INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100630001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 45
• Document Creation Date: December 22, 2016
• Document Release Date: July 15, 2011
• Sequence Number: 1
• Publication Date: October 31, 1986
• Content Type: REPORT

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;~E ~, Directorate of
,~~ ~ ~ ~ Intelligence
.~i B,~
5 ~t,~e,Cc,cJ
International
Economic & Ener y
Weekly ~~
$eerek-
DI IEEW 86-04 ~/
31 October 1986
6'6
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International
Economic and Energy Weekly
The dismissal of Shaykh Yamani as Saudi Oil Minister implies that Riyadh will
probably promote more of a "Saudi first" policy in future OPEC meetings,
starting with the next meeting in December.
Oil industry forecasters, however, believe demand for OPEC oil will be close to
current OPEC output, because oil companies have unusually large inventories that
can be drawn down at faster than normal rates. If the Saudis, who are already pro-
ducing over their quota, attempt to maintain production at or above current levels
of 5 million b/d, and Iran is able to bring production to near its quota, prices
would probably erode and could approach $10 per barrel or go even lower.
OPEC's Task Next Year
OPEC will have a difficult time holding together its production-sharing agreement
in the near term. Other members would have to make greater sacrifices to
accommodate any stronger Saudi demands, or face the prospect of a major price
war. The group is still deeply split on priorities; the wealthier Arab producers-led
by Saudi Arabia-want to hold on to market share and implicitly are willing to let
prices fluctuate; the others prefer altering output to support prices. Moreover, the
group no longer has a swing producer willing to adjust supply to meet seasonal de-
mand changes. Without a swing producer, OPEC will have to adjust its output sev-
eral times a year, which ma rove too burdensome. Tensions between Ri adh and
Tehran ma also increase
Major Uncertainties
Any major change in oil prices over the next several years will probably result
from OPEC members acting unilaterally, and there is considerably more risk of
prices falling than rising. If oil demand falters or if other members are unwilling to
concede to any Saudi demands, OPEC overproduction could lead to a rapid
unraveling of the agreement. If the Iran-Iraq war ends in such a way that permits
both nations to increase oil exports-both probably would-to pay for reconstruc-
tion and debts, any agreement would be undermined.
The only prospect for prices to rise significantly in the near term is if a major oil
supply disruption occurred. The probability of such an occurrence is low but
cannot be ruled out. Recent Iraqi attacks, for example, have lowered Iranian oil
export capacity substantially, and Tehran may respond by more aggressive attacks
on tankers transiting the Persian Gulf.
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International
Economic & Energy Weekly 25X1
iii Synopsis
1 Perspective-Eastern Europe: Seeking To Rebuild Economic Ties to the West
3 Eastern Europe: Outlook for Joint Ventures With the West
7 Eastern Europe: Prospects for Trade With Developing Countries
11 The Libyan Economy: Qadhafi's Achilles' Heel
17 Japan: Increasing International Cooperation in Science and Technology
21 Latin America: Public Opinion on the Debt
Energy
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate o.1'Intelligence
i Secret
DI /EEW 86-044
31 October 1986
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International
Economic & Energy Weekly 25X1
Synopsis
1 Perspective-Eastern Europe: Seeking To Rebuild Economic Ties to the West
Most East European regimes believe that solutions to many of their problems lie in
increased trade with the Western economies.
Despite the increased interest in joint ventures, the East European regimes are
reluctant to take the steps that we believe are necessary to attract Western firms,
both for ideological reasons and fears of foreign intrusion in their economies. In
particular, until the governments adopt more liberal laws regarding profits and
operations, efforts to entice Western companies will produce minimal success.
7 Eastern Europe: Prospects for Trade With Developing Countries
Eastern Europe continues to seek expanding commercial relations with developing
countries, particularly in light of the region's deteriorating competitiveness in
developed country markets. Financial problems on both sides, however-particu-
larly in the developing countries-will retard expansion of trade.
11 The Libyan Economy: Qadhafi's Achilles' Heel
Libya's economic decline is the greatest potential threat to the regime of Libyan
leader Qadhafi. Discontent has yet to erupt into widespread popular protests, but,
unless conditions unexpectedly improve next year, Qadhafi is likely to face further
unrest that may well prove beyond the control of his pervasive security forces.
17 Japan: Increasing International Cooperation in Science and Technology
Tokyo's increased funding in recent years of "fundamental research and develop-
ment" projects reflects Japan's concern that an inadequate technological base will
impair its ability to maintain competitiveness and that Tokyo will be increasingly
excluded from sharing in Western technology.
Secret
D/ /EEW 86-044
31 October 1986
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21 Latin America: Public Opinion on the Debt
Public opinion in several Latin American countries demonstrates realism about the
causes of financial problems and support for government policies to resolve the
debt problem. Although little public support exists for repudiating external debt,
poll results suggest that Latin Americans want new debt policies to ease the
region's financial plight.
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International
Economic & Energy Weekly ~~ 25X1
Perspective Eastern Europe: Seeking To Rebuild Economic Ties to the West
Eastern Europe's economic relations with the West are showing new life, after five
years of stagnation. Apparently, most regimes believe that solutions to many of
their problems lie in increased trade with the Western economies. Imports from
the West are up sharply this year for the first time since 1980. Most countries are
seeking expanded access to Western markets through approaches to GATT, the
EC, and the European Free Trade Association, and have liberalized joint-venture
laws to attract Western capital without adding to debt.
The impetus for this interest lies in the region's stagnant economies, which
desperately need modernization:
? Growth rates remain generally low, despite some recovery from the economic
crisis of the early 1980s.
? The cuts in investment made in recent years must be reversed to improve
productivity and revive long-term economic growth.
? Development of science and technology is a key part of the new five-year plans.
The moderate successes some countries have had in strengthening their financial
positions-as well as certain fortuitous external developments-have aided the
revival of Western ties. The region's preoccupation with managing debt over the
last five years has paid off in reduced debt burdens and improved borrowing
opportunities for several countries. Lower interest rates, a fall in the dollar, and a
reduced need for food imports in the northern countries because of record
agricultural output have further helped trade and financial positions. Financially
strapped countries such as Poland, however, have been unable to capitalize on
these opportunities.
While East European-Western economic relations may be on a cyclical upswing,
any gains will be slow. The success of Eastern Europe's effort to rebuild economic
ties to the West depends upon how well the regimes use Western imports to
strengthen their economies. Although the regimes recognize the risks of large
import programs after the debt crisis of the early 1980s, most still pay only
lipservice to the need for internal economic reform to bolster efficiency and
competitiveness. Export performance remains disappointing and the troubled
debtors-Poland, Yugoslavia, and Romania-continue to stagger from one re-
scheduling to another. Generally, the countries are still inclined to look for simpler
fixes such as joint ventures, countertrade, trade with LDCs, or pressure to remove
Secret
DI /EEW 86-044
31 October 1986
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Movement in the economic arena, however, remains tied to the overall East-West
political climate. Eastern Europe has taken some steps to show its interest in better
political ties. While Eastern Europe followed the Soviet line in blaming the United
States for the failure of the Reykjavik summit, the regimes have stressed the
importance of a continuing dialogue. Other individual initiatives include:
? The general amnesty for political prisoners in Poland, in part aimed at inducing
the West to lift sanctions and provide economic aid.
? Romania's grudging concessions on human rights in order to retain most-
favored-nation status with the United States.
? Positive signals by generally hard-line Bulgaria, including an agreement to aid
the US in drug enforcement and apparent adherence to a pledge to halt arms
shipments to Nicaragua.
Soviet attitudes, however, will ultimately determine the pace and direction of East
European ties to the West. Significantly, the Soviets have somewhat tempered
their harsh rhetoric of the early 1980s against economic dealings with the West, in
recognition of the Bloc's need for Western technology. Moscow is itself showing in-
terest in joint ventures with the West, and in joining GATT. The USSR accepted
the EC's precondition on bilateral agreements between the Community and Bloc
states to revive the EC-CEMA talks. Nonetheless, Moscow still issues periodic
warnings about the risks of allowing too much Western influence through
economic ties. Moreover, the region's opportunities for dealing with the West may
be restricted by Moscow's demand for better quality goods and closer CEMA
cooperation in developing new technology.
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Eastern Europe: Outlook for
Joint Ventures With the West
Most East European countries ' have amended or
formulated new joint-venture legislation in the past
year to increase their access to new technology and
boost hard currency exports while minimizing expen-
ditures of hard currency. Despite the increased inter-
est in joint ventures, the East European regimes are
reluctant to take the steps that we believe are neces-
sary to attract Western firms, both for ideological
reasons and fears of foreign intrusion in their econo-
mies. In particular, until the governments adopt more
liberal laws regarding profits and operations, efforts
to entice Western companies will produce minimal
success.
Experiences Differ by Country
The experience of Western firms participating in joint
ventures varies by country. Some regimes, particular-
ly Hungary and Yugoslavia, appear receptive to joint
ventures and have implemented increasingly favorable
legislation. Others, especially Poland, Romania, and
Czechoslovakia, remain cautious in encouraging joint
ventures. Only East Germany has shown no interest,
in large part because it is extremely wary of any
foreign involvement in the economy. Furthermore,
East Berlin's strong financial position and access to
Western markets through inter-German trade reduce
the need for this type of cooperation.
