INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000300020005-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 27, 2016
• Document Release Date: April 20, 2011
• Sequence Number: 5
• Publication Date: February 7, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300020005-4 5xi
?Secret?
Directorate of
Intelligence
International
Economic & Energy
Weekly
7 February 1986
Secret?
DI IEEW 86-006
7 February 1986
Copy
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International
Economic & Energy Weekly
7 February 1986
Secret
iii Synopsis
1 Perspective Capital Flight and Political Events
3 Nicaragua: The Growing Consumer Squeeze
7 The USSR's Eastern Coal Basins: A Potential White Elephant
11 LDCs: Obstacles to Foreign Investment
17 Stagnant Caribbean Exports: Continuing Drag on the
Regional Economy
23 Briefs Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
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DI IEEW 86-006
7 February 1986
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International
Economic & Energy Weekly
Synopsis
Secret
1 Perspective?Capital Flight and Political Events
While most of the capital flight over the past few years has been economically
motivated, political uncertainty and government corruption have been major
factors in the Philippines, Nigeria, and Argentina. The structural reforms
necessary to stem the outflow of capital, however, are difficult to implement
because the financial interests of powerful political constituencies would
suffer.
3 Nicaragua: The Growing Consumer Squeeze
Nicaraguan consumers are tightening their belts as the economy deteriorates
and the regime commits an ever larger share of its budget to the war effort.
Prospects for improvement are bleak, and the regime will rely on shipments
from the Soviet Bloc to maintain minimum consumption levels while using
state-of-emergency powers to prevent open discontent.
7 The USSR's Eastern Coal Basins: A Potential White Elephant
Expanded use of coal underpins the Soviet Long-Term Energy Program
despite Moscow's current focus on oil and natural gas. We believe that coal
production and utilization will probably increase only slightly?if at all?
during the coming decade, leading to energy constraints beginning sometime
in the 1990s.
11 LDCs: Obstacles to Foreign Investment
Significant increases in foreign investment are blocked in many LDCs by
economic and policy barriers ranging from weak markets to poor investment
climates. A number of these barriers could be lowered if LDC governments
would adopt some key policy reforms, but the high political costs of the policy
action required will make it difficult for most developing countries to overcome
these obstacles over the next few years.
17 Stagnant Caribbean Exports: Continuing Drag on the Regional Economy
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Despite access to preferential trade arrangements, such as the Caribbean
Basin Initiative (CBI), Caribbean exports continue to decline, both to the
United States and other developed countries. Declining exports are hurting the
region's domestic economies and their effects are exacerbating political
problems.
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International
Economic & Energy Weekly
7 February 1986
Perspective Capital Flight and Political Events
Secret
While most of the capital flight over the past few years has been economically
motivated, political uncertainty and government corruption have been major
factors in the Philippines, Nigeria, and Argentina. Even in economically sound
South Africa, a slight positive inflow of capital before the most recent period
of black unrest began shifted to a $2.2 billion net outflow of private capital in
the following six months. Similarly, at least
$10 billion flowed out of the Arab states during 1978-79 as the revolution in
Iran, the terrorist attack in Mecca, and the Soviet invasion of Afghanistan led
people to question the stability of the world's key oil-exporting region.
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Capital flight frequently builds as political uncertainty develops. Elections 25X1
where the outcome or the policies of the likely winner are in doubt may lead to
an acceleration in capital flight in the months and weeks leading up to the bal-
loting. In Israel, for example, against a background of economic difficulties,
capital flight picked up momentum as the July 1984 elections drew near.
Likewise, when a government's longevity is clearly in question, assets will
move out of the country. This pattern was visible in Iran as the Khomeini
forces gathered strength against the Shah. 25X1
Capital flight can almost always be expected following unanticipated political
events such as assassinations or coups. In the wake of the Aquino assassination
in the Philippines, bankers estimate that capital flight reached $5 million a
day, draining reserves and forcing a debt moratorium two months later. The
Philippines, however, had been suffering from political and economic malaise
long before the assassination. Earlier that summer, Marcos's health problems
had prompted fears of a destabilizing power struggle.
by the time of the Aquino assassination, most businessmen had already shifted
the majority of their liquid assets abroad. Much of the subsequent capital
flight was actually disinvestment.
Under authoritative governments where elites face no serious monitoring from
opposition parties, movement of capital by government officials, their political
associates, or family members is often prevalent. The Somoza government in
Nicaragua virtually drained the central bank before Somoza was ousted in
1979. Similar charges have been leveled against members of the Marcos
government who have large holdings in the United States
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When periods of prolonged political instability or uncertainty occur, people
begin to follow their money out of a country. As evidence of a tremendous
"brain drain" in the Philippines, lavish homes are being sold at bargain prices.
\ In South Af-
rica, white emigration in July and August was up 60 percent over the same pe-
riod in the previous year, according to official government figures. Similar
episodes of South African emigration occurred after the Sharpsville riots in
1960, and during the two years following the Soweto shootings in 1976.
The political hazards that capital flight leaves in its wake are acute. Successor
governments inherit overwhelming debt burdens and an empty till, leading
them to question the "legitimacy" of their debts. The Alfonsin government in
Argentina is a case in point. Such debtors say they will not "sweat" to pay
back loans made by bankers who knew the money was being spent not for eco-
nomic development but to enrich corrupt officials. At the same time,
commercial banks, multilateral institutions, and OECD governments are
reluctant to continue to fund countries where capital flight is an ongoing
problem. The structural reforms necessary to stem the outflow of capital,
however, are difficult to implement because the financial interests of powerful
political constituencies would suffer.
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Nicaragua: The Growing
Consumer Squeeze
Nicaraguan consumers are tightening their belts as
the economy deteriorates and the regime commits
an ever larger share of its budget to the war effort.
The Sandinistas' gradual socialization of the econo-
my has led to a highly centralized distribution
system, but rationing of basic foods?which began
in 1983?is increasingly haphazard. Declining real
wages have eroded purchasing power?food short-
ages and a phaseout of subsidies have led to soaring
staple prices. Prospects for improvement are bleak,
and the regime will rely on shipments from the
Soviet Bloc to maintain minimum consumption
levels while using state-of-emergency powers to
prevent open discontent.
Food Distribution Controls
On seizing power in mid-1979, the Sandinistas
centralized food distribution through the newly
created National Basic Foods Corporation, which
was given sole authority to import, export, and
wholesale basic foodstuffs. Over time,
the organization:
? Took over the previously privately owned super-
markets in Managua.
? Created "people's stores" to supply basic goods at
subsidized prices.
? Supplied foodstuffs to commissaries in some
workplaces throughout the country; these com-
missaries were replaced in mid-1985 by two
central commissaries in Managua.
? Furnished priority supplies to some private stores,
in exchange for pledges to sell controlled items at
official prices.
? Built marketplaces with stalls for private vendors
in neighborhoods throughout Managua with the
apparent hope of closing the Eastern Market, the
capital's bastion of small-scale free enterprise.
? Subsidized foodstuffs and consumer goods by
enforcing wholesale and retail price ceilings.
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Secret
During the first two years of Sandinista rule, food
imports and donations compensated for the sharp
decline in agricultural production during the revo-
lution. Per capita food imports jumped more than
threefold in 1980 and remained steady the follow-
ing year, according to press and US Embassy
reporting. By 1982, however, a falloff in donations
and the growing shortage of foreign exchange
limited the flow of foodstuffs from abroad, leading
to frequent shortages.
In response, Managua set up a system of "guaranty
supply cards," first for sugar, then later for rice,
beans, corn, cooking oil, salt, sorghum, and soap.
Each family was guaranteed the right to buy at
least a specified amount of each product per month
through government outlets at official prices. A
more stringent fixed ration system established in
March 1983 remains in affect today, with Cuban-
style ration cards distributed by the neighborhood
Sandinista Defense Committees. Nonetheless, sup-
plies of these goods have become increasingly
scarce, giving impetus to a prospering black mar-
ket. The regime now uses the block committees and
other mass organizations to police neighborhood
markets to ensure that official prices are honored,
according to the US Embassy.
