INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100370001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 22, 2016
• Document Release Date: June 23, 2011
• Sequence Number: 1
• Publication Date: July 3, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP97-00770R000100370001-2
Directorate of Sccrct
/ Intelligence
International
Economic & Energy
Weekly
3 July 1986
C71e._ Col
Do fiat renidvc1
40 Sta. 4.1t,t4.
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3 July 1986
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International
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Economic & Energy Weekly
3 July 1986
iii
Synopsis
1
Perspective?The Philippine Economy:
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Pulling Up on Its Rural Bootstraps
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The Philippines: Aquino's Critical Challenge?Reviving
the Economy
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Saudi Arabia?Kuwait: Budget Constraints Reducing
Aid to Iraq
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Lebanon: Financing the Militias
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Intellectual Property Rights: Enhanced Protection in Key Asian LDCs
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LA I
25
Briefs Energy
International Finance
International Trade
Global and Regional Developments
National Developments
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Indicators
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence, 25X11
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International
Economic & Energy Weekly
Synopsis
1 Perspective?The Philippine Economy:
Pulling Up on Its Rural Bootstraps
President Aquino's economic advisers are weighing a commitment to rural
development as the cornerstone of the new government's program for economic
recovery.
The Philippines: Aquino's Critical Challenge?Reviving the Economy
President Aquino recognizes that her political future depends primarily on
reviving the troubled economy, and, in some respects, her government is off to
a good start. Nevertheless, maintaining the economic recovery beyond 1987?
and, in turn, undercutting the Communist insurgency will require major
economic reforms in a riculture, government finance, the banking system, and
trade policy.
9 Saudi Arabia?Kuwait: Budget Constraints Reducing Aid to Iraq
Saudi and Kuwaiti aid, which underwrites Iraq's war effort, probably will drop
this year to about $1.6 billion?down from an estimated $2.5 billion last
year?unless Riyadh and Kuwait substantially increase cash payments. Even
so, Saudi Arabia and Kuwait are still committed to supporting Baghdad and
preventing an Iranian victory; they probably will continue to provide enough
aid to prevent economic difficulties from threatening Iraq's ability to prosecute
the war
15 Lebanon: Financing the Militias
Lebanon's abysmal economy is driving much of the once-thriving Lebanese
population to the brink of poverty and is impinging on the activities of the mili-
tias, which control most of the country. Rival militias are forced to seek funds
more aggressively from local and foreign sources?a process that will almost
certainly intensify factional struggles and violence.
21 Intellectual Property Rights: Enhanced Protection in Key Asian LDCs
As a result of strong pressure from Washington, several Asian LDCs are
beginning to offer more protection for intellectual property rights (IPRs). In
the future, the pace of reform may slow as harder problems, such as product
patents, are tackled, and the regulations for administering and enforcing these
laws are worked out. Moreover, once the US review of the Generalized System
of Preferences (GSP) is completed, an important US bargaining chip will be re-
moved.
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International
Economic & Energy Weekly
3 July 1986
Secret
Perspective The Philippine Economy: Pulling Up on Its Rural Bootstraps
President Aquino's economic advisers are weighing a commitment to rural
development as the cornerstone of the new government's program for economic
recovery. They realize that declining support for the Marcos government and
the rapid escalation of the Communist insurgency after 1981 coincided with
the sharp decline in rural incomes. In our judgment, Aquino's advisers believe
that an effective counterinsurgency program requires a "decent" standard of
living in the countryside, where 70 percent of the population resides and which
contributes more than one-fourth of the national output.
In our view, a good case can be made for the rural strategy on the grounds that
traditional development programs will not significantly improve the living
standards of the average Filipino. Import-substitution policies of the Marcos
government, for example, foisted high costs on manufacturers, discouraged
agricultural export production, and created few industrial jobs. Moreover,
Aquino's economic planners cannot count on sustaining growth simply by
exporting unprocessed agricultural commodities or manufactured goods; com-
modity prices this year are at their lowest levels relative to those of
manufactures since the 1930s, and most economists expect little improvement
for at least the next few years. Furthermore, the low cost of Philippine labor is
no longer sufficient by itself to ensure the competitiveness of manufactured
goods because, for over a decade, new production technologies have lowered
labor's share of total manufacturing costs.
Alternatively, by boosting rural output and incomes through improved rural
infrastructure, agricultural extension services, and market-oriented pricing
policies, the Philippines, we believe, could develop an internal market capable
of supporting economic growth while avoiding the inefficiencies of import-
substitution policies. A necessary component of this strategy would be an
exchange rate depreciation that directly raises incomes for rural exporters and
makes it profitable to invest in agribusiness enterprises. We believe the peso's
nearly 50-percent devaluation since late 1983, for example, helped boost
agricultural output by nearly 5 percent during 1984-85?in contrast to a 10-
percent decline in the economy's overall production.
Aquino's government, nevertheless, faces numerous political hurdles in carry-
ing out a rural-focused development strategy. Urban interest groups?which
were responsible for ousting Marcos?are likely to oppose exchange rate,
tariff, pricing, and tax policies designed to boost the rural economy if they be-
lieve those policies would hurt urban industries or raise consumer prices.
Furthermore, Aquino's economic team?comprising businessmen, bankers,
and academics with little understanding of small-scale agriculture?may not
be sufficiently committed to rural development to overcome lobbying by urban
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interest groups. Complicating the picture is the time it takes for rural
development to succeed under even the best of circumstances, and Aquino has
said publicly that she has to deliver tangible benefits quickly in the country-
side.
Manila's projected large budget deficit this year?probably more than 4
percent of national output?will also restrict the scope of the government's
rural development effort. A high-impact rural development program requires
large outlays for roads, postharvest food storage, irrigation, and a revitalized
agriculture extension service. In addition, improving farmers' welfare will
require costly improvements in both the civilian and military counterinsur-
gency programs to increase rural security.
Such budget constraints seem certain to make financial aid a contentious and
troublesome issue between Manila and its aid donors. For example, during a
May meeting in Tokyo, Manila pressed donors with unrealistic expectations
for additional assistance, while resisting politically unpopular economic policy
reforms such as new taxes and lower import tariffs. Under these circum-
stances, Manila may well use the prospect of renegotiation of the Military
Bases Agreement with the United States, which is likely to begin in 1988, as
leverage to obtain more aid now from Washington.
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The Philippines:
Aquino's Critical Challenge?
Reviving the Economy
President Aquino recognizes that her political fu-
ture depends primarily on reviving the troubled
economy, and, in some respects, her government is
off to a good start. If investor confidence continues
to firm, the economy could grow by 1.6 percent this
year and by almost 6 percent next year, according
to our econometric simulations. Nevertheless,
maintaining the economic recovery beyond 1987?
and, in turn, undercutting the Communist insur-
gency?will require major economic reforms in
agriculture, government finance, the banking sys-
tem, and trade policy. Conservative-minded advis-
ers, such as Finance Minister Ongpin, will face
considerable opposition to these reforms from popu-
lists and nationalists in Aquino's Cabinet.
Aquino's Economic Opportunity
Despite the fact that the Philippine economy has
been ravaged over the past decade, Aquino comes
to power at an opportune time in the business cycle.
According to our index of leading economic indica-
tors,' the economy bottomed out late last year from
the recession that began in 1983 and is now
probably growing slightly?a development that
preliminary Philippine Government estimates of
GNP for the first quarter of this year confirm. In
addition, inflation is low?prices actually fell in
April?interest rates are declining, and foreign
exchange reserves have increased by nearly
$800 million to $1.7 billion since Aquino took
office.
Continued economic recovery in the short term
depends heavily on private-sector confidence as
Manila finds it increasingly difficult to use more
traditional fiscal and monetary tools to prime the
economy. A $1.9 billion projected budget deficit for
' The index tracks the Philippine economy on a monthly basis and
allows us to anticipate by three to four months major turns in the
economy. The index follows money, trade, profit expectations,
government revenues, and manufacturing employment and produc-
tion costs.
3
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this year?primarily the result of preelection
spending by Marcos?will, in our view, force Ma-
nila to trim spending or raise taxes to reduce the
deficit to a manageable level. In addition, the
deficit is a major point of contention with the IMF
in negotiations for a new standby credit agreement.
