INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP93T00643R000100310001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 48
• Document Creation Date: December 22, 2016
• Document Release Date: December 15, 2011
• Sequence Number: 1
• Publication Date: September 25, 1987
• Content Type: REPORT

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International
Economic & Energy
Weekly
DI IEEW 87-039
25 September 1987
Copy 887
25 September 1987
w
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International
Economic & Energy Weekly
iii Synopsis
1 Perspective-Cuba: Long-Term Economic Troubles
ALA
3 International Financial Situation: Update on LDC Debt
DI Analysts
7 Cuba: Declining Trade With the West
ALA
ALA
17 LDCs: Resisting Pharmaceutical Patent Protection
Trade Issues Branch, OGI
23 Greece: Living Beyond Its Means
EURA
29 Spanish Agriculture: Coping With EC Membership
EURA
directed to Directorate of Intelligence,
Energy
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 87-039
25 September 1987
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International
Economic & Energy Weekly
iii Synopsis
1 Perspective-Cuba: Long-Term Economic Troubles
We believe the Cuban economy-which has deteriorated markedly since early
1986-will continue to face economic stagnation, consumer austerity, and increas-
ing dependence on the Soviet Union into the next decade because of severe hard
currency shortages and President Fidel Castro's refusal to make needed reforms in
the economy.
3 International Financial Situation: Update on LDC Debt
Developments this week focus on the Philippines, Brazil, and Nigeria.
7 Cuba: Declining Trade With the West
Havana's severe hard currency shortage and default on Western debt repayments
is choking off vital imports from the West. The financially strapped Castro
government now finds Western suppliers increasingly unwilling to ship critical
intermediate and capital goods-a situation that is unlikely to improve into the
1990s.
Tightened government control of food production, marketing, and pricing has
worsened chronic Cuban food shortages. Havana's failure to remedy the situation
will add to growing, but contained, popular discontent, while contributing to
increasing Soviet frustrations with overall Cuban economic policy and food policy
in particular.
17 LDCs: Resisting Pharmaceutical Patent Protection
The reluctance of many LDCs to strengthen pharmaceutical patent protection will
probably continue despite US pressure for tougher standards.
Two years of economic austerity have not significantly reduced Greece's current
account deficit. While Prime Minister Papandreou still stresses the need for
stabilization, he may adopt more expansionary policies before the next election-
due by 1989-which will push the current account deeper into the red at a time
when scheduled amortization payments are high.
Secret
DI /EEW 87-039
25 September 1987
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29 Spanish Agriculture: Coping With EC Membership
Spain's entry in January 1986 into the European Community will ultimately
benefit its agricultural sector by providing substantial development assistance,
forcing it to modernize, and increasing its access to the huge EC market. Spain,
however, will realize the benefits slowly because of the seven- to 10-year phasein
period.
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Secret
partly because of Castro's recalcitrance. The Kremlin maintains its substantial
economic aid to Cuba-about $5.4 billion in 1986-but growing frustration with
Cuban economic mismanagement is causing Moscow to push harder for more
market-oriented economic reforms. Increasing Soviet pressure on Castro to
decentralize the economy and meet export commitments will almost certainly
increase friction in the bilateral relationship.
In the absence of major reforms or external relief, Havana probably will continue
its current policy of increasing austerity to mitigate financial problems and
exhorting the population to produce more. This approach, so far, has failed to stem
the current economic slide and is unlikely to meet with future success. Havana ap-
pears locked into a cycle of continuing stagnation in economic growth and
consumption levels, rising domestic discontent, and tighter domestic control.
Current efforts to diversify exports, meanwhile, probably will not begin to pay off
until the middle of the next decade.
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International
Economic & Energy Weekly
25 September 1987
Perspective Cuba: Long-Term Economic Troubles
We believe the Cuban economy-which has deteriorated markedly since early
1986-will continue to face economic stagnation, consumer austerity, and increas-
ing dependence on the Soviet Union into the next decade because of severe hard
currency shortages and President Fidel Castro's refusal to make needed reforms in
the economy. Persistent drought, low world prices for Cuban exports, and Castro's
increasing reliance on doctrinaire economic policies have sharply undercut eco-
nomic growth over the past two years. Moreover, worsening hard currency
shortages have cut vital imports from the West, and the Castro government has de-
faulted on its official Western debt for the first time. Havana has virtually
exhausted its hard currency reserves, access to Western credit, and inventories of
vital industrial inputs.
Cuban payments arrears are damaging Havana's relations with both Western
bankers and commercial suppliers. Cuban imports from the OECD dropped by 50
percent during the final two quarters of last year as Western partners cut trade
credits to Havana, and both Western lending and deliveries remain low this year.
Despite efforts to diversify the economy, Cuban hard currency earnings remain
dependent on weak agricultural exports such as sugar and tobacco. Cuba's
reputation as an unreliable supplier has also undercut Havana's efforts to diversify
exports and find new trade partners.
Castro's response to his economic troubles has been to call on the population to
make further consumption sacrifices. Increased austerity, including reduced
rations and higher prices for food and other basic commodities, appears to be
fueling popular discontent. This discontent, illustrated by anti-Castro graffiti and
sabotage, is further decreasing worker productivity and probably heightening the
desire of many Cubans to leave the island. The Castro regime, keenly aware of do-
mestic dissatisfaction, has responded by increasing internal security.
Havana has exhausted virtually all options available in the short run that could
stem the current economic decline. Western creditors are unlikely to provide more
credits or debt relief, and the Soviets appear unwilling to offer large infusions of
additional aid-especially badly needed hard currency-that could revive the
island's economy. Market-oriented reform of Cuba's economy would seem to offer
hope over the longer term, but President Castro reportedly continues to reject such
measures. Castro's personal identification with the Cuban revolution makes him
hesitant to invite the criticism that would be implicit in the complete reversal of
past economic policies.
Even before the reform-minded Gorbachev came to power, the Soviets had been
trying to promote economic diversification and planning reforms aimed at making
the island more self-sufficient. These efforts have been unsuccessful, however,
Secret
DI IEEW 87-039
25 September 1987
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Key LDC Debtors:
Economic/Financial Indicators
Argentina
Venezuela
Indonesia
Egypt
Nigeria
Foreign Months of Import
Debt a Coverage by
(billion US $) Reserves b
110 3.3 (Jul 87)
1.9 (Apr 87)
104 17.0 (Jul 87)
10.2 (Apr 87)
51 2.8 (Jun 87)
3.9 (Feb 87)
36 7.1 (Mar 87)
10.1 (Dec 86)
40 8.7 (Dec 86) c
10.3 (Sep 86)
30 1.5 (Apr 87)
1.4 (Jan 87)
28 3.2 (Jun 87)
3.7 (Mar 87)
19 8.4 (Jun 87)
7.6 (Mar 87)
19 1.0 (Jun 87)
0.9 (Feb 87)
15 3.7 (Feb 87)
4.7 (Nov 86)
a Yearend 1986.
b Derived from the ratio of foreign exchange reserves, excluding
gold, to imports.
Other
Indicators
Monthly inflation rate-officially 3 percent in July
and 6.4 percent in August-probably will return to
double digits this month.
Current account swung from a $1 billion deficit for
first six month of 1986 to a $3 billion surplus for same
period this year.
Trade surplus for first-half 1987 totaled only $610
million, less than half the comparable figure for 1986.
Reserves in mid-August totaled $1.7 billion.
Inflation rose 5.2 percent in July bringing annual rate
to 84 percent; government moving to impose more
extensive price control system.
Tight monetary policy continues although rupiah
liquidity has eased due to forced conversion of foreign
exchange holdings into rupiah by state banks.
Foreign exchange collected under new currency re-
gime surpassed $1 billion since mid-May; IMF re-
mains concerned about long-term viability of ex-
change rate system; black market creeping back into
operation.
GNP target for 1987 revised downward from 6.8
percent to between 5.1 and 5.8 percent because of
poorer-than-expected performance in several sectors,
including agriculture.
Economy grew at a 6-percent annual rate during first-
half 1987. Inflation slowed in August to 1.4 percent,
down from 1.7 percent in July.
Central Bank puts total international reserves, includ-
ing gold and SDRs, at $851 million.
Inflation spurted to a 130-percent annual rate during
July-August after running at a 100-percent rate dur-
ing first-half 1987.
Foreign reserves, excluding gold, plus net foreign assets of
commercial banks used in deriving months of import coverage.
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International Financial Situation:
Update on LDC Debt
Developments in LDC debt situations this week focus on the Philippines as well as
Brazil and Nigeria:
? In the wake of an aborted military coup in late August, Philippine President
Aquino shuffled her Cabinet to relieve civil-military tensions and end the
bickering between Cabinet members that has contributed to political instability.
Of her financial team, Aquino dismissed Finance Secretary Ongpin, a respected
conservative businessmen, because of public and Congressional criticism that he
"caved in" to foreign creditors during the country's difficult debt negotiations.
According to the US Embassy, Aquino probably will also replace Central Bank
Governor Fernandez, who reportedly has wanted to quit for some time, and
Economic Planning Secretary Monsod, who has publicly endorsed selective
repudiation of the country's foreign debt. If Aquino replaces Monsod and
Fernandez, she probably will select technocrats who reflect the expertise and
conservative economic approach of Ongpin's replacement Vicente Jayme, former
Secretary of Public Works and Highways.
Jayme's first priority in the foreign policy sphere will be to conclude the $13.2
billion rescheduling agreement with commercial bankers. The accord has been
stalled since mid-August because of Manila's decision to delay implementation
of the controversial Planters Product Inc. (PPI) loan agreement-a $56 million
private-sector debt guaranteed by Manila. This same issue threatened the last
rescheduling agreement but was resolved when Manila and the commercial
banks agreed to treat the PPI loan as government guaranteed debt. According to
US Embassy reporting, Jayme is likely, in the near term, to
pursue the same kind of debt strategy as his predecessor. In our judgment, he
will complete the accord before the 15 November deadline to ensure continued
good relations with creditors and to sustain the Philippines' modest economic
recovery.
Nonetheless, the US Embassy reports Jayme believes LDC debt problems are no
longer solvable by traditional approaches. His reported readiness to explore
unorthodox ideas, excluding outright debt repudiation, combined with continued
pressure from a nationalistic Congress-that already has called on Manila to
renege on the PPI agreement and reopen debt talks-suggests future negotia-
tions with foreign creditors may be more prolonged and contentious than in the
past. Manila will need to negotiate with the IMF in April when its current
standby arrangement expires, and will probably need new funds from commer-
cial creditors next year as well. With only $13 billion in commercial debt, the
Philippines does not have as much leverage with bankers as Brazil, Mexico, and
Argentina. As a result, Manila probably will play up its special relationship with
the United States and will expect Washington to intervene with commercial
creditors.