Shortages are partly caused by inefficient handling
and distribution,
For example, L /bur-
densome customs procedures prevent prompt use of
donated goods. Opposition journalists claim regime
incompetence is hindering distribution of available
supplies of cooking oil and grains. We believe low
producer prices drive many farmers to divert goods
to the black market.
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Nicaragua: Economic Indicators, 1978-85
Consumer Price Growth
Percent
300
250
200
150
100
50
Real Wages
Index: 1978-100
? Real average wage
Real minimum wage
Real Per Capita GDP
Index: 1978-100
0
1978
I
80
306094 2-86
[
30
85 1978
I I
80
I L 1 1111_11 L_1
30
85 1978 80
85
Soaring Food Prices and Declining Real Wages
By early 1985, Managua could no longer afford the
huge and growing food subsidies, in part because of
escalating military expenditures. r
\ Citing the drain on the budget
and the need to curb speculation, the government
sharply boosted official prices for rice, beans, and
other staples last February and again on several
other occasions during the year?the first substan-
tial increases since 1979. Black-market prices of
these goods also rose sharply.
The impact of the subsidy cuts on inflation has
been tremendous. Between 1979 and 1984, the
consumer price index rose by an average of 35
Secret
percent per year, according to IMF data. On the
basis of US Embassy reporting, we estimate infla-
tion last year at about 300 percent.
Minimum wages, which were increased by 40
percent soon after the Sandinistas took power,
remained virtually frozen for several years despite
inflation. Three wage adjustments last year and
another hike of 50 to 100 percent in early January
did not keep pace with inflation. Analysis of official
data indicates that real minimum wages fell by
one-third during 1985 alone, while the average
purchasing power of all workers dropped by one-
fifth last year. Since 1978, real minimum wages
have declined by 50 percent and real average wages
by two-thirds.
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Nicaragua:
Prices for Basic Foods
Cordobas
Product
Beans
Unit
Official Prices a
Free Market Prices
December December
1984 1985
January
1985
January
1986
pound
4
105
21
150
Rice
pound
5
21
15
100
Corn
pound
5
10
10
55
Sugar
pound
5
16
7
100
Cooking
oil
gallon
60
NA
350
3,000
a The current official exchange rate is 70 cordobas per US dollar
and the black-market rate is 1,300 per dollar.
Plunging Consumption
US Embassy reporting indicates the steep decline
in purchasing power has altered patterns of con-
sumption. The limited data available indicate that
per capita consumption of food staples increased in
the first two years of Sandinista rule?when food
imports were high and prices subsidized?but have
fallen steadily since the end of 1981. The plunge in
real wages has wiped out savings, restricted the use
of private automobiles, dining out, and the pur-
chase of imported goods, and otherwise dramatical-
ly altered lifestyles of professionals and the middle
class. Minimum-wage earners are postponing pur-
chases of clothing and other basic consumer
goods?a pair of pants, for example, costs the
equivalent of half a month's earnings. In addition,
many Nicaraguan housewives report sharp deterio-
rations in family diets because of both price and
supply constraints.
Shortages?even of basic rationed staples?are
widespread, despite increased shipments of food-
stuffs from the Soviet Bloc last year. Since last
Christmas, nearly all basic staples?rice, beans,
sugar, cheese, milk, chicken, and meat?have been
in extremely short supply in government-run out-
lets, and cooking oil has been practically unavail-
able anywhere for several months. According to the
5
Secret
US Embassy, this is the first time so many scarci-
ties have occurred simultaneously. While many
middle-income consumers are resorting to the black
market?where a pound of rice, for example, costs
nearly five times the official price?the US Embas-
sy reports that this option is not open to lower
income families.
Bleak Prospects
The outlook for consumers remains grim. Several
sources indicate the harvest of key staples this year
will be significantly lower, in part because of poor
growing conditions. Inefficient government eco-
nomic policies, increased land confiscations, and
the growing squeeze on the private sector also are
hindering agricultural production. Foreign ex-
change constraints will limit food imports, although
the Soviet Bloc probably will continue to provide
enou h to satisf minimum consum tion needs.
The regime's commitment to
eliminate remaining subsidies on consumer goods
and foodstuffs?highlighted in an internal govern-
ment document?probably will push official and
black-market prices higher.
The calls by Sandinista leaders for a "survival"
attitude in the face of mounting pressures suggest
they expect supply problems to continue. Managua
is likely to push for more donations from the Soviet
Bloc while trying to deflect blame for the shortages
to private vendors. The program of land redistribu-
tion to bolster support among the peasants will
continue. The regime will rely on the expanded
state of emergency to prevent strikes, consumer
demonstrations, or other manifestations of discon-
tent. Spontaneous reactions may occur, however, as
evidenced by the murder of a price control inspec-
tor in a Managua marketplace in mid-January as
he tried to cite a vendor for price violations.
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The USSR's Eastern Coal Basins:
A Potential White Elephant
Expanded use of coal underpins the Soviet Long-
Term Energy Program; despite this, Moscow's cur-
rent focus is on oil and natural gas. Planners are
counting on coal from eastern deposits, together
with nuclear power, to provide nearly all growth in
energy output once natural gas production levels
off in the mid-1990s. Major problems remain in
developing coal-use and energy transfer technol-
ogies that will be needed to facilitate expanded coal
production in the major eastern basins. Moreover,
some of the increased output from these basins will
merely offset declining production from the major
underground basins west of the Urals. We believe
that coal production and utilization will probably
increase only slightly?if at all?during the coming
decade, leading to energy constraints beginning
sometime in the 1990s.
Key Eastern Basins: High Potential
for Output. . . and Headaches
The Soviets are banking on the development of
selected coal basins in the eastern USSR, but
progress in overcoming technical problems related
to the transport and use of coal from these basins?
Kuznetsk, Kansk-Achinsk, and Ekibastuz?has
been slow.
The Soviets have focused largely on their ability to
surface-mine vast amounts of coal cheaply, but
have underestimated the technical problems and
costs of using this very-low-quality coal. To move
coal back to the forefront of energy production and
use, the Soviets must find and implement techno-
logical solutions to two key problems:
? Low quality of the coal?most of the USSR's
coal reserves are low in energy value: either
lignites (often with high moisture content) or
7
USSR: Stagnating Coal Production
Million metric tons raw coal
800
1970 75 78 80 81 82 83 84 85-
Peak production.
308096 2-86
subbituminous coals with a high ash content.
These coals require unique approaches to mining,
transportation, and combustion.
? Distance?the major coal deposits that the Sovi-
ets want to develop are thousands of kilometers
from the industries and population centers most
in need of the energy. Consequently, low-cost
energy transportation is essential.
In short, eastern coal may be a white elephant?an
energy reserve requiring research and investment
funding far out of proportion to the gains achieved
by meeting planned targets for coal output and use.
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Soviet Development of Eastern Coal Basins
I I
Major coal-producing basin
? ? ?.Coal-slurry pipeline under construction
Major railroad
Transmission lines (1,150 kV or greater)
Operational
? ? ? Planned or under construction
1320 Kilometers
200 400 Miles
0
.Chelyabinsk
ustanay
Moscow*
Tambov"
Soviet Union
West
Sib ria
Area
of map
Kartalt.k,
Achinsk,
kchetav
Karag
Kazakhstan
Novosibirsk
Belo
7
,13-a-rnauf
? 1150-k7A 0
tui.\
'bastuz
ben
Achinsk'
Itatakiy4
n?tski*
Ka
707009 (A05636) 2-86
Secret
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The key to progress lies in developing state-of-the-
art coal-use and energy-transfer technologies?
large-capacity lignite-fired boilers, coal-slurry pipe-
lines, ultra-high-voltage electricity transmission
systems, and synfuel plants. Mastering these tech-
nologies will require carefully planned, well-
executed research and development and sizable
capital outlays. Annual investment in the coal and
power industries would have to increase by 50
percent to provide the estimated 50 billion rubles
(roughly $60 billion) required in the next 15 years
to successfully fund the planned expansion of coal
mining and use.