Hungary has the most successful and liberal joint-
venture law in Eastern Europe allowing a wide spec-
trum of activities, including banking and tourism. The
1972 law was strengthened in 1982 to permit more
decisionmaking freedom for the Western partner.
Earlier this year, the law was amended to reduce the
profits tax for the first five years to 20 percent~ne-
half the rate paid by Hungarian enterprises-then 30
percent after five years. In priority sectors, such as
pharmaceuticals and electronics, firms enjoy a tax
holiday for five years and pay 20 percent thereafter.
In addition, the government allows firms to purchase
locally supplied raw materials and energy at subsi-
dized prices, and to pay workers at the lower Hungar-
ian labor costs and in local currency.
Joint ventures in Yugoslavia enjoy some advantages
not available in other East European countries, but
substantial problems remain. The government allows
Western companies to establish majority positions in
joint ventures in almost every sector. It also has
mandated a liberal treatment of profits, with taxes at
only 10 percent in all republics. Western firms,
however, fear cost overruns caused by a triple-digit
inflation rate and delays in receiving equipment and
raw materials. Joint enterprises are subject to some of
the same import restrictions and limitations on hard
currency access that face Yugoslav firms.
Bulgaria has had little success in attracting Western
firms for joint ventures, despite a seemingly flexible
law that gives ajoint-venture contract approved by
the Council of Ministers the full force of law overrid-
ing other legislation. Western firms are discouraged,
however, by the slow and often confused managerial
decisionmaking process and restrictions on the use of
hard currency earnings.
Czechoslovakia is the most recent East European
country to approve the concept of joint ventures, but
several problems already hinder their development.
The vague legal basis permitting joint ventures, in-
cluding uncertainty over the rights of Western part-
ners and the lack of specifics covering management,
administration, and repatriation of capital and profits,
are likely to discourage Western participation. Resis-
tance by hardline elements in the leadership may
inhibit efforts to make these ventures attractive,
although increasing Soviet interest in joint ventures
may quiet the opponents.
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DI IEEW 86-044
3/ October 1986
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Eastern Europe: Joint Ventures
Year permitted 1980 1985 1972 1976 1971 1967
Number 8 I 50 0 a ]0 187
Permits Western majority yes no yes no no yes
Permits Western profit yes yes yes yes
yes yes
repatriation
Profit tax rate (percent) 20 to 30 50 20 to 30 50 40 ]0
Types of joint ventures Machinery, Electronics Banking, tvn Machinery Machinery,
consumer tourism, and textiles mining, and
goods, and machinery, and agriculture
chemicals manufacturing
~~ Excludes "Polonia" firms.
~ Joint ventures in priority sectors.
Eastern Europe: Examples of Joint Ventures
Western Western Year Amount Western Type of
Country Company Signed Invested Share Venture
/thousand US $/ (percent)
Bulgaria Japan Fanuc 1981 660 50 Service numerically controlled
machine tools
Czechoslovakia Denmark Senetec 1986 2,000 NA Produce measuring equipment
Hungary Portugal Amorim and 1984 675 25 Produce bottle corks
Irmaos
Romania
Produce and distribute small
passenger cars
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Romania has experienced little success in attracting
Western joint ventures, because of the many restric-
tive clauses in its laws and its poor economic condi-
tion. Some firms have had to import raw materials
because the needs of joint-venture firms are not
considered in the economic plan. The government also
requires firms to pay for workers in hard currency
while workers receive only 40 percent of the salary in
local currency. A representative of a West European
firm participating in a joint venture complained that
poor management and shortages at the plant result in
operations at 12 percent of capacity and with a high
rate of assembly faults.
Poland's joint-venture laws, despite their highly publi-
cized changes, remain among the most restrictive in
Eastern Europe and are unlikely to attract many
Western firms.Z The new law allows capital repatria-
tion and applies no taxes until the third year of
operation. The Western firm, however, must sell 15 to
25 percent of all earned hard currency to the state at
overvalued exchange rates, and the Ministry of Fi-
nance must issue permission for all economic transac-
tions. Many businessmen, according to the Western
press, are indifferent to the new law because past
frequent changes in regulations make them wary of
doing business in Poland. They also hesitate to invest
in a country where raw material supplies are notori-
ously unreliable, the tax system is continually altered,
and economic and political stability cannot be as-
sured.
Western firms generally face difficult negotiations
over the terms for joint-venture deals because their
goals often conflict with regime objectives. In many
cases, Western firms hope mainly to gain access to
domestic markets in the partner country or to other
CEMA markets with repatriation of profits in hard
currency. The Western partner, however, generally
has little interest in exports to hard currency markets
that would compete with its production facilities in
' Separate regulations apply to "Polonia" firms, a special type of
joint venture, that can be formed only by foreigners of Polish
East European regimes see joint ventures as a means
to acquire Western goods and technology essential to
modernization without adding to already large hard
currency debts. These ventures can also:
? Expand hard currency exports through sales by
Western intermediaries.
? Replace hard currency imports or augment domes-
tic supplies.
? Provide access to Western production and manage-
ment techniques.
? O.~`er help in completing unfinished investment pro-
jects and utilizing slack capacity.
the West. Eastern demands for state-of-the-art tech-
nology are often a barrier to the establishment or
continuation of a joint venture because of Western
government export controls or the partner's unwilling-
ness to share the most competitive technologies.
Many joint ventures, once launched, have proved
unsuccessful because of inadequate regime support.
Because these ventures frequently fall outside the
formal economic and trade plans, obtaining adequate
domestic supplies of suitable quality presents a prob-
lem. Also, the venture may not be able to sell output
to other CEMA markets. In addition, sales to domes- 25X1
tic or other CEMA markets often result in payment in
goods that can be resold to the West for hard currency
only after substantial time and financial commit-
ments. Other aspects such as the calculation of em-
ployee wages and acceptable work standards are also
sources of controversy between the firm and the
regime.
The poor economic and political situation in some
countries, the unfavorable business climate, and the
lack of stable legal regulations, particularly concern-
ing management and repatriation of profits, make
joint-venture deals a big gamble with a small jackpot.
For example, if a venture proves too profitable for the
Western partners, the regime will sometimes modify
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the terms or laws under which it was established. As a
result, some firms may adapt fairly well, but others
discontinue operations after the two- or three-year tax
holiday offered by most countries.
Difficulties in doing business in Eastern Europe will
discourage many Western joint ventures, until East-
ern countries are willing to make major changes in
economic policy. Unrealistic exchange rates and large
discrepancies between domestic and world prices are
key stumblingblocks to Western participation. The
replacement of central allocation of supplies with
negotiated supply contracts and greater acceptance of
wage incentives to boost worker productivity, are also
needed to improve the business climate. Nonetheless,
even with policy changes, most Western firms will
remain wary of capricious changes in their legal
rights, especially concerning the repatriation of profits
and investment.
The Soviet role is pivotal in the future of joint
ventures for Eastern Europe. The regimes are likely to
proceed cautiously until it becomes clear what limits
Moscow believes should be placed on these activities.
For that reason, the region will watch Moscow's
movement on joint ventures with interest. According
to the US Embassy in Moscow, the USSR will allow
49-percent Western ownership and repatriation of
profits. The framework for establishing joint ventures,
however, does not appear to go beyond most East
European legislation, and Moscow is likely to run into
similar difficulties in attracting Western investment.
Nonetheless, prospects for increasing a firm's access
to the Soviet market could spark greater Western
interest than currently in the smaller East European
domestic markets. Gorbachev may allow the region to
adopt a more flexible joint-venture policy as a testing
ground for possible Soviet initiatives. Such acquies-
cence could elicit a Soviet demand that Eastern
Europe provide more assistance in helping Gorbachev
meet his modernization goals.
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Eastern Europe: Prospects for Trade
With Developing Countries
Eastern Europe' continues to seek expanding com-
;nercial relations with developing countries, particu-
larly in light of the region's deteriorating competitive-
ness in developed country markets. Moreover, the
prospect of stagnant Soviet deliveries of raw materials
and energy is intensifying Eastern Europe's search for
alternate sources of supply. Financial problems on
both sides, however-particularly in the developing
countries-will retard expansion of trade. Nonethe-
less, even where commercial advantages are few,
political and strategic motives will sustain the efforts
of some Bloc regimes to strengthen economic ties to
Eastern Europe: Cumulative
Trade With Developing
Countries, 1981-85 a
the Third World.
In the 1970s Eastern Europe rapidly expanded its
trade with the Third World. Imports rose 24 percent
annually from 1970 to 1980. Growing East European
demand for raw materials and fuels as well as large
price increases on these goods prompted the import
surge. Barter deals and East European efforts to
generate hard currency to offset trade deficits with
the developed West caused exports to grow nearly as
quickly.
Trade has languished in recent years, however. East
European sales have tumbled since 1983 when debt
problems forced many developing countries to slash
imports; more recently, plunging oil prices have tight-
ened the financial squeeze on LDC oil exporters,
Eastern Europe's leading Third World customers.
Similarly, the East Europeans have curtailed hard
currency purchases to conserve foreign exchange to
service sizeable debt obligations and manage persis-
tent financial problems.