Finally, export growth will provide little help to the
economy; slower demand growth in the United
States and Japan and low prices for the Philippines'
leading commodity exports?coconuts and sugar?
will probably keep overseas sales flat this year.
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For their part, domestic investors are responding
enthusiastically to the change in government. Un- 25X1
derlining this confidence, stock prices on the rela-
tively small Philippine stock exchange have in-
creased by almost 40 percent since Aquino took
office and capital flight, which was rife in the last
two years under Marcos, appears to have ended. If
domestic business confidence continues to firm and
the confidence of foreign investors strengthens, the
economy will grow by about 1.6 percent this year
and by almost 6 percent in 1987, according to our
econometric model. 25X1
On the financial side, an improved foreign pay-
ments position over the next two years hinges on
foreign creditors agreeing to reschedule principal
payments falling due in 1987. Principal payments
on the foreign debt are scheduled to jump by more
than $1 billion next year because the 1985 resched-
uling agreement included only debts maturing
through the end of 1986. A rescheduling of both
public and private debt will allow Manila to main-
tain foreign exchange reserves at relatively com-
fortable levels of $2-3 billion over the next few
years with little additional external financing.
Moreover, the Philippines' external finances will
probably improve this year because of the dramatic
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The Philippines: Index of Leading Economic Indicators, 1984-86
Percent change from previous month
3
2
? 111111
1 1111
-2
-3
-4
-5 A S ONDJ F M A
1984 1985
MJ J A S ONDJ F
1986
309673 6-26
falls in world oil prices and international interest
rates that together will save the government nearly
$1 billion in foreign exchange outlays.
There is considerable downside risk in the outlook,
however. Continued business confidence is not as-
sured, and foreign investors are especially cautious.
they are looking for at
least six months of economic and political improve-
ment before risking investments of new money. In
particular, Japanese businessmen?and the Japa-
nese Ministry of Finance?are worried about the
strength and longevity of the Aquino government,
A Reform Agenda: Core Issues
In our judgment, the Philippines' tenuous economic
recovery will run out of steam unless further policy
adjustments are made to deal with major problem
areas.
Secret
Agricultural Productivity. Agriculture, which gen-
erates more than one-fourth of national output and
provides livelihood for 70 percent of the population,
was severely damaged under the Marcos govern-
ment by monopolies, misdirected investment, and
an overvalued exchange rate. Freeing agriculture
from the control of marketing monopolies is a
major first step to increase rural incomes. We
estimate, for example, that the lifting in March
1986 of the four-year ban on the export of copra?
the oil-bearing meat of the coconut?will increase
domestic copra prices by at least 50 percent over
the next year as oil mills and exporters compete for
domestic copra. In addition, allowing the peso to
depreciate further would boost exporters' incomes
and help direct investment into more profitable
rural ventures, such as food-processing industries.'
'Although the Philippine peso has been devalued by 50 percent
against the US dollar since 1983, we calculate that, at 20.5 pesos
per dollar in May 1986, the exchange rate remains overvalued by as
much as 25 percent.
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The Philippines: Balance of Payments, 1981-86
Million US $
1981
1982
1983
1984
1985
1986
Current account
-2,096
-3,212
-2,751
-1,253
105
661
Trade balance
-2,224
-2,646
-2,485
-679
-486
-305
Merchandise exports
5,772
5,021
5,005
5,391
4,628
4,555
Coconut oil, crude and refined
533
401
516
580
347
350
Sugar, raw and refined
567
416
299
246
169
125
Copper, concentrates
429
312
249
115
84
90
Electronics products
838
1,000
1,053
1,329
1,056
1,100
Garments
616
539
545
603
622
650
Merchandise imports
7,946
7,667
7,490
6,070
5,114
4,860
Crude petroleum
2,081
1,784
1,741
1,472
1,278
1,000
Service exports
2,861
2,983
3,127
2,626
3,284
3,440
Service imports
3,205
4,023
3,865
3,586
3,155
2,940
Interest payments
1,374
1,911
1,929
2,380
2,125
1,990
Private transfers, net
325
322
237
118
140
144
Official transfers, net
147
152
235
268
322
322
Capital account
2,009
2,570
-622
998
1,986
316
Direct investment, net
172
16
105
-6
-7
40
Portfolio investment, net
3
1
7
-3
-4
38
Other long-term capital, net
1,131
1,548
1,044
257
3,052
50
Other short-term capital, net
712
1,281
-1,550
502
-1,728
-62
Errors and omissions
-490
-364
-356
100
540
0
Other
481
88
128
148
133
250
Overall balance
-87
-642
-3,373
-255
2,091
977
Foreign exchange reserves (end of year)
2,066
888
747
602
615
2,400
, Estimated.
The Government Budget. Manila ran annual budget
deficits since the mid-1970s, half of which were
financed by overseas loans. A major source of the
budget problem is inefficiency in the domestic tax
system, including a narrow tax base and poor
collection. Import duties and export taxes, which
account for almost 35 percent of revenues, have
been sharply reduced as foreign trade declined over
the past few years. At the same time, money-losing
government corporations are a major drain on the
budget from the spending side, costing Manila
almost $1 billion a year in operating subsidies.
Narrowing the deficit would reduce the country's
5
reliance on foreign capital and spur domestic in-
vestment by freeing savings for private use. Return-
ing ailing corporations to the private sector would
slash government expenditures, but, given their
weak balance sheets, Manila may find it difficult to
find buyers. The government, for example, believes
that the private sector is interested in purchasing
only five of the 35 companies held under the
National Development Corporation-a government
holding company.
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The Philippines: Selected Economic Indicators, 1980-87
Percent
Real GNP Growth
Real Per Capita GNP Growth Consumer Price Inflation
10 5
05-1111111111.11111r1
-5
-10 1980 81 82 83 84 85 86a 87a
Note scale change.
a Projection.
309672 6-86
60
-5
20
-10 1980 81 82 83 84 85 86a 87a 0 1980 81 82 83 84 85 86a 87a
Financial System. The Philippine banking system
is undercapitalized and has been threatened over
the last several years by failing public banks and
deteriorating loan portfolios. Banks are stuck with
nearly $5 billion in problem loans primarily be-
cause they financed the government's acquisition of
financially distressed firms, many of which were
purchased from political allies of Marcos.
Moves to shore up the financial system would
include merging some private banks, as well as
limiting new lending by government financial insti-
tutions and transferring some of their functions to
the private sector. A strengthened banking system
would, in our view, more effectively channel sav-
ings to high-return investment projects and reduce
the country's reliance on foreign borrowing by
encouraging domestic saving.
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International Competitiveness. For the most part,
Philippine manufacturing firms are uncompetitive
in world markets. Philippine industry?operating
within an extensive network of tariff and nontariff
barriers?has had the lowest export growth among
developing countries in East Asia over the last
several years. High tariffs have insulated domestic
firms from tough import competition and, as a
result, have left much of the economy plagued with
high-cost, inefficient production. In addition, an
overvalued exchange rate?designed to benefit po-
litically active urban consumers under Marcos?
discourages exports, encourages imports, and di-
rects investment to enterprises that can only sell to
the domestic market. Under pressure from
Manila's financial creditors, limited progress was
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The Philippines: Key Economic Issues, Political Pressures, and Likely Outcomes, 1986
Issues
Politics
Likely Outcome
Foreign debt
Leftists and nationalists will push hard for radical
approach, but Finance Minister Ongpin strongly
opposes such moves. He will make this a key fight
if necessary.
Radical approach unlikely, particularly if IMF
allows more expansionary policy. Will probably
follow lead of other LDC debtors in negotiations
with commercial banks.
Rural development
Leftists emphasize income redistribution and
champion sweeping land reform, subsidized inter-
est rates for farmers, and strict price controls.
Ongpin, however, promotes private-sector initia-
tives and channeling credit to rural areas.
A modest land reform program will begin, sup-
port prices for agricultural goods are likely, and
new rural lending institutions will be established.
Despite considerable rhetoric, however, Manila
will be slow to undertake comprehensive rural
development.
Agricultural monopolies
Nearly all coalition members favor dismantling
the monopolies.
Moves to dismantle the monopolies have begun,
including allowing the export of copra.
Government corporations
Ongpin in favor of privatizing numerous govern-
ment corporations. Nationalists and small busi-
nessmen will argue against allowing overseas
companies to purchase these firms.