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DI IEEW 87-039
25 September 1987
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The new Aquino Cabinet also must make continued headway on promoting the
private economy and increasing political stability if foreign and domestic
investment is to solidify and be sustained. Although foreign investment is up
sharply from last year, the actual dollar amounts remain low-only about $17
million from US investors this year, according to the Embassy.
In our judgment, wary investors will continue to look elsewhere in Asia unless
Manila makes headway on programs that address social inequities, creates a
more favorable labor climate, and convinces the international audience that
military dissatisfaction with Aquino has dissipated.
? The proposal Brazil will present to its Bank Advisory Committee today probably
will not differ significantly from ideas already put forth in recent weeks by
Finance Minister Bresser.
According to the US
Embassy, Brasilia's position has hardened in the wake of the fallout at home of
Bresser's nonproductive meetings with US officials earlier this month. Brasilia is
thus likely to continue to push for long-term fixed interest rate exit bonds
covering up to 50 percent of its $72 billion commercial bank debt. Moreover,
Brazil almost certainly will continue to insist on a rescheduling agreement from
banks, with no IMF program, and is unlikely to make a token interest payment
unless it wins a major concession from banks. It is likely to begin negotiations
proposing that the interest spread over LIBOR be eliminated, but will probably
accept a compromise rate that is less than the 0.813 percentage point over
LIBOR received by Mexico and Argentina, according to the Embassy. Bankers,
for their part, are highly skeptical that today's negotiations will set the stage for
an agreement, according to press reports.
? Nigeria and the IMF have been unable to conclude the review of the 1986
standby arrangement. According to the US Embassy, the main issues yet to be
resolved relate to improving Lagos's fiscal performance, including reducing
government expenditures, increasing customs receipts, and accurately counting
total oil export revenues. In addition, the IMF remains concerned with the
foreign exchange auction system, especially the continuing sale of $100 million
biweekly in order to maintain the current exchange rate. Instead of attempting
to resolve these difficulties, the IMF may not complete the review and instead fo-
cus on designing a new standby to begin next year, according to the US
Embassy.
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over the previous week
Bresser met with Argentine, Mexican, and Philippine
counterparts in New York yesterday to exchange ideas
on debt.
Seeks support from Tokyo for a proposal to convert
debt into long-term bonds guaranteed by international
organizations and foreign governments.
Buenos Aires probably will not meet October IMF
targets; likely to ask for waiver. Scheduled to receive
$750 million from banks this month.
Latest version of draft constitution contains highly
controversial provisions; also provides for parliamenta-
ry system of government.
De la Madrid's state-of-the-nation address earlier this
month indicated that current policies could continue
until his term ends in 15 months, suggesting a pro-
longed period of high inflation.
Opposition Peronists-who favor a debt moratori-
um-won gubernatorial and congressional elections
on 6 September. Buenos Aires will have difficulties
carrying out economic reforms.
President Lusinchi approved signature of Caracas's
domestically controversial $20.3 billion debt accord
with commercial creditors. Set to be signed 1 October.
Asian Development Bank made Jakarta eligible for
limited amounts of interest-free, 40-year loans to
bolster economy.
IMF asked Cairo to complete debt accords with
creditor governments before requesting new loans from
the Fund.
As of mid-September, 40 banks still must sign $13.2
billion debt accord)
Wrapping up bilateral debt negotiations; probably
will sign accords with Spain and Austria later this
month.
IMF will defer review of standby arrangement targets
until early 1988.
Lima and two foreign banks have agreed on a debt-for-
commodities repayment scheme amounting to about
$70 million; scheme limited to short-term debt.
Congress has appropriated an additional $700 million
to finance infrastructure projects; likely will boost
inflation in fourth quarter.
New Parliament and People's Consultative Assembly
will convene 1 October. Assembly meets every five
years to set new guidelines for state policy.
Mubarak looking forward to reelection by referendum
in October; considering ways to soften political impact
of further economic reforms.
Military presses for removal of armed forces chief
Ramos; Aquino's political and business supporters
urge her to address military concerns.
President Pinochet unexpectedly granted 16-percent
wage increase for public-sector workers and
12-percent minimum wage hike effective
1 September; hopes to improve political image.
Military taking first steps toward returning to civilian
leadership. Committee reviewing Constitution is
barred, however, from addressing contentious issues.
July wage increases have not satisfied most workers;
state workers participated in strike last week; teachers
set to strike next month.
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Cuba: Hard Currency Current Account Balance, 1983-87
238
511
Petroleum products
578
548
573
300
300
Imports
920
1,201
1,283
1,296
950
Net services and transfers
-273
-321
-226
-285
-300
Havana's hard currency current account deficit tri-
pled in 1986 as export earnings fell further. Cuba, for
the first time, missed payments to its official credi-
tors, and its outstanding Western debt rose to about
$4.7 billion-more than four times the value of 1986
hard currency export earnings. To meet its critical
financing needs, the Castro government drew down
hard currency reserves to less than one month's
import coverage and increasingly relied on expensive
short-term trade credits from Western commercial
suppliers. Cuban commercial entities are up to 12
months in arrears to creditors,
As a result, Western firms have
placed increasingly stringent credit limitations on
sales to Cuba. Several West German and Japanese
firms now insist on payment for merchandise in
advance or on delivery
Havana's poor payment record has caused Western
governments recently to restrict trade credits and
export insurance on sales to Cuba:
? Japan, historically Havana's leading supplier, elimi-
nated export insurance for Cuba in late 1986.
? Italy also suspended trade credits and export insur-
ance to Cuba by the end of the year.
? France now insures export credits only under re-
strictive terms,
Spain-
Havana's most loyal and, currently, leading
supplier-has reduced exports to Cuba in this year's
commercial agreement.
As a result of hard currency shortages, credit cut-
backs, and other factors, imports from Cuba's leading
Western suppliers in real terms in fourth quarter 1986
were less than one-half the level of the second quar-
ter.' financial
shortage and a resulting austere import policy-which
Fidel Castro announced at the end of 1986-are
keeping Cuban imports from the West depressed this
year.
Cuba's inability to acquire capital goods and interme-
diate inputs from the West seriously undercuts Cuban
economic growth and modernization goals. According
' Spain, Japan, West Germany, Great Britain, Italy, and France
accounted for 78 percent of Cuba's industrial imports from the
OECD. Canada-Cuba's number-three supplier in 1986-is not
included because most of Canada's exports to Cuba consisted of
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Cuba: Declining Trade
With the West
Havana's severe hard currency shortage and default
on Western debt repayments is choking off vital
imports from the West. The financially strapped
Castro government now finds Western suppliers in-
creasingly unwilling to ship critical intermediate and
capital goods-a situation that is unlikely to improve
into the 1990s. The Soviets, moreover, appear unwill-
ing to boost aid to offset the economic damage caused
by declining trade with the West. Domestic dissatis-
faction with the Castro regime appears to be on the
rise, but Havana has responded only through exhorta-
tions to produce more and by tightening security.
Cuba's trade with the developed Western countries
began expanding in the mid-1960s as Havana adjust-
ed to the imposition of the US trade embargo and
searched for goods unavailable from socialist trading
partners. By 1975, trade with the West accounted for
more than 40 percent of Havana's foreign trade-up
from 24 percent in 1965-and was the channel for
quality intermediate and capital goods critical to
Cuban industrial production and efforts to modernize
the economy. By 1986, however, the Western share in
Cuban foreign trade had steadily fallen to less than 14
percent, amounting to nearly $2.4 billion.
Havana has traditionally paid for its Western imports
with earnings from sugar and, to a lesser degree,
tobacco and" coffee exported to Western customers.
More recent sources of foreign exchange have been
sales of excess oil from the Soviet quota-an especial-
ly important source of hard currency during 1983-
85-and exports of shellfish.
Depressed commodity prices, natural disasters, and
the continuing inefficiencies of central planning seri-
ously eroded Cuba's hard currency earnings in the
mid-1980s. Hurricanes, drought, and weak prices on
the world market caused sugar earnings to fall 50
Cuba: Share of Total Trade
by Major Area
1
I
Other
Communist
percent between 1983 and 1985. In addition, the fall
in world oil prices caused revenues from sales of
surplus Soviet-supplied oil to decline sharply. At the
same time, Havana used trade credits and commercial
loans to boost imports-from about $900 million in
1983 to $1.3 billion in 1986.
Secret
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Cuba: Factors Hampering Hard Currency Earnings
Sugar. Production of sugar, Cuba's leading export to
its CEMA partners and its largest hard currency
earner, is persistently below target, and the current
1986/87 crop-hampered by drought in the growing
season and battered by harvest rains-will likely be
limited to 6.5 million metric tons, the lowest in 20
years. Cuba has failed to meet sugar commitments to
both CEMA and OECD countries this year and,
is purchasing
foreign sugar to help meet obligations.
avana's sugar earnings from
the 1987/88 crop will also be depressed. Not only is
part of the harvest already committed to cover
missed deliveries from 1986/87, but the recent
drought has ensured low crop yields. Additionally,
Western experts estimate that world sugar prices will
remain low because of oversupply and declining
demands in developed countries.
Oil. With low prices on Western markets, the oil
provided by Moscow to Havana for resale has lost its
prominence as a revenue earner. Cuba is slowly
expanding domestic oil extraction, which may come
to 20,000 .b/d in 1987. The high sulfur content of
Cuba oil limits its profitability as a revenue earner,
although this production marginally reduces Cuban
dependence on Soviet supplies to meet domestic
needs.
Other Agricultural. Production of tobacco and cigars
has been hampered in recent years by crop disease
and persistent drought. Exports of citrus fruit, a
shortages. Fidel Castro's rejection of economic decen-
tralization, and the elimination of limited existing
entrepreneurial opportunities and incentive payments
probably will undermine Cuban labor productivity.
Agricultural yields, moreover, will be depressed
through the next year, and world commodity markets
for important Cuban exports will remain weak. In
addition, Havana has virtually exhausted its access to
Western credit that could support trade.
major component of Cuban trade with the Soviet
Union and Eastern Europe, play only a minor role in
trade with the West mainly because of poor quality.
Shellfish. Strong demand for Cuban lobster, the
leading export to the OECD in 1985, makes the
Cuban lobster farm and fishing industries promising
hard currency earners.
Nontraditional. The Soviets are assisting Havana in
the development of nickel mines and processing
plants, but initial output is dedicated to the USSR
and has remained small because of continuing con-
struction delays. Competitive prices are likely to
allow Cuba to successfully promote pharmaceutical
sales to Third World countries. Production from the
fledgling Cuban electronics industry will probably
only be acceptable to CEMA customers.
