SMALLER LDC DEBTORS: ECONOMIC SITUATION AND US INTERESTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00586R000200220006-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: August 18, 2010
• Sequence Number: 6
• Publication Date: March 1, 1985
• Content Type: REPORT

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Directorate of Secret
Intelligence
and US Interests
Smaller LDC Debtors:
Economic Situation
State Dept. review completed
Secret
GI 85-10068
March 1985
397
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Directorate of
Intelligence
Smaller LDC Debtors:
Economic Situation
and US Interests
This paper was prepared by
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
Economics Division, OGI,
Secret
GI 85-10068
March 1985
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Smaller LDC Debtors:
Economic Situation
and US Interests
Key Judgments The condition of many low- and middle-income debtors-illustrated by
Information available Colombia, Egypt, Indonesia, Morocco, Pakistan, Peru, and the Philip-
as of 4 February 1985 pines-requires increased attention. The potential for further deterioration
was used in this report.
has put their governments at odds with international creditors, the
International Monetary Fund, and domestic opposition groups. Moreover,
important US interests could be hurt by their economic and political
problems.
These debtors probably will face increasing difficulties over the next few
years because of slowed growth in industrial countries; soft commodity
prices; protectionist pressures in export markets; rescheduled debt, which
will fall due in 1986-87; and rapid population increases. The United States,
therefore, could face a new set of debt-induced commercial issues. LDCs
strapped for foreign exchange probably will increasingly adopt counter-
trade requirements that will hurt US exporters and undermine US trade
policy. Moreover, developing country attempts to rapidly expand exports
could accelerate protectionist pressures in Western countries.
Although most of these debtor LDCs value their ties with Washington,
worsening economic problems probably will move them to try to use these
ties-particularly foreign policy and military/ strategic ties-to exact
financial concessions such as increased aid. They could turn to Washing-
ton's ideological adversaries if they feel the United States is not being
responsive-even though they would meet limited success and receive
primarily military assistance.
The United States will confront difficult-or potentially difficult-eco-
nomic and political conditions in its bilateral relationships with many
debtor developing countries, not just the seven discussed in this paper. A
steady improvement in the world economy and the adoption of rational
economic policies by these LDCs would greatly help their financial
problems. In our judgment, however, this combination of events is unlikely
in the near term.
iii Secret
GI 85-10068
March 1985
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Philippines
6
Forces for Economic Improvement
7
Strategic/ Military
11
Foreign Policy
12
Opportunities for US Adversaries .
13
C. Economic/Social Indicators
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Smaller LDC Debtors:
Economic Situation
and US Interests
The debt condition of low- and middle-income LDCs
has been largely overshadowed by attention to larger,
higher income countries such as Mexico, Brazil, and
Argentina. In many cases, however, the debt burden
of these countries relative to the size of their econo-
mies is just as great as that of the Big Three. Seven
countries illustrate the economic problems of these
LDC debtors:
? Peru and the Philippines face severe economic and
political crises.
? Egypt and Morocco need to reduce subsidies and
cut budget expenditures.
? Colombia and Peru have the additional problems
that stem from drug trafficking and guerrilla terror-
ism, which are further eroding confidence in their
governments.
? Indonesia and Pakistan, although not in immediate
danger, are not on solid footing.
Despite their differences, the seven countries are
similar in their vulnerability to external economic
conditions such as recession in industrial countries,
fluctuating commodity prices, high interest rates,
uncertain commercial. lending, and slowdowns in
Western aid. Moreover, because these countries have
linkages to key US interests, the problems posed by
their economic slide go beyond concern for the stabil-
ity of the international financial system.
The 1981-82 recession in industrial countries, the
contraction of world trade, and other external and
domestic problems have heavily hurt these developing
countries.
Colombia'
With its substantial mineral resources, varied agricul-
ture, and growing industrial base, Colombia is better
equipped than many of its Latin American neighbors
Table 1
LDC Debtors:
Rank and Magnitude of Debt, 1984
Philippines
17.
Colombia
12
Egypt
18.
Pakistan
12
India
19.
Taiwan
10
Malaysia
20.
Ecuador
8
to deal with its economic problems. In the late 1970s
when prices for coffee, cocaine, and marijuana were
high, Colombia opened the economy and enjoyed an
economic boom. Now commodity prices are down and
Colombia's inefficient industries still are being bat-
tered by imports. Agricultural and industrial produc-
tion has declined, and unemployment is climbing-
now 14 percent. Even earnings from illicit drugs have
declined from a peak of $1 billion annually in the
early 1980s to about $400 million in 1984, according
to press reports. The US Embassy reports that real
GDP growth is projected to be 1 to 2 percent in 1984.
To cope with the economic downturn, President Be-
tancur's government implemented economic reforms
in 1984 that tightened import restraints, accelerated
the pace of the peso's mini-devaluations, and intro-
duced a value-added tax.
Colombia is relying on two new energy projects to
resolve its economic problems. The world's largest
coal strip mine began production for export in early
1985, and, according to the press, by 1986 Colombia
could be self-sufficient in oil. However, Bogota's quest
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c to
Table 2
Smaller LDCs: Factors in Economic Plight r?.
Price Trends for Key Weather Worker Remittances Military Government Policies/ Debt, 1979-84 Exports to OECD, 1981-
Commodity Ex- Expenditures Political Problems 83 b (million US $)
ports, a 1983-84
Colombia Coffee =
3.5 percent
Egypt Petroleum d =
- 15 percent
Down 10 percent, About 1 percent of Narcotics trafficking; $6-12.5 billion; inter- 2,673
1984 (projected) budget guerrilla violence. est payments 2,613
doubled; debt-service 2,766
ration from 17 per-
cent to 30 percent.