Privatization will probably move ahead but with
restrictions on foreign ownership. Biggest prob-
lem will be finding domestic buyers for the
troubled firms.
Budget deficit
Except for economic technocrats, almost univer-
sal opposition to tax reform that would result in
higher taxes. Ongpin favors reducing deficit with
spending cuts, but populists will push expensive
social programs.
Even with the privatization of government corpo-
rations, Manila will have a difficult time reducing
the deficit without higher taxes. Will be conten-
tious issue in IMF negotiations.
Exchange rate
Ongpin, technocrats, and export-oriented busi-
nesses will push for a freely floating rate, which
will probably result in a depreciation of the peso
as the economy strengthens. Populists in the
Cabinet, however, want to avoid the politically
costly inflation that would result.
A managed float with slight depreciation.
Labor disputes
Could be an area of severe disagreement among
coalition members?particularly between left-
leaning Labor Minister Sanchez and the probable
hardline approach of Defense Minister Enrile.
A stronger government mediation role is possible.
Could also generate considerable political fallout.
Disposing of crony assets
Ongpin favors dumping the assets of Marcos's
associates on the free market. Nationalists may
argue that the government should retain them,
while others?such as Jose Cojuangco and Vice
President Laurel?would not object if they re-
ceived some of the spoils.
If pre-martial-law ownership is clear, assets will
probably be returned to original owner with sub-
stantial political benefits. Otherwise, most assets
will probably be sold on the open market.
Banking system
Ongpin favors free market approach, but most
other Cabinet members will oppose reforms if
they result in large job losses.
Moderate level of reforms likely. Will help pla-
cate foreign creditors.
Foreign trade and investment
Technocrats and trade-oriented businesses favor
more open environment, but populists in Cabinet
are wary of increased competition. Heavy opposi-
tion from small businessmen and nationalists.
Moves to open the economy will be slow and will
probably generate extensive public debate.
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made under the Marcos government in areas such
as loosening foreign exchange regulations, but most
barriers to trade remain.
Looking Ahead
Although most of Aquino's economic advisers?
including Finance Minister Ongpin and Trade
Minister Concepcion?support economic reform,
progress will probably be slow in coming. Many of
Aquino's closest advisers would prefer that the new
government move in a populist direction, chiefly
toward more social spending and continued protec-
tion of inefficient domestic industries and employ-
ment. Several important political constituencies?
consumers, small businessmen, and organized la-
bor?are likely to mount stiff resistance to tax,
trade, foreign investment, and financial reforms
because, despite the potential long-term benefits,
these reforms entail short-term costs.
If Aquino indulges the populists, the economy
could become her biggest liability, particularly
because expectations for improvement among Fili-
pinos are so high. Short-term economic recovery
and a piecemeal approach to economic reforms, for
example, will not be enough to provide the boost in
rural living standards needed to undercut the Com-
munist insurgency. Even if the economy grows by
an average of 5 percent a year after 1987?a
difficult task without major reforms?per capita
income could not return to the 1981 peak until
1994. Without an improvement in the distribution
of income, the Communists will continue to make
political and military inroads in the countryside no
matter how well the middle class in Manila is
doing.
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Saudi Arabia-Kuwait:
Budget Constraints
Reducing Aid to Iraq
Saudi and Kuwaiti aid, which underwrites Iraq's
war effort, probably will drop this year to about
$1.6 billion?down from an estimated $2.5 billion
last year?unless Riyadh and Kuwait substantially
increase cash payments. Since the decline in oil
prices and the Iranian capture of Al Faw, Iraq's
need for financial aid has grown, but the economic
constraints on Saudi Arabia and Kuwait have
made them increasingly reluctant to bear any
additional financial burden. Moreover, Tehran's
willingness to take aggressive action against Iraq's
aid donors has heightened the risks of continuing to
support Baghdad. Even so, Saudi Arabia and Ku-
wait are still committed to supporting Baghdad and
preventing an Iranian victory; they probably will
continue to provide enough aid to prevent economic
difficulties from threatening Iraq's ability to prose-
cute the war.
Forms of Aid
Neutral Zone Oil Sales. The bulk of Saudi and
Kuwaiti assistance to Iraq comes in the form of oil
aid payments and probably will total $700 million
this year. These payments are based on a 1983
agreement whereby Iraq receives annually the cash
equivalent of 248,000 b/d of crude production from
the Hut 1 and Al Khafji oilfields offshore from the
Neutral Zone. Because the oil aid is based on
volume, payments have declined substantially this
year as oil prices fell. This loss in revenue has been
compounded by the inability or unwillingness of the
donors to market the agreed-upon amount of
Neutral Zone oil?sales have averaged about
125,000 b/d during the first four months of this
year. Baghdad is to repay Saudi Arabia and Ku-
wait for the Neutral Zone aid?without interest?
in crude. These payments, however, which original-
ly were to start in February 1985, have been
rescheduled and are unlikely to be repaid in full.
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Saudi Arabia and Kuwait: Cash and Oil
Aid to Iraq, 1980-86
Million US $
I
Saudi Arabia
M Kuwait
5,000
4,000
3,000
2,000
1,000
0 1980 81 82
83
Si
86a
a Projected aid based on total oil price and production levels so far this year. Assumes
oil prices will increase slightly during the second half of 1986.
309699 6-86
Saudi Arabia and Kuwait recently agreed to renew
the Neutral Zone aid agreement, despite their own
financial constraints. The original Neutral Zone
agreement was to expire in January 1985 but was
extended until February 1986. Riyadh and Kuwait
then hoped that the completion of the Iraqi-Saudi
Spurline (phase I), with the additional revenues it
offered Iraq, would allow them to terminate the
agreement. Instead, Saudi Arabia and Kuwait
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Saudi and Kuwaiti Direct Aid
to Iraq, 1985-86
Million US $
Supply of Military Equipment. Saudi Arabia and
Kuwait provide Baghdad with small amounts of
munitions out of their own stocks, including cluster
bombs and FROG missiles.
Total
Neutral Zone oil
Saudi oil
Cash payments
a Based on exports of 60,000 b/d.
b Observed payments to date.
500 285
100 570b
agreed that the escalation in the Iran-Iraq war
required a continuation of aid until an agreement
between the combatants was reached,
Saudi Oil Sales. Saudi Arabia continues to sell
some of its own oil on Iraq's behalf. Last year these
sales amounted to about 50,000 b/d but probably
will increase this year to help offset the decline in
Neutral Zone oil aid. A large portion of the sales
probably is under an agreement in which the Soviet
Union lifts Saudi oil and sells it to India, with the
proceeds used to pay for Iraqi purchases of Soviet
weapons.
Cash Payments. Since the Iranian invasion of Al
Faw in February, the Saudis and the Kuwaitis have
made up for at least some of the shortfall in oil aid
payments through direct cash transfers. We
estimate Saudi payments have totaled about $520
million so far this year and probably were used to
finance arms purchases. We believe Kuwait has
given Iraq about $50 million with the promise of
further payments to follow.
Guarantees of Iraqi Financing.
Riyadh guaranteed payment
of Iraqi letters of credit issued to finance the
purchase of US military trucks and probably will
do the same for the purchase of US cargo planes.
We believe Saudi Arabia and Kuwait are likely to
guarantee future Iraqi borrowin for the purchase
of critical military supplies.
Secret
both Saudi
Ara ia an Kuwait serve as transs ipment points
for Iraqi military and civilian supplies.
Export Pipelines. Although not direct aid to Iraq,
Saudi Arabia allows Baghdad to export about
350,000 b/d through the Spurline-Petroline combi-
nation, which began operations last September. At
an average price of $13 per barrel, this pipeline will
provide Iraq with about $1.7 billion this year.
Riyadh also has given final approval for the Iraqi-
Saudi pipeline (phase II), which will cross Saudi
Arabia and increase Iraq's oil export capacity
through the Kingdom to about 1.6 million b/d by
the end of 1989.
Growing Pressures
Although both Iraq and Iran face severe economic
hardships in the months ahead, the decline in oil
prices probably poses greater economic and politi-
cal dangers for Baghdad than for Tehran. Oil
revenues have declined dramatically because Bagh-
dad is unable to raise oil exports significantly to
offset lower prices. It remains dependent, however,
on its oil revenues to finance imports?both mili-
tary and civilian?and to meet payments on its
large foreign debt. In addition, the Ba`th regime
relies heavily on domestic spending to maintain
popular support.
