INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000400020004-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 45
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 4
• Publication Date: November 4, 1983
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
%.t
DI IEEW 83-044
4 November 1983
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Secret
International
Economic & Energy
Weekly
Synopsis
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1 Perspective-Mexico's Handling of the Debt Problem
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5 Briefs
Energy
International Finance
Global and Regional Developments
National Developments
schedulin
g Update
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21 Mexico: T
he Austerity Record and Econo mic Adjus
tment
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29 Italy: Deal
ing With Decline
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33 Syria: How
Socialist Is It?
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37 Free Worl
d Competition for Commercial pace Ser
vices
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Comments and queries re arding this publication are welcome. They may be
directed t Directorate of Intelligence,
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International
Economic & Energy
Weekly
Synopsis
Perspective-Mexico's Handling of the Debt Problems 25X1
President de la Madrid's impressive mastery of Mexican politics combined
with tough economic policies have made Mexico the star performer among
major LDC debtors. His political success, however, has kept many observers
from noticing that important economic reforms are still needed to avoid future
financial crises.
International Financial Situation: Debt Rescheduling Update 25X1
This article is part of a special series of articles on the economic and political
aspects of the international financial situation. The article examines the
unprecedented magnitude of debt relief provided this year-$55 billion
rescheduled so far compared with the previous record of $8 billion in 1981.2 5X1
Mexico: The Austerity Record and Economic Adjustment 25X1
During his first year in office, President de la Madrid has done an impressive
job in convincing Mexicans that tough economic policies have been necessary.
Because much still remains to be done to bring the massive foreign debt and
rapid inflation under control, we foresee a continued deterioration of the
economy. Moreover, broader structural reforms must be undertaken if Mexico
is to avoid recurrent financial problems.
Italy: Dealing With Decline
We believe Rome will fall short of its economic policy targets this year and
next. Nonetheless, policies already in train suggest a weak recovery after three
years of recession
Syria: How Socialist Is It?
Despite President Hafiz al-Assad's strongly socialist rhetoric, Syria maintains
a "dual economy" in which the failings of the state sector are partially
compensated for by a thriving private sector that is allowed to evade official
regulation. The economic and financial cushion provided by the private
sector's illegal activities helps cushion Assad against foreign financial pres-
Free World Competition for Commercial Space Services
Growing foreign competition in space services poses a number of challenges to
the United States, both on the commercial and security fronts.
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DI IEEW 83-044
4 November 1983
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International
Economic & Energy
Weekly
Perspective Mexico's Handling of the Debt Problem
President de la Madrid's impressive mastery of Mexican politics combined
with tough economic policies have made Mexico the star performer among
major LDC debtors. Domestic confidence in the ruling party-government
complex is beginning to rebound, and opportunities for the opposition to unite
against the austerity program have been undercut by presidential flexibility.
At the same time, a firm hand in dealing with leftist parties, some Communist-
dominated unions, and antiausterity demonstrators has kept a lid on protests.
De la Madrid's political success, however, has kept many observers from
noticing that important economic reforms must still be introduced if Mexico is
to avoid recurrent financial crises. Although the President earlier endorsed
basic structural adjustments, at this point it is not certain that he has the
determination or the political leverage to make such severe changes.F-1 25X1
The power of the presidency is paramount in Mexico, and de la Madrid's
personal philosophy and style have had a major impact on the public mood.
Regarded early on as a political neophyte, de la Madrid during his first year
has demonstrated considerable political savvy. Recent public opinion polling
indicates that his low-key, down-to-business style and vigorous attack on
inefficient policies have convinced many Mexicans that continued belt
tightening is appropriate and that burdens are being shared equally. A
vigorous anticorruption campaign has targeted even key ruling party loyalists,
in part to show that the government too must sacrifice. His administration's
National Development Plan calls for extended economic retrenchment, while
stressing equity and promising that living standards of the poor will be
protected, in part by eliminating privileges of the rich. In an effort to lower
tensions in urban slums-considered by the ruling party as potential
flashpoints-de la Madrid has kept up food supplies through large commodity
imports from the United States and maintained subsidies on basic items.F25X1
Retaining support of organized labor has been key to keeping austerity going
and, in our opinion, de la Madrid's most notable achievement. He has provided
progovernment unionists with enough "victories" to keep their followers in
line, while avoiding the impression among hard-hit businessmen that he is
totally in the union camp. Labor chief Fidel Velazquez, while stressing that
union support is not unconditional, has put his substantial political weight
behind moderation to help preempt problems with labor. These maneuvers
increased confidence in de la Madrid's ability to handle challenges to the
system without resorting to repression
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The President's iron will and skillful negotiating tactics to date have earned
him the grudging cooperation of business and the middle class. A labor-
government-business solidarity pact announced in August committed the
signatories to distribute the burdens of austerity evenly and reduce the effects
on the poor by providing basic consumer goods. Although attacked by
nonestablishment labor and criticized by some rank-and-file unionists, the
solidarity pact has held together. Despite plunging real wages, we see little
likelihood of pressures from big labor for additional wage increases this year.
Nevertheless, businessmen are concerned about the absence of an explicit role
for private enterprise in de la Madrid's policy statements. Even though he has
not specifically called for more nationalizations, many private-sector
entrepreneurs believe government ownership of productive capacity will
increase. Their fears have been fed by the recent decree that sharply increased
the government's role in the automobile industry and by early drafts of
restrictive regulations for the pharmaceutical and computer industries.
The President's political skill has diminished tensions and the chances of
widespread opposition to austerity that some observers had predicted.
Nonetheless, potential for unrest remains high, in part because sticking to the
IMF program will require additional cuts in public spending and perhaps a net
reduction in the public-sector work force. High inflation will continue
squeezing labor and the middle class. With crime and unemployment rising,
spontaneous riots in urban squatter areas are possible at any time.
Instituting structural economic reforms will be even more difficult than
maintaining austerity because major interest groups will see the basis of their
privileged status undermined. So far, de la Madrid has just laid the
groundwork by cutting real wages, reducing public outlays, and devaluing the
peso. To keep these gains from being eaten away, additional, politically risky
measures must follow. In the external sector, not only must the exchange rate
be kept realistically valued, but trade and investment barriers that protect
inefficient domestic industries from international competition need to be
sharply limited. Domestic prices will have to be brought more closely in line
with international levels, and wages will have to be contained to permit
investment to be financed from domestic resources.
Even with a year of political successes behind him, de la Madrid's willingness
to move forward' on basic reforms is in doubt. Policy drift in two areas raises
the specter of backsliding. First, the administration's decision to maintain the
dual exchange rate and depreciate by only 13 centavos a day is causing the
peso's competitive edge to be rapidly eroded; Mexican inflation dramatically
outpaces the rate of its major trading partner, the United States. Secondly,
de la Madrid has failed to gain control of bloated public-sector enterprises.
During the last 12 months, while employment in the rest of the economy has
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contracted sharply, the public-sector work force grew slightly. Mexico City
still has not yet decided what to do with the 300 or so nonfinancial businesses
that were acquired when Mexico City nationalized the banks in September
1982. Unless the government makes basic policy reforms, sacrifices similar to
those demanded of the Mexican people in the last 18 months will be required
repeatedly as financial crises persist
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Energy
Nigeria-OPEC Discord Nigerian officials are angry about increased oil production in Saudi Arabia
Over Production Levels and Iran and are relaxing controls on output imposed in August. This decision
to increase output could lead to more violations of the shaky OPEC accord and
put the cartel in a poor position to defend prices when seasonal demand
weakens early next year. Nigeria previously had ordered foreign operators to
limit production to the country's OPEC allocation of 1.3 million b/d through
the end of the year. According to the US Embassy, the officials say that,
because other OPEC members are exceeding their quotas, Nigeria will
produce an additional 100,000 b/d until overall OPEC production falls within
its ceiling. OPEC production currently is running nearly 1.5 million b/d above
the cartel's self-imposed limit of 17.5 million b/d
OECD Nuclear Power Nuclear power generation in the OECD countries was 14 percent higher in
Grows third-quarter 1983 than in the same period a year earlier-reaching
4.1 million b/d oil equivalent. Nuclear power generation in France soared by
OECD: Gross Nuclear Electricity Generation
3rd Quarter
1982
3rd Quarter
1983
Percent
Change
OECD
188.5
214.9
14.0
United States
79.9
81.4
1.9
Japan
27.5
29.6
7.6
Canada
10.7
13.1
22.4
Western Europe
70.4
90.8
29.0
Belgium
3.1
7.2
132.3
Finland
4.2
4.3
2.4
France
22.5
35.5
57.8
Italy
1.6
1.8
12.5
Netherlands
1.1
1.1
0
Spain
2.1
2.5
19.0
Sweden
7.0
7.3
4.3
Switzerland
3.1
3.6
16.1
United Kingdom
11.2
11.8
5.4
West Germany
14.5
15.7
8.3
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Big Seven Electricity
Consumption Begins To
Recover
increase its share of electricity generation.
nearly 60 percent and now represents the equivalent of 670,000 b/d of oil. In
the past 12 months, five nuclear power plants in France have come on line and
two more have begun low-power startup and testing. The increase in nuclear
power production in Belgium results from the 1982 shutdown for maintenance
and refueling. Nuclear power generation rose in other OECD countries despite
little growth in electricity demand. We expect OECD electricity demand to
resume about 3-percent growth next year as the economic recovery gains
momentum. Nuclear power generation is expected to rise more rapidly and
capacity.
Electricity demand during the second quarter of 1983 in the Big Seven
increased by 1 percent-about 200,000 b/d oil equivalent-compared with the
same period a year ago. Six of the Big Seven countries showed increases in de-
mand with the United Kingdom growing by 4.4 percent, France by 2.8
percent, and Canada by 2.7 percent. The sharp rise in electricity demand in
the United Kingdom resulted from a rapid increase in chemical and primary
metal production. US electricity use was up only 0.6 percent in the second
quarter; improved economic factors combined with the July and August heat
wave probably boosted electricity demand in the third quarter. Electricity
demand is expected to reach previous growth rates of about 3 percent a year as
the economic recovery gains momentum around the world. Increased demand
will boost oil and gas consumption by electric utilities, at least in the short
term, pending the completion of new nuclear and coal-fired generating
Japanese Cut Forecast After reducing electricity demand forecasts for the 1990s by 17 percent earlier
of Coal-Fired Power this year, Japan is now slashing projections for coal-fired electric generating
Plants capacity for 1990. Because of the favorable economics of nuclear power and
the stiff penalties that would be incurred as a result of the "take or pay"
clauses in LNG contracts, coal-fired generating capacity will bear the brunt of
the decline in electric power requirements.
coal-fired capacity in 1990 is now expected to reach only 14,000
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pan, probably will feel this cutback most severely.
megawatts-electric (MWe), compared with the previous forecast of 23,000
MWe. Coal consumption by the electric power sector has been revised
downward to about 26 million metric tons, down nearly 16 million tons from
last year's forecast. The United States, being the high cost coal supplier to Ja-
past when large foreign buyers prefer to deal with only a few sellers.