Up 7 percent, 1984 13 percent of budget Food, energy subsi- $16.5-25.3 billion. 4,760
dies-$3 billion, 4,032
1982-83 (14 percent 3,664
of budget).
Indonesia Petroleum d = Drought 1982-hurt c Less than 15 percent Subsidies on food, $16.8-32.0 billion. 21,650
-15 percent rice crop. of budget fertilizer, fuel; anti- 18,567
Rubber= Chinese riots, 17,698
-6 percent Orthodox/Muslim
clashes.
Morocco Phosphate rock = Drought since Down in 1983; exact Spends $1 million Food, education sub- $6.1-12.8 billion. 1,794
-25 percent 1981-hurt grain figures not available per day on Western sidies (9 percent and 1,788
production. Sahara war 27 percent of admin- 1,736
istrative budget); riots
in early 1984.
Pakistan Cotton = Poor weather hurt Down 5 percent, 25 percent of budget Demonstrations in $8.7-11.5 billion. 1,090
-9 percent cotton, wheat crops. 1984 Sind; Afghan 1,079
refugees; narcotics 1,115
trafficking.
Peru Petroleum d = El Nino-drought,
- 15 percent floods; agricultural
production down 10
percent.
25 percent of budget, Subsidies on food, $9-14 billion; debt 2,556
.1983; Sendero Lu- energy, water; labor service ratio from 32 2,479.
minoso insurgency strikes; narcoterror- percent to 75 per- 2,480
ism. cent.
Philippines Coconut oil = Drought 1982-83- Up 74 percent, 1981- Communist insur- Subsidies on food, $13-26 billion; inter- 5,311
3 percent hurt rice, sugar, co- 83 gency; pressure for fuels, transportation; est payments 4,333
Sugar = conut crops. increased spending labor strikes, demon- quadrupled. 4,715
- 35 percent strations, opposition
Copper = to Marcos.
-8.4 percent
a = IMF data, annual prices.
b = OECD Data
c Blank box indicates no significant information or development in this area.
d = OPEC weighted average, crude.
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Table 3
Smaller LDCs: Austerity Programs
IMF program Currency Devaluation Foreign-Exchange Budget/Subsidy Cuts, Tax Reform Other
Controls 1983/84
a Value-added tax. Import restrictions;
barter counterpurchase
requirement for 30 prod-
uct-imports.
Multiple exchange rates Recent crackdown on Will slowly reduce New consumption tax on Promises greater role for
with gradual adjustment unofficial FX dealers; subsidies. luxury goods. private investment and
in tourist and new regulations to countertrade agreement
commercial rates. attract tourists/ required.
remittances.
$300 million standby
(September 1983 to
March 1985)
16 percent (1983)
Pakistan
Extended Fund Facility
(1981-83) canceled
a
Extended Fund Facility
(June 1982 to June 1984)
canceled. Standby $344
million (April 1984)
53 percent (1984)
Philippines
$615 million standby
(December 1984)
34 percent (since
October 1983)
Removed controls;
multiple FX rates before
IMF program.
a Blank box indicates no significant information or development in
this area.
Cut budget deficit; elim- Tax increase. Ban on new government
inate food subsidies; investment projects.
raise prices for water,
gasoline, electricity.
Budget cuts; Tax increases; broaden a
removed/reduced base; improve collection.
subsidies on basic
commodities.
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Cut government spend- Tax reform: lower rates, Canceled/rephased
ing; reduced subsidies on broaden base, simplify major development
food, fuel, fertilizer. laws. projects.
Reduced subsidies for
basic commodities and
education.
Subsidies for basic
commodities.
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for financing to support development projects has
been stymied by "guilt by association." Because of
problems with other Latin debtors, banks are reluc-
tant to lend money for energy development projects,
and they have refused to roll over Colombia's $3.4
billion short-term debt. As a result, Colombia is in a
debt trap: it draws down reserves to service its $12.5
billion debt, and banker reluctance to lend increases
as foreign exchange reserves fall
Egypt
Egypt lives beyond its means and relies on external
sources of income over which it has little control:
? Petroleum exports are subject to declining prices
and soft markets.
? Remittances from 3 million overseas Egyptian
workers are vulnerable to changes in demand for
immigrant labor in the Middle East.
? Suez Canal revenues are subject to slowed shipping
traffic.
? Tourism receipts have not regained ground lost after
President Sadat's assassination in 1981.
According to Egyptian Government officials, income
from these sources slipped in 1984.
Following 8-percent real economic growth annually
during the 1970s, the economy has fallen on hard
times largely because of high consumption and unpro-
ductive investment. The trade and current accounts
recorded large deficits-$5.8 billion and $2.5 billion,
respectively-in 1984. External debt climbed to over
$25 billion in 1984, ranking Egypt eighth among
LDC debtors. Although most of its debt is in official
medium- or long-term obligations, Egypt's 1984 debt
service totaled $3.2 billion-second only to
Indonesia's among these seven countries.
Domestic economic policies have contributed to eco-
nomic dislocation. Agricultural pricing policies have
discouraged farmers from increasing output. Food
subsidies-for bread in particular-have encouraged
consumption, requiring food imports of about $3
billion in 1983. The government also has held petro-
leum and public utility prices to less than 20 percent
of world prices, and consumption increases by about
15 percent annually. In addition, the country's infra-
structure is decaying, urban overcrowding contributes
to epidemics, and the housing shortage is acute. In the
country's "race against time," President Mubarak has
initiated economic reforms-without an IMF pro-
gram-to reduce subsidies, raise taxes, and encourage
foreign investment. The pace may be slow, however,
because the government has met popular resistance in
the past.