Tourism. Havana is trying to boost hard currency
receipts by expanding tourist facilities and marketing
efforts to attract more visitors, most of whom now
come from Canada. ~
tourism appears to have peaked in
1986 and is now declining because of over priced,
low-quality accommodations and services.
Although a reversal of the current decline is unlikely,
some Western countries will continue at least limited
trade with Cuba. US officials report that Western
commercial officers in Havana want to maintain their
share in the limited Cuban market in order to expand
sales easily if trade prospects improve. Furthermore,
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Cuba: Hard Currency Debt Disbursed,
December 1986
Cuba: Leading OECD Exporters,
1985-87 a
Commercial supplier
trade credits
22.3
Private financial
institutions
35.2
to Havana's claims, economic growth dropped to 1.4
percent in 1986, compared with a 7.2-percent average
annual growth for the 1981-85 period. We believe
these figures are inflated and probably mask negative
real growth in 1986.
lack of Western fertilizer and equipment has de-
pressed the output of the Cuban citrus industry and
undermined expansion efforts. Similar shortages un-
doubtedly affect other Cuban crops and industries.
Difficulty with acquiring Western spare parts, for
example, has hampered the transportation industry,
Alternative Strategies Fail
Spain
West Germany
United Kingdom
Italy
France
I I I I
IV I II III
1985 86
tial customers.
unsuccessful because of Cuba's limited range of at-
tractive exports, its lack of hard currency to pay for
imports, and its inability to provide credits to poten-
Startup delays, bad management, and poor quality No Recovery in Sight
control have hampered Havana's attempts to diversify
the island's export base and boost export potential, Havana's ability to counter the current decline in its
according to the US Interest Section. The Cuban hard imports from the West will probably continue to be
currency shortage, moreover, has led to a cutback in limited by weak export earnings and hard currency
commercial staff operating in Western countries,
limiting Havana's ability to export. Cuban efforts to
expand trade with Latin America have been largely
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some Western governments-especially Spain, Italy,
and France-see preservation of economic ties as
important to maintaining political influence.
Cuba's decline in trade with the West will boost the
the island's dependence on economic links to the
Soviet Bloc. The Soviets, however, appear unwilling to
increase subsidies to Cuba and are unlikely to boost
aid to the degree necessary to offset the economic
setbacks resulting from Havana's loss of important
Western imports. In particular, Moscow almost cer-
tainly will not increase needed hard currency support.
Furthermore, Western-quality intermediate and capi-
tal goods cannot be replaced through intra-CEMA
trade.
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Cuba: Food Rations and Prices,e 1987
Monthly Food Ration
(per person)
Ration Price
(US $ per pound)
Parallel Price
(US $ per pound)
20 (ounces)
0.24
1.80-2.00
Coffee
4 (ounces)
Cooking oil
8 (ounces)
Lard
I pound
Second-class beef
5 (ounces)
NA
NA
Chicken
2 (pounds)
0.70
3.00
Rice
5 (pounds)
0.24
1.50
a Prices converted from the current official exchange rate of one
peso equals one US dollar.
b Six cans for persons 65 and older.
c For example, the potato ration can vary from 0 to 8 pounds per
month.
To minimize its culpability, Havana places much of
the blame for Cuba's chronic food shortages on
unfavorable weather conditions. Severe droughts have
periodically plagued the island for six years, delaying
crop plantings, reducing yields, and killing livestock.
Torrential spring rains this year provided only brief
respite from the droughts, while damaging several
food crops even further.
Cubans have reacted to tighter rationing and price
increases with restrained anger
While continued rationing has the
support of some, recent interviews with a broad cross-
section of Cubans reveal that even those who general-
ly support the Castro government are unhappy over
food shortages and long lines. Consumers are dissatis-
fied particularly with price hikes last year that raised
grocery prices by about 15 percent but failed to
decrease the lines to purchase food. Many city dwell-
ers, however, applauded Castro's attack on farmers
and middlemen who had profited from the farmers'
free markets.
Discontent over government food policies is wide-
spread among farmers angered by the dissolution of
the free markets. The government has threatened
farmers with imprisonment and confiscation of all
possessions for selling food illegally or giving it away
to nonrelatives,
Few farmers, however, are complying fully
with government regulations, mainly because state
prices do not cover production costs.
some farmers have
reacted by letting livestock loose in the fields to
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Cuba: Troubled Domestic
Food Sector
Havana's tightened government control of food pro-
duction, marketing, and pricing has worsened chronic
Cuban food shortages and resulted in rising domestic
discontent. The inefficiencies of central planning
mechanisms, foreign-payments difficulties, and unfa-
vorable weather suggest that little significant im-
provement in food availability is likely to develop over
the next year. Havana's failure to remedy the situa-
tion will add to growing, but contained, popular
discontent, while contributing to increasing Soviet
frustrations with overall Cuban economic policy and
food policy, in particular.
The Cuban Government faces embarrassment and
increasing popular discontent over food shortage prob-
lems. All Cubans have a monthly ration of basic foods
at nominal prices, but principal foodstuffs often are
missing from Cuban stores. Waiting 15 days for the
monthly meat ration is not uncommon
Recent Cuban exiles a so report a
milk usually is unavailable, and bread and cooking oil
are of low quality. Even when food is available, the
rationed portions are insufficient to last the average
Cuban through the month.
The food problem was made more acute last year
when Havana began reversing steps taken in the early
1980s that had liberalized the marketing system. The
Castro government's "food offensive" was part of
Havana's return to more doctrinaire Marxist econom-
ic policies. The farmers' free markets-which allowed
farmers to sell production in excess of government
distribution quotas at free market prices-were dis-
banded, despite their success in generating increased
food production and distribution networks. As the
food situation has worsened over the last year, the
government has responded with general plans for
stricter control of food collection agencies.
Factors Behind Food Shortages:
A Closer Look
Havana's food problems are largely the result of a
system of centralized pricing and production quotas
that have reduced output and slowed distribution.
Havana's determination, particularly in the 1960s, to
direct long-term capital investment toward the sugar
sector was made at the expense of food production.
Higher urban wages also have aggravated food short-
ages by draining skilled labor and management from
farms.
Havana's worsening hard currency shortages have
complicated Cuban food problems. Cuban foreign
payments difficulties-heightened by the fall in world
prices for reexported Soviet oil and the reduction of
hard currency sugar earnings-have forced Havana
to trim hard currency import expenditures this year.
Cuts in already limited Cuban food purchases from
the West are being accompanied by reduced imports
of Western fertilizer and spare parts for the agricul-
tural sector. According to the US Interests Section,
the reduced availability of imported agricultural in-
puts has slowed the planting and harvesting of local
food crops.
Moreover, the diversion of domestically produced food
abroad to meet trade obligations to socialist partners
and to earn hard currency from the West adds to
domestic food shortages. Ironically, sugar rationing in
sugar-rich Cuba continues as Havana tries-so far
unsuccessfully-to meet export quotas to CEMA
while selling sugar to the West for badly needed hard
currency.
Havana also continues to send scarce milk, grain, and
chicken to Nicaragua, according to Embassy report-
ing.
Secret
DI IEEW 87-039
25 September 1987
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Frequent food shortages force the average Cuban to
supplement government-regulated ration quotas by a
variety of legal and illegal means. For example, food
can be purchased in several alternative Cuban mar-
kets in addition to the ration market and in restau-
rants, government-subsidized cafeterias, and school
lunchrooms:
? Government-regulated parallel markets where basic
consumer goods and "luxury" items such as Bul-
garian canned peaches and Cuban cheese are avail-
able at higher prices. Although supply is sometimes
scant, these markets provide consumers a legal
outlet to supplement diets while drawing down
private savings and adding to state coffers.
? The illegal black market, which can meet demands
for even rare commodities-but at prices signifi-
cantly higher than other markets. Other forms of
illegal trade include the gray market, where items
are bartered without government supervision, and
the "red" market, where diplomats-often from the
Soviet Bloc-trade items purchased at special dip-
lomatic stores for a black-market rate
he
current black-market exchange rate ranges from 6
to 15 pesos to the dollar in contrast to the official
. rate of about one peso to the dollar.
In addition, Cubans have set up intricate personal
networks to guarantee access to scarce foods. Rural
residents assist urban relatives by transferring ra-
tions and sending "care" packages, some farmers,
and fishermen skim production from state food-
collection agencies for sale, while some cafeteria and
grocery employees pilfer food,
Moreover, Cuban
consumers have developed intricate networks for
trading unwanted goods for preferred items. To cope
with frequent lines for food and other consumer
goods, some Cubans also leave their jobs to wait in
lines, while others hire professional line-keepers.
Meanwhile, Soviet pressures to rationalize the Cuban
food sector will probably result in little more than
window-dressing measures such as the ministerial-
level committee formed earlier this year to study food
production problems in response to Soviet prodding.
Any benefits from these studies are likely to be offset
by increasing food demands from natural population
growth, by Castro's reluctance to eliminate the well-
worn rationing system, and by continuing difficulties
with financing imports of critical hard currency in-
puts.
Moscow is likely to apply increasing pressure on its
Cuban ally to rationalize food production, particularly
if, as we expect, there are no real gains in food output
over the medium term. Increased Soviet pressure may
reveal itself in a growing proportion of project-tied aid
from Moscow and a larger number of Soviet-technical
advisers in Cuban agricultural ministries that would
effectively limit Cuban policy options over the long
runs
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In addition to general pressures to adopt Gorbachev-
style reforms in order to liberalize the economy,
Moscow has increasingly emphasized to senior Cuban
officials the political, social, and economic importance
of eliminating the rationing of consumer goods, par-
ticularly food, oscow
has sharply criticized 20 years of continued Cuban
rationing as an embarrassment to Communism and a
poor example for other Latin American countries.
Earlier this year Moscow reportedly renewed pressure
on Havana to produce enough food domestically to be
able to end rationing. The Soviets, specifically, have
questioned the heavy concentration of planned Cuban
investment in sugar relative to food and investment in
new sugar factories even though current mills are
operating at less than 85-percent capacity,
Despite popular unhappiness and Soviet pressure, we
see little likelihood of significant policy change by
Havana to reverse the cycle of food shortages and
continued rationing any time soon. Constrained by
ideology, Castro probably will preserve the system as
a symbol of equity to maintain the support of the poor,
who view rationing as a "right" guaranteed by the
revolution, and to use the distribution of ration cou-
pons through block committees in order to keep tabs
on the population.