Baghdad will need sustained Saudi and Kuwaiti
financial assistance to offset Iran's greater econom-
ic resilience and to bolster its beleaguered economy.
Both Saudi Arabia and Kuwait face their own
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Iraqi-Saudi Petroleum Export Facilities
Caspian
Sea
Iraq-Saudi Arabia
Neutral Zone
K"alt
HUWAIT
? ? ftiat
Al Khaff7
Yanbu'al Bahr
Al
Saudi East-West Pipeline -Pettoline
*RIYADH
Gnaw&
- - - - 2nd Saudi East-West Pipeline
a-r pq 0S:a .P-i pal bid e
I 6 million d
coniPlete
b(PihdasWe hie! n)
expansoon
Red
Sea
an
innin
708063 (1300162) 7-86
11
DOHA
ar
ABU DHABI
OP
? 0
no defined
boundary
no defined
boundary
Oilfield
E Proposed single-point
mooring buoy
Oil pipeline under
construction
? Oil pipeline
1?1116 Oil terminal
Former boundary of
Kuwait-Saudi Arabia
Neutral Zone
O 200 Kdonleters
O 200 Miles
tt4441t1,11P,***
.tafotonniror
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serious financial constraints, however, including
budget cuts of unprecedented levels, and are show-
ing signs of increasing weariness with large aid
payments. The weak oil market and the donors'
difficulties in marketing their own oil exports make
them reluctant to sell large amounts of oil on Iraq's
behalf.
Since the oil price decline and the Iranian invasion
of Al Faw, financial and security concerns have
multiplied for Saudi Arabia and Kuwait, as well as
for Iraq. Tehran is becoming more agitated with
Saudi Arabia and Kuwait for their financial sup-
port to Iraq because it believes that Riyadh's
aggressive oil policy is directly responsible for the
sharp drop in oil prices. Tehran also probably
believes that the fall in prices puts it at a disadvan-
tage with respect to Iraq, which can turn to Riyadh
for help in offsetting its oil revenue losses. Iran has
made its position clear by increasing attacks on
Saudi oil tankers in the Persian Gulf and stating
publicly that it cannot allow Saudi Arabia and
Kuwait to continue financial support for Iraq. The
attacks in June against Kuwaiti oil installations?
probably by Iranian-backed terrorists?show
Kuwait's vulnerability to subversion and magnify
Kuwaiti fears, especially since the invasion of Al
Faw, of Iranian designs on Iraq and the Gulf states.
Outlook
The Saudis and the Kuwaitis are committed to
supporting Baghdad and to preventing an Iranian
victory, but are unwilling to bear more of the
financial burden than absolutely necessary. While
they do not want to give the appearance of buckling
under to Iranian pressure, they seek to avoid
intentionally provoking Tehran. Even so, they prob-
ably will continue making substantial cash and oil
aid payments to Baghdad.
If Saudi and Kuwaiti aid remains at current levels
for the rest of the year, none of Iraq's $4 billion
decline in oil revenues this year will be offset. As a
result, Iraq would have to institute tougher auster-
ity measures than those already in place and reduce
imports by more than the one-third cut presently
Secret
Saudi Arabia and Kuwait: Aid to Iraq
as a Share of Total Aid to Arab States
Percent
Saudi Arabia
Other Arab
States
Kuwait
Other Arab
States
Iraq
303698 6-86
needed. In addition, Baghdad's lenders probably
will further restrict trade credit, making foreign
suppliers even more reluctant to do business with
Iraq. Saudi Arabia and Kuwait probably will wait
until Baghdad reschedules a large portion of its
debt payments due later this year, slashes imports,
and further reduces spending before giving Bagh-
dad substantial cash payments not tied directly to
military purchases.
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The financial troubles of Saudi Arabia and Kuwait
will push them to find the least costly way of aiding
Iraq. The donors may broaden selective guarantees
of Iraqi letters of credit and guarantee debt resche-
dulings. Less desirable options would be to sell
additional oil on Iraq's behalf, allow more Iraqi oil
through the Spurline-Petroline combination?cur-
rent exports out of the Yanbu' al Bahr (Yanbu)
terminal are about 200,000 b/d below the line's
capacity?or allow Baghdad to export its oil
through the second Saudi East-West Pipeline, ex-
pected to be completed early next year. Such sales
would entail no cash outlay or strain to the donors'
productive capacities, but allowing additional oil on
the already glutted market probably would weaken
prices further. In addition, Riyadh is unhappy
about Iraqi price competition for oil sales at
Yanbu. Saudi Arabia may also want to limit Iraqi
oil exports through Yanbu because increased Irani-
an attacks on Saudi oil tankers in the Persian Gulf
may require greater use of Riyadh's Red Sea
facilities for its own oil exports.
If Iran were to launch another major offensive
against Iraq, Saudi Arabia and Kuwait probably
would immediately channel additional cash to
Baghdad. The Saudis and the Kuwaitis believe an
Iranian victory would threaten their security and
are committed to providing at least enough aid to
prevent such a development. At the same time,
however, an emboldened Iran would be likely to
step up pressure on the donors to cut aid. Efforts by
Saudi Arabia and Kuwait to mollify Tehran may
lead them to miscalculate the minimum aid neces-
sary to keep economic problems from threatening
Iraqi political stability.
13 Secret
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Lebanon:
Financing the Militias
Lebanon's abysmal economy is driving much of the
once-thriving Lebanese population to the brink of
poverty and is impinging on the activities of the
militias, which control most of the country. Rival
militias are forced to seek funds more aggressively
from local and foreign sources?a process that will
almost certainly intensify factional struggles and
violence. The militias have become more opportu-
nistic in shifting alliances and patrons in order to
survive. The result will be further destruction of
what is left of the economy, and fading hope for
any reunification.
Militia Money Woes
All of the major militias have experienced shrink-
ing revenues, especially from sources abroad, and
have stepped up illegal activities to raise funds. The
US Embassy in Beirut reports that Citibank in
West Beirut was robbed almost weekly until it
closed in late 1985. Muslim West Beirut recently
suffered a two-week cutoff of petroleum deliveries
after transport trucks refused to cross the Green
Line because their cargoes were likely to be stolen.
some militias
demand a special fee at the gas pumps, while others
siphon off gasoline from motorists at checkpoints.
The militias depend on financial support from
residents of cities and villages in their respective
cantons. The relative poverty of many rural areas,
however, is pushing the militia leaders to turn to
alternative sources for funds:
? In the southern Shia region, a fundraiser in each
village collects money from most residents to
su sort Amal
Ama p ans to sul s a container port in
Beirut to gain customs fees.
15
Secret
Druze leader
Jumblatt recently sent a letter to 2,000 Druze
businessmen soliciting donations. When contribu-
tions are not forthcoming, strong-arm methods
are used-16 Druze in one village were killed
recently after refusing to pay monthly fees levied
by the militias.
The Christian Lebanese Forces seek money from
local merchants and other commercial establish-
ments in East Beirut, levying a special tax on
restaurants, petroleum, cinemas, and the Casino du
Liban. In addition, the Christian militia controls
three illegal ports in the Christian enclave, and
leases them to Christian entrepreneurs for large
sums. We believe that revenues from these port
operations dropped significantly after Syria tight-
ened its border in January to stem illegal imports.
The Lebanese Forces also have increased appeals to
wealthy Christian expatriates in Western Europe,
Africa, and the United States.
Foreign Support Dwindling
We believe that funding from major supporters,
Syria and Iran, as well as Libya, has generally
declined over the past two years as the various
patrons have suffered economic problems of their
own. As a result, the rival militias have sought
multiple patrons?often with opposing aims?to
finance militia activities and further their own
interests.
Syria gives financial and military support to sever-
al allies in Lebanon, including the Shia Amal
organization, the Syrian Socialist National Party,
the Ba`th Party, and the Lebanese Communist
Party. Amal receives the lion's share, and there are
reliable reports that Amal is now almost totally
Secret
DI IEEW 86-027
3 July 1986
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Impact on the Economy
Although the militias ultimately represent a de-
structive element in the economy, financial support
they receive from Iran, Syria, the PLO, and others
actually provide a short-term economic boost.