Because of coal's enormous reserve base and be-
cause of dwindling high-quality reserves of oil and
eventually even of gas, we judge that the USSR
will continue to emphasize coal in its long-term
energy plans. It will, however, probably not devote
the resources needed in the short term to overcome
fundamental obstacles to expanded use. The imme-
diate investment needs of the oil and gas industries
and modernization of the machine-building sector
during 1986-90 will more likely take priority.
Western Assistance Needed
Secret
to transport 3 million tons of West Siberian coal
annually. For the last five years, the Soviets have
been soliciting assistance?primarily through tech-
nical information exchange agreements?in coal
liquefaction technology from Western firms.
Implications
A failure to expand coal output and use would
probably have the following consequences:
? An already tight balance between supply and
demand for electric power in the Urals and
Kazakhstan would be upset. An increase in the
frequency and duration of power shortages during
the 1990s would probably lower the output of key
metallurgical, defense production, and agricultur-
al facilities in these areas.
The inadequacy and slow development of Soviet
technology and equipment for coal mining and use
have been increasingly criticized by Soviet energy
experts in press and industry journals. Some of
these specialists have gone so far as to note that
Western approaches to the commercialization of
coal technology, such as coal liquefaction, are
superior to those of the USSR.
If the USSR decides to make the commitment
necessary to expand coal output?and is willing to
make the hard currency outlays?we believe that
Western technology and equipment will play a
growing role in the effort and could become major
factors affecting the speed and magnitude of Soviet
coal development. Coal-cleaning facilities have al-
ready been ordered from West German and Italian
firms. An Italian firm has recently received a
contract to provide process technology and engi-
neering services for a 250-km coal-slurry pipeline
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Many power plants burning coal as their primary
fuel would have to continue using more fuel oil
than planned because of low coal quality and coal
shortages. This situation would hamstring Soviet 25X1
efforts to free up additional oil for alternative
domestic and export uses?an important consid-
eration in view of declining oil output.
? Shortages of coking coal would continue to be a
drag on steel production, adversely affecting Gor-
bachev's economic modernization program.
Time is running out on the opportunity to avoid
these problems. Moscow could redesign the Long-
Term Energy Program and, as an alternative to
coal expansion during the late 1990s, attempt
further growth in natural gas output and larger-
than-expected increments in nuclear energy pro-
duction. To make these decisions, the Soviet leader-
ship would have to focus on the longer term issues
in energy and pull itself away from the day-to-day
management that usually occupies its attention.
An energy program with greater emphasis on gas
and nuclear power would face different but still
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demanding problems. Further increases in gas out-
put would accelerate depletion of reserves and risk
a loss in ultimate recovery, a factor that Gorbachev
has already warned against. Moscow is already
planning to increase substantially the electricity
generated by nuclear power stations in the
European USSR. Soviet industry will have to in-
crease considerably the output of nuclear power
plant components and equipment if the existing
goals are to be met. Nuclear power could not be
substituted for coal east of the Urals without even
more sizable and costly additions to nuclear-
component-manufacturing capacity, major rede-
sign work, and massive training of new personnel.
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LDCs: Obstacles to
Foreign Investment
One of the cornerstones of the Baker Initiative is
increased inflows of foreign investment into debt-
troubled LDCs to compensate for reduced commer-
cial lending and to provide jobs and expertise.
Significant increases in such investment are
blocked in many LDCs by economic and policy
barriers ranging from weak markets to poor invest-
ment climates. A number of these barriers could be
lowered if LDC governments would adopt some key
policy reforms, but the high political costs of the
policy actions required will make it difficult for
most developing countries to overcome these obsta-
cles over the next few years. Increased foreign
investment, in turn, probably will make only a
small contribution to the resolution of LDC eco-
nomic problems.
Key Obstacles
Weak Markets. A weak domestic market is a
serious barrier to foreign investment in many
LDCs, particularly the larger countries. High infla-
tion rates, often coupled with domestic price con-
trols, dampen an LDC's attractiveness by squeez-
ing foreign investor profits when production costs
rise faster than sales prices. For example, according
to press reports, many prospective foreign firms are
postponing investments in Brazil because of a
renewed fear of high inflation. Sluggish economies
have weakened local markets in Nigeria, the Phil-
ippines, and Venezuela as well. These recessions
have depressed local demand and reduced domestic
purchasing power, temporarily deterring foreign
businesses seeking new investment opportunities.
The smaller LDCs have a difficult time attracting
foreign investors because their domestic markets
are limited even in the best of times. Existing local
11
Secret
manufacturers frequently have saturated many lo-
cal and regional markets. This production glut is
often magnified by low economic growth and per
capita income levels. In Kenya there are limited
market niches available to foreign businesses be-
cause the domestic market is largely filled with
locally manufactured goods and there are few
regional marketing opportunities. Similarly, a well-
developed domestic consumer products industry in
Tunisia precludes foreign investor opportunities in
the manufacturing sectors.
Regulatory Environment. Adverse regulatory envi-
ronments also block foreign investment in LDCs:
? The restrictive investment codes of some LDCs
deter prospective foreign investors. For example,
the Andean Pact countries?Bolivia, Colombia,
Ecuador, Peru, and Venezuela?legislate strict
foreign ownership and buy-out rules. Even though
some of these countries have recently announced
legislative improvements, investors are still reluc-
tant. Similarly, Mexican legislation that restricts
overseas ownership to a minority position and
enforces local content conditions in the automo-
tive and pharmaceutical industries is a key disin-
centive to foreign firms, although notable excep-
tions have been made for large-scale projects.
? Inadequate legislative safeguards to protect pat-
ents and intellectual property have discouraged
many high-technology businesses from entering
into overseas ventures. South Korea's patent laws,
for example, protect only the manufacturing pro-
cess, not the product. Similarly, Argentine patent
protection is weak to nonexistent in many sectors,
especially in the pharmaceutical industry, accord-
ing to Embassy reporting.
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DI IEEW 86-006
7 February 1986
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Secret
Developing Countries: Obstacles to Foreign Investment
Serious obstacle
? Moderate obstacle
Minor obstacle
Weak
markets
Regulatory
environment
Political
instability
Bureaucratic
delays
Foreign
exchange
Argentina
?
?
?
?
Brazil
?
?
Chile
?
Colombia
?
Ecuador
?
Egypt
?
5
5
Honduras
?
?
?
Jamaica
?
5
?
5
Kenya
?
?
?
Mexico
?
?
?
?
Nigeria
?
?
a?
?
Pakistan
?
5
5
?
?
Peru
?
?
?
5
Philippines
S?
?
e
South Korea
?
Sudan
?
?
Tunisia
?
5
Venezuela
?
*
The extent of the obstacles blocking foreign investment varies
across LDCs. The constraints are most severe in Nigeria, the
Philippines, and Sudan. For these LDCs, the uncertain domestic
political situation is the most serious obstacle, but foreign
investors also face moderate barriers in other areas. Constraints
are also large in Egypt and Mexico. On the other hand, South
Korea poses the fewest obstacles to foreign investors, with the
regulatory environment, especially poor intellectual property right
protection, serving as the only major constraint to overseas
ventures.
36035 2-86
? The preferential treatment of domestic firms?
through subsidies, assured access to local inputs,
and guaranteed market shares?also deters for-
eign investment. These benefits?most prevalent
in LDCs with centralized, highly state-controlled
economies?give the local firm, often a parasta-
tal, an advantage over foreign firms. In Egypt, for
example, the subsidized sale of energy only to
Secret
parastatals places foreign investors at a disadvan-
tage. Similarly, in Pakistan controlled prices,
coupled with growing local-content requirements,
are likely to reduce the profits of foreign-owned
businesses.