Domestic discontent over food policies, therefore, is
likely to grow and probably will result in some
continued cuts in food production by disgruntled
farmers and in an increasing use of illegal markets
and distribution networks. Public gripes over food
availability and prices probably will continue to be
met with calls for revolutionary spirit and self-sacri-
fice. Havana undoubtedly would meet any serious
outward displays of dissent with a quick, repressive
response.
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Status of Patent Major Concerns
Protection
No product patent for Process patent lapses if
pharmaceuticals product is not produced or
process is not used locally
Considering proposal to for two years
shorten term of process
from 15 to 5 years Situation could worsen if
proposed bill requiring or
encouraging the use of
generic drugs is passed
No product or process Constitutional article ex-
patent for empting pharmaceuticals
pharmaceuticals from patent protection pos-
sible; final draft due in
November
1931 law exempting Discriminatory registration
pharmaceuticals from procedures
product patent
protection
Bilateral consultations
with the United States
continuing
Pending 301 petition
filed by Pharmaceutical
Manufacturers Associa-
tion accepted by US
Trade Representative 23
July 1987
US industry expected to
file 301 petition Novem-
ber 1987
Prospects for adequate pat-
ent protection dim for fore-
seeable future
Unlikely to make any pro-
gress in next several years
PMA action may slow pro-
cess and increase pressure
for constitutional article
Prognosis is fair, better than
in Brazil or Argentina
If Supreme Court rules
against US industry peti-
tion, would lessen chance
for change in 1931 law, for
political reasons
No product patent for Process patent term only
pharmaceuticals five years from date of filing
or seven years from date of
issue, whichever is shorter
Indian Government can
override patents for "gov-
ernment undertaking"
No patent law Decree issued June 1987
creates more stringent li-
Draft patent bill under censing regulations for
consideration expected pharmaceutical firms
in Parliament late 1987
but final version may not Concern that final version
cover pharmaceuticals might not include protection
for pharmaceuticals
New patent law enacted Too soon to determine effec-
in 1986 providing pro- tiveness of enforcement
cess and product
protection
US companies in Chile
filed pending Supreme
Court case challenging
constitutionality of 1981
law
Decision on GSP bene-
fits postponed until
1 October 1987
Possibility of PMA fil-
ing a 301 petition
Memorandum of Under-
standing signed 9 July 1987
on Vaccine Action Program
stated that an accord on in-
tellectual property, includ-
ing patents, will be devel-
oped and agreed on within
90 days; details unclear
Draft patent bill under con-
sideration by a presidential
commission, expect submis-
sion to Parliament in late
October
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LDCs: Resisting Pharmaceutical
Patent Protection
The reluctance of many LDCs to strengthen pharma-
ceutical patent protection will probably continue de-
spite US pressure for tougher standards. Many LDCs
are targeting their pharmaceutical industries for de-
velopment and view patent protection as undercutting
this objective. The lack of adequate LDC enforcement
of existing patent laws and resistance to adopting
tougher standards could pose difficulties for broader
US GATT objectives and ultimately strengthen LDC
competition in key pharmaceutical markets.
Ineffective pharmaceutical patent protection has been
a source of friction involving several LDCs and the
United States and Western Europe over the past few
years. Moreover, the issue has become entwined in the
broader problem of intellectual property rights protec-
tion, including protection for copyrights, trademarks,
and patents. United States political and economic
pressure-such as unfair trade practice cases and the
threat of removing Generalized System of Preferences
(GSP) benefits-to achieve such protection has result-
ed in tougher standards only in some instances. We
believe that seven of the eight LDCs involved in
bilateral negotiations with the United States on phar-
maceutical patent protection will strongly resist
agreement.
Economic Versus Legal Perspectives
do not provide adequate legal protection for patented
pharmaceuticals and have resisted outside pressure to
introduce patent legislation. In some cases, such as
Thailand, the issue has focused on nationalist interests
and self-determination.
Even where patent legislation has been enacted, LDC
political and economic pressures have resulted in
continuing violations. Although US economic pres-
sure helped push Mexico, Taiwan, and South Korea
to adopt stronger patent laws, for example, the eco-
nomic and political forces resisting patent protection
still remain, potentially undermining effective en-
forcement. The Mexican patent law includes a 10-
year adjustment period during which pharmaceuticals
will not receive product patent protection. We believe
this interim period could be extended because of
Mexican pharmaceutical industry pressure. In South
Korea, adequate enforcement of its new patent law is
seriously threatened by opposition in both government
and industry. For similar reasons, counterfeiting
pharmaceuticals in Taiwan has decreased, but the
patent law has not eliminated the problem.
Major Centers of Resistance
Among the LDCs currently considering pharmaceuti-
cal patent protection, Thailand, Brazil, and Indonesia,
in particular, have intensified their resistance to
adopting tougher standards. Common elements of the
three countries' positions include resistance to outside
pressure, a degree of anti-US sentiment, powerful
A serious stumblingblock in negotiating patent pro-
tection is the differing perspectives between the indus-
trial and developing countries. While industrial na-
tions see patent protection as a legal right, LDCs view
it in economic and political terms. Many LDCs have
targeted their pharmaceutical sectors in order to
promote economic development, and the counterfeit-
ing of patented drugs allows nascent pharmaceutical
industries to avoid significant research and develop-
ment expenditures. Most of these countries, therefore,
vested interest groups, and a desire for a strong
indigenous pharmaceutical industry.
Some government officials have stated that Thailand
has no intention of bowing to US pressure on the
patent issue. Bangkok's hard line is, in part, in
response to domestic accusations of Thailand acquies-
cence to the United States on the copyright issue.
Secret
DI IEEW 87-039
25 September 1987
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According to US Embassy reporting, a Thai Govern-
ment meeting in August concluded that Bangkok
would rather give up GSP benefits than agree to take
actions-such as pharmaceutical patent protection-
which are viewed as running counter to Thailand's
national interest. As a result, we believe the current
US threat of removing GSP benefits as a penalty for
insufficient intellectual property right protection will
probably not produce patent legislation and may even
increase Thai resolve to deny US pharmaceutical
protection.
The Thais' increasingly negative perception of their
economic relationship with the United States is fur-
ther complicating patent negotiations, according to
the US Embassy. Such sentiment stems partially from
the 1986 US Farm Act, which subsidized American
rice exports, and partially from Bangkok's belief that
the pending US omnibus trade legislation is protec-
tionist and harmful to US-Thai trade. A recent Thai
editorial stated that the profit lost to US firms from
intellectual property right infringement is insignifi-
cant compared with the damage to Thailand from
subsidized US rice exports.
In addition to political resistance to US pressure, most
Brazilians do not believe there is an economic case for
increased pharmaceutical protection. Indeed, accord-
ing to the US Embassy in Brasilia, US companies
control about 72 percent of the total market and have
lost about $20 million during 1979-86-or about 1 to
2 percent of total sales-because of patent infringe-
ment. In addition, a number of US subsidiaries in
Brazil are involved in pirating US patented drugs,
according to Embassy reporting.
In the current political atmosphere, we believe US
pressure will not only be ineffective in producing
pharmaceutical patent protection in the near term,
but may also reverse recent gains, including liberaliz-
ing pricing and easing registration restrictions. Patent
protection might even become impossible if the Bra-
zilian constitution now under consideration contains
provisions excluding pharmaceuticals from patent
coverage.
Powerful domestic pharmaceutical interests oppose
pending Indonesian legislation providing pharmaceu-
tical patent protection and will probably significantly
undercut enforcement if the legislation is passed.
According to the US Embassy in Jakarta, there are
two key pharmaceutical issues under debate: whether
the patent legislation should include pharmaceuticals
at all, and, if so, whether it should cover pharmaceuti-
cal products as well as production processes. President
Soeharto is expected to resolve the issue in late
September.
We believe the threat of US trade actions against
Indonesia for inadequate intellectual property protec-
tion will not further the case for pharmaceutical
patent protection in particular. Although general pat-
ent legislation will probably be enacted, perceived US
pressure regarding pharmaceuticals could stiffen Ja-
karta's resolve to include protection for that industry,
out of fear of appearing to bow to US demands.
Improved LDC pharmaceutical patent protection is
probably years away in many cases. Such hardline
countries as Brazil and Thailand may, in fact, become
more inflexible in the face of strong US economic
pressure. In addition, vested domestic interests will
probably weaken the enforcement of new laws should
they be enacted. Moreover, tensions in US bilateral
relations created by disputes over pharmaceutical
protection could ultimately cause the general climate
for US investment to deteriorate further in some
countries. In these cases, adverse changes in LDC
pricing policies and pharmaceutical registration regu-
lations would be more likely to hurt US pharmaceuti-
cal company performance than would the continued
lack of patent protection. Even US drug firms that
have competed successfully despite patent infringe-
ment could find their operating environment more
constrained.
Continued LDC infringement of US pharmaceutical
patents could pose additional problems for US inter-
ests. Efforts to achieve improved international intel-
lectual property protection in the Uruguay round of
GATT negotiations could be threatened by increased
US bilateral disputes with those countries currently
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Prospects for Pharmaceutical Patent Protection (continued)
Status of Patent
Protection
Law amended in 1986
providing product patent
protection for 14 years
from date of issue
10-year transition peri-
od, product patent cover-
age begins in 1997
Process and product pat-
ents available to inven-
tions patented in the
United Kingdom; cover-
age in accordance with
the United Kingdom
Patents Act
Government-use excep-
tions; patents can be ig-
nored if for use in gov-
ernment hospitals or
institutions
Compensation limited to
5 percent of net ex-
factory bulk cost of the
drugs
Newly enacted patent
law covering both pro-
cesses and products, ef-
fective 1 July 1987
Amended patent law in
1986 to provide process
and product protection
Pharmaceuticals exclud-
ed from 1979 patent law
10 years until product pat-
ent protection will begin
Patent holder given only five
years to work patent before
it can be voided by petition
National pharmaceutical
concerns likely to seek to
revoke law or extend transi-
tion period; position of next
President may determine
their success
Ability to enforce patent
law is questioned due to
powerful vested interests of
Mexican pharmaceutical
industry
Enforcement of legislation
has been inconsistent
Compulsory licensing provi-
sion required working pat-
ent in Singapore within
three years of UK patent
grant
No action pending; legis-
lation provides adequate
protection
An Inter-Ministerial Com-
mittee has been meeting for
several years to consider
changes; the lack of urgency
makes timetable uncertain
Significant concerns over ef-
fectiveness of enforcement
New law only applies to US
patents
Enforcement of process pat-
ents ineffective due to bur-
den of proof requirements
Patentholders must "work
the patent" in Thailand in
order to obtain protection
Promises to resolve 301
case now being
implemented
No action pending, issue
resolved through a 301
case and other trade
pressures
USTR accepted PMA's
501 petition for the 1987
GSP review, President's
decision on status due 1
April 1988, could re-
move Thailand from
GSP
Although it now provides
patent protection, its will-
ingness to enforce law is
questioned
Prospects for further reform
in the near term is good
Patent issue being studied
by five- or six-person group;
expected to report recom-
mendation in October or
November; probably will
recommend against patent
protection, given committee
membership
Prospect for pharmaceutical
patent protection is dim for
next year or two
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Prospects for Intellectual Property Rights
Reform in the Uruguay Round
Intellectual property rights (IPR)-which refers to
patents, copyrights, and trademarks-is on the agen-
da for the ongoing GATT Uruguay round. The issue
is controversial because GATT members have not yet
agreed on which intellectual property issues should
be addressed, and patents are particularly sensitive.