Although the LDCs account for a relatively small
share of Eastern Europe's trade (about 30 percent of
the region's nonsocialist trade and 10 percent of its
Hungary
5,158
4,327
831
Poland
7,222
3,853
3,369
Romania
11,886
14,197
-2,311
a Exports and imports are on an f.o.b. basis except for Hungarian
and Yugoslavian imports, which are on a c.i.f. basis.
total trade), these ties remain valuable to the Bloc.
Third World countries buy East European manufac-
tures that are unmarketable in the West. Partners in
the Middle East and North Africa are especially
lucrative markets for turnkey industrial plants, con-
struction and other technical services, and arms. In
return, the East Europeans secure raw materials and
oil to supplement Soviet deliveries. Furthermore, we
believe some Bloc countries use these ties to advance
Soviet political objectives in the Third World in
return for economic assistance and other favors from
Moscow.
While Eastern Europe maintains commercial rela-
tions with more than 100 developing countries, trade
generally is concentrated on a small number of part-
ners, particularly those in the Middle East and North
Africa. The exchange of East European engineering
and construction projects, military hardware, and
finished goods for oil yields significant trade surpluses
for most Bloc countries. While Brazil and India are
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Eastern Europe: Trade With Developing
Countries, 1970-85 a
~ ~ ~ ~
0 1970 75 80 85
a CIA data include Yugoslavia.
b Hungarian and Yugoslavian data are c.i.f..
also major Third World trading partners, Eastern
Europe's commercial ties to Asia and Latin America
generally are limited, with a trade deficit resulting
from large imports of raw materials and foodstuffs.
Trade with Sub-Saharan Africa is even less devel-
oped, although some Bloc countries are important
suppliers to Marxist-oriented regimes in the region.
Eastern Europe: Trade With Developing
Countries, by Commodity, 1984 a
Exports, f.o.b.
Total = US $5.4 billion
Imports, c.i.f.
Total = US $5.2 billion
a Excluding Bulgaria, East Germany, and Romania for which data
are not available. Data include Yugoslavia.
Slumping sales in Western markets and the persistent
need for hard currency have pushed Eastern Europe
to seek new and expanded markets in the Third
World. Developing countries frequently pay in hard
currency or in goods such as oil, which most East
European countries then refine and reexport to the
West for hard currency. From 1980 to 1985 the
region earned $4-7 billion in hard currency annually
from reexports of oil. Most East European coun-
tries-except Romania and Yugoslavia-have main-
tained hard currency trade surpluses with the Third
World in the 1980s to help offset deficits with devel-
oped countries.
Hard currency shortages in developing countries usu-
ally make them more willing than developed countries
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Eastern Europe: Trade With Developing
Countries by Region, 1985 a
Middle East and
North Africa
68
to conduct countertrade. Such deals may allow the
East Europeans to conserve hard currency for pur-
chasing sorely needed capital equipment in the West.
In addition, some agricultural products and industrial
materials can be obtained from the developing coun-
tries on a barter basis instead of on a cash basis from
developed countries. According to the OECD, coun-
tertrade already accounts for as much as 30 percent of
trade between the Soviet Bloc and developing coun-
tries, and this share probably will grow. Moreover, the
USSR's economic problems and demands for more
balanced trade with its Eastern allies may force
Eastern Europe to depend on Third World countries
for more of the raw materials traditionally supplied by
Impediments to the Relationship
Significant obstacles stand in the way of expanded
East European-Third World trade. Cash shortages in
developing countries have caused problems for several
Bloc countries in receiving payment for exports. As a
result, the East Europeans have become more reluc-
tant to extend trade credits to some particularly
unreliable partners.
Arms sales account for more than 1 S percent of
Eastern Europe's exports to the Third World, total-
ing $9.6 billion over the 1981-85 period. East Euro-
pean arms deliveries-including some advanced
weapons-consist mostly of ground forces equipment,
but also ammunition, communications equipment,
vehicles, and quartermaster supplies. Developing
countries purchased one-haU'of the region's arms
exports last year, and Middle Eastern and North
~gJrican states bought 80 percent of this share. Princi-
pal clients were Iraq and Libya-each receiving one-
third oJEastern Europe's arms deliveries to the
Third World last year, respectively followed by
India, Syria, and Iran. Czechoslovakia, Romania,
and Yugoslavia have been the biggest suppliers.
While it is d~icult to discriminate between political
and economic motiveslor arms trade, we believe that
Eastern Europe's prime motive is economic. The
region usually requires payment in hard currency,
and terms generally are sti8er than those of the
USSR, suggesting little, if any, implicit aid. Roman-
ia's drive to earn hard currency through expanding
arms sales has actually impeded efforts to modernize
its own forces, and this may apply to other East
European countries to some degree. Although.finan-
cial d~culties in oil producing countries make arms
sales a less lucrative source of hard currency than in
the past, these countries will remain significant cli-
ents because of their emphasis on domestic defense
and security concerns and continued tensions in the
region.
Czechoslovakia has refused to sign new trade agree-
ments with Syria~espite Soviet pressure-and Lib-
ya because of their payments record. Prague still
supplies weapons, training, and hardware mainte-
nance on credit, although Hungary and probably
some other Bloc countries now demand cash payment
from Syria for military goods. Romania frequently
has blamed its liquidity problems this year on failure
of several Third World partners to meet payment and
delivery schedules.
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While the most financially strapped Third World
countries will tend to play down the poor quality of
East European manufactured goods, the more afflu-
ent countries will continue to view the Bloc as a less
preferred supplier. The region's lack of desirable
exports will sharply limit its ability to purchase
machinery from the newly industrializing countries,
as alternatives to Western suppliers. Furthermore,
Moscow's demands for more and better goods from its
Eastern neighbors may reduce further the supply of
desirable products available for export to the LDCs.
Despite these problems, the lack of better alternatives
will push Eastern Europe to persist in its efforts to
develop commercial relations with the Third World.
Both East European and developing countries would
prefer closer ties to the developed West to acquire new
technology and state-of-the-art machinery. Both par-
ties, however, share financial problems, Western re-
luctance to engage in countertrade, the difficulties of
marketing goods of poor quality and product design,
and what they perceive as protectionism in the devel-
oped West. Both parties may try to rely on each other
for more trade in products where substitutes-such as
low-technology machinery and food products-exist
to save cash for purchasing products available exclu-
sively in developed countries.
Eastern Europe will continue to attempt to boost ties
and lure partners away from potential Western sup-
pliers by offering some goods and services at prices
and payment terms favorable to most developing
countries. The East Europeans hope that their experi-
ence with projects suited to developing countries'
needs, in addition to lower costs, will entice clients to
look East rather than West. They also hope that some
industrial cooperation agreements will pay long-term
dividends by increasing demand for East European
equipment and services. Nonetheless, the East Euro-
peans must contend with efforts by several partners to
reverse their own trade deficits or increase their
surpluses with the region.
Even where the economic payoff may be minimal,
most East European regimes see a favorable political
spinoff from a commercial presence in countries of
political and strategic importance to the countries in
the Bloc. While not the principal motivation, this
benefit alone could maintain some regimes' interest in
ties to the Third World.
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Secret
The Libyan Economy:
Qadhafi's Achilles' Heel
Libya's economic decline is the greatest potential
threat to the regime of Libyan leader Qadhafi. The
oil-dependent economy has been hit hard by the world
oil price slump; without a major boost in prices, Libya
will earn only about $4.9 billion from oil this year-
about one-half last year's total and less than one-fifth
peak 1980 receipts. Living standards have sunk far
below oil-boom levels, but Qadhafi has offered little
more than revolutionary rhetoric to soothe the popu-
lace. He has not adopted low-cost measures, such as
temporary imports of food and other essential goods,
that could buy valuable time for the regime. Discon-
tent has yet to erupt into widespread popular protests,
but, unless conditions unexpectedly improve next
year, Qadhafi is likely to face further unrest that may
well prove beyond the control of his pervasive security
forces. A weakened security service would remove a
major impediment to a move against the regime by
disaffected elements in the military.
The Libyan economy is almost totally dependent on
oil. Petroleum accounts for nearly 50 percent of GDP
and virtually all export receipts. As a result, the
country has been hard hit by the weak world oil
market. Petroleum earnings so far this year, in fact,
are at their lowest level in nearly I S years. Production
currently is averaging about 1 million b/d, Tripoli's
OPEC quota.
We believe the oil slump is causing the Libyan
economy to register its poorest performance in five
years-growth is down nearly 10 percent from last
year's depressed rate-and the slowdown is hurting
living standards. Libya's previously enviable standard
of living was once regarded as one of the hallmarks of
Qadhafi's regime. Various open sources indicate GDP
per capita-though still quite high at about $6,500-
is now only two-thirds the 1981 level. Moreover,
although these same sources report unemployment is
not yet a problem in this sparsely populated country,
development projects.
the Zwara aluminum smelter project has been put on
hold for at least four years and may be canceled. In
addition, the steel mill under construction at Misratah
may be shelved if a foreign partner cannot be found.
Open sources indicate the $800 million second phase
of the Sirte fertilizer complex has also been moth-
balled.
progress on Qadhafi's flagship project, the Great
Man-Made River, has slowed.
price discounts to maintain its market share.