Lebanon's only bright spot in 1985 was a foreign
payments surplus of $250 million, which is expect-
ed to increase in 1986. According to IMF data,
"unidentified payments" inflows grew by 25 per-
cent last year to $1.6 billion. Although a portion of
this came from increased worker remittances as
more Lebanese found work abroad, outside finan-
cial support for the militias probably accounted for
much of the increase. Palestinian money flowed
back into Lebanon beginning in early 1985 as
expelled PLO fighters returned. The PLO has also
substantially increased arms deliveries and finan-
cial support since its departure in 1983.
In addition, the rival militias offer young, unedu-
cated Lebanese men one of the few remaining job
opportunities available in Lebanon. Unemployment
is near 50 percent, and real annual per capita
income has fallen to about $250 from $1,250 in
1975. Militia salaries and the money and goods
acquired as "protection fees" from local business-
men appear increasingly attractive to many:
? in late 1985
Amal was paying new recruits monthly salaries
of 1,200 to 1,500 pounds?about $75.
? Hizballah attempts to lure Amal militiamen
with cash bonuses, higher salaries?about $200
per month?and housing for families of militia-
men.
Nonetheless, on balance, militia violence and de-
clining security have devastated the economy. In-
dustrial activity is currently at 40 percent of
capacity, and the chances of external financial
support are slim. The US Embassy estimates price
increases of 100 percent for the first half of this
year, and the fall in the Lebanese pound?about 55
percent in 1986?has choked off vital consumer
goods and raw materials. In addition, much of the
skilled, professional class has finally opted to
leave the country.
dependent on Syria for military support. Nonethe-
less, Amal still
actively seeks funding from Shia expatriates in
West Africa, Europe, and the United States. In
fact, Amal leader Nabih Barri has proposed a Shia
fundraising conference for Africa in July to attract
funds from Lebanese expatriates in Sierra Leone,
Ivory Coast, Liberia, and elsewhere. Amal, howev-
er, faces increasing competition for Shia African
money from other militias, including Hizballah and
the Syrian Socialist National Party.
Iran's principal surrogate, Hizballah, is financially
dependent on Tehran and is suffering a shortage of
funds as the war with Iraq saps Tehran's resources.
The Iranians typically funnel support through Da-
mascus, but Tehran also provides funding through
representatives in Beirut. Iran's financial support
for the militia has fallen behind, and salaries for
Secret
militiamen are several months in arrears. Hizballah
faces the prospect of losing militiamen to rival
groups. We believe that Hizballah now regularly
receives military aid and large sums of cash from
Arafat to help undermine Amal and Syrian inter-
ests in Lebanon.
The Druze and their political party, the Progressive
Socialist Party (PSP), are better organized than
other Lebanese militias and are perhaps the most
adept at attracting funds from the region's
antagonists:
the Druze help pro-
Arafat PLO fighters infiltrate in return for cash
and despite Syrian objections.
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The Partition of Lebanon
A canton is an area in which one
concessional group is politically
and militarily dominant.
Mediterranean
Sea
Fifth Basin port
BEIRUT
Contested-""
Shia
canton
Khaldah port
Lebanese
Army controlled
Tripoli
Syrian
occupied
4 Sidon
ested
Israeli-
controlled
security
Tyre Shia
Zone
zone UNDOF
canton
.4 sidin's i
g / /
1 Golan
/ ? I
=I/ /Heights
, I
--_,-------- ?l t;---J Israel j \ (Israeli occupied) 1949"
I
708064 7-86
17
Syria
*DAMASCUS
Port facility
0 20 Kilometers
0
Boundary representation is
not necessarily authoritative.
Secret
20 Miles
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Lebanon: Militias and Their Sources of Support, 1986
Militia/Supporters
Comments
Druze
USSR
Syria
Libya
Israel
PLO
Supplies arms, making Druze best-armed militia.
Transit point for Soviet arms.
Pays some salaries, allowed to maintain presence.
Limited intelligence contacts.
Pays for help infiltrating Fatah fighters through Khaldah.
Christian Lebanese Forces
Domestic
Illegal ports, taxes, checkpoints.
Expatriates
Collect funds from Christians in Europe, Africa, and United Sta
es.
Israel
Intelligence contacts, past arms support.
Amal
Syria
Military aid and salaries.
Expatriates
Collect funds from Shia businessmen in Middle East and West Africa.
Hizballah
Iran
PLO
Principal donor, funnels funds through Embassy in Damascus.
Pays for arms and for help in infiltrating Fatah fighters.
Libya
Selected payments to individual members.
Syrian Socialist National Party
Syria
Libya
Military aid
Mainly pays salaries.
Sunnis
Saudi Arabia
Supports groups in Sidon and Beirut.
Libya
PLO
Aid to anti-Arafat groups.
Aid to counter Amal and other pro-Syrian elements.
? Meanwhile, the Druze port was also used in 1985
for periodic arms deliveries from Libya to major
anti-Arafat factions in Lebanon.
? The Druze also may receive a payoff from the
Christians for not interfering in illegal ports in
East Beirut, according to recent Embassy
reporting.
? In addition,
a Druze official in late May negotiat-
ed an agreement with Romania to ship fuel
products to the PSP-controlled port of Al Jiyah in
an effort to insulate themselves from periodic
petroleum shortages.
Secret
Outlook
The economic decline in Lebanon will almost cer-
tainly increase the militias' dependence on external
sources, which will probably lead to even greater
outside interference in Lebanon. Foreign players
will probably take advantage of Lebanon's econom-
ic chaos to buy influence among rival factions.
Continued militia violence will further destabilize
the country and diminish the prospects for econom-
ic recovery and breaking the political stalemate.
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The shortage of money both internally and abroad
will intensify factional rivalries and help institu-
tionalize the practice of "guns for hire." Competi-
tion for funds will encourage militias to serve
several masters, further complicating the Lebanese
scene. In addition to robbery and extortion, cash-
starved militias may increasingly engage in drug
trafficking. Both rival and allied militias will vie
more fiercely for turf to compensate for shrinking
revenues?a development that will push street
fighting to dangerous new levels.
Finally, the pressures toward cantonization will
increase with the decline in Lebanon's security
situation. The growing violence will inhibit the
human and commercial traffic between cantons. As
rival groups seek to establish autonomous economic
enclaves, the prospects for political reintegration
become less likely.
19 Secret
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Intellectual Property Rights:
Enhanced Protection in
Key Asian LDCs
As a result of strong pressure from Washington,
several Asian LDCs are beginning to offer more
protection for intellectual property rights (IPRs). In
particular, Taiwan, Singapore, South Korea, Ma-
laysia, Indonesia, and Thailand are at various
stages of improving their copyright, patent, or
trademark laws. There are deficiencies with some
of the new laws being considered, however, such as
inadequate protection of pharmaceuticals. In the
future, the pace of reform may slow as harder
problems, such as product patents, are tackled, and
the regulations for administering and enforcing
these laws are worked out. Moreover, once the US
review of the Generalized System of Preferences
(GSP) is completed, an important US bargaining
chip will be removed.
A Costly, Pervasive Problem
Foreign infringement of patents, copyrights, and
trademarks is eroding US competitiveness in world
markets. This theft of US inventions, creative
works, and scientific discoveries costs US compa-
nies an estimated $8-20 billion annually,
Foreign counterfeiters are
able to undercut US companies because they do not
bear any of the R&D, advertising, or quality
control expenses that legitimate businesses must
incur. The infringement of IPRs extends to many
industries and products including pharmaceuticals,
chemicals, clothing, records, computer software,
automobile parts, and videotapes. The problem is
most troublesome in the Third World where intel-
lectual property is not protected under the law,
penalties are weak, or enforcement lax.
Slow But Steady Progress
To redress this problem, Washington has exerted
considerable pressure on a number of Asian LDCs
through bilateral negotiations, the threat of cur-
tailed GSP benefits, or, in the case of South Korea,
21
Some Definitions
? Intellectual property describes creative works,
inventions, or scientific discoveries that have, in
cases where necessary, been registered with gov-
ernment authorities for the sale or use by their
owner.