Many LDCs are wary of including intellectual prop-
erty in the GATT forum because they see a GATT
agreement on IPR as mainly benefiting developed
countries. They also do not want attention in the
Uruguay round diverted from issues of more interest
to them such as agriculture and tropical products.
Brazil and India have been particularly vocal, argu-
ing that setting international standards and minimum
levels of protection are outside the scope of GATT
and should be confined to the World Intellectual
Property Organization. Brazil is also using obstruc-
tionist tactics as a means to stall progress on this
issue, in our view.
On the other hand, we believe there is growing
support among LDCs for discussions on intellectual
property issues in GATT. According to Embassy
sources, Thailand prefers a multilateral approach
rather than a bilateral approach, and South Korea
and Singapore have also supported the talks. In our
view, many LDCs could agree to broad GATT stan-
dards on intellectual property provided they include
preferences for LDCs.
resisting patent protection, since GATT decisions are
made by consensus. In addition, it is possible that
LDCs without pharmaceutical patent protection could
begin to export counterfeited pharmaceutical products
in the future, competing with legitimate US drug
exports in third-country markets. Such problems
stemming from ineffective Third World pharmaceuti-
cal patent protection will probably grow in the next
few years as other countries begin to develop their
own indigenous pharmaceutical sectors.
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Greece: Living Beyond
Its Means
Two years of economic austerity have not significant-
ly reduced Greece's current account deficit. The
October 1985 austerity program has sharply reduced
real wages but has fallen short of most other objec-
tives. Although Prime Minister Papandreou still
stresses the need for stabilization, he may adopt more
expansionary policies before the next election-due
by 1989-which will push the current account deeper
into the red at a time when scheduled amortization
payments are high. As a result, we believe Greece
probably will encounter financing difficulties by the
end of this decade.
Greece traditionally has experienced current account
deficits, typically in the range of 3 to 4 percent of
GNP but was able to finance these deficits without
incurring large foreign debts because of steady in-
flows of private direct investment. The current ac-
count deficit doubled as a percent of GNP during
1979-81, however, because of higher oil prices and the
profligate policies of the conservative New Democra-
cy government. After taking office in October 1981,
Andreas Papandreou boosted wages and increased
government intervention in the economy, which un-
dermined business confidence and eroded Greek com-
petitiveness. When Papandreou further eased policy
in anticipation of the 1985 election, the current
account deficit soared to a record $3.3 billion-10
percent of GNP-in 1985. Net foreign debt, exclud-
ing military obligations, tripled during 1982-85 to
$13.9 billion.
To obviate the need for IMF assistance, Papandreou
announced a two-year austerity program in late 1985.
The measures included a 15 percent devaluation of
the drachma, substantial advance deposits on imports,
and-the centerpiece of the program-a revision of
the wage indexation formula intended to reduce real
wages by at least 11 percent over two years.
Greece's current account deficit fell in 1986 by 46
percent to $1.8 billion, but not because of the auster-
ity program. The decline in oil prices saved Greece
almost $1.2 billion, and transfers from the EC in-
creased $500 million, while the nonoil trade deficit
actually worsened. Private consumption remained
strong, partly because wages covered under the aus-
terity program constitute less than 50 percent of
household income. Moreover, savings were drawn
down, and households turned to the underground
economy to supplement earnings. Continued growth
in government spending also boosted imports.F_
This year the current account deficit is likely to hold
at roughly $1.7 billion-about 4.5 percent of GNP.
Athens also must repay $1.5 billion of medium- and
long-term debt in 1987. Greece will be able to finance
these needs through about $800 million in private-
capital inflows, $1.25 billion in EC loans, about $460
million in commercial loans, and the rest from further
borrowing or a drawdown of foreign exchange re-
serves, now at $2.2 billion.
The End of Austerity
In a major economic policy speech earlier this month,
which was clearly aimed at pleasing all sides, Papan-
dreou announced the formal end of the austerity
program but stressed the need for continued stabiliza-
tion. The conciliatory tone of the speech-he spoke of
the need to lower taxes, reduce government interven-
tion, boost private investment, and improve Greek
Secret
DI IEEW 87-039
25 September 1987
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Greece: The Economy at a Glance, 1982-87
Public sector borrowing 12.6 11.3
requirements as a share of
GDP
Greece: Scheduled Debt-Amortization
Payments, 1980-95
competitiveness-contrasted markedly with Papan-
dreou's socialist rhetoric during his first term. Never-
theless, he was very short on specifics.
Athens has, in fact, already retreated significantly
from the 1985 austerity plan. The preimport deposit
scheme was abolished at EC insistence. More impor-
tant, we calculate that almost two-thirds of the
benefit of the October 1985 devaluation has been lost
because subsequent exchange rate adjustments have
not fully offset the inflation differential between
Greece and its trading partners. The public-sector
borrowing requirement fell last year, because Athens
appropriated most of the gain from lower oil prices,
but it now appears stalled at about 14 percent of
GDP-crowding out private investment and fueling
inflation.
I I I The status of the restrictive wage policy is less clear.
0 1980 85 90 95 This was the most successful part of the austerity
program, reducing real wages by about 11 percent.
While Papandreou promised that "true take-home
pay" will rise next year, Athens may still try to hold
nominal wage increases below the rate of inflation.
25X11
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-1,885
-1,876
-2,130
-3,276
-1,756
-1,650
-5,927
-5,386
-5,351
-6,268
-5,591
-5,900
4,141
4,105
4,394
4,293
4,503
5,100
648
725
893
834
510
400
Fuel
2,778
2,647
3,080
3,188
1,702
1,500
Invisibles balance
4,042
3,510
3,221
2,992
3,835
4,250
Payments
-2,056
-2,019
-2,068
-2,268
-2,597
-2,800
Interest/profits
-784
-874
-1,082
-1,237
-1,356
-1,500
Earnings
6,098
5,529
5,289
5,260
6,432
7,050
EC funds
550
834
715
869
1,393
1,600
Tourism
1,527
1,176
1,313
1,428
1,833
2,100
Shipping
1,657
1,309
1,095
1,038
998
950
Remittances
1,043
935
922
800
906
1,000
Capital account
1,779
2,303
2,477
3,146
1,923
Estimated.
b CIA estimate.
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Supply Rigidities Shackle Greek Competitiveness Greece: Trade-Weighted Real Exchange Rate,
1985-87 a
Greece's chronic, large external deficits partly reflect
structural imbalances in the economy. Most of these
problems derive from state intervention-Athens'tra-
ditional response to economic difficulties-particu-
larly under Papandreou's Socialist government.
The high cost of labor, combined with inflexible labor
laws, is one major supply barrier:
? Wage increases boosted unit labor costs by 30
percent, relative to its trading partners, soon after
Papandreou came to power in 1981, and indexation
has kept labor costs high.
? Wage increases in sectors facing foreign competition
exceeded the national average.
? Restrictive dismissal, overtime, and part-time regu-
lations hinder firms' ability to respond to market
signals and efficiently allocate resources.
The huge public-sector deficit, combined with Athens'
pervasive system of capital controls, has severely
depressed private investment-which has been declin-
ingfor at least six years-hurting Greek
competitiveness:
? Some government-administered prices are kept be-
low production costs.
? Seventy-five percent of total bank credit is allocat-
ed by the government.
? Lending to politically favored sectors is subsidized.
? Laws discourage the development of alternatives to
bank finance.
Greek economic policy is in transition from austerity
to what Papandreou in vague terms calls a "program
of development." At present he appears to still em-
phasize stabilization, but we think he will ease up as
the next election approaches, particularly with regard
to fiscal policy and wages. In addition, concerns about
inflation probably will keep Athens from implement-
ing the substantial real devaluation that we feel is
needed to improve Greek competitiveness.
75 JFMAMJJASONDJFMAMJJASONDJFMA
1985 86 87
e Data for end of month.
Impact of a Currency
Depreciation on Greece's
Trade Balance, 1988-90 a
Impact on exports 4.9 9.1 9.4
Impact on imports -2.0 -3.3 -3.3
a A 10-percent real depreciation would return the exchange rate to
the level of October 1985.
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Unless Athens adopts needed stabilization measures
and policies to enhance competitiveness, the external
deficit will widen. Greece will have difficulty in
finding the resources to finance both higher amortiza-
tion payments and a higher current account deficit.
Capital investment-primarily direct investment-
will probably stagnate because of Greece's structural
problems, a lack of capable Greek partners for joint
ventures, and the government's recent move to take
over the North Aegean Petroleum Company-by far
the largest foreign investment in the country. More-
over, Athens could have trouble maintaining the
confidence of foreign commercial banks, which hold
about 70 percent of Greek foreign debt. Even the EC
could prove reluctant to continue supporting Greece's
deficits once the austerity measures are lifted.
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Spanish Agriculture: Coping
With EC Membership
Spain's entry in January 1986 into the European
Community will ultimately benefit its agricultural
sector by providing substantial development assis-
tance, forcing it to modernize, and increasing its
access to the huge EC market. Spain, however, will
realize the benefits slowly because of the seven- to
10-year phasein period. The inefficient dairy and beef
industries are likely to suffer, and even the more
competitive fruit and vegetable farmers probably will
experience only limited gains because of continuing
EC restrictions. Adjusting to the Common Agricul-
tural Policy (CAP) and other EC regulations is likely
to accentuate regional differences, with the north
generally doing poorly and the south faring relatively
well. Membership will eventually result in significant
declines in US agricultural exports to Spain-espe-
cially corn. Because of the large size of its agricultural
sector, Spain will probably become an important
player in the formulation of EC agricultural policy.