Indonesia
Indonesia is not now on the LDC economic sick list,
but potential difficulties exist. Jakarta has stayed off
the troubled debtor list so far because it undertook
austerity early to prevent further deterioration of its
external and domestic budget accounts when oil prices
dropped in 1982-83 and other commodity markets
softened:
? In 1983 it devalued the rupiah 27.5 percent to stem
capital flight, boost reserves, halt currency specula-
tion, and encourage nontraditional exports.
? The government also reduced subsidies on food,
fertilizer, and fuel products, causing domestic fuel
prices to rise 50 to 76 percent.
? In addition, the government reviewed 125 major
development projects and decided to cancel or re-
phase those with a major import content that would
drain foreign exchange.
These measures have reversed the external trends that
had hurt Indonesia but have also severely pressured
the domestic economy. The government is having to
deal with nearly 2 million entrants to the labor market
annually, and layoffs are adding to the problem.
Official unemployment for 1983 was 4 percent, but
the US Embassy estimates that 20 to 25 percent of
the 60 million labor force is effectively unemployed.
These unfavorable trends have led to some labor
restiveness and an increase in wildcat strikes. Increas-
ingly, union leaders have spoken out on behalf of
members emphasizing the need for job protection and
wage increases and decrying subsidy cuts for fuel and
bus fares. The rise in unemployment also has led to an
increase in violence,
The government may have to deal with unrest among
those hurt by austerity measures and with dissatisfac-
tion among students and youth who see poor pros-
pects. Anti-Chinese bomb attacks and Orthodox Mus-
lim riots already have erupted.
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Morocco
Morocco faces acute financial difficulties, many of
which have developed from circumstances beyond its
control:
? Severe droughts since 1981 have caused serious
shortfalls in agricultural production-particularly
of cereals-and required heavy grain imports.
? Collapsed phosphate markets have reduced export
income; Morocco relies on phosphates for 40 percent
of its export earnings.
? European trade barriers have restricted Morocco's
traditional citrus and vegetable exports, and
Europe's economic restructuring has caused the
level of remittances from Moroccan workers-the
country's largest foreign-exchange earner-to level
? Service payments on the country's $12.8 billion debt
escalated because of high interest rates and US
dollar appreciation and necessitated a debt resched-
uling in 1983-84.
War in Western Sahara is an added economic drain
and costs the government an estimated $1 million per
day or 30 percent of the government's administrative
budget, according to the US Embassy.
The government also faces social pressures caused by
economic decline. More than 40 percent of the popu-
lation is at or below the poverty line, and the number
is rising because of falling real incomes. To ameliorate
these conditions, the government provides subsidies
for basic foods, which take 9 percent of the national
budget; free universal education consumes another 27
percent. Despite high financial outlays for education,
only 28 percent of the population is literate.
To qualify for an IMF standby arrangement in
September 1983, Rabat implemented austerity mea-
sures. Efforts by the government to raise food prices
and school fees as part of that program spawned riots
in January 1984. The standby expires in March 1985,
and negotiation of a new IMF program is necessary
for Rabat to reschedule debts and receive additional
aid. We expect negotiations to be completed by
Pakistan
Pakistan is not experiencing an economic crisis, but it
is one of the world's poorest countries with formidable
external debt servicing requirements. Real economic
growth slowed to 3.5 percent in 1984, the lowest since
President Zia took power in 1977. This was primarily
because of a disastrous cotton crop and a disappoint-
ing wheat harvest. A 5-percent decline in worker
remittances in 1984-on which the economy relies
heavily-also contributed to increased economic diffi-
culty. Moreover, financial support for over 2 million
Afghan refugees who have fled to Pakistan cost the
Pakistani Government-according to its claim-
$350-400 million in goods and services in 1983 and
continues to drain its resources.
Pakistan's debt-$11.5 billion-ranks it 18th among
LDC debtors in 1984. Although 85 percent of the
debt is owed to official sources at mostly concessional
rates, the 1984 debt servicing burden was still over
$1 billion. Despite several debt reschedulings in the
1970s and early 1980s, the country's debt service ratio
was 22 percent in 1984-about average for many
developing countries, but high given the number of
reschedulings.
The government's proposed 1985 budget does not
introduce dramatic revenue measures that would hurt
the populace. However, the US Embassy reports that
Islamabad may need to cut social-sector investments
for health, education, and population control. The
need for reductions could be precipitated by an eco-
nomic downturn resulting from a combination of
events-such as bad weather or further drops in
worker remittances.
Peru
The economic and social crisis in Peru is deepening
largely because of three factors: natural disasters,
world recession, and narcoterrorism. In December
1982 climatic changes caused by El Nino-a warm
current that replaced the cold waters of the Humboldt
Current-brought severe drought in the south and
floods in the north. It left $1 billion in damage and
dropped agricultural production 10 percent. The
1981-82 world recession contributed to plunging
midyear.
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prices for Peru's primary exports-copper, silver, and
petroleum. The resulting need to cut imports contrib-
uted to a decrease in industrial production to about
one-third of total capacity. Industrial unemployment
and underemployment now affect two-thirds of the
Narcoterrorism is the country's third major problem.
Peru is one of the world's two largest coca leaf
producers, and for the past two years Peruvian pro-
ducers, with help from Colombian distributors, have
moved aggressively into the market. According to the
US Embassy, the growing narcotics trade has corrupt-
ed important Peruvian institutions such as the police
force and court system, and it is a temptation for a
middle class trying to maintain its standard of living.
A new difficulty is that terrorists-especially the
Maoist Sendero Luminoso-are now operating in
major drug producing areas where the level of vio-
lence has increased and threatens the government's
antidrug program.
Adding to Peru's economic drain are:
? Pressures for increased military expenditures be-
cause of the military's dominant political role.
? A thriving underground economy that robs the
government of tax income and undermines the
government's legitimacy.