According to the Greek Energy Minister, the government will soon submit a
single international tender for the country's 1984 steam coal needs of
approximately 3 million metric tons-worth roughly $135 million. Greek 25X1
Government officials doubt that US suppliers will obtain the sale. Aside from
the high cost of US coal, the Greeks favor barter arrangements that the
Canadian and Australian Governments have indicated a willingness to accept.
Moreover, the Greeks desire a single bid and contend that the smaller US
exporters stand a chance only if the US Government coordinates all offers and
presents Greece with a single bid. US coal exporters have been hindered in the
Nigerian Oil Discovery Nigeria's National Petroleum Corporation (NNPC) has announced a new
discovery of offshore oil in the Cross River delta near Port Harcourt. NNPC
officials stated that the test well produced at two levels-24-degree API heavy
crude from the upper reservoir and 39- to 40-degree API light crude from the
lower reservoir. The officials are optimistic that the heavier crude eventually
can replace Venezuelan oil that currently is imported and blended with
Nigerian crude to create a suitable mix for Nigeria's refineries. Under a swap
arrangement, Nigeria and Venezuela exchange about 25,000 b/d of oil, but
Lagos must pay an undisclosed amount of hard currency for the more
expensive Venezuelan crude. Nigeria most likely will develop the find
rapidly-despite excess productive capacity-to replace the Venezuelan crude
and conserve foreign exchange.
Ecuador Has Trouble Despite an official statement by Quito that it was "very happy" with its recent
Selling Oil Exploration sale of oil exploration rights, bad experiences with previous Ecuadorian
Rights administrations and an unattractive new hydrocarbons law limited bidding by
most major foreign oil companies. According to Embassy reporting, at the end
of last summer over 20 companies had purchased one or more geologic data
packages-at $50,000 per packet-and the oil ministry was optimistic that
competition over 11 blocks of land offered for bid would be high. When the
sale was closed last month, however, only six offers were received, covering just
four tracts. Only one block near the major producing fields in eastern Ecuador
elicited more than one bid. Quito has not released further details on the offers
but is expected to announce by the end of the year whether it will accept the
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USSR Oil and Gas The USSR recently signed an agreement with Norwegian Petroleum Consul-
Exploration in the tants for a general work plan for exploration and development of oil and gas
Barents Sea deposits in the Barents Sea. This undertaking by a consortium of small
Norwegian firms is a preliminary step in systematically exploring and
developing the area. The Norwegians will provide technical assistance and
management services for an exploration area covering about one-third of the
central Barents Sea, primarily near shore in waters of less than 60 meters
depth. Thus far, the Soviets are reported to have mapped 15 to 20 structures in
the area, including several large features which cover a 10-square-kilometer
area.
The Soviet motive for concluding an agreement with the Norwegians was
political as well as economic. By jointly working with the Norwegians, the
Soviets hope to create a more harmonious atmosphere between the two nations
that will facilitate negotiations of the offshore boundary dispute in the area.
Economically the Soviets need to locate large new oil discoveries to supply
long-term energy needs. No large onshore oil discoveries have been reported
since the West Siberian fields were found in the 1960s; offshore the search has
only begun. The Soviets currently have little offshore technical capability and
the project opens a "door"-albeit a small one-to the West's providing access
to state-of-the-art equipment and technology. The Soviets remain concerned
over US trade controls and the Norwegians can provide initial technical
support and guidance. In the event of a major discovery, the Soviets realize
that only major UK and US oil companies have the financial and technical re-
sources to undertake development
Argentine Election Raul Alfonsin's decisive win in last Sunday's balloting for the presidency will
Results Will Speed enable him to begin discussions with international lenders almost immediately.
Debt Talks Closer election results, which were widely expected, would have delayed the
selection of a president for up to two months and held up debt negotiations. By
scoring a clean victory, however, Alfonsin has the military's blessing to resume
the stalled debt talks. Lenders will be pleased to begin negotiations that will be
acceptable to the new civilian government
Argentina needs to put rescheduling discussions back on track so it can obtain
fresh flows of foreign exchange to avoid default and to maintain the import
levels needed to run the economy. Alfonsin will enter the talks bound by a
campaign promise to obtain better terms than those offered to the outgoing
military regime, but initial press reporting indicates a willingness to work
pragmatically toward agreement with foreign creditors. Bankers still appear
ready to disburse $500 million in loans quickly-necessary to clear arrearages
blocking access to an additional $1.6 billion in credit-if Buenos Aires can get
negotiations restarted.
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Philippines Faces The collapse of import financing is deepening Manila's economic crisis and
Import Shortages
little success.
could cause further political problems for President Marcos in the weeks
ahead. The press reports that the banking system has stopped issuing new
letters of credit because of the shortage of foreign exchange. Philippine
officials are reportedly threatening to institute a foreign exchange rationing
system for importers if the banks do not make more foreign exchange available
in the next few days. Shortages of imported goods are not yet evident, but
prices of many goods sold from inventory stocks are rising rapidly in
anticipation of shortages. The government has responded by freezing prices for
goods it considers to be affected by speculative buying or by the 21-percent de-
valuation last month. While there is an 80-day supply of oil, the Labor
Minister is warning that the government may ration oil products to stretch
supplies while prices are frozen. The Philippine National Oil Company,
meanwhile, continues to fall further behind in its payments to major US
banks, and its efforts to raise new money to finance oil imports have met with
to avoid serious economic disruption in the weeks ahead.
Foreign exchange will remain scarce at least through the end of the year.
Central Bank reserves have fallen from slightly over $2 billion in mid-August
to about $300 million. Interest payments on the foreign debt are running about
$180 million per month, and the National Oil Company could not pay the $38
million it owed in principal repayment obligations at the end of October.
Manila has little choice but to tighten control over foreign exchange if it wants
Jamaica-IMF Jamaica and the IMF will undertake a new round of negotiations this week to
Discussions try to break the impasse that developed when Kingston fell out of compliance
with its Extended Fund Facility program in September.
the Fund is insisting that Jamaica abolish its dual
Somalia: Export
Earnings Decline
exchange rate system and float the Jamaican dollar as a precondition to
granting the island its second waiver in six months. Kingston, however, will
probably push for postponement until December since a float would probably
result in a substantial devaluation. The Jamaicans will argue that thorough
studies are needed to examine the impact of such a devaluation on government
programs so that its effect can be minimized. Prime Minister Seaga-who
prematurely announced the passage of Fund tests last month-needs to resolve
the IMF breach quickly so Jamaica can restore import levels cut by the
suspension of multilateral and some bilateral capital inflows and prevent
Mogadishu's weak financial position has been hurt by Saudi Arabia's decision
earlier this year to ban cattle imports from Somalia and other rinderpest-
infected countries. Official statistics indicate that Somalia's livestock trade-
80 percent of export earnings last year-dropped 52 percent during May to
September compared with a year earlier. US Embassy reporting indicates that
Somalia could lose $65 million in foreign earnings this year, compounding
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foreign debt difficulties. The government already is in arrears to the United
States and several other Western creditors, and Mogadishu is almost certain to
seek debt relief and additional grant aid from its Western benefactors. F_
Global and Regional Developments
EC-US Specialty Steel Bonn will no longer block other Community members' attempts to retaliate
Dispute Heating Up against the United States for its specialty steel restrictions. A West German
Economics Ministry spokesman told a US Embassy official last week that the
EC, including the West Germans, are "fed up" with the United States over the
specialty steel issue. West Germany found unacceptable the most recent US
offer to lower some trade barriers as compensation for its higher duties on
specialty steel. The spokesman noted that Bonn was particularly aggravated by
the continued filing of antidumping suits by US steel producers against West
German firms. The EC appears increasingly likely to retaliate if an acceptable
compensation arrangement cannot soon be worked out; the EC could decide its
position at a Council meeting on 28 November. Bonn's decision to stop playing
the mediator role within the EC will allow other members, particularly the
French, to push through trade restrictions against US products.
EC Raises Flour
Export Subsidy
that the United States would interpret it as a further trade challenge.
competition in the Egyptian flour market. Although the EC Commission
maintains that the action should not be considered provocative, US Embassy
sources report that the United Kingdom counseled against the action, warning
The EC announced on 26 October a 10-percent increase in its subsidy for
wheat flour sales to Egypt in an attempt to counter previous subsidized US
flour sales to the country. The new subsidy applies to 400,000 metric tons of
flour exports, and should result in a sale price of just over $200 a ton-slightly
below current world prices. Egypt imports 1.5 million tons of flour a year-a
third of which it receives as food aid-and accounts for 20 percent of the world
flour market. EC sales to Egypt fell 40 percent in 1982-83, and the
Community hopes that revived trade will help reduce its burgeoning wheat
stockpiles of 10.3 million tons. The increase was largely a response to pressure
from France, the EC's largest wheat exporter and a fervent critic of American
EC Farm Payments The EC has suspended advance payments on agricultural supports, an
Frozen unprecedented move that has caused an uproar among Community farmers.
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Under EC regulations agricultural exporters could claim up to 80 percent of
their export subsidies in advance, and farmers were eligible for prepayment of
production aids for such commodities as soybeans, cotton, butter, and sugar.