12
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Political Uncertainty. A third major obstacle is an
uncertain domestic political environment. Overseas
firms are cautious when considering an investment
in an LDC faced with an insurgency problem?
such as the Philippines, Colombia, and Peru?
because of the greater chance of losing their assets
under chaotic conditions. Similarly, the possibility
of a change in government, whether by an election
or by coup, may deter the entry of foreign investors
until the policy position of the new regime is clear.
In LDCs with elections pending?the Philippines,
Jamaica, and Chile?or in countries with a history
of coups, such as Nigeria, foreign investors are
likely to adopt a wait-and-see attitude. In addition,
the potential for a spillover of regional tensions may
deter some foreign investors from considering such
LDCs as Egypt or Honduras.
Bureaucratic Delays. A lengthy and cumbersome
approval process is the fourth major constraint.
This difficulty is often compounded by a review of
the application by government ministries that have
no jurisdiction over the business or that have little
authority to make decisions. These delays create
added expense for foreign investors and prevent
them from taking advantage of favorable market
conditions. Bureaucratic delays have been cited as
a moderate disincentive in Egypt, Nigeria, Paki-
stan, the Philippines, and Venezuela.
Foreign Exchange Difficulties. Chronic problems
in gaining access to foreign exchange also discour-
age overseas investors. Foreign exchange shortages
may create delays in receiving the foreign currency
necessary to import equipment or materials needed
for production, making it difficult for foreign inves-
tors to operate efficiently in many LDCs. Such
delays are a problem for foreign investors operating
in Argentina, Mexico, Nigeria, and the Philippines.
In addition, when foreign currency reserves dwin-
dle, LDC governments often tighten controls on
profit remittances, as has happened in the Philip-
pines, Argentina, and Nigeria.
An overvalued exchange rate, usually a source of
difficulty in obtaining foreign exchange, also dis-
courages foreign investors directly. Since many
potential investors rely on imports for productive
13
Secret
inputs and export markets for sales, an overvalued
exchange rate implies a smaller return on foreign
investment. The overvalued currency also penalizes
foreign firms by distorting profit repatriation and
reinvestment levels.
Needed Policy Reforms
We believe that government policy reform in three
key areas could offset some of these obstacles and
lead to a dramatic improvement in the investment
climate in these LDCs over the medium term:
? Improving the regulatory environment. Actions
that open new sectors to foreign firms can be a
major step in attracting overseas investors, espe-
cially in high-growth industries. South Korean
reforms in 1984 and 1985 that permit foreign
ventures in recently opened sectors and Argentine
efforts to attract foreign businesses in order to
spur technology transfer are prime examples of
LDCs loosening regulatory obstacles. Also impor-
tant in attracting new foreign firms are regula-
tory measures to protect patents and other intel-
lectual property and actions to equalize
government preferential treatment.
? Overhauling the investment approval process.
Most important are efforts to simplify the ap-
proval process by centralizing the authority to
consider and provide all the permits necessary for
prospective investors to begin operation. Egypt, in
October 1984, adopted new measures to stream-
line the bureaucracy by allowing the Investment
Authority to grant provisional approval to a
project the day of submission. Another example is
the July 1984 Foreign Capital Inducement Law
in South Korea that now permits automatic
approval of foreign investment applications for
projects that meet size, export, and ownership
criteria.
? Reforming the foreign exchange system. Where
exchange controls exist, reforms are necessary to
ensure that adequate foreign exchange currency
Secret
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Secret
Selected LDCs:
Net Foreign Direct Investment Flows
Million US $
1980
1981
1982
1983
1984
1985
350
Argentina
788
944
257
183
268
Brazil
1,544
2,313
2,534
1,373
1,556
1,500
Chile
170
362
384
148
67
65
Colombia
51
228
337
514
411
250
Ecuador
70
60
40
50
50
60
850
10
10
Egypt
541
747
285
471
713
8
Honduras
6
?4
14
21
Jamaica
28
?12
?16
?19
0
Kenya
80
60
82
50
54
50
Mexico
2,186
2,537
1,655
459
391
450
200
Nigeria
?734
543
430
345
200
Pakistan
59
107
66
31
61
50
?100
Peru
27
125
48
38
?89
Philippines
?106
172
16
105
?6
?25
South Korea
?7
60
?76
?57
73
125
Sudan
0
0
0
0
9
0
Tunisia
235
291
339
186
115
175
Venezuela
55
184
253
86
42
75
is available to foreign investors. In countries with
severe payments problems, allocation may be
necessary to provide faster and more reliable
access to exporters or designated firms. Jamaica,
for example, now uses an auction system to
allocate and distribute its scarce foreign ex-
change. Also important is the correction of over-
valued exchange rates, which removes the export
disadvantage facing many foreign-invested com-
panies.
High Costs Will Limit Reform
Whether an LDC government will undertake these
policy actions will depend on the results of a careful
weighing of costs and benefits?both political and
economic. On the one hand, the entry of foreign
Secret
investment could greatly increase output and accel-
erate economic growth and development. In addi-
tion, a foreign investor may also help ease foreign
payments pressures, expand the country's export
capabilities, spur technology transfer, and reduce
domestic unemployment problems. Better bilateral
political relations and additional commercial fi-
nancing also may follow from LDC efforts to
remove obstacles to foreign investment.
In contrast, there are economic and political costs
in changing policies to attract foreign investment
that limit the scope of investment reform. The
economic costs associated with reform efforts are
generally minor, however: local unemployment may
14
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rise as a result of greater competition from foreign
firms; and the prices of imports are likely to
increase after a devaluation, possibly heightening
current account pressures and fueling inflation
temporarily
The greater constraint is the high political costs.
Vested interests?some local producers, the mili-
tary, government elites, and the bureaucracy?
often oppose improving investment regulations be-
cause they would suffer reduced profits or a per-
ceived loss of control over the economy by liberaliz-
ing foreign investment regulations. Because of their
political power, their opposition is often effective.
For instance, the Argentine bureaucracy, in order
to maintain economic control over oil production
and revenues, delayed many of the March 1985
regulatory reforms proposed for the petroleum in-
dustry, according to Embassy and press reporting.
Because new foreign investors would be competi-
tors in the limited local market, local producers
also may reject investment reform. In Mexico, for
example, pressure from two existing computer joint
ventures was a major factor in the rejection of
IBM's initial proposal, according to the assessment
of one source.
Implications
In the face of these domestic political costs, LDC
efforts to reform investment regulations will be
quite limited, in our view. Moreover, we expect
many of the other major obstacles inhibiting for-
eign investors to remain, thus minimizing the favor-
able impacts of any reforms and reducing the
chances of an increase in foreign investment in the
LDCs. Indeed, the flow of foreign investment into
developing countries over the short term will proba-
bly stay well below historical highs and have only a
limited impact on generating new economic
growth, replacing lost commercial borrowing, eas-
ing foreign payments problems, or transferring
technology.
Secret
15 Secret
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Stagnant Caribbean Exports:
Continuing Drag on the
Regional Economy
Despite access to preferential trade arrangements,
such as the Caribbean Basin Initiative (CBI), Ca-
ribbean exports continue to decline, both to the
United States and other developed countries.'
Weak markets for the major commodity exports?
particularly petroleum?are the principal problem,
but inadequate government policies to promote
exports and investment, and currencies pegged to a
still relatively high US dollar have also contributed
to poor export performance. Declining exports are
hurting the region's domestic economies and their
effects are exacerbating political problems. At the
same time, the depressed state of the Caribbean
economies is encouraging drug production and traf-
ficking, directed largely toward the US market. As
a result of their difficulties, these countries most
likely will continue to ask for increased US assis-
tance and market access, especially for sugar and
apparel.