The Libyan oil industry has weathered so far the
disruptions caused by the freezing of its US assets in
January, the imposition of increasingly tough US
export sanctions since February, and the termination
of all US oil company operations in June. The Libyan
sales organization, Brega International, has success-
fully used marketing tactics such as netback deals and
most Libyan oil is still sold to Western
Europe, although some shifts by country have oc-
curred. West German imports, for example, fell al-
most 30 percent during the first half of the year as
compared to the same period in 1985 while Italian
imports rose nearly 30 percent. Sales to Communist
countries including Bulgaria, Romania, and the Sovi-
et Union also have increased. As much as one-third of
Libyan crude exports are on a barter basis-largely in
payment for Soviet Bloc arms. In addition, South
Korean and Turkish construction firms are also ac-
cepting Libyan crude for work on projects in Libya.
Libyan deliveries to Belgium reflect the South Korean
firm Dae Woo's purchase of a Belgian refinery to
process Libyan crude.
Libya has managed to sidestep most US oil-related
export restrictions
inflation is running at a record 17 percent.
pare parts are available either
Secret
D/ /EEW 86-044
3l October 1986
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Secret
Libyan Economic Indicators, 1981-86 Libyan Petroleum Exports, 1985-86
Real GDP Growth
Percent
Consumer Prices
Percent
Financial Reserves a
Billion US ~
OECD countries
Italy
West Germany
United Kingdom
Switzerland
Austria
Estimated Ex-
ports of Crude
Oil and Products
Thousand 6/d
Growth of Estimated
Exports of Crude Oil
and Products From
Previous Period
(percen[J
Jan-Jun
Jan-Jun
Jan-Jun
1985
1986
1986
1,002
1,070
6.8
853
915
7.3
262
337
28.6
205
148
-27.8
66
125
89.4
49
60
22.4
64
46
- 28.1
46
32
-30.4
52
42
-19.2
49
51
4.1
27
36
33.3
18
26
44.4
a End of period, excluding 3.6 million ounces of gold.
h Estimated.
c Projected.
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from existing stockpiles in country or from numerous
foreign suppliers in Western Europe and Asia. These
foreign connections also supply Libya with essential
oilfield services. The Italian company AGIP is devel-
oping the large offshore Bouri Field for the Libyans
that probably will begin production in 1987 at an
estimated rate of 75,000 b/d. The multinational
oilfield service company, Schlumberger, continues to
play an important role in servicing the industry.
The departure of US companies has not materially
changed the functioning of the oil industry. The
Libyan National Oil Company has maintained five
production companies, although they have changed
the names of two of the former American-run firms.
Nonetheless, the industry remains heavily dependent
on foreign oil technicians and workers. Libyan nation-
als control the top managerial positions, but North
Americans and West Europeans provide most of the
technical and supervisory personnel while Asians per-
form the manual labor in the oilfields. Approximately
300 to 400 US citizens were still workin on oil
facilities in Libya as of late June 198
Qadhafi's response to the deteriorating situation has
been to demand more sacrifices from the populace.
the Libyan lead-
er has slashed civil service salaries by 45 percent and
cut back government employee housing allowances by
55 percent. Moreover
mandatory retirement in the gov-
ernment is now enforced at 60 years old and all
promotions have been frozen.
several new taxes have also been levied in addition to
hefty income, retirement, and social security taxes
already in place.
Not even the military has proved beyond the reach of
Qadhafi's cost-cutting measures. Hardware purchases
still receive high priority, but the military has lost
many lon standin rivile es.
Reduced oil earnings have made shortages of essen-
tial goods and services commonplace for the average
Libyan. Food imports are at their lowest level in
seven years, and there are long lines for most staples.
other goods such as light
bulbs, soap, and shampoo often cannot be found in
the markets. Moreover, what is available-shoes,
bedding, and some clothing-is oji-iferior quality. As
a result, the local black market,
is rapidly becoming the principal
source ojluxury goods and many commodities.
~1inancial shortfalls have
hampered the government's ability to provide basic
government services. Electricity in fluent sections of
Tripoli is oJjjor several hours a week, while in the
poorer neighborhoods it is often out for days at a
time. Water in Tripoli is sometimes brackish and
pressure is low. Trash bins are emptied about once a
month. Even education and health care-the pride of
Qadhafi s social revolution-are in trouble. Accord-
ing to the US Embassy in Brussels, all preschool and
primary schools have been closed and instruction has
been turned over to parents.
although there is no shortage of
medical personnel-most are East European expatri-
ates-there is a severe shortage of medical supplies.
The shortage of foreign exchange has cut imports of
spare parts and raw materials to only one-fourth the
1981 peak. Approximately 30 percent of offices and
apartment buildings in Tripoli are either abandoned
for lack ojrepair or uncompleted because ojshort-
ages of spare parts. Pepsi Cola was unavailable in the
summer because of a lack of aluminum for the cans.
Libyan cigarettes are di~cult to obtain now because
the manufacturing plant is short of paper.
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Libya: Current Account Balance, atJ[ton us $
1985-87
Qadhafi's inability or unwillingness to improve living
conditions is focusing increasing attention on him as
the root of economic decline.
antiregime graffiti and pamphlets
and limited demonstrations are becoming more and
more common in urban areas and on college
campuses.
a Estimated.
e Projected.
Reflects $3.1 billion investment income from Fiat sale.
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Of more potential concern for Qadhafi is that he is
alienating a broader spectrum of the Libyan military.
Qadhafi spent considerable time last summer mend-
ing fences with various military units, but what
support he currently has could easily evaporate if
economic grievances are not acted on. So far, Qadha-
fi's pervasive and effective security forces have kept in
check any potential plots to oust the regime.
Although Libya's financial outlook has deteriorated,
Qadhafi's economic policies still are unlikely to
change a great deal. The Libyan leader has some
powerful remedies at hand to alleviate quite large
financial shortfalls without changing his basic policy
direction:
? Foreign exchange reserves still total roughly $6.6
billion including the $3.1 billion Tripoli received
from the sale of its shares in Fiat.
? Tripoli could liquidate other overseas investments,
which reportedly have a book value of about $1
billion-their market value is probably much
higher.
? Qadhafi could increase production to 1.6 million
b/d to boost earnings.
? He could tap the international financial market for
loans;
To maintain maximum flexibility, we believe Qadhafi
will probably draw down reserves somewhat and allow
payments arrears to mount. We estimate payments
arrears will exceed $5 billion by yearend, including at
least $1 billion to the Soviets. Qadhafi views these
arrears as useful leverage to extract political and
other concessions, particularly from Libya's West
European trading partners.
The primary question is how far Qadhafi can push the
population, in general, and the military, in particular,
on austerity. Most educated Libyans are aware of the
financial windfall available to the regime from the
sale of the Fiat assets. Expectations almost certainly
will be high in Tripoli and other Libyan cities for
major improvements in the availability of consumer
goods. To the extent that these expectations are not
met, and Qadhafi is seen as squandering money on
terrorism and other unpopular foreign adventures,
popular dissatisfaction could result in increasing inci-
dents of antiregime activity.
Qadhafi already has lost virtually
all popular support outside of a small cadre of revolu-
tionaries and his security services. The ability of the
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Secret
security forces to cope with increasing disgruntlement
could weaken their resolve and provide the opportuni-
ty for disaffected elements in the military to make a
move against the regime.
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Secret
Japan: Increasing
International Cooperation
in Science and Technology
Tokyo's increased funding in recent years of "funda-
mental research and development" projects reflects
Japan's concern that an inadequate technological base
will impair its ability to maintain competitiveness and
that it will be increasingly excluded from sharing in
Western technology. As a result, Tokyo is removing
legal barriers to foreign participation in Japanese
research and is starting a number of programs intend-
ed to increase both fundamental R&D and interna-
tional scientific and technical cooperation. Although
recently proposed fundamental research and interna-
tionalization programs are small, we believe that the
shift toward fundamental research will increase op-
portunities for mutually beneficial S&T cooperation
between Japan and Western countries.
Tokyo's goal is to establish an indigenous R&D
infrastructure and technology base for Japan's future
industries. According to the Council for Science and
Technology (CST), Japan's S&T policymaking and
oversight body, this objective is to be achieved by
increasing the amount of "fundamental research"
performed-past Japanese R&D efforts have focused
on improving existing technologies. Nonetheless, the
choice of "fundamental research" rather than basic
science as a theme continues Japan's traditional em-
phasis on engineering rather than on scientific aspects
of research. The CST argues that, because fundamen-
tal research requires more "creativity" than Japanese
industry or government laboratories have shown in the
past, increased interaction between industry, Japanese
universities, ' and foreign researchers is needed.
The primary motive for Tokyo's change in direction,
in our estimation, is concern that rapid improvement
in Japanese industrial technology cannot be sustained
by incremental improvements in technology or by
'The Prime Minister's Ad Hoc Committee on Education Reform
has been studying, since 1984, how to encourage creativity in
importing technology. Having equaled Western capa-
bility in technologies believed critical for its future
economic growth, Japan can continue to advance
rapidly only by making basic technical contributions.
Tokyo also fears that access to Western technology
will be reduced. For example, the European Commun-
ity's ESPRIT program, linking academic and govern-
ment researchers to manufacturers, is cited as part of
a trend toward excluding Japanese firms from West-
ern R&D.