? Peru's $14 billion external debt in 1984.
The Embassy reports that 40 percent of the 1985
budget is slated for debt service. Lima had stopped
interest payments on its debt in June 1984 but
recently paid $50 million to keep from falling more
than six months behind on servicing, according to
press reports. Even so, Peru is $200 million behind on
commercial bank interest payments, and negotiations
with creditor banks continue to be bogged down while
Peru seeks bridge financing. Because earlier reforms
caused demonstrations and strikes, Belaunde's gov-
ernment appears unwilling to take the austerity steps
necessary to negotiate an IMF agreement before the
spring elections. The US Embassy reports that auster-
ity combined with prolonged economic stagnation will
be socially explosive and probably politically untena-
Philippines
Despite abundant natural resources, a well-educated
labor force-overall literacy is 87 percent-talented
government technocrats and business entrepreneurs,
and an open, capitalistic economy, the economy is in
its most serious crisis since World War II. It currently
has one of the worst growth performances in Asia;
real GNP fell 5.5 percent in 1984. The inflation rate
exceeds 50 percent, its current account deficit is
nearly $1 billion, and it is the seventh-largest LDC
debtor. Prices for its traditional commodity exports
remain low, and the value of the peso has declined 34
percent since September 1983. The domestic financial
system has also weakened with some banks going
under.
In response to these problems, the Philippines adopted
an IMF-approved economic program as a prerequisite
for a $615 million standby loan; the agreement was
signed in December 1984. Before that, subsidies were
reduced for the second time in 12 months on basic
food items, petroleum products, and electricity. In
addition, the Central Bank has lifted foreign
exchange controls, and the government has canceled
or scaled back major industrial projects and is raising
taxes.
The deteriorating economy has affected all sectors of
society. Since 1983, financial credits for business have
dried up, bankruptcies have increased, and factories
have halted or scaled down production. As a result,
unemployment has climbed, and workers' unemploy-
ment benefits are running out. Philippine economists
indicate that unemployment in Manila alone grew by
400,000 in the first 10 months of 1984. Real incomes
have dropped and the income gap between rich and
poor is growing. The press reports that nearly 80
percent of the population lives below the poverty level,
and obtaining sufficient food is increasingly a problem
for more than half of the population. Economic
deterioration also has affected education where costs
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have risen, and parents cannot afford to pay even
nominal fees. In 1984, according to press reports,
60 percent of enrolled students were forced to return
to the provinces from universities in Manila.
The Philippines' economic straits are compounded by
concurrent political pressures on the government of
President Ferdinand Marcos. Political opposition
spurred by the assassination of Benigno Aquino has
coalesced with demonstrations against economic aus-
terity. Marcos's health also has raised concern about
the successor issue, and these simultaneous political-
economic forces are contributing to a potentially
volatile situation.
To quell popular discontent, most of these LDCs, and
many others like them, will resist needed changes in
economic policy and management. Government subsi-
dies for basic food and other consumer goods drain a
large share of budget resources in Egypt, Morocco,
Indonesia, the Philippines, and Pakistan. Many of
these governments have committed to reducing or
eliminating subsidies, which could cause strikes or
other turmoil that could threaten these regimes. On
the other hand, politically expedient economic poli-
cies-such as food subsidies-designed to mollify
restive populations could lead to equally destabilizing
budget deficits and spiraling inflation.
Although some military expenditures have been pared,
the reasons for substantial military allocations are not
likely to recede. Insurgent groups in Peru and the
Philippines are gaining strength while Colombia is
trying to counter terrorist groups. There is no indica-
tion that Morocco's war against the Polisario in
Western Sahara will end soon. Pakistan will continue
to feel the need to allocate a large share of its budget
to the military partly because it fears Indian
intentions.
Sociopolitical conditions in most of these countries
will worsen without resumption of vigorous economic
growth. Lack of jobs, unemployment, and underem-
ployment probably will continue to be serious prob-
lems in the wake of a continued need for austerity.
Moreover, real incomes will continue to decline, and
High population growth in all the countries-at
2.1 percent Colombia's is lowest-will exacerbate the
unemployment nightmare as well as strain social
services and resources. In Indonesia nearly 4 million
are born annually and 2 million will enter the labor
market every year. Pakistan is the world's ninth most
populous country, and its population will double ap-
proximately every 23 years. Morocco's population is
expected to double by the year 2010. We estimate
that Peru and the Philippines, respectively, will need
to create 150,000 and 700,000 new jobs annually just
to keep pace with population growth.
While irrational government policies and demograph-
ic forces augur continued problems for low- and
middle-income debtors, improvements in the interna-
tional economy could brighten their prospects:
? Economic growth in the OECD countries should
expand an average 3 percent in 1985, although
growth in the United States and Japan will slow
from last year's rates; continued OECD growth will
support some LDC recovery, but not enough to put
the LDCs back on a path of sustained growth.
? The resulting expansion in world trade also should
contribute to LDC economic recovery. GATT re-
ports that world trade volume grew 9 percent in
1984, and a rate of just over 6 percent in growth is
possible this year.
? Continued declines in interest rates also will ease
LDC economic burdens. For the major LDC debt-
ors, a 1-percentage-point decline in interest rates
saves $2 billion annually in debt service.
? Lowered oil prices have helped nonoil LDCs curb
spending for energy, and this trend probably will
continue in 1985. It does, however, hurt prospects
for the oil exporters in the group, like Peru and
Indonesia.
gaps between rich and poor will widen.
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In the long run, adherence to economic adjustment
programs adopted by some debtor LDC governments
will be a primary factor in determining the extent of
their recoveries. Some-Colombia, Egypt, and
Peru-may undertake formal IMF programs this
year. Should these governments maintain the political
will to carry out needed reforms-despite probable
downturns in the first year of austerity-the long-
term prospects for their economies will be significant-
ly improved.