Exports to the United States: Still Declining
While the United States remains the Caribbean's
largest trading partner, exports from the region to
the United States fell by over 17 percent between
1980 and 1984, according to US trade data, and
continued to decline in 1985. Hard-hit Caribbean
exports include some of the region's most important
revenue-earning commodities?bauxite, petroleum,
and sugar. Moreover, tourism?usually a high rev-
enue earner?was also down last year.
' Caribbean export statistics are based on industrialized country
import data. In this article, the Caribbean area includes the
following countries: Anguilla, Antigua, The Bahamas, Barbados,
Bermuda, British Virgin Islands, British West Indies, Cayman
Islands, Dominica, Dominican Republic, Grenada, Guadeloupe,
Haiti, Jamaica, Martinique, Montserrat, Netherlands Antilles,
St. Christopher and Nevis, St. Lucia, St. Pierre and Miquelon, St.
Vincent, Trinidad and Tobago, and Turks and Caicos Islands. Not
all of these nations are members of the trade programs or organiza-
tions that are discussed.
17
Secret
Caribbean fuel exports to the United States suf-
fered the largest drop, declining from $6.3 billion in
1980 to $4.3 billion in 1984. The Bahamas, Neth-
erlands Antilles, and Trinidad and Tobago were
especially hurt by the decline in fuel exports. In
contrast, exports of manufactures increased by
about 80 percent, rising to $1.4 billion. The shift
was due, in part, to increased US demand for
chemicals, clothing, and electrical machinery.
Exports to the European Community:
Falling Even Faster
Caribbean exports to the EC have also declined in
the 1980s, dropping by 40 percent from 1980 to the
1984 level of $1.6 billion. EC imports from the
region during the first three quarters of last year,
however, were 9 percent higher than the same
period in 1984. On a commodity basis, sales of fuels
to the EC fell from $1.8 billion to $900 million
between 1980 and 1984. Caribbean food exports to
the EC also declined, falling 12 percent to $500
million between 1980 and 1984; hardest hit were
Jamaica, Haiti, the Dominican Republic, and Trin-
idad and Tobago.
25X1
25X1
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25X1
As with the CBI, the Lome Convention?an EC
preferential trade, aid, and credits program for
some 66 African, Caribbean, and Pacific (ACP)
countries?has met with only limited success in the 25X1
Caribbean. Caribbean participants have failed to
benefit under Lome because they lack entrepre-
neurial initiative and maintain overvalued ex-
change rates, according to the EC's Caribbean
representative. Both the EC and the ACP countries
also agreed that much aid in the past was used
inefficiently. Although the latest Lome renewal
Secret
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7 February 1986
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Caribbean Countries: Exports to the United States
and the European Community
Million US $
1980
1982
1984
1985
US
EC
US
EC
US
EC
US
EC
Total
8,221
2,742
6,386
2,164
6,800
1,637
3,829
1,056
Netherlands Antilles
2,679
636
2,186
663
2,098
535
689
233
Trinidad and Tobago
2,449
426
1,667
491
1,411
304
1,003
194
The Bahamas
1,433
927
1,086
338
1,218
120
531
164
Dominican Republic
769
77
616
58
921
66
801
49
Jamaica
418
236
323
174
415
125
239
107
Haiti
264
88
325
64
394
61
304
50
Other
209
352
183
376
343
426
262
259
First three quarters.
Source: UN and IMF trade statistics.
attempts to ensure more effective development-
oriented use of aid, we doubt these efforts will be
successful in the short term.
Several ACP states argue that greater access for
agricultural exports to the EC?currently limited
by the EC Common Agricultural Policy?is the
key to rapid export growth. ACP access for most
agricultural products is generally no better than
access provided to other countries outside of the
agreement, and the EC is unlikely to liberalize its
agricultural trade policy. Although there are spe-
cial arrangements for sugar, rum, and bananas,
exports of these products to the EC, except for
bananas, declined sharply during the 1980s.
Intra-Caribbean Trade:
Low and Continuing To Fall
Trade within Caricom 2 also has declined over the
past four years, falling by about 25 percent from
1981's record level of $540 million. Trade fell a
= The Caricom countries?the Caribbean Economic Community?
include Anguilla, Antigua, The Bahamas, Barbados, Belize, Domi-
nica, Grenada, Guyana, Jamaica, Montserrat, St. Christopher and
Nevis, St. Lucia, St. Vincent, and Trinidad and Tobago.
Secret
further 10 percent for the first three quarters of
1985 as compared to the same period in 1984.
Foreign payments problems in most countries in the
region, combined with the failure of some Caricom
members to remove various tariff and nontariff
barriers, have contributed to the decline in intra-
community trade. Reacting to the decline in petro-
leum prices, Trinidad and Tobago?Caricom's
largest regional market?attempted to reduce im-
ports and stem a decline in foreign exchange by
instituting import licensing. Most recently, it deval-
ued its currency by one-third. Although Port of
Spain agreed last month to remove import licensing
in response to complaints from its Caricom neigh-
bors, Barbados announced limited retaliatory mea-
sures against selected Trinidadian goods.
Despite commitments to expand intracommunity-
trade at the past two Caricom Heads of Govern-
ments Conferences, members have been slow to act.
An agreement?the Nassau Understanding-
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United States: Commodity Composition
of Imports From the Caribbean
Secret
European Community: Commodity
Composition of Imports From the
Caribbean
Percent Percent
1975
US $4.7 billion
Other 1.2
Raw materials 4.7
Manufactures 6.5
Foodstuffs 14.2
Fuels 73.4
1980
US $8.2 billion
Other 0.9
Raw materials 4.6
Manufactures 9.4
Foodstuffs 8.2
1975
US $1.2 billion
Other 1.7
Raw materials 2.6
Manufactures 14.8
Foodstuffs 50.5
- Fuel 30.4
1980
US S2.7 billion
Other 2.2
Raw materials 1.8
Manufactures 9.9
Fuels 76.9 Foodstuffs 21.2
1984
US $6.8 billion
Other 1.4
Raw materials 4.1
Manufactures 20.2
Foodstuffs 10.5
303116 2.86
Fuels 64.9
1984
US $1.6 billion
Other 2.4
Raw materials 2.4
Manufactures 10.4
Fuels 63.8 Foodstuffs 31.1
303117 2-86
Fuels 53.7
19 Secret
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Secret
Caribbean Basin Initiative: Limited Success
The Caribbean Basin Initiative (CBI)?a unilateral
free trade arrangement between the United States
and designated Caribbean Basin countries imple-
mented in late 1983?is intended to stimulate
investment in nontraditional export industries, cre-
ate jobs, and foster political and social stability in
the region.a Preliminary trade results under the
CBI, however, have been disappointing. Several
factors have held back CBI-related export develop-
ment, including:
? Poor infrastructure and lack of sufficient manu-
facturing capacity.
? Continued dependence on commodity exports
experiencing depressed prices?for example, sug-
ar, bauxite, and bananas.
? Inadequate government incentives to expand in-
vestment and increase export competitiveness.
? Many currencies pegged to the US dollar.
The Caribbean CBI countries include Anguilla, Antigua, The
Bahamas, Barbados, British Virgin Islands, Cayman Islands,
Dominica, Dominican Republic, Grenada, Haiti, Jamaica, Mont-
serrat, Netherlands Antilles, St. Christopher and Nevis, St. Lucia,
St. Vincent, Trinidad and Tobago, and Turks and Caicos Islands.
From the Caribbean perspective, the CBI is viewed
as too limited because it excludes key exports?
textiles, apparel, footwear, and petroleum?where
these countries have a comparative advantage, and
because CBI-eligible exports make up only 7 per-
cent of total US imports from the designated
Caribbean countries. Most of the items included
under the CBI already receive duty-free access
under the Generalized System of Preferences
(GSP), although the CBI has improved rules of
origin and eliminates annual GSP product reviews
and competitiveness limits. Moreover, US sugar
import quotas have also hurt low-cost Caribbean
sugar exporters. Caribbean and Latin American
sugar-exporting countries asked the United States
during an OAS Permanent Council meeting last
month to reconsider the reduction in sugar quotas.