? A patent is a government grant assuring an
inventor the sole right to make, use, and sell an
invention for a certain period of time.
? A trademark is a name, symbol, or other device
identifying a product used to distinguish it from
similar goods.
? A copyright protects literary, musical, artistic,
and, more recently, computer software works
against unauthorized copying or use.
unfair trade practice actions. This approach has
resulted in slow but steady improvement in intellec-
tual property protection:
? Taiwan has substantially increased the protection
afforded to owners of intellectual property. In
June 1985, a new copyright law was passed
widening the scope?to include computer soft-
ware and videotapes?and increasing the penal-
ties for violators. Moreover, works will now be
protected immediately after they are published in
the United States. In addition, new patent and
fair trade legislation is pending.
? In March 1986, Singapore submitted a copyright
bill to parliament that stiffens penalties and
doubles the period of protection from 25 to 50
years. Once the law is passed, it is likely that
Secret
DI IEEW 86-027
3 July 1986
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Intellectual Property Rights in Key Asian LDCs
Copyright
Patent
Indonesia No foreign works are cov-
ered by the current law.
Copyright infringement
poses a particularly serious
problem for the US record-
ing industry.
Trademark
Investors are allowed to file
patent applications to create
a priority claim once a pat-
ent law is passed. However,
this procedure provides no
immediate protection.
Not believed to be a serious
problem at this time.
Comment
Earlier this month, a US
industry group requested an
unfair trade practice investi-
gation over Indonesia's lack
of copyright protection. It
has been estimated that 40
million counterfeit tapes
worth $75 million were
manufactured in Indonesia
in 1983.
Malaysia The motion picture industry
has complained of videocas-
sette piracy as well as unau-
thorized public perfor-
mances of copyrighted
material. Lack of protection
in Malaysia for computer
software has led to pirating
popular software programs
and instruction manuals.
Malaysia enacted its patent
law in 1983. The US phar-
maceutical industry has
complained that the 15-year
protection period granted
for its products is too short
to recoup R&D costs. The
law also lets the government
expropriate a patented in-
vention without compensa-
tion.
Trademark infringement
has occurred in both the
cosmetic and pharmaceuti-
cal industries.
Malaysia said it intends to
join an international copy-
right convention. A new
tougher copyright law was
introduced to Malaysia's
parliament in June.
Singapore US nationals can obtain
copyright protection only by
publishing in Singapore or
in a British Commonwealth
country within 14 days after
first publishing in the Unit-
ed States. To prevent impor-
tation of counterfeit works,
copyright owners must reg-
ister with an agency that
has been abolished.
South
Korea
Not believed to be a serious
problem at this time.
Not believed to be a serious
problem at this time.
Singapore has taken some
steps to increase intellectual
property enforcement but
faces significant local resis-
tance from counterfeiters
and retailers.
South Korea provides no
protection for foreign works
or computer software in its
copyright law.
South Korean laws deny
patents on such items as
new chemical substances
and their uses, food, food
products, and seeds. Process
patents are ineffective and
inadequate.
There is frequent pirating of
US trademarks and brand
names by South Korean
companies. New guidelines
abolishing the link between
the use of trademarks and
technology transfer agree-
ments may limit the size of
royalties paid to foreign
trademark owners.
On 16 October 1985, an un-
fair trade practice case on
South Korea's treatment of
intellectual property rights
was initiated. A resolution
of the case is expected soon.
Taiwan
Secret
Requirements to supply
Chinese-language dialogue
for foreign films enable pi-
racy to flourish. In addition,
there is a relatively short
30-year term for copyright
protection compared to in-
ternational standards-50
years or author's life plus 50
years.
Taiwan limits its patent pro-
tection for chemicals and
pharmaceuticals to process
patents. The burden of proof
in process patent cases lies
with the patent holder. Mi-
croorganisms per se are not
patentable. In addition,
Taiwan's patent law makes
it difficult to determine
whether two inventions are
identical.
Taiwan lacks both a defined
discovery process and evi-
dence code. This impedes
successful trademark and
patent infringement case
protection.
The draft patent law would
reverse the burden of proof.
In addition, unfair competi-
tion resulting from false or
misleading product packag-
ing, labeling, or advertising
is an IPR problem in Tai-
wan. Taipei submitted a fair
trade law in June.
22
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Intellectual Property Rights in Key Asian LDCs (continued)
Copyright
Patent
Trademark Comment
Thailand Bilateral copyright relations
governed by a 1966 US-
Thai treaty. A legal prob-
lem involving the treaty has
made it impossible to actu-
ally secure direct copyright
protection.
Thailand enacted a patent
law in 1979. Pharmaceuti-
cals, food products, and ma-
chinery are among the items
excluded. The patentee
must engage in local pro-
duction using the patented
process to obtain protection
against patent-infringing
imports.
Trademark copying or in-
fringement by using slightly
altered packaging is a prob-
lem in Thailand.
Resolution of the copyright
problem is possible this
year, but will require that
the Thai Assembly pass an
amendment to the existing
copyright law.
This table summarizes information derived from The Annual
Report on National Trade Estimates, 1985, and followup cables
from US Embassies.
Singapore will sign a bilateral treaty with the
United States or join the Universal Copyright
Convention (UCC). Moreover, enforcement
against counterfeiters has been stepped up, and,
according to the US Embassy, audiotape and
computer software dealers have been disposing of
their stocks of pirated products.
? South Korea is drafting new patent and copyright
laws in response to a US trade investigation of
South Korea's inadequate protection of US IPRs.
South Korea plans to extend patent protection to
pharmaceuticals and agricultural chemicals and
join the UCC. Although some differences re-
main?such as translation rights, retroactive pro-
tection of US patents and copyrighted works, and
a separate computer software bill?an agreement
with the United States for improved protection is
expected soon. In the trademark area, Seoul has
issued new guidelines that abolish the require-
ment that the importation of trademarked goods
must be connected to a technology transfer
agreement.
? Malaysia introduced a new copyright law in June
that, among many provisions, provides for protec-
tion of computer software. Moreover, various
23
Malaysian officials have said Kuala Lumpur will
join an international copyright convention. In
addition, improvements have been made in the
patent law.
? Thailand intends to grant the United States
direct copyright protection, according to the US
Embassy. In addition, a judicial council has ruled
that computer software is protected under copy-
right law. Bangkok has also proposed some
amendments to its existing trademark law that
would extend coverage to well-known marks.
Progress has been sidetracked, however, since the
dissolution of the parliament in May.
? Indonesia is slowly becoming more aware of the
need to enhance its protection of IPRs. Following
his recent meeting with President Reagan, Presi-
dent Soeharto instructed his ministers to accom-
modate US interests, according to the US Em-
bassy. A draft patent law is expected to be
submitted to parliament in the coming months
and probably will be enacted by yearend. In
addition, the Indonesian Trade Minister said
Jakarta may be willing to pursue a bilateral
copyright treaty with the United States, accord-
ing to the US Embassy.
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Despite this progress, many problems remain:
? Indonesia's draft patent law does not provide
adequate protection to pharmaceuticals, chemi-
cals, food, and beverages?deterring US compa-
nies from investing in these sectors.
? In Singapore, the copyright bill does not provide
retroactive protection for US works.
? Instead of amending its copyright law, South
Korea wants a separate computer software pro-
tection bill that probably would offer weaker
protection.
? Bangkok is resisting any changes to its patent law
that would include protection of pharmaceuti-
cals?infringement cost one US pharmaceutical
company an estimated $42 million in 1984, ac-
cording to corporate records.
Outlook
Asian countries will continue to upgrade their
protection of IPRs in the face of sustained pressure
from Washington. The pace of reform may slow,
however, as the harder problems, such as product
patents, are tackled, and regulations for adminis-
tering and enforcing these new laws are worked
out. Moreover, once the US GSP review is complet-
ed, an important US bargaining chip will be re-
moved. In addition, the problem is likely to shift to
countries offering less protection. Thailand, for
example, has reportedly replaced Taiwan as the
primary source of counterfeit goods as a result of
Taipei's stiffer laws and enforcement against copy-
right infringement.
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4nother Inconclusive
Sudan's 0.