The possible consequences of these LDCs' economic
problems-and of countries like them-could threat-
en significant US interests that go beyond the stabil-
ity of the international financial system. These inter-
ests include economic, strategic/military, and foreign
policy concerns that could be hurt if LDC economic
problems lead to increasingly unstable domestic situa-
tions.
Commerce
US trade and investment could suffer increasingly.
The US trade deficit will widen in 1985, and these
LDCs' economic adjustment programs will contribute
to the increase. In 1984, US exports to these seven
countries dropped below 1983 levels for all but Paki-
stan and Morocco. Exports to Indonesia fell by $250
million or 17 percent; and by $148 million to Peru or
16 percent. These countries-especially Colombia,
Peru, and the Philippines-will again severely curtail
imports and promote exports in line with IMF stabili-
zation programs and self-imposed austerity measures
this year. These efforts will further dampen demand
for US goods.
In addition, these countries could resort to greater
trade distorting policies, such as export subsidies, to
stimulate exports and earn more foreign exchange.
These subsidies will present increasing problems to
US policymakers as the demand from US industries
for offsetting protectionist policies will grow.
Another concern to the United States is increased
countertrade, that is, trade contingent on an exchange
of goods and services. Countries strapped for foreign
exchange are requiring countertrade arrangements.
US Exports, Imports, and Investment
Position, 1983
Legend ~ Exports
= Imports
Investment
Colombia
Egypt
Indonesia
Morocco
Pakistan
Peru
Philippines
Depending on the definition of countertrade, observ-
ers estimate that it composes 10 to 40 percent of all
Third World trade. Indonesia and Colombia now
require countertrade for certain imports. These re-
quirements not only burden US exporters, but they
also undermine US policy efforts to promote open
markets.
Deterioration in the investment climates of these
debtor countries also has constrained US investment-
represented by bank lending and private investment-
and has hurt earnings of the banks and companies
involved. Although some LDCs now are paying lipser-
vice to welcoming foreign investment and improving
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Table 4
US Interests
Democracy.
Moderate voice in Latin
American/Third World
issues.
Promoted Contadora
Group.
Hosted Latin debtor
countries.
Camp David accords.
Role in broader Arab-
Israeli peace.
Helpful on issues re-
garding Lebanon.
Strength offsets radical
Arab states.
Pro-West anti-
Communist.
Moderate, nonconfron-
tational on North-South
issues.
Pro-West.
Moderate in Arab
councils.
Helped return Egypt to
Islamic conference.
Strategic position in
Caribbean.
Support for US policies
may depend in part on
economic needs and re-
sources to be gained
from Arab ties; wants to
reap greater economic
benefits from US "spe-
cial relationship."
Malacca Straits and
other Indonesian waters
for military/commercial
movement.
Strait of Gibraltar, con-
trols Mediterranean ac-
cess; access and transit
agreement; use of four
airbases for training,
emergencies; unrestrict-
ed US Navy port calls.
US exports = $9 billion,
1983, but dropped $400
million from 1982.
US imports = $1
billion.
New counterpurchase
law.
US exports = $2.8
billion.
US imports = $0.3
billion.
Relies on Indonesia for
imports: petroleum, rub-
ber, tin ($5.3 billion).
$1.5 billion US ex-
ports-growth market.
Countertrade law for
government-sponsored
contracts.
US Moroccan Joint
Committee for Econom-
ic Relations.
US exports = $439
million.
US imports = $31
million.
US investment position
= $1.9 billion.
Trying to change restric-
tive Andean Pact
provisions.
US investment position
= $1.5 billion, 1983.
OPIC = $2.2 million di-
rect loans; $215 million,
largest contingent liabil-
ity for insurance.
Investment position,
1983 = $3.04 billion;
oil, manufacturing,
forestry.
US Moroccan Joint
Committee for Econom-
ic Relations.
US investment position
= $46 million (1982).
$19.2 million, FY 1985 Control of narcotics
proposal for narcotics trafficking-cocaine,
control and military marijuana.
assistance.
$1.175 billion in military
grant aid, FY 1985 pro-
posal. $1 billion econom-
ic aid, FY 1985
proposal.
$155 million, FY 1985
proposal.
$211 million military as- Largest VOA trans-
sistance February 1983 mitter outside US.
to February 1985. 25-year agreement to
$84 million to upgrade build new VOA facil-
airbase. ity signed in 1984.
Development assistance
since 1956 = $1.2
billion.
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Table 4
Investment position = Fourth-largest US aid Control of opium and
$109 million (1982). recipient-$3.38 billion, hashish traffic from
US-Pakistan aid agree- "golden crescent."
ment for 1982-87.
US investment position Largest US aid program Narcotics traf-
= $2.3 billion; petro- in Latin America. ficking-cocaine.
leum, banking. $110 million in food/de-
velopment/disaster aid,
FY 1984.
$78.3 million, FY 1985
proposal.
Investment position = $236.3 million, FY 1985 Immigration, legal
$1.1 billion; banks, proposal. and illegal.
manufacturing. Social Security and
veteran benefits.
Historical, colonial ties.
US Interests (continued)
a Blank box indicates no significant information or development in
this area.
Supports Soviet contain-
ment in Afghanistan,
Afghan resistance, and
Afghan refugees.
Moderating influence on
Arab-Israeli issues.
Sought to resolve Iran-
Iraq conflict.
Largest Soviet presence
in South America.
Growing appeal of
Marxism.
Approach to Third
World debt does not
support US policy.
Pro-West, United
States.
Moderate on north-
south issues.
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Frontline state between
Soviet-occupied Afghan-
istan and Persian Gulf.