EC Agricultural Commissioner Poul Dalsager announced on 10 October that
these advance payments would be suspended for 10 days, pending European
Parliament approval of a special supplementary budget increase. Despite
subsequent passage of the supplementary budget, the Commission on
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19 October extended the suspension order to the end of the year to help
prevent a projected $550 million budget shortfall for 1983. The suspension
order is not part of efforts to reform the Common Agricultural Policy but is
simply a temporary measure to conserve funds until 1984; EC Ministers will
try to resolve their financial problems at the December Athens summit. The
suspension will not have much effect on the EC's agricultural competition with
the United States in third countries because only the timing of the payments
will differ, not the ultimate amounts
National Developments
Developed Countries
West German Growth On the basis of the strong upturn in domestic economic activity in first-half
Slightly Better Than 1983, West Germany's five leading economic research institutes have issued a
Anticipated slightly more optimistic forecast for the economy by upping their projection of
this year's real GNP growth to 1 percent. The institutes doubt, however, that
the jump in private investment that supported the upswing earlier this year or
Bonn's current economic policy will lead to a long recovery. They believe the
recovery will lose strength in the second half of next year, leaving real growth
in 1984 at 2 percent. Despite an anticipated poor export performance, the
institutes set the 1983 current account surplus at about $4 billion-we believe
it will be slightly higher. For 1984, the institutes expect export business to pick
up and boost the current account surplus. The institutes doubt that the
upswing will be vigorous enough to ease unemployment. The number of jobless
West Germany:
Real GNP Growth Forecasts of Five Institutes
0.5
1.0
2.0
0
1.0
1.0
0
-0.5
0
2.0
3.5
4.5
Equipment
1.0
5.5
4.0
Construction
3.0
2.0
4.5
Exports of goods and services
0
-1.0
3.5
Imports of goods and services
0.5
0
3.0
Consumer price index
3.0
3.0
3.0
a The five participating economic research institutes are Kiel
Institute of the World Economy; HWWA Institute, Hamburg; IFO
Institute, Munich; West German Institute for Economics (DIW),
Berlin; and Rhine Westphalian Institute, Essen.
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industries.
is expected to average 2.3 million this year and could reach 2.4 million in 1984
even with a revival in the labor-intensive automotive and construction
West German Exports Sluggish exports are hampering economic recovery in West Germany. Real
Lagging exports were almost flat during first-half 1983. We expect exports to rebound
only a bit in the second half, given a recent pickup in foreign orders. Sales to
the United States and industrialized countries outside the EC have been
improving slightly since April. Sales to EC countries-which account for
about 50 percent of West Germany's exports-continue to be restrained by
slow economic growth. Exports to OPEC countries-about 9 percent of West
German exports-have fallen and are not likely to recover quickly, given
slumping oil revenues. One of the few bright spots was sales to the Soviet
Union, which ran 28 percent ahead of first-half 1982 in value terms. FRG im-
port volume, on the other hand, grew at an annual rate of 9.4 percent in first-
half 1983 in response to increased domestic demand. Higher imports, lagging
export earnings, and a smaller services deficit will prevent the large increase in
the current account surplus previously expected. We see the current account
surplus growing only $1.5 billion above 1982 to $5 billion.
EC Capacity
Utilization Rises
upswing before acting on investment plans.
The rise in industrial capacity utilization in the European Community
reported for the third quarter points to continued recovery. Seasonally
adjusted capacity utilization averaged 77.2 percent during July-September, up
from 76.4 percent in the first and second quarters-the lowest level since the
bottom of the 1975 recession. The West German and British rates posted the
strongest advances in the third quarter, rising 1.9 percentage points and 1.4
points, respectively. Utilization rates fell in Italy and Ireland because of
tighter monetary and fiscal policies, and in Luxembourg because of the soft
world steel market. We expect capacity utilization to continue rising in the
European Community, but business investment is not likely to pick up much in
the near future. West European manufacturers will wait for clearer signs of an
Israeli Foreign Finance Minister Cohen-Orgad banned foreign currency purchases by Israelis
Currency Controls on Monday night to reduce the strong demand for foreign currency and to
stem the downward pressure on the stock exchange. Exceptions will be allowed
for importers and Israeli travelers going abroad, who can purchase up to
$3,000 of foreign currency. This action will do little to calm public uncertainty
over Israel's economic future. On Tuesday, the black-market rate for dollars
shot up to a 9-percent premium over the official rate as Israelis continued to
buy foreign currency illegally
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British Plans To
"Privatize"
Communications
Monopoly
West Germany Begins
Partial
Denationalization
Australia Fights
Speculative Capital
Flows
lobbying activities to stop the sale unless jobs are preserved
The British Government has announced plans to sell 51 percent of state-owned
British Telecom (BT) next fall-one of the largest transfers from public to
private ownership ever undertaken. The size of the firm will make this complex
sale difficult, but London does not want to break up BT because it believes less
profitable divisions would be hard to sell. BT employs over 244,000 people and
had sales of $10 billion last year. The transaction is expected to provide the
government with at least $6 billion which could offset half of the $12 billion
budget deficit anticipated for 1984/85. Last year total equity sales on the
London Stock Exchange amounted to only $2.7 billion. Britain's Treasury
Department is considering offering stock in foreign markets as well; the largest
single offering in the United States has been only $1 billion. BT's management
believes it must solve the problem of overmanning before the company can be
sold. It has laid off 7,500 workers so far this year and plans additional cuts of
7,500. In response, the telephone unions have threatened to expand strike and
used to reduce the federal budget deficit
Bonn has decided to reduce its 44-percent stake in Veba AG, the nation's
largest company. The government will hold on to 25 percent of the energy con-
glomerate in order to maintain a blocking minority and ensure a government
say in the energy sector. This is Bonn's first denationalization move since
1965, when it also reduced its holding in Veba, and others may follow. Bonn
has direct stakes in some 56 domestic and foreign companies worth about
$4 billion, and the conservative Kohl government sees this a part of its strategy
to reduce the government role in the economy. According to press reports,
Lufthansa could be denationalized next, and the sale of some Volkswagen
stock may be in the offing. According to Finance Minister Gerhard Stolten-
berg, the $270 million expected from the January 1984 sale of Veba will be
deficit of about $6 billion this year.
The Hawke government eased foreign exchange regulations last week to
discourage short-term, speculative capital flows. Canberra put an end to the
Australian Reserve Bank's daily fixing of the US dollar/Australian dollar
exchange rate and to the daily fixing of the forward rate for the Australian
dollar. The moves are designed to make it more difficult for speculators to
profit from exchange rate movements. Large short-term capital inflows and
outflows since the Hawke government assumed office last March-at times
approaching $500 million a week-have hindered efforts to control money
supply growth. It is currently running at an annual rate of 13 percent
compared with a target of 9 to 11 percent. The new measures should not affect
long-term capital inflows that Australia needs to finance its current account
South Africa's Midyear The South African Government has met its spending and revenue targets for
Budget Outlook the first half (April-September) of the current fiscal year, but Pretoria is likely
to turn to international commercial borrowing to cover a deficit that probably
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to obtain additional foreign loans.
will exceed the IMF guideline of 2 percent for the full year. Spending is
currently running ahead of budget in some important categories-such as
drought relief-and a 12-percent rise in civil service salaries is set for
1 January. The revenue outlook, moreover, is bleak. South Africa's continuing
recession-real output is projected to decline by as much as 3 percent in
1983-is reducing taxable corporate and personal income, and a five-percent
surcharge on imports must be dropped by the end of 1983 to meet another
IMF condition. In addition, low gold prices are also holding down tax
revenues. Government officials have told the US Embassy that they now
project the budget deficit to reach 3.4 percent of GDP. New taxes would be an
obstacle to economic recovery and are unlikely to be introduced before the next
budget in March. South Africa is already negotiating a $100 million loan in
West Germany, and its solid international credit rating probably will enable it
Less Developed Countries
Lebanese Financial The Lebanese economy, which had been resilient since the 1975-76 civil war,
Difficulties has declined rapidly in recent months because of the deteriorating security
conditions. Morale among businessmen is extremely low, and little investment
is taking place. Unforeseen expenditures to resupply the Lebanese Armed
Forces, coupled with reduced tax receipts because of lower economic activity,
will result in a budget deficit more than double earlier projections, according
to a banking source of the US Embassy. Lebanese bankers, who already hold
more than two-thirds of the government's debt, reportedly are reluctant to
invest additional funds in President Gemayel's government. The trade deficit
has increased considerably, in part because of larger military imports. Worker
remittances, the most important source of foreign exchange, have dropped in
recent months to less than one-third of their normal level because of the lack of
confidence in the Lebanese economy. As a result, foreign exchange reserves
that had remained high since the civil war have dropped $1.4 billion this year
to $1.2 billion
The economy will continue to deteriorate unless early progress is made in the
national reconciliation talks that started this week in Geneva. Even if an
agreement on power sharing is worked out, we believe Lebanese and foreign
investors will wait until after the agreement is demonstrated to be working
before participating in reconstruction. The Central Bank Governor estimates
that Lebanon will need $2 billion to tide the country over until the reconcilia-
asked the United States to consider a long-term, low-interest loan.
tion process has made sufficient progress to boost investor confidence. He has
Panama's Mounting The Panamanian economy is headed into a deeper recession than earlier had
fore late 1984. Nationwide unemployment is running at 17 percent,
been predicted. According to the US Embassy, Panamanian officials estimate
real GDP will decline 2.8 percent in 1983, and recovery is unlikely to start be-
a government official has stated publicly
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Secret
immediate goal will be to create new jobs.
that unemployment in the Colon Free Zone area is near 60 percent. President
de la Espriella announced in late October that employment commissions would
be formed in several urban centers, including Panama City and Colon; their
Increase in Namibian The South African-appointed administration in Namibia has raised the
Sales Tax general sales tax rate from 6 to 7 percent on 1 November. Namibian officials
describe the increase as part of an attempt by South Africa-on which
Namibia depends heavily for financial support-to make the territorial regime
more self-supporting and to avoid increases in Namibia's external debt.
Pretoria has provided about $400 million in budget assistance to Namibia in
each of the past two years and $200 million a year in loan guarantees.
Announcement of the sales tax increase prompted sharp criticism from
citizens' groups who blame their higher taxes on the favorable tax treatment
provided South African and international mining companies operating in the
territory. Local observers expect the tax rate to rise to 8 percent, probably by
the end of the fiscal year in March, possibly triggering stronger protests.