Secretary General Rainford of the Caribbean Eco-
nomic Community (Caricom) stated last July that
the CBI has failed to achieve balanced economic
development in the region, and he has requested a
review of the CBI to find ways to ensure that the
program's benefits accrue to smaller countries.
drafted in 1984, but not yet fully implemented,
proposes to:
? Remove all barriers to free trade in Caricom.
? Establish a common external tariff to protect a
selected group of products made in Caricom
countries.
? Increase domestic content requirements for goods
seeking duty-free entry from the Leeward and
Windward Islands.
The agenda for the recently postponed Caricom
Council meeting?the second-highest decisionmak-
ing body in Caricom?would probably have includ-
ed a discussion on intracommunity trade, including
implementation of the Nassau Understanding, ac-
cording to press reports.
Secret
Outlook
No rebound in Caribbean exports is likely in the
near future. Export growth will continue to be
restrained by dependence on low-priced commod-
ities, poor infrastructure, and insufficient govern-
ment export incentives. While the CBI has stimu-
lated some export diversification?manufactures'
share of total Caribbean exports to the United
States more than doubled to about 20 percent
between 1980 and 1984?exports to the EC proba-
bly will remain concentrated in fuels and foods.
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25X1
25X1
25X1
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Caribbean Exports to the United
States and the European Community
Billion US $
10
8
1980
308115 2-86
82
84
United States
European
Community
Trade within Caricom will most likely continue its
decline or become stagnant as long as these coun-
tries face domestic economic problems and attempt
to restrict imports.
The adverse impact of stagnant trade on the Carib-
bean will continue to spill over into Caribbean
political affairs. Continued discontent and protests
from the public and private sectors over worsening
economies, as well as the need to increase exports
and foreign exchange earnings, will probably be
major issues in the region's upcoming elections-
21
Secret
Caribbean Drug Trafficking
Located between South American sources of cocaine
and marijuana and the US market, the Caribbean
has become one of the world's leading transshipment
areas for narcotics. According to reporting from
US Embassies in the region, the continued recession
in the Caribbean economies has provided strong
incentives to replace lost income through drug smug-
gling. In Jamaica?the only major producer of illicit
drugs in the Caribbean?a joint military/police task
force is struggling to suppress a deeply entrenched
drug industry that directly employs an estimated
25,000 agricultural laborers, and many more in
indirect employment. In The Bahamas, drug smug-
gling has created pervasive corruption. Finally, US
law enforcement pressure on customary smuggling
routes appears to be pushing traffickers to develop
new transportation channels through Haiti, the Do-
minican Republic, and the islands of the eastern
Caribbean.
for example, in Jamaica, Barbados, and the Domin-
ican Republic. Poor economic prospects also are
encouraging drug production and trafficking, with
much going to the United States. As a result,
Caribbean leaders probably will call for increased
US assistance and market access, including an
expansion of the CBI program, especially in sugar
and textiles.
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UK Choices on
Oil Production
Indonesia's
New Marketing
Strategy Hits Snag
Angolan Oil
Production Rising
Secret
Briefs
Energy
British officials continue to assert that they will not agree to OPEC calls to
limit oil production, but London may take subtle steps to influence North Sea
producers if prices fall much further. Prime Minister Thatcher told Parliament
last week that output levels remain in the hands of the producing companies.
The British realize that their small share of output has little leverage on world
oil prices. Moreover, the British are convinced that OPEC stands to lose more
from an oil price war than the United Kingdom, with its more diversified
economy. Nevertheless, if OPEC took concerted steps to offset a sharp fall in
oil prices, London probably would quietly move to support OPEC actions by
encouraging producers to delay some pum.inl until rices recover.
Jakarta's plan to restructure its marketing strategy to cope with declining oil
prices has stalled, according to US Embassy reporting. A new reference price
scheme based upon a market basket of crudes would result in an immediate
loss of tax revenue. Moreover, a change in the present system would adversely
affect liquified natural gas revenues because some LNG contracts are based on
the government's selling price for
/Until these matters are resolved, foreign firms will
continue to resist pleas by Indonesian officials that they boost production.
Under the existing pricing arrangement, the production share of oil compa-
nies?contractually set at 15 percent?has been reduced to below 10 percent.
Although the government will not publicly admit it, total oil production is in
slow decline, and further development of existing fields is unlikely in the
present investment climate.
Angola's oil production will increase by 30 percent during 1986 to 300,000
b/d . Oil exports last year earned $1.8 billion,
more than 90 percent of Angola's hard currency receipts. Luanda spent about
half of its 1985 oil earnings for Communist military assistance to support the
fight against UNITA insurgents. If prices stay at current levels?about $20 a
barrel, as compared with roughly $25 a barrel in 1985?Angola will earn as
much as $2 billion in hard currency from oil exports in 1986. Luanda again in
1986 will have to allocate earnings from oil sales to
Communist countries to support its military effort and to service debts.
23
Secret
DI IEEW 86-006
7 February 1986
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Secret
India Rolls Back
Domestic Oil Price
The government this week was forced to roll back some of the 1 February pe-
troleum product price increases. The initial increases ranged from 5.6 percent
on diesel fuel to 20 percent on liquid petroleum gas. Apparently all the price
hikes except for aviation fuel have been trimmed. Over the last 15 years the
annual growth in oil demand has exceeded 5 percent and growing sales of
automobiles and other vehicles have probably pushed growth up to about 7
percent the past year. The new prices met with opposition from the members of
the ruling party as well as industry and trade associations. About 2,000 people
were arrested in New Delhi early this week following a protest over recent
price hikes on a variety of essential consumer goods, including petroleum
products. The attempt to boost the price of kerosene, in particular, will
probably be exploited by critics of Prime Minister Gandhi's economic policies
as more evidence of discrimination against the poor.
International Finance
Soviet Gold Sales Following a substantial rise in Soviet gold sales last year, Moscow may be
scheduling a further increase this year.(
/Annual net Soviet gold sales have been estimated at less than 100 tons
from 1982 to 1984, but the estimate is 180 tons for 1985. With oil output and
prices declining, and a sluggish arms market, higher gold sales?possibly as
much as the 300 to 400 tons sold annually in the mid-1970s--would ease
Moscow's hard currency situation. The USSR is likely to proceed with its
customary caution, however, to guard against a fall in the price of gold. Sales
to nontraditional buyers, such as Japan, might give Moscow greater latitude to
sell gold without depressing prices.
Secret
7 February 1986
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Tanzanian-IMF
Talks Falter
IMF Declares
Khartoum Ineligible
EC Unemployment
Continues To Rise
Secret
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Negotiations between the government and the IMF lapsed this week because
of conflicts over devaluation, mismanagement of semiofficial enterprises, and
low prices for commodities.)
/Military interference
in the government remains an unlikely prospect, but the Army and civil service
appear increasingly frustrated by the economic deterioration and Nyerere's
continued influence.
The IMF Governing Board's decision to declare Sudan ineligible for Fund
resources will have little effect on the country's already bleak economic
outlook. The action follows over a year of unsuccessful attempts by Khartoum
to negotiate an acceptable economic reform package and a resolution of
arrearages to the Fund, which currently total over $200 million. Last minute
attempts by the regime to forestall the IMF action, including a reported $10
million arrearage payment last week, were insufficient to alter the IMF
decision. The declaration of ineligibility does not prevent further consultation
between the IMF and Khartoum, nor does it actually change Sudan's access to
Fund financial resources?Khartoum has been effectively barred from IMF
resources from the moment that arrears began in July 1984. The formal
declaration will, however, probably be viewed by the Sudanese as a slap in the
face from the United States and other Western benefactors and may provoke
an anti-US reaction.