Soviets providing easy
credit for military
purchases.
Main line of defense in
Pacific; Clark Air Base,
Subic Bay Naval Com-
plex; Five-year Military
Base Agreement-$900
million.
US exports = $812
million.
US imports = $167
million:
US exports down 18
percent.
US exports = $0.9
billion.
US imports = $1.2
billion.
10th-largest US export
market among LDCs.
US exports = $1.8
billion.
US imports = $2.0
billion.
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investment opportunities, financial press reports indi-
cate that little is changing to improve the climates for
foreign investors. Despite increasing need for external
capital, we believe that many countries are maintain-
ing or introducing new investment performance re-
quirements and linking bilateral trade issues to for-
eign investment.
In addition, other economic measures are stifling
foreign investment in these countries. Exchange con-
trols have curtailed profit repatriation; import restric-
tions have impeded capital imports necessary for
production; and greater poverty has shrunk domestic
markets and sales. In many cases, these conditions
have required the Overseas Private Investment Corpo-
ration to pay insurance claims to US companies and
the US Export-Import Bank to include its credits in
rescheduling arrangements.
In response to these conditions, a Council of Americas
survey of 52 major US corporations operating in four
Latin American countries found that corporate man-
agement will make only minimum effort to maintain
their investments. In particular, most indicated an
unwillingness to add to their self-finance programs.
This trend will hurt the US current account by
slowing foreign investment income and will limit US
export of products that US subsidiaries buy from the
United States. The slowdown in the growth of US
assets overseas, compared with increased foreign in-
vestment in the United States, also will contribute to
the trend that is making the United States a net
debtor this year.
Finance
The United States also has a substantial financial aid
investment in many of these debtor countries. Much
of the development progress supported by US money
has been eroded with the steady deterioration of their
economies. In the case of military assistance-where
Egypt, Pakistan, and the Philippines rank among the
highest recipients worldwide-arrears on debt service
have accumulated.
Given their economic straits, most of these LDCs are
asking the United States for increased economic and
military assistance. For example, the United States
provided the Philippines with a bridge loan following
completion of the IMF standby agreement in Decem-
ber 1984, and the Marcos government has requested
increased military assistance to help resist the Com-
munist insurgency. Egypt received $2.2 billion in US
aid for FY 1984/85 but recently requested an addi-
tional $1 billion to offset an expected drop in income
this year from oil sales, remittances, and tourism,
according to the press. President Mubarak wants to
reap greater benefits from the US special relationship
and contends that the United States has reneged on
its commitment to maintain military and economic
aid parity between Egypt and Israel. Because of this
special relationship, Egypt also believes that the Unit-
ed States should reschedule Egypt's military credits
bilaterally, rather than in a multilateral forum. Grow-
ing economic pressures in Egypt probably will mean
continued requests from Egypt for more aid and debt
relief.
Morocco also has pressured the United States to
forgive Foreign Military Sales credits as well as
provide increased assistance. If the United States does
not acquiesce, Moroccans could begin to question the
close ties with the United States and blame King
Hassan for not getting enough aid in exchange for
military privileges. Like Egypt and Morocco, other
LDCs pressed with declining economies will increase
requests to the United States for greater economic
and military assistance and will try to use whatever
ties they have as leverage.
Economic deterioration and rising debt burdens also
may cause some developing countries to question their
stance on external debt. Although most LDCs contin-
ue to reject the idea of a debtors' cartel, the several
meetings of Latin American debtors-the Cartagena
Group-show that LDCs can form a debtors' organi-
zation to talk about coordinating debt policies. If
economic conditions become intolerable, the LDC
governments might consider a debt cartel.
Strategic/Military
A number of these low- and middle-income countries
provide strategic and military advantages important
to the United States and its Western allies. These
countries could use US interests as leverage for
greater economic support. For example, Morocco's
strategic position at the Strait of Gibraltar, the access
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Table 5
US Economic and Military Assistance,
FY 1984
Worldwide
16,300.6
Colombia
11.3
Egypt
2,504.3
and transit rights it grants to the US military, the use
of four former US airbases for training and emergen-
cies, and unrestricted port calls by the US Navy could
be denied if Morocco believes that the United States
is not sufficiently forthcoming. In 1982 Rabat refused
the United States permission for landing rights for
US aircraft for a military exercise. According to a
Moroccan official, refusal was linked to levels of
military assistance.
A similar situation could arise in the Philippines for
the use of Clark Air Force Base and the Subic Bay
Complex. Philippine economic needs could push the
government to request more economic and military
assistance in return for another Base agreement.
Similarly, the United States relies on unimpeded
passage through Indonesian waters, especially the
Malacca Straits, for military and commercial move-
ment. US strategic interests could be undermined if
Indonesia hampered movement of US naval ships and
aircraft across Indonesian waters. If Pakistan's econo-
my were to deteriorate, it too could refuse further
cooperation with the United States in resisting Soviet
adventurism in Afghanistan and accepting Afghan
refugees unless the United States provided increased
Foreign Policy
Many low- and middle-income debtors have been
instrumental in supporting US foreign policy objec-
tives. Three of these countries-Pakistan, Morocco,
and Egypt-frequently support US Middle East
goals. Pakistan has been a moderating influence in
Islamic councils on Arab-Israeli issues and has sought
to resolve the Iran-Iraq conflict. Morocco's King
Hassan also has mediated between moderate and
hardline Arab countries. Egypt is crucial for keeping
the Camp David accords alive, offsetting the influence
of radical Arab states, and encouraging a broader
Arab-Israeli peace. If they perceive that their eco-
nomic interests are better served elsewhere-for ex-
ample, with other Arab states-they may not be as
willing to carry the water for the United States in
achieving its policy goals.