Financial Crisis
Threatens Central
African Republic
Regime
President Kolingba is facing some hard economic choices. The IMF last month
suspended the country's $20 million standby program for failure to meet
overnment spending guidelines. The move not only cuts off the shaky Bangui
regime from additional IMF disbursements but also threatens access to French
funds needed to pay government salaries. The IMF is insisting on additional
government wage cuts before resuming disbursements. Kolingba is resisting
because he anticipates that serious domestic unrest will follow; a salary
reduction last February prompted calls for a general strike that was averted
only by a strong government crackdown including the arrest of several labor
Thailand Reduces Bangkok last month cut its export tax on rice to spur lagging sales. The volume
Export Tax on Rice of rice exports in the first half of 1983 had fallen 14 percent below the level of
the same period a year earlier because of the soft international rice market.
The tax cut will stimulate sales, especially in price-sensitive African countries,
but Thailand's rice earnings still are likely to fall below the $950 million
recorded in 1982. Next year, however, looks better for the world's largest rice
exporter. The government projects a bumper 1983/84 crop of nearly 18 million
metric tons-5 percent more than this year. Moreover, Thailand will benefit
from higher prices next year that are expected by market analysts.
USSR Comments on Soviet officials recently provided insights on why the leadership is moving
Economic Reform cautiously in introducing economic reforms. General Secretary Andropov has
publicly encouraged steady change but has met with opposition in the
Politburo and economic bureaucracy. He has called for changes as part of the
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Moscow Assails
Disregard of Decree
to Spur Innovation
on the form and extent of change.
Five-Year Plan for 1986-90, but statements by other leaders and reporting
from other Soviet political observers indicate that the Politburo is undecided
because of international tensions.
Fedor Burlatskiy, a Soviet political commentator with ties to Andropov, told
US Embassy officials in Moscow that economic reform has slowed primarily
because the Soviet leadership has not agreed on the replacement of personnel
or on a model for reform. He also says the leadership is concerned that
economic reforms would induce social change. He asserts that concern in the
USSR about the upheaval in Poland retarded prospects for reforms. In a
separate conversation, Izvestiya economic editor Borodin told US Embassy
officials that improved economic results for the first three quarters of this year
are inspiring "new confidence" that some targets of the Five-Year Plan for
1981-85 can be achieved. He attributes the improvement to the discipline
campaign and doubts that major new reforms will be introduced soon, partly
The Central Committee last week publicly attacked a major research and
development facility-the Ural Scientific Center-for disregarding the re-
gime's August decree on "measures to stimulate scientific and technical,
progress in the national economy." In reporting the Committee's criticism
Pravda indicated that the decree was being widely ignored. The decree, a
highly publicized attempt to increase productivity and innovation, was for the
most part hortatory and vague but did include a few specifics. For example, on
1 January 1984 all industrial output will be classified "top quality" or "first
quality." Articles judged below "first quality" will be withdrawn from
production. within two years and in the meantime their prices will be cut 30
percent. Prices of articles classified "top quality" will be raised 30 percent. In
addition, plant managers will be required to submit and fulfill an annual plan
for the introduction of new technology or suffer a reduction in their total bonus
payments of up to 25 percent. An official of the State Committee on Science
and Technology has recently indicated that additional steps to implement the
decree will include making "new funds" available for advanced equipment and
facilities. He was unclear, however, about whether these "new funds" will
change the level and allocation of investment. Directives from Moscow are not
likely to remove constraints that inhibit technological development. Marginal
improvement could result, however, from additional investment resources and
the threatened sanctions if managers take their responsibilities more seriously.
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Debt Rescheduling Update [-
This article is part of a special series focusing on
the economic and political aspects of the interna-
tionalfinancial situation.
The unprecedented breadth and magnitude of debt
servicing difficulties are starkly illustrated by the
large number of countries that have obtained debt
relief during 1983-21 through 1 November. An-
other 12 LDCs currently are in the process of
renegotiating their debt and could reach agree-
ments with their creditors by yearend. The previous
high for a single year was 13 in 1981. Moreover,
the volume of debt rescheduled already totals $55
billion, far outdistancing the 1981 sum of about $8
billion. The rapid growth rate of rescheduled debt
is alarming to bankers and governments alike; the
33 rescheduling countries hold more than half of
total LDC and East European debt.
Terms on 1983 reschedulings were generally tough,
but in recent agreements-such as Brazil's second
refinancing package this year-they have eased
somewhat. Spreads on bank reschedulings were
about 1.8 to 2.3 percentage points above LIBOR
with maturities of six to eight years including two-
rescheduling of current obligations and are often
tied to adoption by the debtor of an IMF auster-
ity program.
? The magnitude of the debt for troubled borrowers
such as Brazil, Mexico, and Poland has caused
most new bank lending to these LDCs to be
involuntary. The large Western banks have had
to provide much of the new lending to the large
Latin American debtors because of the unwilling-
ness of smaller banks to participate in the refi-
nancing packages.
? The simultaneous rescheduling of debt by several
large debtors has been unprecedented. This has
accounted for the sharp increase in the volume of
rescheduled debt in 1983. While some observers
were concerned about the ability of the interna- 25X1
tional financial system to handle this situation,
the task has been accomplished thus far without
pushing the system to the breaking point.
Key Countries' Debt Reschedulings
to four-year grace periods. Official reschedulings The largest concentration of 1983 reschedulings
generally contained maturities of 8 to 10 years has occurred in Latin America, where nearly all of
including three- to four-year grace periods, with the countries have been involved. Developments in
interest spreads determined on a bilateral basis he major countries included:
? Mexico rescheduled about $20 billion in public-
New Developments in 1983
Among the 1983 debt reschedulings, several impor-
tant patterns are evident:
? In contrast to previous years, private banks,
foreign governments, and multilateral institu-
tions-particularly the IMF-have combined
their efforts into large-scale refinancing packages
for debtors such as Mexico, Brazil, and Yugosla-
via. These packages involve new money as well as
sector debt in August and September, but only $3
billion of Mexico's $15 billion private-sector debt
has been rescheduled thus far.
? Brazil rescheduled $4.7 billion under its four-part
refinancing package in early 1983. The new
financing plan set up in September includes a
rescheduling of $5.3 billion in 1984 maturities
owed to banks and $2 billion in debt owed to
foreign governments through the Paris Club.
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Outside of Latin America, nearly all of the re-
scheduling activity has been in Eastern Europe and
Sub-Saharan Africa. Of key countries in these
regions:
? Nigeria rescheduled $1.6 billion in short-term,
Bank Debts Rescheduled
Argentina Nigeria
Brazil Panama
Chile Peru
Costa Rica Poland a
Cuba Romania a
Dominican Republic Uruguay
Ecuador Yugoslavia
Malawi a Zambia
Mexico
Central African Republic Peru
Costa Rica Romania a
Cuba Sudan
Malawi Togo
Morocco Zambia
Other Countries Seeking
Rescheduling Before Yearend
Bolivia Niger
Honduras Philippines
Jamaica Senegal a
Liberia a Uganda a
Madagascar a Venezuela
Nicaragua - Zaire
? Chile obtained debt rescheduling on $3.4 billion
from private banks in August as part of a total
financial package of $6.4 billion.
? Peru rescheduled $380 million in debt owed to
banks in June. The Paris Club rescheduled over
$1 billion in debt owed to foreign governments in
July.
? Argentina refinanced about $1.5 billion in debt
obligations to banks in March, but rescheduling
of some $7.5 billion in public-sector debt has been
slowed because of domestic political and legal
problems.
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4 November 1983
trade-related credits that were in arrears. The
July agreement with banks eased banker con-
cerns over the country's large arrearages.
? Yugoslavia and commercial banks signed a refi-
nancing package in September, which included a
rescheduling of $1.9 billion in short- and medi-
um-term debt.
? Poland rescheduled about $2.1 billion in debt
owed to banks in August. Discussions with West-
ern governments regarding a Paris Club resched-
uling of about $7.0 billion in official credits due
in 1982-83 probably will begin this month.
Debt renegotiations are under way for several of
the larger debtors that have not yet rescheduled
this year. Venezuela's rescheduling talks on about
$18 billion of external debt, however, are at an
impasse because of the country's refusal to adopt
an IMF austerity program, a necessary condition in
bankers' eyes. The Philippines' financial situation
has worsened severely in the past few months;
Manila has declared a moratorium on principal
repayments and has set up a bank advisory commit-
tee to work out a solution to servicing its $3.5
billion in debt repayments due this year
In our judgment, the outlook for the next year or so
is one of continued debt repayment difficulties and
additional reschedulings. The debt servicing prob-
lems of some countries-Mexico, Nigeria, and
Romania, for example-probably will abate as a
result of the current reschedulings, tough import
cutbacks, and some improvement in export earn-
ings. Others such as Brazil, Yugoslavia, and Poland
will be forced to seek further rounds of reschedul-
ings because of the magnitude and complexity of
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their financial situations. We believe banks, gov-
ernments, and the IMF will have to continue to
work together to assist developing countries in
coping with the debt problem by encouraging debt-
ors to restrain their external financing needs, con-
vincing lenders to sensibly reschedule existing debt
and provide prudential amounts of new lending,
and preparing governments and financial institu-
tions for inevitable requests for bridge loans
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Secret
Mexico: The Austerity Record and
Economic Adjustment
During his first year in office, President de la
Madrid has done an impressive job in convincing
Mexicans that tough economic policies have been
necessary, and that they are being administered
equitably. De la Madrid's actions have pleased the
international financial community but seriously
undermined economic performance and sharply
reduced living standards. The cost of adjustment
includes a 7 percent drop in economic activity this
year. Because much still remains to be done to
bring the massive foreign debt and rapid inflation
under control, we foresee a continued deterioration
of the economy. Moreover, broader structural re-
forms must be undertaken if Mexico is to avoid
recurrent financial problems.
We are concerned about the underlying potential
for violence in Mexico that would test the ability
and resolve of Mexico City. Next year will not be
easy. Many Mexicans believe their situation will
soon improve, and the clash between expectations
and reality may present de la Madrid with a
dilemma that jeopardizes sound economic policies
and risks serious political problems
Harsh Austerity Steps
De la Madrid embarked on the tough stabilization
program in large part because he believed he
lacked responsible alternatives. Foreign lenders had
abandoned Mexico. To restore economic order, he
was faced with realigning consumption and invest-
ment patterns to reflect available resources. Among
the steps he initiated were slashing wages and
government spending, reducing consumer subsidies,
relaxing price controls, and sharply devaluing the
peso. (C)
Recent official data indicate that the austerity
program has bitten deeply. The government deficit,
imports, and consumption have all dropped further
than economic planners or international observers
had envisioned. It has taken these major adjust-
ments, however, for Mexico to meet-and only by a
slim margin-harsh IMF financial targets.
