan" for 1983-85, which was published last
November, underlines the vagueness of the Mu-
gabe government's conception of socialism. No-
where does the Plan refer to the seizure or confisca-
tion of private property. The closest thing to a
threat of nationalization is the statement that
"Government will participate in the ownership and
control of some enterprises in manufacturing if this
is deemed to be in the national interest."
In our view, the government's pragmatic economic
policies to date are based largely on the advice of
Mugabe's Western-oriented Minister of Finance
and Economic Planning, Bernard Chidzero. While
sharing Mugabe's socialist orientation and goals,
Chidzero has reacted to the pressure of rising
budget and balance-of-payments deficits with con-
servative fiscal and monetary policies. His leader-
ship has carried the day in cabinet decisions for
reduced government spending, a wage freeze, a
currency devaluation, cuts in foreign exchange
allocations, reduced subsidies for basic foods such
as corn and vegetable oil, and the publication of
official investment guidelines designed to encour-
age foreign investors. F__-]
The slow pace of land reform, long considered the
principal objective of the struggle for black rule in
Zimbabwe, exemplifies Harare's caution. F
Harare has spent extra time to
provide satisfactory basic services (water, roads,
diptanks for cattle, and schools) and training in
skills required for long-term development. The
government also has moved slowly to avoid impair-
ing the operations of the white commercial farm-
ers-who earn more than one-third of the country's
foreign exchange, produce most of its food, and
employ about 400,000 black laborers. Bureaucratic
snafus caused by inexperience and confusion over
the goals, policies, and procedures of resettlement
also have impeded progress.
Similarly, the government has moved gingerly in
acquiring private businesses. All. of the acquisitions,
have been by government purchases of stock and
have been with the full cooperation of the existing
stockholders. Moreover, the Harare government
has permitted the private, South African-based
minority shareholders to continue to manage two of
these concerns. The government also has passed up
opportunities during the current recession to force
hard-pressed minerals producers to offer equity in
exchange for aid. Instead, it budgeted over $50
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Zimbabwe
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million in loans during the July 1982-June 1983
fiscal year to tide the mines over until better times.
The government's recent announcement that it will
take over fuel procurement was at least tacitly
encouraged by the four foreign importers of fuel
(Mobil, Caltex, British Petroleum, and Shell). In
view of the precedents established in its previous
acquisitions, we doubt the government will confis-
cate the storage tanks. Instead, we believe that it
will purchase or lease needed tanks from the corn-
panies.
Business Confidence in the Future
Most businessmen in Zimbabwe seem fairly confi-
dent about the future of private enterprise there,
feelings which we think reflect Mugabe's record of
pragmatism and Chidzero's steadying influence on
economic policy. A recent president of the Confed-
eration of Zimbabwe Industries said in May 1983
that his organization believes the Mugabe govern-
ment is increasingly recognizing the importance of
private enterprise and the need to promote foreign
investment. A dozen Zimbabwean business and
farm leaders traveled to the United States and
Europe in June 1983 at their own expense to
express their confidence in the future of private
enterprise there. The Director of Lonrho informed
officers in the US Embassy in London in May that
his business situation in Zimbabwe was highly
satisfactory and noted that Lonrho had begun a
number of expansion programs in the country.F_
Prospects
We believe the government remains far from
reaching any clear consensus in its own councils
about what the substance of "socialism" in Zimba-
bwe should be. There is no doubt that Mugabe is
personally committed to achieving a socialist state
eventually and that some of his cabinet ministers
strongly favor a more rapid move toward socialism.
Several probably would opt for nationalization of
commercial farms and at least the larger foreign- 25X1
owned enterprises, such as the mines, if given free
We believe Mugabe is not inclined toward radical
measures, however, because of his recognition of
the crucial role of the private sector in the econo-
my, his respect for Chidzero's judgment, and his
willingness to leave private enterprise alone so long
as the economy is functioning well enough to
support the government's social programs for
blacks. Moreover, Mugabe is aware of the econom-
ic dislocations in neighboring Mozambique precipi-
tated by the postindependence exodus of whites,
and, according to press reports, he fears provoking
a similar white departure from Zimbabwe. These
factors will probably delay disruptive moves against
the private sector at least through the three-year
term of the development plan.
Over the next several years, however, we believe
the government will probably purchase sharehold-
ings in numerous firms, with foreign-owned mining
companies receiving priority attention. Individual
manufacturing firms are also likely to be singled
out for purchase by the government, particularly if
the regime judges their behavior to be inconsistent
with its commitment to the "general welfare." The
corn milling industry, for example, recently pro-
voked Mugabe's ire when two firms that compose
80 percent of the industry threatened to close down
because of a profit squeeze resulting from the
government's removal of subsidies on corn meal.F_
The program of land resettlement, furthermore, is
bound to accelerate and could reach targeted annu-
al levels of 54,000 families during the next few
years as growing experience enables officials to
overcome bureaucratic problems.
The government alrea y
owns about l.million hectares of land for future
resettlement and has additional offers-particular-
ly from white Matabeleland farmers frightened by
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the dissidence there-of more land than it is willing
to purchase, according to a press statement by the
president of the Commercial Farmers Union of
Zimbabwe.
Although a deterioration of security conditions in
Matabeleland might divert Mugabe, at least tem-
porarily, from pursuing the socialist path, we be-
lieve that the government will continue to contain
the unrest there satisfactorily so long as the dissi-
dents do not receive outside help. The fighting has
not inflicted serious direct damage on the economy,
even though Zimbabwe's two rail links to South
Africa and the one north to Zambia cross the
region.
Certain contingencies could result in Harare adopt-
ing a much more rapid and destructive pace toward
socialism than the measured one that we anticipate.
Chidzero's resignation, for example, would be like-
ly to trigger a sharp turn in policy, in our view.
Chidzero has expressed frustration with lack of
cooperation from other ministers and with what he
sees as their tendencies toward uncontrolled and
uncoordinated government spending. Chidzero
threatened to resign last year, but Mugabe con-
vinced him to stay. The strong support Chidzero
received from the Prime Minister seemed to
strengthen his position considerably
There is also no guarantee that a moderate eco-
nomic upturn of the kind we anticipate in 1984
would ease the frustration of those who want to
move ahead with the Zimbabwean "revolution." As
recovery gets under way Mugabe might feel politi-
cally compelled to hasten wage increases, land
transfers, and acquisitions of corporate shares in
order to deflect criticism from those within his
party demanding more radical change. The damp-
ening effect on profits of government-mandated
wage increases (in the absence of compensating
price increases) would be likely to sap the strength
of the economic recovery, in our judgmen
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