In Latin America, Colombia has worked within the
Contadora Group to resolve the Central American
conflict. President Betancur played a direct role in
arranging contact between a representative of the
Salvadoran guerrillas and the US special envoy to
Central America. Colombia also played a moderating
role in the Latin American debtors' conference at
Cartagena in June 1984. If the United States refuses
to help Colombia overcome its economic difficulties as
it perceives the United States should, Colombia may
change its moderate stances on Central America and
LDC debt issues.
Other US Interests
The United States has cooperative programs with
Pakistan, Colombia, and Peru for controlling drug
trafficking. For fiscal years 1984 and 1985, the
United States allocated over $25 million to support
control programs in these countries. If their economic
and debt burdens become too great, the countries
could abandon these efforts and put their resources
elsewhere.
Another fallout from decline of these economies will
be increased legal and illegal immigration to the
United States. This is especially true in the Philip-
pines where over 375,000 Filipinos are registered for
immigration under preference categories and where
visa and passport fraud has become epidemic.
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Opportunities for US Adversaries
Severe economic problems could force these countries
to seek alternate sources of aid from US adversaries.
For financial reasons, some-Peru, Egypt, and
Morocco-already are seeking closer ties with the
Soviet Bloc and other US ideological adversaries who,
in turn, will seize the opportunity to increase their
influence.
The Soviet Union, for example, already has a substan-
tial presence in Peru but is seeking to strengthen its
relationship by offering generous credit terms for
supply the Peruvian Air Force with spare parts and an
AN-32 aircraft. President Belaunde recently indicat-
ed to the US Ambassador in Lima that, if Peru could
not get more financial help from the United States, it
might look elsewhere.
Other smaller debtor countries are making or have
been offered increased Soviet ties:
? Egypt hopes to acquire more spare parts for Soviet-
built weaponry in its inventory and, in our judg-
ment, believes that improved Egyptian-Soviet ties
will facilitate this. The recent exchange of ambassa-
dors may lead to trade concessions and resolution of
the military debt that Egypt owes the Soviet Union.
? The Soviet Union also has made overtures to the
Philippines to increase commercial ties. Although
the Philippines has not warmed to the prospects, its
continuing economic crisis could force it to reevalu-
ate its position-particularly since Mrs. Marcos has
had favorable contacts with the Soviets.
? Partly for economic reasons, Morocco has moved to
develop closer ties with Libya. By signing a union
treaty, Rabat, in our judgment, hopes to gain
financial aid, possible barter arrangements, and
90,000 additional jobs for Moroccan workers. Rabat
also warmly received a Soviet trade delegation and
gave the mission prominent press coverage.
The United States has interests in other LDCs-such
as Nigeria, Sudan, Jamaica, Kenya, Ivory Coast, and
Chile-which face economic burdens and/or
political-military problems that could challenge US
policymakers. For example, Sudan could ask for more
aid for its ailing economy and assistance against the
perceived military threat from Libya, while in Jamai-
ca, economic problems could contribute to the reelec-
tion of the leftist leaning opposition party. A steady
improvement in the world economy and the adoption
of rational economic policies by these LDCs, of
course, would go a long way toward solving their
financial problems. In our judgment, however, this
combination of events is unlikely in the near term.
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Appendix A
Basic Economic Indicators
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Colombia
Basic Economic Indicators
Billion US $
(except where noted)
Imports, f.o.b.
3.00
4.30
4.76
5.18
4.76
4.60
Gross domestic product
27.93
33.39
36.38
38.88
37.32
37.69 b
Real growth rate (percent)
5.1
4.2
2.5
1.1
0.9
3.0
Inflation rate (percent)
24.7
26.5
27.5
24.6
19.8
18.0
Commodities as a percent
of total exports c
68.0
72.0
64.0
62.0
66.0
NA
a f.o.b.-"free on board," quoted price of merchandise includes the
cost of loading the goods into transport vessels at the specified
place.
b Adjusted for inflation.
c Coffee, cotton, sugar, and fuel oil; IMF data.
Egypt
Basic Economic Indicators
Billion US $
(except where noted)
Commodities as a percent 62.0 78.0 78.0 79.0 76.5 NA
of total exports c
a f.o.b. - "free on board," quoted price of merchandise includes
the cost of loading the goods into transport vessels at the specified
place.
b Data changes beginning in 1980 from calendar to fiscal year.
c Crude petroleum, refined petroleum, and cotton; IMF data.
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Indonesia
Basic Economic Indicators
Billion US $
(except where noted)
Basic balance of payments
2.29
5.01
1.55
-1.01
NA
NA
Current account balance
0.97
2.90
-0.61
-5.95
-4.20
-3.40
Merchandise trade balance
5.90
9.17
6.79
1.36
0.43
2.50
Exports, f.o.b.a
15.14
21.76
23.39
19.71
18.64
18.90
Imports, f.o.b.
9.24
12.59
16.60
18.35
18.21
16.40
Gross domestic product
51.50
72.50
85.50
90.0
79.2
82.6
Real growth rate (percent)
5.1
7.6
7.1
-0.4
5.1
5.0
Inflation rate (percent)
21.8
16.0
7.1
9.7
11.5
9.0
Commodities as a percent of
total exports b
97.6
97.7
97.1
95.3
95.0
95.0
Official foreign exchange reserves (excluding gold
holding)
a f.o.b.-"free on board," quoted price of merchandise includes the
cost of loading the goods into transport vessels at the specified
place.
b Crude oil, rubber, wood, palm oil, coffee, nickel, tin, copper,
refined petroleum, and liquefied natural gas.