As evidence of Tokyo's concern, S&T spending has
had relatively high priority in recent budgets. In a
period of budget reductions for most discretionary
programs, government S&T funding has been nearly
constant. On the basis of Ministry of Finance guide-
lines, we believe that this pattern will continue
through FY 1987.2 Without increased funding, the
shift toward fundamental research will continue to be
financed by cuts in other S&T programs, accompa-
nied by efforts to attract industry support.
Among the R&D-supporting ministries competing to
introduce fundamental research projects, MITI has
been the most aggressive. Its major fundamental
programs include:
begun in 1981-is encouraging cooperation between
firms (often with 50-percent funding) and offering
access to the 16 MITI research labs. Next Genera-
tion projects concentrate on new materials, new
electronic devices, and biotechnology methods-
technologies believed to be critical to future
industry.
Secret
D/ IEEW 86-044
3/ October 1986
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Secret
Japan: General and Science and Japan: Science and Technology
Technology Expenditures, 1978-87 a Expenditures, by Agency, 1978-86 a
I
0 1978 80 85 86c 87c
i i ~ i
0 1978 80
_~ Ministry of
.......
Education, Science,
and Culture
l-~~
85 86 6
Science and
Technology Agency
a Fiscal period beginning I April of the stated year. Data converted at
17s yen per dollar.
b Projected.
? MITI is sponsoring a series of regional Centers for
Cooperative Research under a 1985 law to increase
industry-university collaboration on long-term in-
dustrial research.
Fiscal period beginning I April of stated year. Data converted at Japan's Science and Technology Agency (STA),
17s yen per dollar. which primarily supports R&D for major nuclear
b Central government expenditures excluding debt service and power and space projects, is increasing its support for
allocations to local governments.
Projected. fundamental research, mainly through the Institute of
Physical and Chemical Research (RIKEN), the Na-
tional Research Institute for Metals, and the National
Institute for Research in Inorganic Materials. A new
3107881P86 RIKEN life science center in Tsukuba has begun
operating and a materials research center in Kansai is
under discussion. STA has funded, since 1981, the
? The Key Technology Center (Key-Tech), cospon- Exploratory Research in Advanced Technology
Bored with the Ministry of Posts and Telecommuni- (ERATO) program for five-year fundamental re-
cations (MPT), offers 70 percent of capital funding search projects. The 12 actual or proposed ERATO
or soft loans for projects in its targeted technology projects, each employing 20 to 30 researchers, also
areas. focus on fundamental research in materials, electron-
ics, and biology.
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Secret
The Ministry of Education, Science, and Culture,
(MOE), with the largest S&T budget in Japan and
traditional dominance in basic science, is promoting
fundamental research through improved industry-
university cooperation. Japanese academics, however,
have traditionally resisted contact with industry. As a
result, MITI and STA, with more experience in
marshaling industry funding, have seized the funda-
mental research initiative.
Ministries with more limited mandates are also shift-
ing toward fundamental research. MPT is using funds
from Key-Tech to take over fundamental telecom-
munications research from the recently privatized
Nippon Telegraph and Telephone Corporation.
MPT's efforts feature a new research center-the
Advanced Telecommunications Research Institute
(ATR). The Ministry of Agriculture, Forestry and
Fisheries (MAFF) has begun a Center for R&D on
Bio-Industrial Technologies, structurally similar to
Key-Tech, to support agriculturally related biotech-
nology research.
sponsors afund-the Japan Trust-to support indi-
vidual foreign researchers in Japan.
MITI has also proposed the Human Frontier
Program, promoted as alarge-perhaps $20 billion
over 20 years-international research program in life
sciences. Despite extensive publicity for Human Fron-
tiers, which we believe represents ahigh-level com-
mitment to establish an international program in life
science, it has not yet received substantial funding.
MOE, the principal Japanese participant in interna-
tional scientific programs, has been the most open of
the three major S&T ministries. Since 1982, foreign-
ers are eligible to hold long-term staff positions in
national universities. Tsukuba University, a national
university, recently began a program to train foreign-
ers in technical Japanese. In addition, MOE has an
agreement with the French and West German Gov-
ernments to support their researchers while they work
in Japan.
Tokyo is attempting to broaden Western research
participation in Japan~urrently contacts are pri-
marily through Japanese nationals studying or work-
ing abroad. Foreign presence in Japan has been
impeded by language and cultural barriers, by the
absence of assistance to foreign researchers, and by
laws limiting foreign researchers access to govern-
ment-sponsored facilities. Many of these barriers are
being lowered by legal changes and by some small
programs to encourage foreign researchers to work in
Japan.
MITI and MPT, because of their commercial devel-
opment orientation, have historically discouraged for-
eign participation in their research programs. In 1986,
MITI for the first time allowed foreign participation
in its research laboratories. According to the Key-
Tech Center's promotional literature, its projects are
open to foreign corporate participation; press sources
indicate that ATR includes the Japanese affiliates of
three US computer firms. The Key-Tech Center also
STA, particularly in its fundamental research efforts,
has been relatively open to foreign participation.
About 5 percent of the ERATO researchers have been
foreign. Within RIKEN, STA has begun a Frontier
Research Program, working on life and materials
sciences, with approximately one-third of its 35 scien-
tists to be foreign. This program includes housing and
other cultural support for foreign participants. Under
a new law, foreigners are allowed to hold positions
(other than director) in STA laboratories.
Implications for International Cooperation
We believe that Tokyo's new S&T policy direction
will substantially increase the openness of Japan to
international cooperation. Recent changes will proba-
bly have only a small impact on the content of
Japanese research or its international orientation in
the next few years, but the long-run effects of these
changes could be large. These changes signal that the
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government will support fundamental research in the
future, particularly in new materials and materials
processing. They also signal that government labora-
tories and firms will be expected to improve foreign
contacts, both to benefit Japanese industry and to
address complaints that Japan is closed to internation-
al cooperation.
The shift toward fundamental research will, in our
view, increase opportunities for mutually beneficial
international cooperation in R&D. Japan's fundamen-
tal research projects are likely to require more contact
with Western science than traditional projects that
rely on refining existing technology. According to
press reports, European officials are concerned that
Tokyo is structuring cooperative programs to obtain
these benefits without offering Western researchers
comparable access. We believe that Tokyo, while
preferring such uneven exchange, is willing to provide
access to fundamental research results-which West-
ern researchers are likely to find increasingly valu-
able
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Secret
Latin America:
Public Opinion on the Debt
Public opinion in several Latin American countries
demonstrates realism about the causes of financial
problems and support for government policies to
resolve the debt problem. Although little public sup-
port exists for repudiating external debt, poll results
suggest that Latin Americans want new debt policies
to ease the region's financial plight. In particular,
Latin Americans desire longer repayment periods and
limits on debt service payments, which probably will
become key planks in future negotiations with credi-
tors.
? About 70 percent in Argentina and Uruguay cite
trade barriers and high US interest rates, while
slightly more than one-half also attribute the in-
crease in debt to the world economic slowdown.
About two-thirds say that imprudent lending by
international banks is another important cause of
the debt problem.
? Dominicans think that low prices for their exports
were the most important cause of their external debt
problem.
Latin Americans mostly blame their country's debt
problems on their own government policies. About 75
percent of the Argentines, Colombians, and Uruguay-
ans thought that domestic inflation fueled by govern-
ment deficits is an important cause. In Argentina and
Uruguay, excessive spending by military governments
is also cited by at least 10 percent of the respondents,
and a strong majority thinks that the losses of state-
owned enterprises also contributed to the growth of
foreign debt. Among elite groups in Colombia, 42
percent believe internal factors are primarily responsi-
ble.
Although Latin Americans generally give domestic
factors the largest role in creating the debt problem,
they feel that external causes also have contributed to
their predicament:
? In Colombia, more than 75 percent believe that the
world economic recession and high US interest rates
of the early 1980s were major causes, and two-
thirds say that protectionism is important.
'This article is based on recent polls commissioned by the US
Information Agency (USIA). Over the past 12 months, USIA
conducted polls on attitudes toward the debt problem in Argentina,
In contrast, Brazilians disagree on the causes of their
country's financial problems.
Respondents to the polls strongly support most of the
policies that their governments are now following to
manage the debt burden. For example, Latin Ameri-
can respondents want to expand exports, although
they are more divided on the benefits of reducing
imports. Nonetheless, devaluation of the currency is
widely opposed, probably because of the loss of pur-
chasing power and national prestige despite the com-
petitive advantage that it would give exports. Typical-
ly, there are mixed signals on fiscal policy-budget
cuts are favored but without reductions in consumer
subsidies.
Trade Policies. Large popular majorities-ranging
from 66 percent in Brazil to 89 percent in the
Dominican Republic-favor increasing exports; 95
percent of the Colombian elite agree that more ex-
ports would help the economy. Almost 70 percent of
the Argentines and 60 percent of the Dominicans
think restricting imports would help, but only 45
percent of the Brazilians and Uruguayans agree. In
Secret
DI /EEW 86-044
31 October 1986
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Starting in late 1985, the US Irt1ormation Agency
commissioned Latin American polling companies to
conduct opinion surveys on the debt problems facing
Latin American economies. The results represent the
views of those who claimed to have heard about their
country's debt problems. The errors of estimate for
the sample populations range from 1.6 to 3.7 percent-
age points at the 95 percent cor~idence limit.