Reducing Wages and Consumption. We believe the
outstanding economic policy accomplishment of de
la Madrid's first year in office has been in labor
and wage policy. Last December's minimum wage
negotiations-a traditional guideline for union set-
tlements throughout industry-culminated in a
moderate, two-stage wage boost for workers: 25
percent in January and 15.6 percent in June. As a
consequence, real wages fell nearly 20 percent 25X1
during the first three quarters of 1983, and, barring
unplanned hikes, will fall some 25 percent for the
year. Government-affiliated unions are disappoint-
ed over the continuing fall in real wages, but their
near unanimous compliance has helped cut the
budget deficit, reduced pressures on prices, and ,
protected jobs by easing business losses and mini-
mizing bankruptcies. 75X1
These steps, along with lower subsidies and wide-
spread business losses, have substantially lowered
personal consumption. Organized labor, including
government workers, has been shielded by substan-
tial fringe benefit packages. Workers earning mini-
mum wages or less-at least 60 percent of the work
force-and many independent merchants and other
businessmen have not been so lucky. The govern-
ment has continued subsidies on basic foods and
public transportation to lessen the blow. Even so,
Mexicans have eliminated luxuries, drawn down
personal savings, and increased illegal work trips to
Slashing the Public Deficit. Steep spending cuts
and increased peso revenues from foreign and
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1980
1981
1982a
1983b '
Trade balance
-1,992
-3,003
7,802
13,000
Exports (f.o.b.)
16,840
20,927
22,224
22,000
Oil and gas
10,441
14,573
16,477
16,000
Manufactures
3,423
3,665
3,627
3,700
Agriculture
1,528
1,481
1,233
1,300
Minerals
1,448
1,208
887
1,000
Imports (f.o.b.)
18,832
23,930
14,422
9,000
Net services and transfers
-5,231
-9,541
-10,487
-9,400
Interest
-5,477
-8,383
-10,879
-11,400
Current account balance
-7,223
-12,544
-2,685
3,600
Debt amortization due
5,369
6,629
8,497
8,000
Financial gap
-12,592
-19,173
-11,182
-4,400
New medium- and long-term capital inflows
12,204
18,325
12,695
6,400
Rescheduled medium- and long-term external debt
0
0
4,000 c
19,000 c
Net short-term capital
5,187
10,233
-2,118
-17,000 d
Errors and omissions
-3,648
-8,373
-6,580
-1,000
Changes in reserves
1,151
1,012
-3,185
3,000
Other financial items
External debt (at yearend)
Short term
Debt service ratio (percent)
a Estimated.
b Projected.
c Includes debt relief on $4 billion in 1982 and $5 billion in 1983 on
medium- and long-term debt principal due; and $14 billion in 1983
in short-term debt rescheduled as long-term obligations.
d Includes rescheduled short-term debt.
domestic oil sales reduced the public-sector deficit
in January-June. Most of the progress came from
cutting real spending substantially from 1982 lev-
els. The most important factor in the cutback was
the slashing of public-sector investment, particular-
ly for oil development.
Mexico City made less progress on subsidies. Even
though consumer subsidies were lowered sharply
during the first half of 1983, the cuts fell short of
the IMF goal of trimming them 40 percent. We
believe subsidies for food, health, and education
were reduced, while those for public transportation
and electricity grew substantially.
On the revenue side, higher peso income from
foreign oil sales boosted real public receipts some-
what during the period. Earnings from other
public-sector enterprises dropped sharply and the
domestic tax base declined, causing nonoil federal
government revenues to fall
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Regaining Control of Foreign Accounts. The most
visible aspect of austerity has been the turnaround
in Mexico's foreign trade accounts. Sharply revers-
ing the pattern since 1955, Mexico has run trade
and current account surpluses averaging $1 billion
and $300 million respectively each month so far
this year. We estimate that such positive trade
balances will continue, resulting in an unprecedent-
ed $3.6 billion current account surplus for 1983.
An undervalued peso, lower government spending,
and interrupted trade credit lines initially were
most important in making these adjustments. More
recently, depressed consumer demand has prevent-
slightly because of lower prices. Only the mineral
sector-traditionally geared toward exports-has
expanded moderately.
ed an import rebound.
This dramatic turnaround on foreign payments
substantially lowered new foreign borrowing re-
quirements. Thus, Mexico City has been able to
increase foreign exchange reserves and to repay
arrearages on interest and suppliers credits as well
as the $2.5 billion in emergency loans granted in
August 1982 from the Bank for International
Settlements and the United States. Foreign credi-
tors were encouraged and rescheduled the bulk of
principal payments coming due through 1984. Al-
though capital flight has eased, we detect little
capital repatriation.
Merchandise imports in January-September were
slashed to $5.8 billion, less than half of the corre-
sponding 1982 level, and just one-third of the 1981
amount. Private-sector imports plunged to one-
third of the 1982 level and one-fifth of the 1981
level. Capital goods imports led the decline, drop-
ping 80 percent between 1981 and 1983; private-
sector capital goods imports plunged nearly 90
percent. At the same time, imports of consumer
goods fell 75 percent and raw materials imports fell
60 percent
Depressed production and weak world demand for
Mexican products-particularly oil-and underre-
porting of foreign exchange earnings have more
than offset exchange incentives and caused the
dollar value of exports to stagnate. Manufacturing
and agricultural exports have shown only a 3-
percent increase, and oil exports by value are down
Net service payments have declined, primarily be-
cause nonfinancial services have plunged. For ex-
ample, the number of foreign tourists visiting Mex-
ico has risen sharply, but the devaluations have cut
foreign exchange receipts. The falloff in Mexican
expenditures in the United States, however, more
than compensated and allowed a substantial in-
crease in net tourist revenues.
Meeting IMF Targets. Tough austerity kept Mexi-
co in compliance with its IMF stabilization pro
gram in January-June. Even so, official statistics
indicate that Mexico City barely met the criteria
for the public deficit and domestic credit. On the
other hand, it exceeded its external performance
targets-limits on foreign borrowing and increases
in international currency reserves-by comfortable
margins. While an IMF team is in Mexico now
evaluating the third-quarter record, we-as well as
Embassy officers-anticipate that Mexico City will
pass this review. While we believe Mexico City has
every intention of sticking to austerity,'fourth-
quarter compliance is not assured.
25X1
25X1
Despite slashing government spending, the budget
deficit was only 5 percent below its midyear IMF
quantitative target. Even after cutting nonfinancial
spending 30 percent, total public expenditures-
combining the federal government and public-
sector enterprises-exceeded the IMF target by 3
percent. Federal authorities performed best, while
public-sector enterprises overspent. Higher peso
earnings from oil exports boosted revenues above
the IMF target, allowing Mexico City to come in
just under target on the budget deficit. Staying 25X1
within the budget will be more difficult in October-
December. Slippage is most possible in the budget
accounts because additional steep cuts in public
spending and probably a small net reduction in the
public work force will be required
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September December
Net credits to the public sector by the Bank of 1,763
Mexico a
Cumulative overall public-sector deficit b
Cumulative change in net domestic assets of the
Bank of Mexico
Cumulative net foreign borrowing by the public
sector b
1,605
635ac
Cumulative change in net international reserves of 734 a
the Bank of Mexico b
a End of period.
b Limit tested at the end of each period.
c Amount subject to ceiling is defined as the difference between
note issue and net foreign assets.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
360
690
1,005
1,500
21
44
44
104
While we expect the government to continue meet-
ing lending targets to the public and private, sectors,
this will squeeze private borrowers. Rather than
borrow from foreign bankers or the Bank of Mexi-
co, the administration has used an unprecedented
expansion of government bonds and more than
doubled its borrowing from the nationalized banks.
These actions have sopped up loanable funds.F_
Sharply lower foreign borrowing has assured Mexi-
co City of continued compliance with external
targets. International reserves will grow by
$3 billion or more this year, substantially above the
$2 billion target. Moreover, Mexico City plans to
reduce private-sector interest arrears by $800 mil-
lion by yearend, well above the $600 million goal.
Secret
4 November 1983
Economic Tailspin in 1983
Steep Decline in Production. Economic activity is
off markedly. Based on investment and consump-
tion trends, midyear industrial statistics, and
econometric studies, we estimate that domestic
output fell at an annual rate of about 6 percent
during January-June. Furthermore, we believe that
the internal slump is intensifying and that the
economy is now falling at an annual rate of 8
percent; household savings largely have been spent,
real wages are falling steadily, and the government
continues to restrain spending. Gross investment
during the first half of this year was 30 percent
below the 1982 level and 40 percent below the peak
in 1981
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Oil Productiona Debt Service Obligationsb
Million b/d Billion US $
Amortization
Interest
a Excluding natural gas liquids.
b Interest on all debt, amortization due on medium- and long-term only; in
1982 debt moratorium and private sector arrears lowered actual debt pay-
ments $5 billion. In 1983 we expect debt rescheduling to reduce actual
payments on interest and medium- and long-term debt by about $7 billion.
Secret
4 November 1983,
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Summary of Forecasts of Key Economic Variables, 1983
Changes
in GDP
(percent)
Annual
Average
Inflation
(percent)
Current
Account
Balance
(billion US $)
Imports
(billion US $)
Exports
(billion US $)
Data Resources, Inc. a
-4.2
98.7
-1.3
10.6
20.5
Wharton Econometric Forecasting b
-5.1
101
-0.8
11.8
20.6
International Monetary Fund c
NEGL
81
-2.0
14.5
22.6
Central Intelligence Agency
-7.0
100
3.6
9.0
22.0
International Economic Analysis, Inc. in
association with Evans Economics, Inc. d
-7.0
80
-0.7
11.1
18.8
a Latin America Review, Third Quarter 1983, Data Resources,
Inc., September 1983.
b Latin America Outlook, Summer 1983, Wharton Econometric
Forecasting Associates, July 1983.
c IMF Staff Report, 9 May 1983.
d Latin American Economic Outlook, Mexico Economic and Politi-
cal Conditions and Prospects, September 1983.