Dealin
China Increasing
Coal Export
Briefs
Energy
OPEC adjourned its latest meeting without any formal agreement on produc-
tion or pricing targets. The members agreed to reconvene in Geneva on 28
July. In the interim, oil ministers will review proposals on individual produc-
tion quotas with heads of states. The inconclusive meeting probably means that
OPEC production will remain high, nonmembers will have little incentive to
cut output, and world oil prices will dip below the current average of about $14
per barrel. Oil ministers at least have proposals to take home and this may set
the stage for an accord later in the year, when seasonal increases in demand
will make agreement easier. Iran indicated some willingness to accept a
temporary price target of $17 to $20 per barrel?a concession that could help
facilitate a new accord?but substantial differences remain between Tehran
and the majority of OPEC members on the issue of production quotas.
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Sudan appears to have secured sufficient petroleum to meet its needs through
September 1986 and hopes to obtain at least an additional year's worth from
other donors. In late May, Saudi Arabia agreed to supply crude oil in
exchange for Sudanese sorghum. The final shipment from the Saudis arrived
in June and is expected to last through July. In addition, Libya has promised
to cover Sudan's petroleum needs for August and September 1986 in exchange
for $27 million worth of beef. a Sudanese 25X1
delegation will travel to Kuwait and Iran to discuss promises to provide Sudan
with a one-year supply of oil. Donors have been reluctant to supply Sudan with
more than short-term amounts, citing the government's continuing inaction in 25X1
dealing with its economic problems. 25X1
Beijing is planning to triple its coal exports to 30 million metric tons annually
by 1990 to help offset losses of foreign exchange from lower oil prices. China
announced on Sunday that its coal exports should reach 10 million tons in
1986, a 32-percent increase over exports in 1985. China has developed new
markets for coal in South Korea, the Netherlands, and Turkey. Some of the in-
crease will come from China's share of coal from the Sino-US joint-venture
coal mine at Pingshuo, which will open next year. Because of lower interna-
tional coal prices, however, additional exports this year will offset little of the
$2 billion China probably will lose in oil exports. Beijing has the resources to
meet its goal for 1990, and, if necessary, it will drop its price for coal to devel-
op new markets.
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International Finance
Mozambique The Mozambican Government has prepared a package of economic reforms
Preparing for designed to induce a favorable response from an IMF team scheduled to visit
IMF Ne ?than ns Maputo on 7 July, according to US Embassy reporting. The package includes
a substantial devaluation, reduced budget deficits, credit restrictions, and
liberalized price controls. Mozambique wants an IMF agreement to help it.
recover from a staggering 20-percent economic contraction in 1985 caused by
countrywide insurgent activity. An IMF loan also would round out a two-year
effort by Maputo to increase its economic ties to Western institutions and to
reduce its reliance on socialist economic programs. Although Mozambique is
determined to conclude a deal with the IMF, according to Embassy reporting,
negotiations probably will be drawn out and the effectiveness of new economic
reform measures will depend heavily on the course of the insurgency and the
willingness of Western countries to increase aid donations.
Mexico Suspends
Cuban Credit Line
Mexico is holding firm on its April decision to suspend a longstanding credit
line to Cuba, according to the US Embassy. The decision apparently was
reiterated to Cuban Vice President Rodriguez when he visited Mexico in early
June. Mexican officials have stated that the credit line will not be reinstated
until Cuba becomes current on its debt payments to Mexico
. In our view, Mexico City's action resulted primarily from its
own financial difficulties. The Mexican administration suspended'tbe credif
line when Cuba became delinquent in its payments to BANCOMEX, th
government-owned Mexican bank financing the line. The Mexican cutoff most
certainly will reverse the current trend toward increased trade between the two
countries. Mexico City earlier this year had boosted Cuba's credit line to $150
million to promote Mexican nonpetroleum exports and to finance key Cuban
industrial projects.
International Trade
South Korean Seoul reportedly plans to offer a counterproposal to the request for an export
Counterproposal to US "standstill" during the next round of US-ROK textile negotiations, now
"Standstill" e est scheduled for early July.
Secret
3 July 1986
Nonetheless, Ministry of Trade and Industry officials
responsible for the impending renegotiation of the Multi-Fiber Arrangement
reportedly have adopted a more hardline attitude.
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Bogota Summit
of Latin Co
Produc
Angola Paying
Oil to Cu, ?
Global and Regional Developments
The delegates from Latin America's major coffee producers (Brazil, Colombia,
Mexico, and Central America) met in Bogota recently to prepare for the
September meeting of the International Coffee Agreement in London, where
producers and consumers determine world coffee quotas for the next year. In
an unprecedented decision, the producers agreed to back joint Brazilian-
Colombian efforts to maintain current high prices in the world coffee market,
which was recently affected by speculative buying after Brazil's harvest
shortfall early this year. Brazilian Coffee Institute President Graciano main-
tained that he would not permit any reduction in Brazil's quota, despite recent
weather-induced crop losses; he backed the Colombian position that quotas
should be based, in part, on stocks held by producer countries. Colombia is the
only producer that will have sizable stocks on hand next year, and Colombian
Federation of Coffee Growers officials believe these would serve to maintain
coffee prices at reasonable levels. All delegates urged continued US adherence
to the International Coffee Agreement.
Angola has persuaded Cuba to accept 3.5 million barrels of crude oil over the
next six months as compensation for Cuban construction projects in Angola,
according to the US Interests Section in Havana. Frustration over what it
considered unfairly low prices for Angolan oil on world markets apparently
induced Luanda to ask Cuba to accept the oil deal. In early June, for example,
Angola's state-owned oil company was able to get only $7.50 a barrel for
200,000 barrels of crude oil delivered to European companiesj
We have no information on whether Cuba agreed to pay world
average prices?about $14.30 a barrel?or will credit Angola's account on the
basis of what it can get for the oil. At the current world average price, the oil
shipments would be worth $50 million, about one-third of Angola's estimated
annual bill for nonmilitary services from Cuba.
27
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National Developments
Developed Countries
Tokyo Debates
Changing
Aid Policy
Secret
3 July 1986
The Finance Ministry appears to be effectively derailing recent Foreign
Ministry proposals to help developing countries cope with increasingly costly
yen-denominated loans extended by the Japanese Government,
In response to requests from some Southeast Asian debtors
who have seen their debt burden increase by 30 to 40 percent as a result of the
yen's recent appreciation, the Foreign Ministry wants to provide additional
official yen loans at lower interest rates. The Finance Ministry, however,
refuses to consider such measures because it is intent on reducing the deficit of
the Overseas Economic Cooperation Fund (OECF), one of the main govern-
mental overseas lending agencies. The Ministry has agreed instead to permit
up to 30 percent of project-related yen loans to go to cover local costs,
primarily personnel expenses. Although it was announced that local-cost loans
will be extended to Indonesia,
future decisions under this program will be made on a case-by-case basis.
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Weak Norwegian
Austerity Progra
Israeli Nurses'
Strike Conti
The Norwegian parliament's $420 million austerity package falls far short of
solving Oslo's fiscal problems because oil tax revenues are expected to decline
by at least $2 billion this year and another $3 billion next year. After failing to
get a personal income tax increase, the new minority Labor government
accepted many proposals from the opposition parties. The resulting package
includes spending cuts as well as increased national pension system contribu-
tions and higher taxes on gasoline, tobacco, and alcohol. The government did
not seek a vote of confidence on any of the items, indicating it wants to stay in
office for now. Meanwhile, although the opposition parties cooperated to block
many Labor proposals, they do not want to contest Labor's hold on power yet.
With Norway facing an economic slowdown and the prospect of rising
unemployment, the opposition will hope that discontent with the Labor
government grows. More intense confrontation on economic issues is likely to
occur after parliament resumes in the fall.
The Israeli hospital nurses' strike?involving approximately 13,000 nurses
nationwide?is in its second week, with no prospects for an early settlement.
The nurses are demanding negotiations with the government on all outstanding
issues, particularly salary. The government has agreed to discuss employment
conditions, but has stated that salary issues can only be handled in the broader
context of the ongoing public-sector wage negotiations. Hospitals currently are
functioning with skeleton staffs in emergency rooms, maternity wards, and
intensive care units. The nurses, however, have threatened to walk off the job
entirely if the government refuses to move quickly on the wage issue.