Argentina: Interviews were conducted with 1,400
adults selected at random in the six largest cities in
November 1985; 88 percent had heard of Argentine
debt problems.
Brazil: The sample consisted of 1,502 adults in six
major cities, which included a subsample of 300
people with some university education to make the
survey comparable to polls commissioned by USIA in
other Latin American countries. Interviews were con-
ducted in October 1985; only 81 percent knew about
foreign debt issues-the lowest share in any of the
polls.
Colombia: In Colombia, the just survey-conducted
in April and May 1986 polled the opinions 011,014
adults in the four largest cities; 90 percent knew
something about the debt. The second poll, conducted
in May and June 1986, surveyed the views of 750
respondents-business executives, professionals,
journalists, labor leaders, educators, and student
leaders.
Dominican Republic: Interviews were conducted with
1,000 adults in Santo Domingo and Santiago in
November and December 1985; 95 percent of the
sample had heard about the debt problem.
Uruguay: In October 1985, 1,000 adults in the three
largest cities were interviewed, with 96 percent aware
of the foreign debt problem.
Colombia, opinion is evenly divided about more re-
strictions on imports, but 56 percent of the elite
respondents believe that import restrictions would
help the economy, with university student leaders and
journalists the strongest supporters.
Fiscal Policy. Large majorities-ranging from 61
percent in Uruguay to 88 percent in the Dominican
Republic-favor reductions in government spending
as a way of resolving the financial pinch. Support for
cutting government subsidies on consumer items and
services is weaker, however. Almost 80 percent of the
Dominicans-and one-half the Argentines and the
Colombians-think reduced subsidies would help the
economy. A plurality in Brazil favors cutting subsi-
dies, but in Uruguay 45 percent of the respondents
oppose cuts in consumer subsidies, with only 22
percent supporting subsidy cuts.
Relations With Creditors. From a low of 62 percent
in Brazil to a high of 86 percent in the Dominican
Republic, respondents favor asking international
banks for longer repayment periods. The Latin Amer-
icans polled are more divided about the efficacy of
adopting economic adjustment policies recommended
by the IMF. About 45 percent in Brazil and Colom-
bia-which do not now have IMF programs-oppose
a Fund role, while about 25 percent are in favor. In
Colombia, 71 percent of the elite oppose an IMF
program. President Barco reflected these views when
he told the press in September that he does not want
the IMF to continue to monitor the economy as
closely after December. Almost 55 percent in Argen-
tina and Uruguay oppose adopting a Fund program,
while less than 20 percent think an IMF program is a
good idea. In the Dominican Republic, 67 percent are
against adopting IMF-endorsed policies in exchange
for help in paying the debt.
On the basis of the USIA polls, we believe that Latin
American governments probably would be able to tap
a wellspring of support for new debt policies and thus
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will bargain harder for eased repayment terms on
their commercial debt in the future. About one-half
the respondents in the five countries favored canceling
any IMF agreements that require austerity measures,
with about 20 percent opposed to abrogation. Instead,
Latin American respondents think that getting loans
from the World Bank would improve their countries'
debt positions. Although majorities in each country-
ranging from 52 percent in Uruguay to 79 percent in
Colombia-believe that refusing to pay the debt
would worsen the economic situation, large majorities
favor placing a ceiling on the amount paid in debt
service. In Colombia, 58 percent of the respondents
think a ceiling on repayment would help their econo-
my, while 24 percent disagree. A larger share of
Dominicans than other Latin Americans-75 per-
cent-support a debt service ceiling. In Argentina,
Brazil, and Uruguay, about two-thirds think a limit
would help their economies, while less than 10 percent
believe that it would hurt economic performance.
Additionally, about 60 percent of Argentines, Domin-
icans, and Uruguayans think a 10-year grace period
would help the debt situation, although small plurali-
ties of Brazilians and Colombians feel that such a
policy would worsen their financial plight.
On a more positive note, the polls indicate Latin
Americans may actually favor implementing policies
proposed under the Baker Plan to improve the condi-
tion of their economies. For example, substantial
majorities think that encouraging foreign investment
in their economies would improve their financial
situation. Argentines and Dominicans have the stron-
gest consensus in favor of increased foreign invest-
ment, while Colombians and Uruguayans also strong-
ly support encouraging investment. A majority of the
Colombian elite also believe that swapping foreign
debt for equity in domestic companies would help the
economy, with only labor union leaders opposed to the
scheme. In contrast, a plurality of Brazilians-40
percent-feel that more foreign investment would
worsen the financial condition of the economy.
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Iran Presses
To Repair Oil
Export Facilities
Iran and Iraq
Expand Search Jor
Foreign Exchange
Tehran is pressing to repair the damage recently inflicted by Iraq on Khark Island
and other oil facilities. The loss of oil revenues-exports probably will fall from 1
million b/d in September to as low as 700,000 b/d in October-is seriously
limiting Iran's ability to support both the war and its faltering economy. In 1985 25X1
exports from Khark averaged 1.5 million b/d. Iran has installed floating hoses to
allow loading from one berth of the T-jetty at Khark and additional hoses are be-
ing installed to reopen another berth. Iran also has four single-point mooring bouys
with a total loading capacity of 2 million b/d located off Ganaveh. 25X1
War costs and the impact of recent Iraqi attacks on Iranian oil exports have
prompted Tehran to ease its longstanding policy against foreign borrowing.
regime is experiencing.
Tehran's interest in securing foreign credit underscores the economic stress the
For its part, Iraq has increased its liquid cash reserves by about $800 million since
August so that it can make payments to military and civilian creditors. Iraq sold at
least $300 million worth of gold reserves over the last several months. Moreover,
Iraq has received about $500 million in cash from Saudi Arabia since early
September. Baghdad probably will use the aid money for military purchases and
the proceeds from the gold sales to meet overdue debts to civilian suppliers and
commercial banks. According to the US Embassy in Baghdad, a US company last
week threatened to stop work on the Baghdad South power plant unless Iraq
makes an overdue payment within 30 days.
25 Secret
D/ /EEW 86-044
31 October ! 986
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Costa Rican
Debt Maneuvering
Tanzania
Delays Progress
Toward Reform
United States to provide additional assistance.
San Jose appears to have moderated its confrontational approach toward its
foreign creditors by making its first payment to commercial banks since July. The
$5 million payment of overdue interest was made before a meeting with
commercial lenders last week-bankers had refused to meet until a token interest
payment was made. Embassy reporting indicates that Costa Rica, while unable to
pay all interest arrearages-which total some $60 million-has stated that it will
pay as much as $5 million each month as a sign of good faith. Despite the
optimism generated by Costa Rica's action, San Jose and its creditors remain far
apart on a new rescheduling agreement. President Arias has publicly called for a
rescheduling over 25 years, with aseven-year grace period. Negotiations are likely
to be further complicated by the lack of progress in restoring Costa Rica's IMF
program, suspended earlier this year because of repeatedly missed performance
targets. The threat of creditor retaliation-including possible seizure of assets-
probably will keep Costa Rica at the negotiating table. San Jose probably believes,
however, that continued foot-dragging will yield better terms and will pressure the
Tanzania so far has kept within IMF-prescribed credit and spending ceilings,
and regularly devalued its currency.
President Mwinyi's directive postponing review of the medium-term economic
recovery plan, however, could
damage the reform process.
he government probably will remain below the IMF seen mg target
Nicaraguan-US
Embargo Dispute
Continues
Secret
3/ October 1986
at least through the end of the year, thanks largely to an offsetting Swedish grant.
derail Mwinyi's reform efforts
jeopardize badly needed aid-including disbursements from the Fund-and signal
a serious effort by party ideologues supported by Party Chairman Nyerere to
delays in approving the recovery program, and a continued arrears buildup could
the GATT forum.
Nicaragua, dissatisfied with a recent GATT panel decision not to take action on
the US trade embargo, will ask that GATT member countries recommend the
embargo be lifted, offer Nicaragua concessions for its losses, and discuss the legal
justification for the US action. The panel determined it could not find that the em-
bargo nullified or impaired Nicaragua's GATT benefits; it did not address the
legal justification for the action, as Nicara ua had re uested. Nicara ua
is unlikely
to gain much support. Members do not want to alienate the United States and be-
lieve GATT should address only the effects of this type of action, rather than the
motivations behind it. They also want to avoid injecting a political atmosphere into
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GATT members rejected Bulgaria's claim that it is a developing country and
Bulaarian Membership should be allowed to participate in the upcoming round of multilateral trade
negotiations. They also put off its request for a working group to examine its
application for membership. Bulgaria has been a GATT observer since 1967 and 25X1
many GATT members believe that Bulgaria has not used that time to bring its
economy closer to compliance with GATT rules. Sofia claims that during the past
year it has instituted substantial economic reforms, but GATT members say the
reforms have produced few concrete results. While Sofia clearly believes member-
ship is in its own best interest, Moscow is almost certainly encouraging them in an
effort to increase access to GATT. By refusing to recognize Bulgaria as a
developing country, GATT members have effectively blocked Sofia's participation
in the Uruguay Round, but they may reconsider setting up a working party if Bul-
garia acknowledges its status as a nonmarket economy and presents tangible
evidence of economic reform. Acceptance of a workin art would not bind them
to ultimately support Bulgarian membership. 25X1
Secret
31 October 1986
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Secret
Intra-ASEAN
Trade
Vietnam
Stepping Up Trade
With South Korea
Secret
3I October 1986
Despite preferential trade arrangements, member countries account for only about
7 percent of total ASEAN imports, having fallen dramatically in recent years from
$12 million in 1982 to $5 million in 1985. In response, ASEAN has undertaken
several initiatives to improve regional trade: liberalization of tariffs; standstill and
rollback of nontariff barriers within ASEAN; preferential treatment of intra-
ASEAN investments and joint-venture projects; greater cooperation in commod-
ities, shipping, banking, insurance, and tourism; and harmonization of national
development plans and targets. Nonetheless, most members of ASEAN are
disappointed in intra-ASEAN economic cooperation, and it is unlikely that these
measures will make inroads on their strong trade ties to the West-particularly
the US market that accounts for 60 percent of ASEAN sales to the world.