Impact of Accession on Production and Regional
Development
EC accession had only a marginal impact on Spanish
agricultural output during Spain's first year as a
member, because CAP regulations liberalizing intra-
EC farm trade are being phased in over seven to 10
years. Spain's inefficient sectors probably will be hit
hard later in the transition period, which is likely to be
troublesome even for the more competitive producers,
as they become subject to tough CAP regulations and
face increased EC competition:
Spain is a major agricultural power. It is the world's
primary producer of olive oil, the third-largest of
wine, the fourth-largest of dried fruit and almonds,
and the sixth-largest of citrus fruit. With more than
two-thirds of its exports going to the EC-11, Spain is
the largest exporter of farm produce to the Commu-
nity after the United States and Brazil. But, while the
Spanish agricultural area is large-equal to more
than one-fourth the combined farmland of the other
EC countries-it lags them in productivity. Produc-
tivity is less than half the Community average, and in
thefeedgrain and oilseed sectors Spain is one of the
least productive in the EC. Notably, large imports of
corn and soybeans have been responsible for Spain's
overall agricultural trade deficits.
The major problems facing Spanish agriculture are
the small, fragmented, subsistence-level landholdings
in the north; the large, underutilized, and unprofit-
able holdings in the south; and the aging, poorly
educated labor force. Moreover, although irrigation
is required to sustain reasonable yields, only 15
percent of the cultivated land is irrigated. Marketing
structures also are deficient for many products and
distribution costs are high. Madrid's system of price
supports and subsidies also has contributed to ineffi-
ciency by promoting development in areas where
Spain does not have a comparative advantage-such
as grains-to the neglect of Mediterranean products
where Spain has vast productive potential. For most
goods, however, Spanish prices are below those in the
EC.
? Dairy and beef output will probably suffer the most,
since these products will be subject to high EC
quality standards and must adhere to the EC's 5.4-
million-metric-ton milk quota-more than 15 per-
cent below annual Spanish production. Most meat
production-heavily dependent on imported feed-
grains-is likely to be hampered by higher produc-
tion costs because of the imposition of variable
import levies.
? Even the competitive fruit and vegetable growers
probably will experience only moderate gains be-
cause the EC can maintain preaccession quotas
until 1990 and does not have to eliminate them
entirely until 1996. Spain also faces competition
Secret
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from Morocco, Israel, Algeria, and Tunisia, which
have more favorable trade terms under the Com-
munity's Mediterranean policy.
? The grain sector is expected to expand because of
higher support prices, but a possible ceiling on
wheat, high-quality standards for barley, and com-
petition from France may dampen output.
? Continued protection of the olive oil sector probably
will prevent a decline in output until after 1990,
when it will likely fall because of EC policies aimed
at reducing the Community's surplus.
? Table wine output also could decline somewhat
because the EC's quota is about 10 percent below
annual Spanish production, and some producers
may switch to high-quality wines that are not
subject to quotas.
The agricultural sector's adjustment to EC regula-
tions will produce mixed results for Spain's varied
regions during the transition period, and is likely to
accentuate the sharp differences that already exist.
The beef- and milk-producing regions in the north-
west will be the biggest losers. Higher CAP prices will
not offset the large production declines, and many
farmers are likely to be forced out of agriculture. The
fruit and vegetable areas of the Mediterranean coast
stand to gain the most. Despite EC trade restrictions,
farmers there are some of the most efficient in Spain,
are increasingly open to new technology, and have the
advantage of a longer growing season. Accession is
not expected to have appreciable consequences for the
grain and livestock-other than beef-areas of cen-
tral Spain, while the olive groves and vineyard regions
of the south and west will benefit from higher CAP
prices and structural aid, despite a fall in output.
Community membership has forced Madrid to ad-
dress agricultural production problems and growing
regional disparities. The basic objective of Spanish
Spain: Agricultural Production, 1985
Fruits and
vegetables
27.3
Grain
26.8
land reform in recent years has been to increase
productivity through forced leasing schemes or expro-
priation of the large estates in the south and consoli-
dation of the small, fragmented farms in the north.
Madrid also hopes to expand irrigated land from 15 to
25 percent of total cultivated area. The government
would like to implement early retirement plans for
older farmers and is providing low-interest loans and
special credits to younger farmers. In 1986 the EC
approved $12.8 million for projects to upgrade the
fruits and vegetables, meat, grain, and wine sectors,
and $70.9 million for projects establishing new mar-
keting facilities. With EC consent, the government
has continued to provide aid for insurance and subsi-
dies for the purchase of farm equipment, fertilizer,
improved seeds, and fuel.
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Major EC Accession Terms for Spanish Agriculture
? Most of Spain's agricultural goods are subject to a
seven-year transition period. The EC's Common
External Tariff (CET) against third-country com-
modities was adopted upon accession, and tariffs
against Community farm products are to be abol-
ished in eight annual stages. Madrid also must
dismantle state monopolies, align domestic prices
with those of the EC, and phase in all remaining
CAP regulations by the end of the transition period.
? Fruits and vegetables are subject to a two-stage, 10-
year transition period. During the first phase, last-
ing four years, Spain must implement the CET and
begin lowering tariffs against Community members.
It may maintain quotas on trade with third coun-
tries, however, and EC members can retain quotas
on Spanish products. During the second stage, all
quantitative restrictions are to be eliminated, and
Spain must complete tariff dismantlement.
? Oils and oilseeds also are subject to a two-stage,
10 year transition period. During the first five
years, Spain will be able to maintain import con-
trols at preaccession levels for oils, but must begin
to reduce tariffs for oilseeds. During the second
phase, all trade barriers are to be abolished. The
CAP will apply fully by the end of the transition
period.
? Imports of various third-country goods-notably
grains-are subject to the EC s system of variable
levies. Madrid was required to impose the levies
upon accession and remit the revenues to Brussels.
? Imports into Spain of certain "sensitive" prod-
ucts-including wine, milk, cheese, butter, live cat-
tle, beef, and bread wheat-are subject to set
quantitative limits with predetermined annual rates
of growth. The EC Commission will continually
monitor import levels to determine if these rates
should be changed.
penetration of European outlets, and Spain's agricul-
tural trade balance with the EC should improve.
Accession already has prompted the more modern
farmers to invest in improved production techniques
and to form marketing organizations and producers'
associations. On the downside, agriculture's growth
potential may well be frustrated by some opposition to
land reform, the strain that the cofinancing of devel-
opment projects may place on Spain's central budget,
and the unfavorable natural conditions in some re-
gions that leave little room for increased output.
Moreover, modernization in the more backward sec-
tors will be long and difficult, and the political
pressures associated with the probable increase in
agricultural unemployment may slow government ra-
tionalization plans.
EC entry also will force Madrid to develop the
necessary bureaucracy to effectively administer the
CAP and to cope with farmers' varied interests.
Although not yet a strong political force, the forma-
tion of producer groups is certain to strengthen the
farm lobby and increase demands for better terms in
price and other negotiations. Dairy farmers have
already taken to the streets to protest the EC's milk
quota; fruit and vegetable growers have demonstrated
over the fact that they face more restrictions than
non-EC Mediterranean farmers; and corn producers
have sought to limit US corn imports because of the
downward pressure on domestic corn prices. As Ma-
drid becomes more experienced with CAP and other
EC regulations, it is likely to push Spanish interests
more aggressively in EC negotiations and aim at
consolidating a "Mediterranean" block within the
Community. This is certain to take time, but given the
sheer size of Spain's farm output-and its even bigger
potential-we expect Spain eventually to become a
major player in the formulation of EC agricultural
policy.
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Spain: Self-Sufficiency in
Selected Commodities,
1976-85 a
I I I I I I I I I
0 1976 77 78 79 80 81 82 83 84 85
is likely to reduce Spain's traditionally positive agri-
cultural trade balance with the EC, which may even
turn negative. Imports are certain to rise substantially
because of lower trade barriers and higher Communi-
ty import prices, while small gains are expected for
exports because Spain's competitive sectors will be
subject to EC import controls throughout the transi-
tion period. Indeed, in 1986 Spain's farm trade sur-
plus with the EC fell from $1.5 billion to $1.3 billion,
as imports surged 111 percent and exports grew only
33 percent.
Spanish entry into the EC probably will lead to an
improvement in its traditional agricultural trade defi-
cit with the United States as imports fall and exports
remain stable. Indeed, in 1986 Spain's food deficit
with the United States fell to $480 million from $570
million a year earlier, and the US share of Spanish
agricultural imports fell more than 8 percentage
points to 19 percent. Accession will cause a sharp drop
in US corn exports to Spain-which account for 40
percent of total US food sales to Spain-because of
the EC's system of variable import levies, but this is
Spain: US Share of
Agricultural Trade, 1982-86
1
I
1
not likely to occur until 1991. Under the settlement
terms of the US-EC dispute over the impact of
Spanish entry on US exports, Spain is required to buy
2.0 million tons of non-EC corn annually between
1987 and 1990.' While the United States faces com-
petition from such non-EC suppliers as Argentina, US
exports probably will remain near previous levels
through 1990.
As EC trade barriers are eliminated after the transi-
tion period, EC entry will force the agricultural sector
to modernize and will also lead to substantial produc-
tion gains for many commodities-especially fruits
and vegetables. Spanish farmers will step up their
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Impact of EC Membership on Spain's Agricultural Regions
,La Palma
Laaxarof
Fueneveatura
0.. Canaria
Very postive impact
Positive impact
No impact
Negative impact
Very negative impact
- Region boundary
- Province boundary
Madrid also has been relatively successful in securing
EC development assistance for its various regions. It
received $200 million from the Community's Region-
al Development Fund last year for infrastructure
projects and $7.3 million from the Agricultural Guid-
ance and Guarantee Fund for mountainous regions.
Most noteworthy, however, was the EC Agricultural
Council's decision to declare nearly 62 percent of
Spain's farmland as "disadvantaged," with about 80
percent of that classified as "most disadvantaged."
This means that the EC's share of project financing
will increase substantially to about 50 percent.
Trade Effects and Implications
for the United States
The major effect of EC entry on Spain's agricultural
trade relations during the transition period will be to
increase trade with its EC partners and to reduce
imports from third countries, including the United
States. In 1986 the EC's share of Spanish trade rose
almost 10 percentage points to 55 percent. Accession
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Burma May Become Sharply declining oil production may force Rangoon to begin importing crude oil,
Oil Importer according to Embassy reporting. Burma's oil production has declined by one-third
since January, from 21,000 b/d to about 14,000 b/d because of aging oil fields.
Moreover, refineries are operating at only 30-percent capacity. Widespread fuel
shortages have resulted in rising gasoline and diesel prices and transportation
bottlenecks, and have crippled development projects. Rangoon has requested
assistance from development banks, including a $24 million loan from the World
Bank, to finance oil imports of up to 10,000 to 15,000 b/d. This sudden
turnaround in Burma's fuel self-sufficiency could at last encourage the govern-
ment to allow foreign involvement in onshore exploration and production in hopes
of bringing new wells on line quickly.