Global and Regional Developments
Unemployment in the EC-10 for 1985 continued its upward trend, rising from
12.4 million persons to almost 13 million?or just over 11 percent of the labor
force. The increase was largely the result of a rise in female unemployment,
which rose from 11.4 percent in 1984 to nearly 12 percent last year; male un-
employment edged up only slightly to 10.2 percent over the same period. The
trend in joblessness was not uniform in the member states, with the four major
countries and Ireland showing increases while the remaining five countries
posted decreases. EC governments are continuing to concentrate on reducing
inflation to boost real incomes, and, with the help of declining oil prices, they
are anticipating an improvement in economic growth that could halt the rise in
joblessness.
25
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Secret
Pressure Building
on Ottawa
To Reduce Deficit
Pressure on the
Canadian Dollar
Secret
7 February 1986
National Developments
Developed Countries
Ottawa is unlikely to meet demands from the business community for drastic
budget cuts. Faster-than-anticipated economic growth and?until recently?
lower interest rates may enable Ottawa to achieve its goal of a US $1.3 billion
reduction in the fiscal 1985/86 deficit. Business groups, however, have used
the recent decline in the Canadian dollar to bolster arguments that additional
spending cuts of at least $3.5 billion are needed this year to reassure financial
markets. Finance Minister Wilson has publicly admitted that his new budget,
expected in late February, must demonstrate the political will to get spending
under control. Despite the Finance Minister's rhetoric, and a deficit still above
7 percent of GNP, Prime Minister Mulroney has been reluctant to risk the un-
popularity such sharp reductions might bring. In a yearend interview, Mul-
roney ruled out spending cuts of the magnitude the business lobbies desire. We
believe the next budget will propose a deficit reduction package of, at most,
$1.4 billion, and will probably rely on higher taxes to accomplish even this
modest goal.
Ottawa is concerned that its efforts to prop up the Canadian dollar will
undercut economic growth, and it is becoming less inclined to defend the
currency. The government's attempts over the past six weeks to strengthen the
dollar by raising interest rates and intervening in exchange markets have
slowed but not stopped the decline. The drop is caused by the negative effects
of falling oil and gas prices on a trade surplus that was already declining and
by the financial market's lack of confidence in Prime Minister Mulroney's
willingness to further cut spending in the coming budget. The government's
focus of concern has switched, however, to the effects of higher interest rates.
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For now, Ottawa will probably maintain higher rates while hoping firmer oil
prices and a more austere budget will provide relief. If this policy works, the
government will gradually reduce interest rates, thereby accepting a weaker
currency but promoting higher growth.
Tokyo Plans
To Restructure
Refining Industry
In an apparent move to liberalize petroleum product imports, MITI has
announced plans for a private industry group?the "oil vitalization industry
center"?to oversee the voluntary reduction of oil refining capacity by 20
percent over the next three years, according to the US Embassy. The Ministry
has proposed that Japanese companies be given financial assistance totaling
$25 million in fiscal 1986 (beginning in April) to scale down or scrap existing
refining facilities. Although awaiting final details, firms in the financially
troubled industry probably will take advantage of the Ministry's restructuring
plan. Nonetheless, the project would not completely eliminate excess domestic
capacity?refining capacity currently is about 5 million b/d, 35 percent above
domestic demand.
27
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Secret
British Unemployment
Worsens
Britain Involving
Private Sector
in Urban Renewal
Italian Efforts
To Join G-5
Secret
7 February 1986
Unemployment climbed again in January, dashing London's hopes that
joblessness had peaked in mid-1985. The seasonally adjusted total rose by
20,600 last month to a record high of over 3.2 million people, or 13.2 percent of
the labor force. The news coincided with an OECD assessment that Britain's
unemployment problem appears more persistent and deep-rooted than in the
1930s. The report supports conclusions from other recent studies that exces-
sively high wages are at the core of the problem. The government?relatively
complacent about unemployment in recent months?now faces heightened
pressures for direct action to combat unemployment in the upcoming March
budget. Conservative MPs and the Confederation of British Industry are
demanding that the Treasury use any discretionary money in the budget?
already limited because of falling oil prices?to create jobs directly rather than
go through with even scaled-down tax cuts. The Thatcher government will
probably continue to reject both direct jobs programs and any formal incomes
policy and emphasize easing labor market rigidities.
A housing and planning bill introduced last week seeks to enhance the private
sector's role in the regeneration of inner city areas. If passed, the legislation
will clear the way for the government to circumvent local authorities and give
financial aid?about $28 million per year?directly to specific projects in the
most deprived urban areas. The Tory government believes that many of the
Labor-controlled local councils have not fully utilized past grants because of
ideological bias against the private sector. The proposed legislation also aims
to eliminate much of the cumbersome local planning bureaucracy. While inner
city programs are targeted to be cut somewhat in the 1986-87 budget,
Environment Secretary Baker hopes his initiative will persuade the Treasury to
provide new money. The new legislation may help secure a longterm commit-
ment of private developers and financial institutions to inner city problems. At
the very least, it will be used to rebuff charges that Prime Minister Thatcher is
"uncaring."
Prime Minister Craxi wrote letters to each of the G-5 countries last month
pressing them to support Italy's membership in the group, and he seems
certain to raise the issue at the Tokyo Economic Summit in May.
/Craxi's push is probably based
on a desire to share in the increasing international press attention generated by
the G-5 meetings. According to the press, France supports Italy's bid. Other
G-5 members appear willing to consider Craxi's request, but are in no hurry to
act on it.
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Business Booming for
Netherland's Fokker
Fokker is having increasing success with its new F50 and F100 passenger
aircraft designs and may move in the next year on a third new model, a
derivative of the F100. After a number of lean years, the two new advanced
commuter aircraft are being bought in large numbers by prestigious airlines.
The 50-seat F50 now has 38 firm orders from six airlines plus 12 options, and
the 100-seat F100 has 38 firm orders from three airlines with 31 options.
Recent customers include Swissair and US Air. Fokker's marketing strategy is
focusing on larger, established airlines in the United States and Western
Europe that account for as much as 85 percent of the market. Production rates
for the F50 are planned to reach 25 aircraft per year and, for the F100, 36 air-
craft per year.
Sweden's Centralized The Palme government has failed to obtain business and labor agreement for
Wage Negotiations wage restraint in the current round of nationwide negotiations. Stockholm has
Unsuccessful been pushing wage restraint in an effort to control costs and improve export
performance. In 1984, centralized negotiations also broke down?the first time
in three decades?and the recent failure reveals continued strains in the
process. This round was broken off by the Swedish Employers' Federation,
which represents most private-sector employer associations, on the ground that
wage demands by both the blue- and white-collar organizations were excessive.
They were also concerned that the government would preempt the bargaining
process and dictate an incomes policy. Some unions also rejected the govern-
ment's call for wage restraint outright because of the low unemployment rate
and last year's decline in real income.
New Nicaraguan
Devaluation
Panamanian
Austerity Proposals
Less Developed Countries
The Sandinistas devalued the currency by 60 percent on 31 January, fixing the
cordoba at 70 to the dollar for most transactions. Embassies and nontraditional
exporters, however, will be able to convert one-fourth to one-half of their
foreign exchange at 750 cordobas to the dollar. This second steep devaluation
within the past twelve months still fails to offset the triple-digit inflation. The
black-market value of the cordoba, now about 1,300 to one, is likely to
continue to fall. Increased cordoba receipts are still unlikely to cover costs for
many exporters, while private-sector importers will see their already limited
access to imports further constrained.
Economic reforms proposed this week by President Delvalle probably will not
go far enough in meeting foreign lenders' requirements and are already
prompting opposition at home. After four months of indecision, the President
announced proposals for labor reform but indicated he would not trim
government spending or remove subsidies for industry. The labor coalition
immediately announced it would organize protest demonstrations. Delvalle's
proposals are an important first step but his failure to address industrial
protectionism and a budget deficit caused by a bloated public sector is likely to
hinder progress in negotiating a financial rescue package.