Less Developed Countries
Challenge to Brazil's A presidential blue ribbon panel, which reviewed all of the nation's nuclear
Nuclear Energy programs, recommended replacing the Nuclear Policy Commission with two
Commission separate new entities to direct research and licensing, respectively.
The proposed revamping of the nuclear bureaucracy
probaby exceeded President Sarney's expectations. The panel did, however,
endorse one of his concerns, the undesirability of continued dependence on
West Germany, which has provided comprehensive, safeguarded fuel-cycle
technology since 1975. Sarney, who has expressed no dissatisfaction with the
nuclear commission, probably will maintain its present structure and its
leadership. This will prove reassuring to nuclear proponents in the military and
in the National Security Council, influential constituencies that fund and
direct critical projects in the unsafeguarded national nuclear program.
29
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Iran Searching for
Foreign Exchange
Lower oil prices are pushing Tehran to try to collect some of the $2.5 billion
tied up in disputes with the United States and France. Iran is seeking to
expedite unresolved cases before the Iran-US Claims Tribunal, created in
1981 to settle bilateral commercial disputes. The National Iranian Oil
Company may try to reach settlements with US claimants outside the
Tribunal in two cases. Iranian
Central Bank officials have discussed outstanding US corporate and bank
claims with US bankers. Tehran also has recently intensified efforts to obtain
repayment of a $1 billion loan to France by the Shah. Tehran had previously
insisted that all unresolved claims?estimated at about 2,000, including
several large claims involving US oil companies?be settled individually; it
probably will be more willing to expedite claims now, but quick settlements re-
main unlikely. Iran has about $3 billion in readily accessible foreign exchange
reserves but would like to free funds tied up in litigation?about $1 billion?to
limit import reductions.
India's Export New Delhi is preparing a package of income tax relief measures designed to
Incentives boost exports, according to US Embassy reporting. The measures are expected
to be submitted for parliamentary approval this summer. India's exports
declined last year and its trade deficit exceeded $6 billion. India's five-year de-
velopment plan calls for 6.8-percent average growth in export yolume during
FY 1986, but this is the first major attempt by the government to stimulate ex-
ports. The proposed measures include special tax credits for foreign exchange
earnings and a 50-percent tax credit for export profits. The US Government
believes the export incentives may include subsidies that would violate GATT
codes and open India to countervailing duty action by trading partners. Indian
officials, however, insist that the program is within the GATT subsidies code.
New Indonesian
Secret
3 July 1986
Indonesia's bleak economic outlook is forcing Jakarta to increase its already
deep budget cuts, the government is now cutting
back on official overseas travel and delaying the disbursement of development
funds. Jakarta, would have to draw down its foreign
reserves?currently estimated at nearly $11 billion?by at least $4 billion this
year to make up for the shortfall in foreign capital inflows. In our view,
however, any significant drawdown in reserves could seriously threaten the
credit standing of Indonesia because its international bankers have become
accustomed to large annual increases in reserve holdings. In addition, a
dramatic drawdown of reserves could lead bankers to curtail credit lines,
precipitating a rescheduling of its foreign debt. In any event, Jakarta's
economic situation will not become critical, in our judgment, unless the price
of Indonesian crude oil?currently about $11.50 per barrel?softens further.
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Soviet Grain Impo
Tumble
New Soviet Guidelines
for Higher Education
Communist
Estimated Soviet grain purchases of almost 31 million metric tons during the
marketing year that ended 30 June were at a five-year low and a marked re-
duction from the record 54 million tons purchased in the 1984/85 marketing
year. Improved domestic crop production and lower market grain prices helped
cut the hard currency grain import bill by an estimated $3 billion to about $3.5
billion. These savings were partially offset, however, by a more than doubling
of soybean imports, a possible reflection of plans to improve the mix of
livestock feeds. Heavy Soviet buying of US soybeans-1.5 million tons over
the past year?contrasted sharply with Moscow's activity in US wheat
markets, where reduced Soviet demand and high US prices limited purchases
to only 153,000 tons. Despite some probable small wheat purchases, the overall
pace of Soviet grain buying shows little sign of picking up as continued
favorable crop production forecasts and hard currency constraints will proba-
bly limit grain imports in the near term.
Moscow recently published draft guidelines to make higher education more
responsive to requirements for critical technical skills to support the industrial
modernization program. The new guidelines call for a system of contractual
relationships between higher educational institutions and enterprises?the
institutions will supply graduates in needed specialties in return for funding to
upgrade educational facilities and equipment. Higher educational institutions
are to make their research more relevant to the needs of industry, cut down on
the proliferation of specialties, and emphasize a broad general scientific
background that will enable students to better adapt to changing technology.
Students are to spend more time in independent work and practical training in
new "educational-scientific-production complexes" and regional training cen-
ters sponsored by enterprises. To address the serious problem of underemploy-
ment of skilled labor?currently one-half of college-educated specialists are in
jobs that do not utilize their skills?secondary schools are to graduate more
midlevel technicians, while standards for admission to higher schools will be
raised for engineering and other technical specialties. There will be higher
wages for the relatively low-paid engineering profession as well as more pay
differentiation according to the quality of work and the complexity of the job.
The new program for restructuring higher education is the latest in a series of
measures aimed at alleviating the shortage of skilled labor. Success will
depend on whether the new system of contract relationships provides enter-
prises with a real incentive to increase their investment in the educational
process as well as on whether the enterprises will have the funds to invest.
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Czechoslovakia Forms
First Joint Venture
Czechoslovakia has agreed to form its first joint venture with a Western
company in a test of the feasibility of direct foreign investment. The new entity
will produce measuring equipment and will involve a modest $2 million
investment by the Danish partner Senetec. The Czechoslovaks are also nearing
agreement on a large joint venture with the Dutch firm Philips to produce
compact disk players, and have been in touch with the Japanese firms Toshiba
and JVC. Complicated legal arrangements and a resultant uncertainty over
the rights of Western partners have hampered formation of these experimental
joint ventures. Reservations by hardline elements in the leadership have also
been an inhibiting factor, although increasing Soviet interest in joint ventures
may help reassure them. If successful, the experimental joint ventures could
give a boost to the Czechoslovak electronics industry?a key sector in leading
industrial modernization under Prague's 1986-90 Five-Year Plan?and lead to
more extensive joint venture formation in the future.
China To Increase The Chinese apparently plan to increase exports of selected nonferrous metals,
Nonferrous Meta Including tungsten and tin, and use the earnings to purchase technology for
Exports China's copper and aluminum industries. Chinese purchases of copper and
aluminum are a major drain on Beijing's foreign currency reserves; we
estimate that imports of these metals reached nearly $1 billion in 1985.
China?with small copper reserves?wants to upgrade domestic production to
reduce imports. On the other hand, China's rich bauxite deposits may support
enough growth in its aluminum industry to make China an exporter by 1990.
Chinese Plan
Dairy Expansio
Secret
3 July 1986
China plans to increase its dairy herd from the current 1.3 million head to 8
million head by the year 2000. The Chinese stated that they were focusing on
US breeding stock, and have already purchased several hundred US dairy
cattle this year. However, China is purchasing even more dairy cattle from
Western Europe, and, will continue to do so be-
cause of EC subsidies for medium-quality breeding cattle.
the Chinese plan to purchase some high-quality dairy cattle from US
breeders to improve herd quality, but would purchase more if prices were more
competitive with EC cattle.
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Beijing Reaffirms
Emphasis on Science
and Technology
Ranking government and party officials reassured scientists of their support
for S&T reform at the Chinese Association for Science and Technology
(CAST) Congress last week. Hu Qili, member of the Politburo and Central
Committee Secretariat, urged more support for S&T management reforms to
increase the contribution of S&T to economic development. Furthermore, Hu
endorsed the concept of greater academic freedom, a key concern among
China's scientific community; the assembly later adopted this principle as part 25X1
of the CAST constitution. Song Jian, State Councilor and Minister of the
State Science and Technology Commission, also noted that laws are being
drafted to protect scientists from outside interference. Although many scien-
tists have reacted enthusiastically to incentives to work closely with industry,
for others there is confusion over what is permitted, concern that political
support for the changes would lessen, and fear that their own power or prestige
would decrease. Beijing probably hopes that the high-level show of support,
aimed at an organization with 6.7 million members, will prompt the footdrag-
gers to more speedily carry out the reforms. 25X1
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