We estimate that plant capacity utilization is down
by a third or more in numerous industries as many
factories reduced work shifts from three to two or
less, and others have shut down completely. Official
Mexican statistics show that industrial production
declined at an annual rate of 10 percent in Janu-
ary-June and, according to preliminary statistics,
13 percent in the third quarter. Through Septem-
ber, production of motor vehicles and textiles
dropped 50 percent, and new public- and private-
sector construction plummeted 75 percent. Even
the important minerals sector has not avoided the
slump; in January-June mineral output fell 1 per-
cent below a year earlier.
The commercial sector is suffering because of
dwindling supplies, lower purchasing power, and
higher taxes. Sales data show that commercial
activities have fallen 15 percent. While sales of
basic consumer goods have changed very little,
merchants report retail sales of other goods off 20
to 50 percent during the first half of the year.
Preliminary reports indicate the sales slump wors-
ened in the third quarter(
Secret
4 November 1983
Agriculture may improve slightly this year with
recent favorable rains in some areas that appear to
have ended two years of widespread drought. Even
so, recovery is limited by lower real farm price
guarantees, shortages of fertilizers, machinery,
seeds, and other imported inputs, and poor weather
early in 1983; harvests will be far below predrought
levels. Because of exchange incentives, we expect
commercial export crops to increase slightly. Pro-
duction for the domestic market from large irrigat-
ed farms is down, even though output in some
rainfed areas is doing betted
Large Job Losses. Job losses-particularly among
unskilled labor-have become severe. We believe
the rate of unemployment has more than doubled
since mid-1982 and now stands at over 20 percent.
In the urban, nonunion private sector, unemploy-
ment stands at close to 30 percent; rural workers
have tended to keep their jobs, because more are
self-employed and the relationship between land-
lords and peasants is generally more paternalistic.
Unionized, private-sector workers have fared better
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Secret
because of flexible wage demands and reduced
hours; we estimate that only 10 percent are out of
Government workers have done the best. We be-
lieve that increases in defense and internal security
largely offset job losses in the rest of the federal
government.
The bulk of the 800,000 young Mexicans that
normally enter the labor force for the first time are
having to resort to make-work jobs, staying in
school, or looking across the US border for tempo-
rary work. Most new entrants have been added to
the ranks of the underemployed.
Curbing Runaway Prices. Tough austerity mea-
sures and the effects of depressed demand are
finally curbing inflation. After rising at a triple-
digit rate in January-July, consumer prices in
August and September slowed to an annual rate of
51 percent. During the last quarter of the year, we
believe inflation will rebound a bit-to an annual
rate of about 65 percent-because of scheduled
public-sector price adjustments and the recent in-
creases in peso devaluations. Average annual infla-
tion for 1983 will total 100 percent, and much
remains to be done if inflation is to be reduced
reforms. In recent speeches-including his only
formal press conference in early October-de la
Madrid has emphasized that "tough and bitter
steps remain to be taken." Because we believe de la
Madrid's priority remains to stabilize the economy
and overcome inflation, the longer term outlook is
favorable. Nevertheless, as political pressures
mount, the chance of policy backsliding remains
significant.
A great deal also will depend on factors outside of
Mexico City's control. Either a setback in the
current world economic recovery or a deterioration
in international finances-perhaps brought on by a
debt default in another country-could preclude
any option of relaxing austerity. Alternatively, a
major disruption in world oil supplies and the
resulting higher prices could boost Mexico's oil
revenue sufficiently to allow a moderate policy
relaxation without seriously aggravating inflation
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substantially.
Looking Ahead
We foresee a slow economic recovery process be-
cause of the magnitude of Mexico's structural
economic problems and the sizable financial re-
quirements of its foreign debt. It will take at least
two or three years before Mexico's production
levels reach those of the early 1980s; it will take
even longer for real personal consumption levels to
The number of years it takes Mexico to regain
normal access to foreign capital markets and re-
establish economic growth-and job creation-on a
sustainable basis will depend in large part on
whether de la Madrid continues basic economic
or foreign payments problems.
Secret
4 November 1983
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Secret
Italy: Dealing With Decline
The Socialist-led five-party coalition under Prime
Minister Craxi has made inflation its top economic
priority. Rome hopes to reduce inflation to 10
percent next year by trimming $30 billion from the
projected budget deficit and holding down wage
costs. The government's draft 1984 budget, how-
ever, has encountered criticism from all sides and
has already been dealt some setbacks. We believe
Rome will fall somewhat short of its budget targets
this year and next, leaving the 1984 budget deficit
at about 16 percent of GDP. Under these circum-
stances, the Italian economy will experience a weak
recovery in 1984, following two years of GDP
declines. Inflation should slow by about 2 percent-
age points, to 13 percent, while the current account
deficit will narrow to less than $2 billion.
Craxi inherited an economy in the throes of reces-
sion since 1980. Last year the situation worsened as
slumping foreign and domestic demand caused a
0.3-percent drop in real GDP-only the second
decline in the postwar period. The downturn was
led by a 5.3-percent drop in investment, due in
large part to high interest rates. Higher indirect
taxes and delays in renewing collective bargaining
agreements held down personal consumption. Re-
cession in key foreign markets depressed exports.
As a result, firms-particularly large concerns-
laid off employees more rapidly than in the past,
pushing unemployment to 9.1 percent.
There have been few signs of a rebound this year.
After increasing slightly in the first quarter, real
GDP plunged at a 7-percent annual rate during the
April-June period. In July the unemployment rate
rose to 9.7 percent. Investment, particularly in
plant and equipment, has continued to sag under
the effects of high interest rates and low profits.
Higher taxes-part of the previous Fanfani govern-
ment's austerity program-have reduced real dis-
posable income and dampened consumer spending.
Sluggish demand in foreign markets has con-
strained exports.
Business and consumer surveys show no significant
improvement in the short term. Foreign and domes-
tic orders have begun to pick up but remain well
below normal. While surveys of future production
trends point to some improvement, inventories
remain relatively high. Industrial and consumer
confidence indicators have become somewhat less
pessimistic, but consumers are still hesitant about
purchasing durable goods
In part because of the recession, Italy has experi-
enced some reduction in inflation and the current
account deficit. As monetary policy tightened to
offset the inflationary impact of a burgeoning
budget deficit and to strengthen the lira, inflation
slowed by 2 percentage points in 1982 to 16.3
percent. At the same time, the trade deficit nar-
rowed, as Italy benefited from soft oil and raw
material prices. The improved trade account in
turn cut the 1982 current account deficit to $5.5
billion, down from $8.1 billion in 1981. The trend
of modest improvement in inflation and the balance
of payments has continued in 1983
The Socialist Program
Craxi's economic program reflects the concessions
made to the austerity-minded Christian Democrats
and Republicans during the negotiations to form a
new government. Under the compromise agree-
ment, Rome is committed to placing the highest
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Italy: Economic Indicators
Inflation Growth
Percent
Real GDP Growth
Percent
Unemployment Rate
Percent
Expanded Public-Sector
Deficit as a Share of GDP
Percent
Secret
4 November 1983
Current Account Deficit
Billion US $
priority on fighting inflation in the short run and to
promoting economic growth in the medium term.
The government proposes to carry out its program
by reducing the size of the budget deficit, holding
down wage costs, and improving competitiveness.
While still somewhat vague, the targets include:
? Holding the expanded public-sector deficit to $50
billion this year and $58 billion in 1984.
? Keeping real wages constant and holding price
increases to 13 percent this year and 10 percent
next year.
? Encouraging economic development over the next
three years and stimulating exports.
? Increasing employment opportunities through a
reform of the program for Italy's depressed
southern region, the Mezzogiorno.
As an initial step, the cabinet approved budget
legislation designed to save $1.2 billion through
cutbacks in health care and disability pension
benefits. In addition, the government obtained a
commitment from Italy's major retailing groups to
keep price increases on 80 basic commodities in line
with the 1983 inflation target. The government also
settled the key metalworkers contract, avoiding
potentially serious labor unrest early in the admin-
istration.
Rome's efforts now are focused on the 1984 budget.
According to official projections, without further
action the deficit would soar to $88 billion-$30
billion above the target. To meet the deficit target,
the cabinet approved an "austerity" budget which,
according to Embassy reporting, included:
? Tax increases of $8.1 billion, including higher
witholding on bank interest income, an 8-percent
surcharge on local taxes, higher corporate taxes,
and a renewal of 1983 tax increases.
? Social Security cuts of $3 billion, including re-
duced cost-of-living adjustments and a limitation
in family allowances.
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? Revenues of $5.2 billion from a tax amnesty
program designed to collect penalties on building
code abuses.
? Estimated "savings" of $7.5 billion, half from a
lowered forecast of interest payments on the
public debt and half from a redeposit of excess
funds held in banks by regional authorities to the
came when the courts ruled against some of the
provisions designed to recoup funds from regional
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treasury's account.
Although strict by Italian standards, the proposed
budget is aimed only at slowing the growth in
spending rather than actual cuts. The program
relies on increased tax receipts, financial transfers,
and revised budget estimates for about 70 percent
of the expected deficit reduction. For many of these
measures-particularly lower debt service costs
and receipts from the.tax amnesty program-
government estimates likely are overly optimistic.
In addition, the budget does relatively little to
tackle the long-run problem of excessive govern-
ment spending, particularly social benefits
Prospects for Enactment
Despite agreement in principle among coalition
members that austerity measures must be imple-
mented, the Craxi program is in trouble. Labor
unions, special interest groups, coalition members,
and opposition parties have all criticized the bud-
get. Some of the loudest complaints have come
from the Christian Democrats (DC) whom Craxi
has allowed to take the lead in formulating eco-
nomic policy. Because of its election losses this
year, the party is particularly sensitive to the
impact of pension and health care cuts. Within
Craxi's own party, the more ideologically inclined
members are probably unhappy with the program.
The government already has encountered two set-
backs. In its first legislative test, 27 Christian
Democrats defected and the Chamber of Deputies
rejected the tax amnesty law. According to press
reports, the government will resubmit a slightly
modified version of the plan. The other setback
Key Role of Unions
We believe that controlling inflation in Italy will
require a strong incomes policy. Unit labor costs
rose about 17 percent last year, the highest rate
among the Big Seven, and will increase about
15 percent in 1983. Labor productivity is stagnat-
ing, while nominal wages probably will rise by 25X1
about 15 percent this year, mainly because of cost-
of-living increases. A moderation of adjustments in
nominal wages plus increased productivity should
help slow the increase in unit labor costs to about
12 percent next year.