Morocco
Basic Economic Indicators
Billion US $
(except where noted)
Basic balance of payments
-0.14
-0.06
-0.55
-0.57
-0.11
0.02
Current account balance
-1.56
-1.47
-1.89
-2.06
1.13
1.15
Merchandise trade balance
-1.34
-1.38
-1.56
-1.77
-1.26
-1.30
Exports, f.o.b.-
1.99
2.42
2.28
2.04
2.04
2.10
Imports, f.o.b.
3.33
3.80
3.84
3.82
3.30
3.40
Gross domestic product
15.9
17.8
14.8
14.7
14.8
15.1
Real growth rate (percent)
4.5
3.8
-1.3
4.5
0.6
2.0
Inflation rate (percent)
15.0
15.0
17.0
13.0
12.0
12.0
Commodities as a percent
of total exports b
40.0
42.0
39.0
36.0
32.0
30.0
a f.o.b.-"free on board," quoted price of merchandise includes the
cost of loading the goods into transport vessels at the specified
place.
b Citrus fruit and phosphates; IMF data.
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Pakistan
Basic Economic Indicators
Billion US $
(except where noted)
Current account balance
-1.13
-1.15
0.99
-1.61
-0.55
-1.03
Merchandise trade balance
-2.17
-2.52
-2.77
-3.45
-2.99
-3.33
Exports, f.o.b.c
1.65
2.34
2.80
2.32
2.63
2.67
Imports, f.o.b.
3.81
4.86
5.56
5.77
5.62
6.00
Commodities as a percent
of total exports d
26.0
34.0
33.0
22.0
24.0
22.0
1982-84 are Pakistani fiscal years ending 30 June. Prior to 1982 c f.o.b.-"free on board;" quoted price of merchandise includes the
the rupee-dollar ratio was valued at 9.9 rupees per dollar. The value cost of loading the goods into transport vessels at the specified
of the rupee compared to the dollar has been declining since 1982. place.
b Includes official assistance and debt relief. d Cotton and rice; IMF data.
Peru
Basic Economic Indicators
Billion US $
(except where noted)
Commodities as a percent
of total exports c
f.o.b.-"free on board," quoted price of merchandise includes the
cost of loading the goods into transport vessels at the specified
place.
b Adjusted for inflation.
c Including copper and oil; IMF data.
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Philippines
Basic Economic Indicators
Billion US $
(except where noted)
Overall balance of payments
-0.60
-0.37
-0.73
-1.64
-2.12
-2.34
Current account balance
-1.50
-1.90
-2.06
-3.20
-2.75
-1.15
Merchandise trade balance
-1.53
-1.93
-2.25
-2.65
-2.48
-0.58
Exports, f.o.b.-
4.60
5.79
5.71
5.02
5.01
5.35
Imports, f.o.b.
6.14
7.72
7.96
7.66
7.49
5.93
Gross national product b
29.85
35.25
38.44
39.54
33.97
31.71
Real growth rate (percent)
7.5
4.4
3.7
2.7
1.4
-5.5
Inflation rate (percent)
17.6
18.2
13.0
10.3
10.0
50.0
Commodities as a percent
of total exports
67.0
64.0
55.0
53.0
53.0
50.0
- f.o.b.-"free on board," quoted price of merchandise includes the
cost of loading the goods into transport vessels at the specified
place.
b GNP growth rate based on the Philippine peso.
c Copper, wood, coconut products, and sugar; IMF data.
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Appendix B
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Colombia
Trends in International Debt
Billion US $
(except where noted)
Egypt
Trends in International Debt
Billion US $
(except where noted)
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Indonesia
Trends in International Debt
Billion US $
(except where noted)
Total debt
16.8
18.7
20.4
24.0
28.4
32.0
Official sources
8.4
9.4
10.0
11.0
12.5
14.5
Private sources
6.7
7.2
7.5
9.4
12.2
14.0
Morocco
Trends in International Debt
Billion US $
(except where noted)
Total debt
6.12
7.81
9.34
10.36
11.30
12.80
Official sources
2.83
3.47
4.35
4.90
5.40
6.05
Private sources
3.87
3.87
3.99
4.63
5.10
5.95
Short term
0.42
0.47
1.00
0.83
0.80
0.80
0.99
1.34
1.59
1.65
1.61
1.89
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Pakistan
Trends in International Debt
Billion US $
(except where noted)
Total debt payments 0.65 0.75 0.88 0.91 0.80 1.02
Debt service ratio (percent) 24 20 17 18 14 22
Peru
Trends in International Debt
Billion US $
(except where noted)
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Philippines
Trends in International Debt
Billion US $
(except where noted)
Total debt
12.6
16.4
19.4
22.9
24.3
26.0
Official sources
2.3
2.8
3.5
3.8
5.7
6.5
Private sources
5.0
6.1
6.9
8.1
9.4
10.0
Short term
5.3
7.5
9.0
11.0
9.2
9.5
1.2
1.7
2.2
3.05
2.9
3.0
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Appendix C
Economic/Social Indicators
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Economic /Social Indicators
GNP Growth and Population and Literacy Rate Unemployment Percent of Popula-
Per Capita Income Growth Rate (percent) Rate (percent) tion in Agricultural
Sector (percent)
Indonesia 5.0 percent (1984) 169 million 64 20-25 66
$440 (1983) 2.2 percent
-5.5 percent (1984) 55.5 million 87 30 47
$570 (1982) 2.3 percent
3.5 percent (1984) 96.6 million 24 NA 52
$320 (1984) 2.6 percent
2.0 percent (1984) 24 million 28 30 50
$640 (1984) 2.9 percent
7.1 percent (1982) 47 million 40 NA 45 to 50
$670 (1984) 2.7 percent
3.0 percent (1984) 19 million 72 60 a 40
$865 (1984) 2.6 percent
3.0 percent (1984) 28 million 81 14 26
$1,335 (1984) 2.1 percent
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