Cuba's Paris Club According to US Embassy reporting, Havana's failure to change economic policies
Creditors Meet to meet debt repayment schedules has exhausted the patience of official creditors,
who are meeting to discuss Cuban debt relief. Paris Club chairman Trichet has re-
portedly said that creditors might have to "reorient their whole thinking on Cuba,"
suggesting the Club is tiring of one-sided efforts to help Havana meet payments.
Cuba last July released data showing increased hard currency deficits and near-
zero economic growth in 1986. The Paris Club will probably extend no new credits
to Cuba because of Havana's refusal to cooperate on economic adjustment. They
may compromise on old debt to encourage future repayment, but deteriorating
hard currency accounts probably preclude full Cuban payments to creditors this
year.
Somalia Backpedals President Siad has announced plans to reverse key parts of Somalia's IMF reform
on IMF Reforms program by ending the foreign exchange auction and reimposing fixed prices on
some food items, according to the US Embassy. The Foreign Minister told US dip-
lomats that the changes are not intended to repudiate reform but to bring it into
line with domestic priorities. Siad probably cancelled the auction-which has
sharply devalued the Somali shilling-to appease his Marehan clan, whose
financial and political interests have been damaged by the IMF reforms. He
probably judged that Mogadishu's declining ability to pay for imports, together
with reduced US military aid, is eroding vital support from the armed forces. He
also may have concluded that returning the economy to government control will
improve the standard of living. In breaching IMF guidelines, Somalia risks losing
substantial assistance from the United States and others, but Siad probably
expects to persuade donors to accommodate the changes.
35 Secret
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North Korean Debt Western banks-which recently declared North Korea in default on $790 million
Rescheduling in debts-have suspended legal action to seize the North's assets, according to
press reports. The move follows Pyongyang's agreement in principle to the banks'
proposal for rescheduling. North Korea has demanded changes in the terms,
however, namely a four- rather than a one-year grace period and a smaller initial
payment. The two lead banks reportedly have accepted the changes but must
secure approval of all 140 banks involved in the loans. North Korea must sign the
agreement and make a $32 million downpayment by 2 October to forestall further
legal action. P'yongyang probably agreed to reschedule because it recognized it
had no more bargaining room, but there is good reason for bankers to be skeptical
about whether it will go through with the deal. Since North Korea took out the
loans in the early 1970s, it has made few payments-and none since 1984-in
spite of three previous reschedulings. Moreover, North Korea is also in serious
arrears on the $1 billion owed on other commercial bank loans and on government
and government-backed credits from Western Europe and Japan.
Secret
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Midyear USSR-Eastern Between January and June, the Soviets ran up a 200-million-ruble deficit in trade
Europe Trade Results with Eastern Europe, the first midyear trade gap with the region since the early
1970s, according to recently released Soviet trade statistics. Lower CEMA oil
prices-reflecting last year's sharp decline in world oil prices-helped cut the
value of Soviet exports more than 5 percent compared with the first half of 1986.
East European exports to the USSR expanded 4 percent, marking an improvement
over the sluggish pace in the comparable period last year. Moscow may want to
run small deficits with East European countries over the next few years because
the East Europeans must repay trade debts by shipping more goods to the USSR.
Since the mid-1970s, Eastern Europe has accumulated a debt of about 17 billion
rubles-about $26 billion-as Moscow extended trade credits to help the region
adjust to higher oil prices. Soviet deficits may grow larger, however, because the
value of exports to Eastern Europe will probably remain depressed despite
Moscow's efforts to offset lower oil prices by increasing deliveries of machinery
and manufactured goods. To avoid larger deficits, Moscow may have to accept
slower growth in imports, threatening plans for increased East European contribu-
tions to Soviet economic modernization.
USSR: Trade With Eastern Europe, First Half 1987
Exports
Imports
Trade
Balance
Total Growth From
(million Same Period
rubles) Last Year
(percent)
Total
(million
rubles)
Growth From
Same Period
Last Year
(percent)
(million
rubles)
Total
16,588 -5.2
16,805
4.1
-217
Bulgaria
3,050 -5.4
3,317
10.1
-267
Czechoslovakia
3,375 0.2
3,480
5.2
-105
East Germany
3,704 -3.2
3,488
0
216
Hungary
2,205 -4.6
2,469
5.1
-264
Poland
3,042 -10.9
2,894
5.2
148
Romania
1,212 -10.6
1,157
-6.8
55
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Australian Opposition to In a Washington press conference last week, Minister for Trade Negotiations
US Trade Bill Michael Duffy strongly criticized the trade bill pending in Congress, citing quotas
on lamb imports, sugar subsidies, and the expansion of the Export Enhancement
Program as measures likely to increase Australia's trade deficit with the United
States. Duffy warned that bilateral ties would be seriously strained if these items
are passed in their present form, suggesting that Australia might discontinue
purchasing US military goods on a cash basis. Australia relies on the US market
for more than 12 percent of its exports and is already upset over accepting limits
on beef exports to the United States last week. Canberra probably will continue
lobbying against the bill in Washington, and the issue almost certainly will come
up again when Prime Minister Hawke visits California next month. Australian
officials remain adamant, however, that the US-Australian joint defense facilities
will not figure in any trade dispute.
Global and Regional Developments
Bundesbank President Bundesbank President Poehl has dismissed claims by French and EC officials that
Clarifies Recent the recent agreement to reform EMS intervention rules involves in any way an
EMS Agreement automatic commitment by the bank to defend other EMS currencies before the in-
tervention limit is reached. In a hastily convened press conference designed to
provide the West German assessment of the recent EC Finance Ministers meetings
in Denmark, Poehl asserted that he would not have agreed to the changes if they
had endangered the Bundesbank's autonomy in setting monetary policy. While
agreeing that the opportunity now exists for the Bundesbank to intervene before
the intervention levels are reached, he stressed that such action requires the
consent of the country with the strongest currency-almost always West Germa-
ny. These decisions, he added, would be taken on the basis of whether they
affected West German price stability. Moreover, Finance Minister Stoltenberg,
who also attended the meetings, signaled that West Germany would not agree to
further steps to improve West European monetary cooperation until additional
steps are taken to liberalize West European capital markets. Indeed, Poehl sharply
criticized Rome for imposing exchange controls on the lira only hours after the
meetings had ended.
Slim Prospects for Faced with sagging world prices, the International Coffee Organization is meeting
New Coffee Quota in London to decide whether to reintroduce old export quotas or establish a new
quota system. According to US Embassy reporting, consumers and most producers
support the US position of a new quota allocation based on exportable production
and coffee stock holdings rather than politically determined quotas. Producers are
concerned that Brazil, the world's largest producer, will reject a new quota
allocation if its current 30-percent quota share is endangered. Producers have been
trying to persuade Brazil to be more flexible, but there is no indication that
Brasilia has softened its position. Although preferring redistributed quotas, most
producers will opt to accept a reintroduction of the old quotas-which would
satisfy Brasilia-rather than risk the continuation of no quotas at all. Quotas were
suspended during a surge in coffee prices in 1986, and, without Brazil's agreement
Secret
25 September 1987
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to establish some type of quota system, world coffee prices will continue to decline.
Brazil recently has been quiet on the quota issue, leaving the proposals to other
producers. The producers are not sufficiently organized to develop objective
criteria setting a quota that would both appease producers and consumers and
convince Brazil a new system would be beneficial.
Producer and Consumer Positions on
International Coffee Organization Meeting
United States Want reintroduction for price support. Will agree on reintroduction based on
and Other allocation.
Consumers
Brazil Will agree on reintroduction as long as Brazil does not need quotas to main-
current market share is maintained. tain export earnings; will agree on re-
introduction, but most likely not based
on objective criteria.
Colombia Willing to accept a decrease in its Is willing to do whatever it takes to
quota share for reintroduction of have a reintroduction in quotas; seems
quota. optimistic that agreement will be
reached.
Guatemala Believes reintroduction or suspension Will agree to quota reintroduction;
will result in either share loss or export considering increased sales to non-
earnings decline. members to decrease stocks.
Indonesia Wants reintroduction of quotas based Strong supporter of consumer position;
on new system. wants to see consumers accept nothing
less than objective criteria for quota
allocation.
Ivory Coast Prefers reintroduction of quotas that Has convinced Brazil that Brasilia
would appease all involved. should be the leader in deliberations
toward a new allocation system; be-
lieves that success rests on consumers
being more flexible toward objective
criteria.
Kenya After hard bargaining, believes that Has minimal hopes for improved quota
midnight agreement will be reached on share; looking at selling more to non-
reintroduction. members to decrease stocks.
Mexico Will settle for reintroduction of quotas Will settle for current quota share as
based on ad hoc system for temporary long as it is open for future
price support. negotiations.
El Salvador Willing to accept a reduction in its Supports new quotas that would pro-
quota share for reintroduction of vide maximum earnings in short run;
quotas. hopeful that higher quotas can be ne-
gotiated in 1987 agreement.
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West Germany Rejects Domestic considerations have led West Germany to reject key aspects of an EC
EC Steel Proposal proposal to restructure the West European steel industry, threatening another
period of sour relations between Bonn and its European allies. Bonn, according to
press accounts, contends the plan would eliminate too many jobs, is too narrowly
focused, and should not be funded from the EC budget. Defense of West German
steel interests has probably taken on greater importance for Chancellor Kohl since
his Christian Democrats suffered sharp losses in the recent state elections. The
Christian Democrats are also trying to improve their political standing in North
Rhine-Westphalia-West Germany's largest state and center of its steel indus-
try-an area traditionally dominated by the opposition Social Democrats.
Change in China's China-one of the world's largest tin producers-has agreed to decrease its tin
Tin Policy exports and has applied to join the Association of Tin Producing Countries
(ATPC), reversing its previous plans to increase tin exports and its noncommittal
position toward joining the ATPC. Many tin producing countries have asked
China to join the ATPC in an effort to better control world tin supply and firm up
world tin prices. Should Beijing follow through, the ATPC would probably have a
stronger case in urging Brazil-another leading producer-to join the organiza-
tion.
Soviets Seeking Oil The Soviets plan to promote their new approach to joint ventures at their "Oil and
Technology Through Gas 87" trade fair being held in Moscow from 20 to 28 October, which several
Joint Ventures Western manufacturers are scheduled to attend. Soviet officials believe that the
depressed state of the petroleum equipment market in the West has improved their
chances for attracting Western companies into joint ventures. If implemented,
joint venture agreements would displace some of the need for direct purchases by
the USSR for its oil and gas industries. Currently, however, Moscow is continuing
to negotiate contracts with Western firms for oil services, technology, and
equipment. The USSR, is close to signing
two agreements with Dreco, a leading Canadian manufacturer of Arctic drilling
equipment-one for the inspection and modernization of Soviet equipment for
Arctic drilling and the other for the manufacture and sale of Soviet turbodrilling
equipment. In addition, several West European petroleum equipment companies
have expressed interest in forming joint ventures to supply the Soviet domestic
market-if they receive adequate compensation.