13-percent target for 1983
An effective incomes policy almost certainly would
include a reduction of Italy's wage indexation
system. Confindustria, the employers federation,
has urged the government to start talks soon. With
sensitive budget issues under discussion, the gov-
ernment is in no hurry to broach the subject. In any
case, the system, which was modified last January,
is to be reviewed at the end of the year. According
to press reports, the largest union-the Commu-
nist-dominated CGIL-may press for compensa-
tion because inflation will exceed the government's
If the government is to have any chance of modify-
ing wage indexation, it will have to handle orga-
nized labor skillfully. While the unions have not yet
called for strikes, their umbrella group-the
Secret
4 November 1983
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United Federation-has criticized the Craxi pro-
gram and plans an extensive lobbying effort. The
CGIL has taken issue with the priority placed on
fighting inflation and has already voiced its opposi-
tion to any major alteration of indexation. The
Socialist-dominated UIL and Catholic CISL, on
the other hand, have suggested they would consider
a limited revision. According to the press, Craxi's
ministers are considering instituting ceilings on
indexation and adjustments to dampen the effects
of exchange rate fluctuations. Union concessions
would probably require government concessions in
such areas as job creation and price controls.
The slowness with which the government has
moved on reining in this year's deficit, plus likely
parliamentary delays, will keep Rome from hitting
its policy targets. Press reports indicate that the
government already has abandoned its 1983 budget
goal. We estimate that the 1983 deficit will hit
about $55 billion--10 percent above target and
equivalent to 16.1 percent of GDP. We also expect
the Craxi government to fall short of its policy
goals for 1984. Faced with a huge public-sector
deficit and wanting to protect the lira from further
depreciation, the Bank of Italy is likely to keep
monetary policy restrictive through 1984
We expect real GDP to be down about 1 percent
this year. Because of high interest rates, low capac-
ity utilization, and weak profits, investment spend-
ing will be off a further 3 percent. Consumer
spending is being restrained by the uncertain eco-
nomic outlook, the delay in the conclusion of new
wage contracts, and adjustments in tax rates; for
the year, it should drop by about 0.5 percent.
With the recession continuing, the current account
balance and the inflation rate will show some
improvement in 1983. Because of the decline in
domestic demand, imports should contract more
than exports, cutting the trade deficit to $4.5
billion. The improvement in inflation, however, will
Secret
4 November 1983
be less marked. Despite a slowing in recent months,
inflation for the full year should come down only
1 percentage point to about 15 percent.
Given our assumption that Craxi will have partial
success in meeting his policy targets, we believe
Italy should experience a mild recovery in 1984.
We expect GDP to rise about 1 percent compared
to an OECD average of 3.6 percent. Exports will
experience a small rebound but will be limited by
the weak growth prospects in key markets-
France, West Germany, and OPEC. With cost
pressures easing and profits improving, business
investment probably will pick up despite high inter-
est rates. Consumption will manage only a small
increase as higher indirect taxes offset part of the
real income gains.
We expect inflation to decelerate as wholesale
prices stabilize, unit labor costs moderate, and
increases in indirect taxes and public tariffs work
their way through the system. A firming of import
prices and continued depreciation of the lira, how-
ever, will contribute to holding inflation to about
13 percent, well above the projected OECD aver-
age of 6 percent and above Craxi's 10-percent
target. The current account deficit should decline
somewhat to $1.9 billion.
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Syria: How Socialist Is It?
Despite President Hafiz al-Assad's strongly social-
ist rhetoric, Syria maintains a "dual economy" in
which the failings of the state sector are partially
compensated for by a thriving private sector that is
allowed to evade official regulation. The "auster-
ity" of the state sector has little impact on the
comfortable life of many middle- and upper-class
Syrians. They maintain themselves by smuggling in
consumer goods financed by overseas earnings.
Meanwhile, for all its other economic failings, the
public sector has significantly improved the life of
the impoverished rural population-a key goal of
the socialist Ba'th Party and Assad's largely rural
Alawite sect. The economic and financial cushion
provided by the private sector's illegal activities
helps cushion Assad against foreign financial
pressures.
Official Austerity
The widespread nationalizations of the 1960s
pushed a significant share of the economy's re-
sources-millions in capital and possibly as much
as one-third of the skilled labor force-overseas,
beyond the reach of the socialist leaders of Syria's
ruling Ba'th Party. The wholesale departures of the
1960s continued during the mid-1970s as thou-
sands of workers departed for the Persian Gulf,
lured by oil money. We estimate that the uncount-
ed earnings of this "overseas economy" probably
run at least $750 million a year, equal to about
5 percent of GDP.
These foreign exchange earnings could be a rich
source of funds for Damascus's hard-pressed trea-
sury and public industries-if the government
could lay its hands on the cash. Remittances have
evaded official channels because of a more lucra-
tive black market. Damascus has been unwilling to
devalue the Syrian pound to avoid a loss of prestige
and because the import subsidy that the state
The Tangled Web of Syria's Exchange Regime
Syria maintains three officially sanctioned
exchange rates. Most government agencies are
permitted to buy foreign currency from the Central
Bank at the official rate, fixed since the 1950s at
3.925 pounds to the dollar. Those private-sector
businessmen who receive permission to import
goods legally are charged the parallel rate,
introduced in early 1981, which has remained at
about 5.4 to the dollar. The tourist rate, which was
created in mid-1982 to be more "responsive" to
market forces and encourage a greater share of
worker remittances tofow through official
channels, has normally been fixed at about 5.6.
The market-clearing illegal rate is generally 3 to
4 percent greater than the tourist rate.l
industries receive via the cheap foreign exchange
helps make their goods competitive. The regime
also is reluctant to face the choice of either hiking
prices on imported, price-controlled commodities or
subsidizing them more directly.
This dual system allows Damascus-which nomi-
nally controls almost all foreign exchange transac-
tions-to lurch along with official reserves at rock-
bottom levels and to resort to import restrictions
and currency conservation measures. The most
recent round of "austerity," for example, allowed
the import of only the most essential items such as
food and medicine. Damascus has also frozen all
major development projects for a lack of cash,
according to the US Embassy. Those few private-
sector importers remaining inside the law who can
get official approval to buy foreign goods wait up to
nine months before Damascus's nationalized banks
can dole out the requisite foreign exchange.
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These policies, however, have produced a thriving
currency black market that probably changes at
least $600 million a year. Moneychangers buy the
dollars of street-wise tourists and recipients of
worker remittances and recycle them to importers
who want to use the services of commodity smug-
glers. One US Embassy source has estimated that
between $750 million and $1 billion of goods are
smuggled in annually-which, if the estimate is
accurate, would boost civilian imports about 25
percent above official totals.
The smuggling of commodities financed by the
currency black market has rendered most govern-
ment restrictions on consumer imports meaningless
except for those who insist on remaining inside the
law. Western consumer goods are widely available,
despite the government's strictures. According to
the US Embassy, the practice of evading currency
and import controls has become so broadly accept-
ed and profitable that even government agencies
get into the act; the Embassy reports that one
military construction unit routinely buys some
$100 million a year on the black market to finance
imports. On the supply side, both civilians and
military officers-particularly those stationed in
Lebanon-are major traffickers in smuggled goods.
US Embassy sources claim that military officers
operate warehouses stocked with furniture, appli-
ances, and home entertainment equipment-one
need only place an order to have it delivered by
military vehicle within a day or two. There are
villages on the Lebanese border, according to the
Embassy, where smuggling is the mainstay of the
local economy and the main streets are bazaars of
contraband goods.
Tacit Government Approval
In an authoritarian state such as Syria, the obvious
thriving of sub rosa private markets must be
regarded as tacit government policy. While the
uneasy coexistence of the two competing systems
does deprive the public sector of resources, it holds
important political benefits for Assad. By clinging
publicly to the mantle of Ba'th Party ideology-of
which state domination of the economy is a key
Secret
4 November 1983
element-President Assad can help legitimize his
one-man rule and avoid the increased inefficiency
and consumer dissatisfaction that would result
from greater state control. Second, the under-
ground trade, one of the few spheres in which
people can act independently of state control, helps
forestall more open opposition to Assad's some-
times heavyhanded approach. At the same time, by
making it very hard for anyone to do business
legally, Assad keeps the business community psy-
chologically and financially vulnerable and im-
presses on them the profitability of not antagoniz-
ing the regime. The system helps keep public
factories operating and workers employed because
the nationalized industries use the black market to
obtain raw materials.
Assad is a member of the traditionally impover-
ished, rural Alawite sect. One of his key aims has
been to break the lock on Syria's economic life
traditionally held by Sunni Muslims and to im-
prove the economic standing of his coreligionists.
The existing structure serves that aim well. The
basis of the Sunnis' previous predominance-pri-
vately held banks, factories, and large farms-has
been undermined by land reform efforts and na-
tionalizations. The emerging domestic economic
elites are those who exploit their influential connec-
tions with the government and military to provide
undisturbed smuggling and other illegal services.
Alawites, who hold most key positions in the gov-
ernment and provide a disproportionate number of
Army officers, profit most.
Finally, while the underground economy does drain
off substantial customs revenues that would other-
wise flow into government coffers, Assad has de-
vised a rather unorthodox method of taxing the
moneychangers. On occasion, when the official
system's currency shortage becomes particularly
acute, Assad launches short-lived currency crack-
downs, arresting moneychangers and confiscating
their cash. The culprits are typically released with-
in a few days-but only about three-fourths of their
cash is returned.
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Over the long haul, however, this dual system of a
lumbering public sector and a thriving private
sector forced to live outside the law retards Syria's
economic development. Instead of investing in in-
dustrial capacity at home, the private sector has
turned its energy and resources to making money
overseas and to smuggling. The public sector,
meanwhile, is handicapped by a lack of cash-
particularly hard currency-poor planning, and
mismanagement. It must be protected by expensive
subsidies in order to compete with imports.
Welfare Syrian Style
For all its other economic failings, Assad's govern-
ment has made significant improvements in the
material lot of Syria's lower classes-long an ex-
plicit government and Ba'th Party goal. The im-
provement is primarily a result of basic human
needs-oriented projects whose benefits are not im-
mediately captured in economic growth statistics:
? Government clinics provide free health care to
rural residents and to those citydwellers falling
below a minimum income.
? Hundreds of villages have been electrified and
thousands of kilometers of roads paved since
Assad's accession to power.