29
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Secret
Dominican Republic
Eases Austerity
The Dominican Republic is relying on increased coffee earnings to partly
finance public-sector wage hikes while continuing compliance with IMF
guidelines for the final drawing in April on a $78 million standby loan. The US
Embassy reports that coffee earnings?roughly 10 percent of total 1985
exports?could grow by $90 million this year. Public-sector workers had
threatened strikes and violent protests if 1985 wage increases were rescinded
this year. Last year the government liquidated reserves of a state-owned gold
mine to meet the payroll while still meeting IMF targets. Nonetheless, there is
a danger that President Jorge Blanco will cite better coffee prices as a reason
for relaxing economic austerity before the May presidential elections. En-
trenched problems, such as inflation and the weak sugar market, continue to
plague the economy, and if the government eases fiscal discipline too far,
economic recovery may well elude the next administration.
Labor Troubles
Continue in Moroccan
Phosphate Sector
Tunisian Corruption
Reverberations
Secret
7 February 1986
The four-week-old strike at the state-owned Youssoufia phosphate mine shows
no sign of ending. some 5,000 workers are
participating in the walkout largely over recognition of their union. Workers
also are protesting the arrest of several of their leaders, the firing of nearly 50
miners for union-related activities, and harassment by local authorities.
Embassy reporting indicates the strike will not have a serious impact on the
production of phosphate?Rabat's primary export commodity unless it
spreads to other mines. Moreover, the Youssoufia mine has large stocks of
phosphate on hand. According to the Embassy, security forces believe they are
capable of controlling any outbreaks of violence that may occur.
Corruption has become a major issue as Tunis sets the stage for a new round of
austerity. Unlike previous anticorruption efforts, this campaign has the
personal backing of President Bourguiba, who has vowed to spend his final
years rooting out social evil, according to the US Embassy. In support of his
vow, Bourguiba threatened to divorce his wife, discharged his son from public
office, and jailed longtime labor boss Habib Achour and the head of Tunis Air.
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Nevertheless, Bourguiba probably will make amends with senior officials
implicated in corruption because of their close ties to Tunisia's powerful family
clans. Sparing high officials almost certainly will exacerbate public cynicism
regarding the regime and its call for greater public sacrifice.
Commercial The government has undertaken a wide-scale crackdown on illegal money
Crackdown changing and smuggling. As many as 1,500 money changers have been
in Syria arrested throughout Syria, according to the US Embassy, and the Lebanese
Tanzanian Coffee
Offers Little Hope
Pakistani Finance
Minister Dismissed
border has been closed to all but official travel.
The pound has temporarily strengthened
to about 16 to the dollar?a 25-percent improvement?but the Syrian moves
are likely to increase rather than mitigate inflation in the long run.
Tanzania will reap only limited benefits from recent increases in world coffee
prices, despite a bumper 1985 crop estimated to be more than 10,000 metric
tons above 1984's yield. Acute shortages of fuel and gunny sacks have stalled
the delivery of coffee to processing plants and ports, according to US Embassy
reporting. In addition, higher prices and the lure of immediate payment have
led many Tanzanian growers to smuggle coffee into Burundi and Kenya. The
Embassy estimates that over 3,000 tons?about 5 percent of last year's crop?
have disappeared into neighboring countries. Moreover, the government has
seized foreign exchange earmarked for the purchase of agricultural chemicals
vital for future plantings; consequently, some 20 percent of next year's crop
could be lost as a result of insects and disease.
The dismissal last week of internationally respected economist, Mahbubul
Haq, is likely to complicate relations with India and sidetrack efforts at
economic reform. Haq, the key architect of improved trade ties to India and a
proponent of increased deregulation of Pakistan's economy, was replaced by
Yasin Kahn Watto, a seasoned politician but a novice in economic affairs.
According to press reports Haq was fired because he
moved too fast in improving trade ties to India, supported unpopular economic
reform, and was not the "approachable" minister the new civilian government
wanted. Because few in the government share Haq's views, improved economic
ties to India and US efforts to include economic reforms as a precondition for
the new multiyear aid package (FY 1988-93) may well be undermined.
31
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Soviet Economic
Growth in 1985
Secret
7 February 1986
Communist
Disappointing farm output held GNP growth to about 2 percent, but General
Secretary Gorbachev can claim some credit for a recovery in growth in the
nonagricultural economy after the poor first quarter. Agricultural output
shrank for the second year in a row, although an improved grain harvest
allowed Moscow to cut grain imports substantially. Industrial production rose
by over 3 percent in 1985, slightly below the 3.5-percent pace in 1983 and
1984 but averaging nearly 4 percent during the last three quarters. Growth in
energy production slowed. A drop of nearly 3 percent in oil production
dampened the effect of a 9-percent increase in natural gas and smaller
increases in coal and electricity. The worst winter in two decades cut power
supplies, caused numerous equipment breakdowns, and delayed deliveries of
raw materials and finished products. Per capita consumption grew more slowly
than in 1984, in part because of stagnation in the availability of foods. Growth
in investment was about 3 percent, faster than the previous year but not as
high as in the early 1980s. The recovery of industrial materials production,
aided by increased rail capacity, probably will help growth in 1986, although
Soviet goals are ambitious?about 4 percent for GNP, nearly 4.5 percent for
industry, and more than 6.5 percent for machine building.
Soviet Economic Performance, 1981-86
GNP Growth
Industrial Growth Agricultural Growth
Percent Percent Percent
8 8
6 6
2
4
2
0 0
?2-2
1981 82 83 84 85 86 ' ?2 1981 82 83 84 85 86 ' 1981 82 83 84 85 86 '
Planned.
308076 2 86
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Strains in Cuba's economic outlook for the next few years is clouded by increasing Soviet
Cuban-Soviet criticism of Cuban inefficiency, and Moscow's unwillingness to increase oil
Economic Ties deliveries or economic assistance beyond current levels for 1986-90. Talks last
October on economic aid for Havana's 1986-90 plan were strained and no aid
New Soviet
Commission on
Economic Reform
China Posts Record
1985 Trade Deficit
agreement was reached, according to a former Cuban official.
/Moscow has probably decided to use the new Cuban plan to
negotiate a more equitable arrangement. Probably as a result, Cuba's draft
economic plan, to be approved in early February, emphasizes increased use of
market mechanisms such as profits and incentives.
A Western diplomat, citing a reliable Soviet source, has told the US Embassy
in Moscow that state planning chief Nikolay Talyzin has been named to head
the commission on management and planning reform recently established
within the government. The new commission will replace a Politburo commis-
sion that had been headed by former Premier Tikhonov. The designation of
Talyzin to head the new commission suggests that work on economic reform
will be concentrated within the State Planning Committee, where several other
groups have been studying ways to improve Soviet planning and management.
Such a move would reduce the friction among separate and often competing
agencies charged with developing reform proposals. That the commission is
only now being set up suggests that Soviet leaders are still nowhere near
reaching agreement on a comprehensive economic reform program.
According to the Ministry of Foreign Economic Relations and Trade, China
last year posted a record $7.6 billion trade deficit?a fivefold increase over the
reported 1984 deficit. Chinese customs statistics, which closely correspond
with our estimates, indicate an even higher yearend deficit of $10.6 billion.
The customs data show that exports grew only 2 percent in 1985, with sharply
lower sales of cotton cloth, textiles, and apparel, while imports?primarily
industrial raw materials and consumer durables?skyrocketed by 45 percent.
Despite the record deficit, Beijing has announced no new measures to narrow
the gap. Tighter credit and import restrictions introduced early last year will
probably continue, but these efforts will be insufficient to alter China's trade
balance significantly in the near term.
33 Secret
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