Developed Countries
West German Position The West Germans expect criticism of their tight fiscal policy at next weeks' IMF
on Economic Issues meetings, but domestic considerations almost certainly preclude a change in
policy. Despite the diminishing prospect of a significant reduction in its trade
surplus, Bonn probably will continue to oppose new stimulative measures including
bringing forward the tax cuts scheduled for 1990, as long as even moderate growth
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persists. Projected sharp increases in the budget deficit-due largely to slower
growth and revenue cuts called for in the tax plan-coupled with continuing rapid
monetary growth are rekindling public fear of renewed inflation. Moreover, state
leaders are urging Bonn to delay tax reform because of its impact on state
revenues. Instead of focusing on growth, the West Germans will probably try to
steer IMF discussions toward stabilizing the exchange rate system. Bonn, which
blames West Germany's slower growth on the sharp appreciation of the mark,
fears that a further steep appreciation will slash growth prospects even more, while
doing little to reduce the trade surplus.
Finance Ministry officials are pessimistic about prospects for keeping
exchange rates at current levels for much longer and are looking for ways to
manage the expected further decline in the dollar. Bonn might be willing to
temporarily push West German interest rates lower, but officials probably will
advocate stronger US action, such as another discount rate hike.
French Economic Woes Recent French media references to "France's economic decline" overstate the
problems, but this exaggerated emphasis on mediocre economic performance gives
Prime Minister Chirac no comfort as he prepares for the presidential election
expected next spring. France has been buffeted by a steady stream of bad
economic news: unemployment has risen to more than 11 percent, the government
has been forced to cut its growth forecast for 1987 to an anemic 1 to 2 percent, and
inflation-though still low-is inching above 3 percent. In addition, the trade
balance, which is the most widely watched barometer of French competitiveness,
has dropped sharply into the red the
Prime Minister is under pressure to stimulate the economy before the election. To
do so, however, would expose Chirac to charges of political expediency. Chirac will
probably earmark some of the revenues from the government's highly successful
denationalization program for new public works projects, a move that would take a
few workers off the unemployment rolls. He may also engineer minor, but
politically popular tax cuts, such as his recent move to reduce the value-added tax
on cars and phonograph records.
British Industrial Led by a 1.5-percent gain in manufacturing output, British industrial production
Production Surpasses in the three-month period ending in July rose by 0.6 percent over the previous
Prerecession Level three months-pushing output past its prerecession 1979 level and setting a new
record for the Thatcher years. Financial markets were pleased by the news and be-
lieve that industry still has reserve capacity to meet Britain's surging domestic
demand without adding to imports. Most economists expect the growth in
manufacturing output to slow next year and do not foresee any buildup in
inflationary pressures as a result of the recent rise. London will use the figures to
blunt opposition criticism that the Thatcher government has presided over the
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Turkey's Current Turkey's current account deficit in first-half 1987 was less than one-half the year-
Account Shows earlier figure, but Ankara probably cannot sustain the improvement for the full
Temporary Improvement year. The main factor in the reduction-from $ 1.1 billion to $ 450 million-was a
16-percent increase in exports, as Turkish businessmen took advantage of generous
export incentives put in place last December. Ankara also benefited from higher
earnings from tourism and increased workers' remittances-which are higher this
year in dollar terms largely because of the appreciation of the deutschemark.
Nonetheless, most forecasters still expect a current account deficit for 1987 very
close to or larger than the $1.5 billion recorded last year. They argue that Turkey
failed to import enough raw materials and capital goods this year to maintain
export growth, and conclude that imports must accelerate or exports slow down; in
fact, the trade balance deteriorated sharply in July. At the same time, Ankara's
growing foreign debt and higher international interest rates probably will cause
interest payments during July-December to exceed the $1 billion paid so far this
year. While international creditors are continuing to provide sufficient new loans
to cover Ankara's 1987 financing bill of roughly $5 billion, a failure to reduce the
deficit below last year's level will heighten fears that Turkey may experience a re-
currence of financing problems prevalent in the 1970s.
Japan's New Regulations Two of the principal Japanese Government ministries responsible for regulating
To Promote the use of genetic engineering technologies are expected to standardize approval
Biotechnology policies for the use of these technologies by the end of the year. This new
government coordination will greatly promote biotechnology, an industry that
Japan has made a national priority. Currently the Ministry of Health and Welfare
is responsible for granting permission to drug firms while the Ministry of
International Trade and Industry processes applications from the chemical
industry to use the technology. In those cases where the technology involves
products that can be used by both sectors, the approval needs to be granted by both
ministries, often a cumbersome and discouraging process. The lack of standardiza-
tion of the criteria for approval has often been cited by both Japanese and US in-
dustry analysts as a barrier to commercialization of the biotechnologies.
Australia Announces Australia's budget for the fiscal year ending June 1988 continues the financial
Balanced Budget restraints introduced in May in the interim budget. Canberra will not raise
taxes-keeping Prime Minister Hawke's campaign promise-and will increase
popular social welfare programs. Keating plans to balance the budget by holding
the line on defense spending and selling off more than $700 million in government
assets, including the national telephone company and airline, a step the ruling
Labor Party has yet to approve. Treasurer Paul Keating apparently designed the
budget for the broadest possible appeal, possibly to improve his chances of
succeeding Hawke as Prime Minister. The lid on taxes and the absence of cuts in
social programs will probably add to the government's popularity. Keating
nonetheless faces potentially divisive opposition within his party to the sale of
government assets. Two Labor Party state governments as well as Labor-affiliated
unions have already passed resolutions against the sales. This controversy probably
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Economic Effects of India's economy is beginning to feel the extended effects of drought. The dry spell
Indian Drought has irreversibly damaged the country's summer crops, particularly cotton, fodder,
and groundnuts-an important source of cooking oil. Reduced supplies of cotton
have led to shortages and higher prices for inputs to the textile industry-which
provides about 10 percent of India's export earnings-prompting firms to restrict
exports in order to meet domestic demand and to lay-off workers in order to cut
costs. New Delhi is attempting to reduce economic hardships facing the population
by expanding food for work programs, releasing greater amounts of food stocks to
hold down prices in some areas, and increasing food subsidies. New Delhi is
planning to implement new taxes in order to cover the cost of drought relief efforts,
including a 5-percent tax on non-essential imports, a surcharge on all taxable
income and corporate profits over $4,000, and higher airfares. The government is
also working to discreetly secure relief assistance from the United States, Japan,
and other Western countries as a short-term means of bridging the gap between
supply and demand of critical items.
Flood Relief Efforts Receding flood waters in some of the most heavily affected areas of Bangladesh
Continue in Bangladesh coupled with increased political pressure has prompted the government to
accelerate relief distribution efforts. According to press reports, President Ershad
has established a committee to coordinate movements of emergency supplies and a
control room at the Chittagong port to expedite the distribution of foodgrains,
relief supplies, and other essential imports. According to the US Embassy in
Dhaka, government efforts to keep prices down by ensuring an adequate supply of
foodgrains and discouraging hoarding have been successful. Even so, the govern-
ment will probably divert funds from other development projects into rural
employment programs and infrastructure rehabilitation. According to IMF esti-
mates, economic targets for the fiscal year which began 1 July will be severely af-
fected-the flood damage is equivalent to roughly 8 percent of GDP, the foreign
payments situation will deteriorate even further because of the need for food
imports, and foreign aid disbursements will increasingly favor food rather than
development aid.
Liberia To Privatize Liberia has announced that it will privatize its inefficient and money-losing oil
Oil Industry parastatal, but the country probably will accrue few financial gains from the
transaction. According to press reporting, a Western company will assume
responsibilities for the Liberian Petroleum Refining Company, including control of
the refinery, two major storage terminals, and a crude oil and product jetty. The
US Embassy reports that the company also has pledged substantial investments in
Liberia's rubber and timber industries. According to the Embassy, President Doe
ignored reports about the company's questionable international standing and
uncertain financial resources, and disregarded advice from some government
officials that Liberia sign an agreement with a more reputable firm.
Although Doe almost certainly expects his
government to receive substantial economic gains from the privatization, it is more
likely that the company's dubious record will drive out other, more reputable
companies now involved with Liberia's petroleum industry.
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Afghan Regime's Recent Afghan press reports have highlighted the government's efforts to reduce
Anticorruption Drive corruption in the economy and in aid-distribution programs. According to one
account, the Kabul city prosecutor's office has undertaken extensive operations
this year to crack down on overcharging at retail shops, cooperatives, gasoline
stations, and other establishments. Government officials also claim to have
uncovered irregularities in the distribution of Soviet relief aid in some provinces. F
Kabul's anticorruption
campaign is almost certainly an effort to win popular support. Charges of
corruption against provincial government officials also may be an attempt by
central government authorities to counter growing opposition from provincial
members in the Communist party. Corruption in the economy has long been
endemic in Afghanistan and the regime's reform efforts are unlikely to have much
of an impact.
Innovative Soviet The Soviets have developed a software package to design and produce the complex
Software Supports cams used to mechanically control the motion of automatic lathes. The software
Industrial Automation will generate numerical control (NC) programs to produce cams for nearly 30
different models of automatic lathes. The capability to easily produce control
cams, normally a very complex and labor-intensive process, has the potential to
enhance productivity in many Soviet machine-building and metalworking sectors
because automatic lathes are much more widely available than NC machines. By
using a single NC machine equipped with this software to produce new cams, a
plant can quickly reset all its automatic lathes to make new parts, thereby
increasing flexibility Moreover, this approach to automation avoids the need for
new machinery and the learning problems associated with installation, debugging,
and worker retraining
Laos Unifies and Vientiane recently replaced its complex, multitiered exchange rate system with a
Devalues Exchange flat rate in what may be the first in a series of measures to modernize the Lao
Rates economy. Previously, the Lao kip was valued officially from 35 to 270 per dollar,
depending on the type of transaction. The new official rate of 350 kip per dollar is
now almost the same as the black-market rate, eliminating a source of growing
criticism from key aid donors, international lenders, and some Lao officials. The
devaluation alone will probably have little immediate impact because much of the
country's consumer economy already operates at the black-market exchange rate.
Nevertheless, Vientiane is eager to improve the economy's performance, and, in
our view, may consider additional measures to halt corruption, stem capital flight,
and attract foreign investment
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