ASEAN Countries: Intra-ASEAN Million US $
Imports,a 1976-85
ASEAN
3.4
4.4
8.8
12.1
8.9
4.8
Brunei
0.1
0.2
0.5
0.4
0.4
0.2
Indonesia
0.2
0.2
0.3
0.2
0.1
NEGL
Malaysia
1.4
1.8
3.7
4.4
4.9
3:8
Philippines
0.1
0.2
0.3
0.5
0.2
0.2
Singapore
LO
1.2
2.9
5.4
2.6
NEGL
Thailand
0.6
0.7
1.1
1.2
0.7
0.5
Vietnam is trying to expand trade with hard currency countries by tapping the $30
billion South Korean import market.
reportedly cannot match
Hanoi is selling ` arge quantltles o coa to
South Korean firms in turn are capturing a larger share o t e letnamese
market by supplying textiles and industrial goods at prices Japanese firms
directly from Vietnam,
some purchases to Chin
took about one-third of Hanoi's total coal exports of $35 million in 1985, is shifting
several South Korean firms to help offset declining sales to Japan. Japan, which
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Tin Producers Indonesia, Malaysia, Thailand, Australia, Bolivia, Nigeria, and Zaire, the mem-
Seek Higher Prices bers of the Association of Tin Producing Countries (ATPC), held a series of
meetings last week in Jakarta on establishing voluntary production quotas in an at-
tempt to force tin prices higher. According to the Executive Secretary, the ATPC
realizes the need to keep production down in the face of the continuing world
surplus. Officials from Brazil and China also attended the meetings. The ATPC
would like to persuade Brazil and China to become members-China reportedly
favors the idea. These meetings were held approximately one year after the
collapse of the International Tin Council and after the London Metals Exchange
refused to continue supporting tin prices.
Canadian Grain
Export Problems
grain exports-are likely to be shut down again to bulk loadings.
Canada will be hard pressed to meet all of its international grain commitments un-
less favorable weather holds in the Great Lakes and west coast longshoremen settle
their continuing labor dispute. Current commitments include a new agreement
with the Soviet Union calling for the export of 2.2 million metric tons through De-
cember, with another 4.5 million tons expected by July. Despite shipping a record
1 million tons of grain in the five days after Thunder Bay longshoremen ratified a
new contract, moving the 5 million tons now on hand through the Great Lakes be-
fore the mid-December freeze poses a problem. Because west coast shippers have
backed out of talks before the 7 November end of their 30-day truce with the long-
shoremen, British Columbian ports-which handle about one-half of Canada's
29 Secret
31 October 1986
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Secret
British Monetary
Policy Speech
Increasing Calls,lor
West German
Tax Changes
Secret
3/ October 1986
Chancellor of the Exchequer Lawson's annual Mansion House speech on monetary
policy disappointed financial markets because it gave no hint of a policy change-
such as joining the EMS-that would confirm London's continued commitment to
fighting inflation. Market analysts are concerned that the rapid growth in money
and credit aggregates will lead to a pickup in inflation, now running at 3 percent.
Pointing out that the monetary base remains within its target range, Lawson
insisted the government will take whatever action is necessary to contain inflation,
although raising interest rates again would be politically difficult. The chancellor
defended the recent hike in base lending rates to 11 percent as necessary to keep
monetary growth under control and to reduce pressure on the pound. Both Lawson
and Bank of England Governor Leigh-Pemberton, who also spoke at the Mansion
House, reassured bankers that sterling's recent depreciation was necessary to
reduce the pressure on the current account from this year's oil price fall but said
they are unwilling to let the pound decline further. Their comments clearly were
designed to strengthen sterling and avoid the need for another interest rate hike.
The five leading West German economic institutes have again urged Bonn to
advance tax cuts now scheduled for 1988 to maintain the resurgence in consumer
demand to prolong West Germany's recovery as the trade surplus declines. The
$4-5 billion tax reduction-the second half of a package begun in 1986-is
designed to reduce the progressivity of the income tax system. OECD estimates in-
dicate it will boost GNP by 0.3 percentage point and not increase inflation, but the
total package will do little more than compensate for the increase in fiscal drag
since 1981. Meanwhile, the Free Democratic Party (FDP), the junior coalition
partner in Bonn, has also recently voiced impatience with Chancellor Kohl's
Christian Democrats for their hesitancy in promoting comprehensive tax reform.
At an FDP conference last week, former Finance Minister Lambsdorff called for
eliminating many deductions in exchange for sharply lower rates and criticized
Finance Minister Stoltenberg for not relying more on tax reform as a tool of
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economic policy. We expect Bonn to reject any acceleration of the 1988 tax cuts.
Moreover, coalition disagreements could delay passage of tax reform in the next
legislative session if, as we expect, Chancellor Kohl's government wins January's
Bonn 0,19'ers
To Assist Huge
Housing Firm
Construction Minister Schneider recently signaled Bonn's willingness to furnish
additional aid to the giant Neue Heimat housing conglomerate. In September,
Neue Heimat's owner, the West German trade union federation, unexpectedly sold
most of the firm's assets-about 190,000 housing units-for the nominal sum of
one deutsche mark to a West German businessman with little or no experience
running such an enterprise. The sale has deeply embarrassed the labor unions, and
hurt the union-supported Social Democrats in Bavaria's recent state election. Bank
shares on the Frankfurt stock exchange fell after the sale, reflecting the impact a
Neue Heimat bankruptcy would have on West German real estate values. Fearing
a bankruptcy is still possible, Bonn is trying to protect both its exposure-roughly
$450 million in loan guarantees-and that of Neue Heimat's creditors. Both
Schneider and Economics Minister Bangemann have supported the new owner's
plan to sell some of the units to existing tenants to restore profitability, a process
they believe will be aided by the more favorable tax laws affecting housing that
take effect on 1 January. They have also suggested that Bonn might help the sale
of units by providing accelerated depreciation or additional housing allowances.
New Portuguese Portugal's new foreign investment code-prompted by the EC accession require-
Foreign Investment Code ment to bring foreign investment regulations in line with EC rules-aims to
simplify the delay-ridden approval process. Investments must be registered with
the government, but will be approved automatically if the Foreign Investment
Institute does not object within 60 days. Similarly, the Bank of Portugal has 30
days to decide on foreign capital transactions, after which they also will be
automatically approved. The new code is welcomed by foreign investors-long
discouraged by Lisbon's redtape-although there is some skepticism about
Lisbon's ability to implement it. The government, however, is very eager for
foreign capital and technology and has indicated its intention to administer the
code as flexibly as possible. We expect delays to occur in the initial stages, but the
new code is a major step toward liberalizing Portugal's approval process and is
likely to lead to increased foreign investment.
Iceland s Prime Prime Minister Hermannsson is hailing a buoyant domestic economy to boost his
Minister Celebrates coalition government's chances in the national election due by April 1987. In his
Robust Economy annual statement to parliament on 16 October, the Prime Minister gave his
Progressive-Independence coalition credit for the single-digit inflation rate expect-
ed for 1986~ompared with more than 80 percent in 1983-and for accelerating
economic growth, which is forecast at 5 percent for the year. Hermannsson also
sought to reassure parliament that his government would be able to manage
remaining problems such as the government budget deficit, high real interest rates,
31 Secret
31 October 1986
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Israel Deregulates
the Oil Industry
"workers' parties."
and the large foreign debt-about 55 percent of GDP. Reykjavik's successes in
controlling inflation and in boosting growth probably will endure through the
runup to the election, but continued improvements depend on the fragile accord
achieved in February between the government and unions over a package of anti-
inflation measures. Hermannsson must still deal with accusations that he buckled
under US pressure in settling whaling and military cargo shipping disputes, and
with setbacks his Progressive Party suffered in May municipal elections. Nonethe-
less, worker support for the conservative Independence Party will be bolstered by
strong real wage gains and will weaken opposition claims that they are the true
companies.