? The percentage of children attending school has
risen sharply in rural areas-particularly in As-
sad's home district of Latakia, where most
Alawites live.
Despite Syria's 3.5-percent population growth rate
and rapid migration to the cities, urban unemploy-
ment is low by Third World standards. Wage laws
and employment policies at state industries serve as
surrogates for formal unemployment insurance and
income maintenance programs. Local observers
agree that state industries are vastly overstaffed
and are employers of last resort. For example, the
proprietor of a small, privately owned textile fac-
tory told a visiting US official that a state factory
of similar output would employ four or five times
the number of workers he employed.
Implications for the United States
The economic and financial cushion provided by
the black markets makes Syria less susceptible to
economic pressures from Arab or other states than
the government's low foreign exchange reserves-
last reported at $113 million-would imply. Even if
foreign economic pressures forced the public sector
into a truly dire cash squeeze, supplies of consumer
goods and domestic opposition to Assad would
remain relatively unaffected. If necessary, the pri-
vate currency markets offer a source of foreign
exchange that could again be tapped on short
notice in a new crackdown.
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Free World Competition for
Commercial Space Services
Over the coming decade, the United States will
face growing competition in commercial space
services. West European and Canadian firms, sup-
ported by a variety of government programs, are
already making inroads into lucrative markets for
launch services and communications satellites.
West European and Japanese firms are also well
positioned to capture sizable shares of future mar-
kets for remote sensing and materials processing.
Taken together, industry observers estimate that
the market for these activities could be worth up to
$75 billion-at current prices-over the next 10
years.
The European Space Agency (ESA) will provide
the only commercial competition for the United
States for space launch services during the remain-
der of the 1980s. ESA officials have stated that
they hope to capture up to one-third of the com-
mercial launch services market over the next
decade. This market has been estimated at $6-15
billion by industry sources.
ESA is pinning its hopes on its Ariane family of
expendable launch vehicles. The current Ariane is
capable of placing a 950-kg load into geosynchro-
nous orbit; later versions have a design capability of
3,300 kg into geosynchronous orbit or 15,000 kg
into low Earth orbit. Although some potential
customers are skeptical of Ariane's performance-
there have been two failures out of seven launches
and one of two satellites was lost on the sixth
launch-ESA officials believe they can capture
market share by offering lower prices for launch
services. ESA is bidding only 83 percent of the
price asked by NASA to put Intelsat VI into orbit.
ESA currently has contracts for 35 payloads
through 1990.
Free World Foreign Satellites
Launched Through October 1983
European Space
Agency
France
United Kingdom
Canada
West Germany
France/
West Germany
We do not foresee any Japanese competition in the
launch services market for the remainder of this
decade because agreements with the United States
restrict the Japanese from commercializing their
current space launch vehicle. Depending on the
amount of US technology used, similar restrictions
may apply to their next-generation space launch
vehicle. By the mid-1990s, however, the Japanese
plan to have a high-energy booster capable of
placing over 12,000 kg into low Earth orbit or
2,000 kg into a geosynchronous orbit. This launch
vehicle is being designed to be competitive with
both the Ariane and the US Space Shuttle.
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European Space Agency's
ERS-1 Earth resources space-
craft
Satellite communications systems represent the
largest segment of the commercial space services
market. The market for these systems could ap-
proach $45 billion over the next decade, according
to industry sources and trade publications. The
market for satellites themselves (including direct
broadcasting) is expected to reach $6-15 billion; the
earth stations and ground equipment market is
estimated at $5-10 billion; the market for home
receivers for direct broadcasting-costing $300 to
$500 each-could reach up to $20 billion.
Although the West Europeans have limited experi-
ence in manufacturing and operating communica-
tions satellite systems (the first operational Europe-
an communications satellite, ECS-1, was launched
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in June 1983), ESA has initiated ambitious pro-
grams in this area. Through these programs, Euro-
pean aerospace consortiums are developing a wide
range of modular communications satellite buses'
that offer competitive performance with those built
in the United States.' Indeed, the French company
Aerospatiale, with a US firm as a major subcon-
tractor, has won the contract for the Arabsat
communications satellite system.
Canadian officials have targeted 10 percent of the
international market for communications satellites
and satellite ground stations within the next
decade. We believe they will achieve this goal.
control system.
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Comparison of Country Space Programs
Government Budget
for Space Program,
1983
(million US $)
Launch Vehicles
Satellites Planned
Materials
Processing
Program
3 communications,
1 remote-sensing
No
European Space Agency (ESA)
700
Ariane family
4 communications,
1 remote-sensing,
3 weather,
4 scientific
Yes
France a
450
None (prime
contractor for Ariane)
4 communications,
4 remote-sensing
No
West Germany a
350
None (second
stage for Ariane)
2 communications,
3 scientific
Yes
1 communications,
1 military
No
Mu-3S (small)
N-2
H-1 (under development)
H-2 (proposed for 1990s)
7 communications,
5 remote-sensing,
4 scientific
Yes
Canada is a pioneer in direct-broadcasting satel- main subcontractor. Brazil and Nigeria have con-
lites and was the second nation (after the USSR) to tracts with SPAR for communications satellites
establish an operational domestic communications and ground stations; again the major subcontractor
satellite system. Moreover, the Canadians were the
first to use geosynchronous orbit for these satellites
(the first Canadian Anik-A communications satel-
lite was launched in 1972; the first domestic US
communications satellite, Westar A-1, was
launched in 1974).
A key factor in the success of Canada's space
program has been its pursuit of a close working
relationship with NASA and the US aerospace
industry. The Canadians have combined their aero-
space capabilities into a single company, SPAR
Aerospace of Canada, to design, develop, and man-
ufacture satellites. SPAR began its relationship
with the US aerospace industry as a subcontractor
to a US firm for the early Anik communications
satellites. SPAR now is the prime contractor for
current generations of Anik, and a US firm is the
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European Multinational Consortiums:
Space Program
Country
Type of Satellite
Production (number
of satellites)
Satcom International British Aerospace
Matra
Selenia Spazio
United Kingdom
France
Italy
OTS-1
OTS-2
Marecs
ECS
Telecom-1
Skynet 4
Unisat
Apex
SPOT
1
NA
1
5
3
2
3
1
2
Aerospatiale
MBB
Thomson
France
West Germany
France
TDF
TV Sat
Tele-x
2
2
2
British Aerospace
Fokker
Aeritalia
Selenia Spazio
United Kingdom
Netherlands
Italy
Italy
Olympus;
derivatives
NA
the characteristics of SPOT imagery. SPOT is
scheduled to be launched in 1985 and is to be
operated by a French-subsidized company, SPOT-
IMAGE. This firm plans to offer imagery with a
much higher resolution than US Landsat imagery
but at comparable prices. There are currently no
plans to launch additional Landsat satellites after
the launch of Landsat D-Prime in 1984. Although
the market for remote-sensing imagery has been
small, averaging only $35 million a year, industry
observers have estimated that it could grow to
between $400-500 million annually over the next
Remote-Sensing Satellites
After 1985, France should be in a good position to
capture a significant share of the market for re-
mote-sensing satellite imagery. France is currently
promoting its remote-sensing satellite program,
called SPOT. Simulated SPOT data from aircraft
are being marketed to acquaint potential users with
The Japanese plan to launch a maritime observa-
tion satellite in 1986 and an earth-resources satel-
lite in the early 1990s. The earth-resources satellite
is designed to have about the same resolution as the
US Landsat. Based on our knowledge of the cur-
rent state of Japanese satellite programs, we believe
they would have to rely on US firms for some key
components, engineering expertise, and systems
integration. It is likely, however, that the French,
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with their plannned high-resolution earth-resources
satellite, could dominate the market by the time the
Japanese satellite is orbited.
Although Canada does not plan to commercialize
its radar-sensing satellite system, it has the only
firm that is currently selling civilian space-based
synthetic aperture radars. US firms are unable to
market commercial versions of their radars because
of military applications. These radars are used for
geologic mapping and can generate images of
regions hidden by clouds or in darkness. MacDon-
ald Dettwiler, the Canadian firm, is furnishing the
synthetic aperture radars for both the Canadian
Radarsat and the ESA remote-sensing satellite,
ERS-1
Materials Processing in Space
We do not believe that space-based materials proc-
essing will develop before the 1990s. No country,
except perhaps the USSR, will have commercial
Earth-orbiting materials processing centers until
that time. Products that may eventually be pro-
cessed in space include pharmaceuticals, microelec-
tronics, large crystals, immiscible alloys, foamed
steel, and monocrystalline filaments. Space'proc-
essing of these items is attractive because of a low-
vibration, low-gravity environment. NASA has
estimated that the world market for space-pro-
duced materials may reach $20 billion annually in
the 1990s. An industry assessment estimates that
by 1995 at least $5 billion worth of pharmaceuti-
cals manufactured in space will be sold each year.
The West European and Japanese space-based
materials processing programs are very similar.
Both programs currently use suborbital rockets to
create short periods of microgravity for research
purposes and will use the Spacelab laboratory
module on the US Space Shuttle for long-duration
microgravity experimentation. In 1986, a reusable
European satellite, Eureca, is scheduled to be orbit-
ed by the US Space Shuttle. Eureca is the forerun-
ner of an automated materials processing facility.
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In the 1990s, both ESA and Japan hope to have
unmanned materials processing facilities serviced
by their own spaceplanes. 1 -1
West Germany is the prime contributor to the ESA
Spacelab program. West Germany also is building
its own version of the Spacelab, which will be used
to develop techniques for a microgravic space in-
dustry. A West German consortium has built a
retrievable satellite that will be used to test equip-
ment for free-flying remote sensing and materials
processing modules. The consortium wants to com-
mercialize this satellite for customers seeking a
vibration-free microgravic environment.
Implications
Growing foreign competition in space services poses
a number of challenges to the United States, both
on the commercial and security fronts. On the
commercial front, not only will US firms lose
market share in another high-technology area, but
they may also become dependent on foreign compa-
nies for vital services such as remote-sensing imag-
ery for resource development. On the security front,
the US Government will have more difficulty con-
trolling the flow of technologies to the Soviet Bloc
as vendors of commercial space services proliferate.
Many of the technologies in this area are directly
applicable to military systems, especially the re-
mote-sensing optical and radar systems, and the
wider availability of these technologies will facili-
tate Soviet and Bloc efforts to acquire advanced
Western technology.
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