In response to the slide in world oil prices, Tel Aviv plans to begin deregulating its
oil industry. The government had already cut its price for domestic oil earlier this
year. The US Embassy reports that the first steps consist of breaking the domestic
oil market cartel and of creating a more flexible pricing system-these could be
implemented as early as January. Also, the Ministry of Energy will permit oil
companies and industries to buy up to 10 percent of their petroleum product
requirements on the international market rather than from government-owned
refineries. Israel now believes its refineries are strong enough to compete with
international producers. Finance Minister Nissim supports the plan, but it must
still be formally approved by two economic committees. If the initial stages of the
plan are implemented successfully, Tel Aviv probably will allow the oil companies
to increase their purchases of foreign petroleum products and move further to
liberalize domestic prices. Lower prices at the pump would benefit Prime Minister
Shamir, and he will probably be able to withstand criticism from the oil
Australia Negotiating Next week, unions will review a new government proposal for conducting wage
New Wages Agreement negotiations and, with national elections necessary within the next year, the
Hawke government will have to decide how far it can push the new proposal
without antagonizing its important trade union constituency. Under the current
system-established in 1983 by an agreement between the Hawke government and
the major trade union organization to reduce industrial strife-a federal Arbitra-
tion Commission twice a year recommends wage increases for each occupation
category, based largely on inflation. Canberra is now urging unions to reach
agreements at the company and industry level-an approach designed to improve
the competitiveness of Australia's manufactures on the world market. For their
part, union leaders are giving the new proposal serious consideration, according to
Embassy reporting, because Australia's economic slowdown and export slump
have hardened employer opposition to indexing wages to inflation. Nevertheless,
union leaders almost certainly will face difficulties persuading their members that
the arbitration system should be abandoned. In the last six months, even when fac-
ing bitter strikes, employers have resisted most attempts by individual unions to
gain wage increases outside the current system.
Secret 32
jl October 1986
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South African Pretoria's reaction to US sanctions so far has been limited primarily to denuncia-
Reactions to Sanctions tions of the United States and a few practical steps to circumvent sanctions.
mediate effect on business confidence. The government is probably convinced that
its program of limited reform will not placate critics and that it must concentrate
Foreign Minister Botha has said, however, that pressure by South African farmers
who have lost US markets would lead to a ban on South African imports of US
grain. To help circumvent sanctions, Pretoria last month omitted from its foreign
trade report the usual breakdown of trade by country and product. The govern-
ment-owned South African Transport Service last week announced that it will no
longer release statistics on cargoes or on the names, destinations, and origins of
ships using South African ports. Pretoria evidently sees no advantage in precipitate
retaliation against the United States, but it will probably make measured
responses such as a lawsuit on behalf of South African Airways over pending US
suspension of landing rights. The government will continue to monitor the policies
of neighboring states closely, however, and will not hesitate to use the leverage de-
rived from its regional economic dominance. The withdrawal of the US corpora-
tions will reinforce perceptions among South Africans that their economy is
becoming increasingly isolated from the West, but it will probably not have an im-
on assisting businesses to evade sanctions.
Colombian Tax
Policy Changes
the reform simply as a way to inhibit capital flight.
The Barco administration last week proposed a major tax reform to broaden the
tax base, simplify the system, and reduce evasion. The new bill includes an offer of
amnesty to encourage repatriation of funds illegally exported by Colombian
businessmen and drug traffickers during 1983-85-a period of high inflation and
frequent devaluation. If enacted, the amnesty, combined with tighter foreign
exchange controls in Peru and banking reforms in Panama-where much drug
money has traditionally been deposited-probably will encourage some narco-
dollars to return to Colombia, adding to inflationary pressures. Although some
foreign observers may interpret the proposal as a softening in the government's
antinarcotics efforts, Barco, who remains committed to drug control, probably sees
Secret
3l October l 986
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Malaysia's Spiraling Kuala Lumpur's budget for next year will cut development spending in an attempt
Budget Deficit
Indonesia
Announces Additional
Economic Reforms
finance some of it by adding to its $20 billion foreign debt.
to deal with the ballooning deficit, according to the US Embassy. The government,
nevertheless, projects that the overall deficit will jump by two-thirds to an
unprecedented 19 percent of GNP. Kuala Lumpur anticipates real economic
growth of no more than 1 percent through 1987. To avoid further depressing the
economy, the Finance Ministry proposes no tax increases. The budget suggests
that the policy of redistributing the national wealth in favor of ethnic Malays
under the politically controversial New Economic Policy will be further slowed.
Prime Minister Mahathir has already suspended portions of the NEP, including
regulations about foreign ownership, in an effort to encourage foreign investment
and to promote economic recovery. The large increase in the deficit will intensify
the concerns of Malaysia's foreign creditors because Kuala, Lumpur intends to
and corruption of the Indonesian economy.
Jakarta has announced a series of economic measures that include dismantling six
import monopolies and eliminating or reducing a wide range of import duties.
These measures, designed to increase the efficiency of domestic industries and
promote nonoil exports, complement the 31-percent devaluation in September.
Two striking omissions from the list of import monopolies slated for elimination
are plastics and steel-both are tied closely to President Soeharto. Moreover,
according to press reports, only a small share of Indonesia's imports are controlled
by the targeted monopolies. According to US Embassy reporting, Indonesia's
foreign donors regard the policies as a realistic attempt to cope with the country's
oil-driven economic slump. We believe, however, that Jakarta has yet to demon-
state the resolve needed to deal with the downturn and with the chronic deficiency
Soviet Crackdown General Secretary Gorbachev appears to be using a crackdown on the falsification
on Falsified of economic data to put pressure on political opponents and recalcitrant regional
Economic Reporting officials. A Central Committee resolution published last week censured the
Ministry of Automotive Industry and the party chiefs of Moldavia and a
Ukrainian Oblast for allowing those under them to falsify data on plan fulfillment,
to pay illegal wages and bonuses, and to distort reporting on fulfillment of contract
Secret 34
3/ October 1986
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Secret
Bulgarian Economic
Mismanagement
Under Fire
China's Grain
Output Rises
35 Secret
31 October l 986
obligations. The party chiefs were officially reprimanded, and the Minister of
Automotive Industry and five senior Moldavian party officials were fired. The
government is probably concerned that fraudulent reporting, always a problem to
some degree, could spread as the pressure to meet Gorbachev's modernization and
acceleration goals intensifies. Targeting Moldavia and the Ukraine-two former
Brezhnev strongholds-strongly suggests Gorbachev also has political motives for
ly will increase and may even reach top-level economic policy makers.
Bulgaria has begun aSoviet-style crackdown on economic mismanagement and
corruption. Two press reports in recent weeks criticized by name midlevel officials
for improprieties or for blocking government economic decisions. One report noted
that an official it named would be prosecuted. The government last week also 25X1
formed a national commission to investigate wayward officials and recommend
sanctions. This is the harshest and most far-reaching criticism of economic
officials since party leader Zhivkov demoted several economic policy makers last
fall in response to Soviet criticism. The new moves may also be intended to placate
Moscow, but in any event they divert responsibility for an expected disappointing 25X1
yearend economic performance from the top Bulgarian leadership. Official public
criticism-and probably dismissals-of midlevel economic officials almost certain-
remain committed to reducing administrative interference in agriculture.
China's reform leaders will use the projected 3-percent increase in grain produc-
tion this year to claim success for market-oriented policies in the rural sector.
Preliminary Chinese estimates indicate that grain production will total 390 million
metric tons, about 10 million tons more than last year but well below the record
407 million tons in 1984. Disruptions caused by reforms in China's procurement
system have not been ironed out-a senior Chinese specialist recently told the US
Embassy that farmers are not fulfilling purchase contracts this year, forcing the
state to buy higher priced grain from China's free market. Conservative opponents
sharply criticized reform leaders last year when new policies-elimination of
mandatory grain procurement quotas, removal of controls on prices of nonstaples,
encouragement for peasants to expand rural industries-and poor weather caused
a drop in grain production. Reformers responded by increasing the incentives.
Beijing's recent decision to make up contract shortfalls with state purchases from
the free market-rather than by reimposing quotas-indicates the reformers
I Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3
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Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3
Secret
China Promotes
Technology Policies
Beijing recently underscored its determination to direct the development of
technology by publishing a policy paper on China's technology. According to press
reports, the document details policies for developing 12 priority areas: energy,
transportation, telecommunications, agriculture, consumer goods, machinery, ma-
terial handling, construction materials, urban construction, town and township
construction, housing, and environmental protection. It calls for developing
technologies appropriate to industrial needs and for combining high technologies
such as electronics with more traditional ones. Publication of the paper, and of a
complementary report on science and technology policy in September, is intended
to provide clear guidance on Beijing's technology priorities to bureaucrats and
managers, many of whom have been slow to embrace technology development
programs. Although the papers were produced through consultation with experts
from government, research, and industrial organizations, how well these groups
will work together to implement the policies remains to be seen. Moreover,
problems such as inadequate investment funds, poor use of equipment, and laces
China Centralizing
Road Trq~ic Control
Secret
3/ October 1986
skilled workers will continue to hamper China's technological advancement.
crease.
The State Council has directed the Ministry of Public Security to draft laws and
regulations on traffic safety and management in an effort to ease the crowded and
often chaotic conditions on Chinese highways. The road sector already handles
nearly 40 percent of the total volume of passenger traffic-excluding the millions
of bicycles-but only about 10 percent of the total freight volume. The central
government probably hopes that, with Public Security departments responsible for
local inspection and toll stations and for controlling roadside activities that tend to
spill onto and block roadways, traffic flow will improve and freight volume will in-
Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3
 Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3
Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3
 ,... .
Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3
Secret
Secret
Declassified in Part -Sanitized Copy Approved for Release 2012/01/09 :CIA-RDP97-007708000100630001-3