INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100660001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 27, 2016
• Document Release Date: June 14, 2011
• Sequence Number: 1
• Publication Date: November 14, 1986
• Content Type: REPORT

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Directorate of
Intelligence
02 s ~,C.~~
9 lei
International
Economic & Energy
Weekly
S-7ft.- aft I&
DI IEEW 86-046(//
14 November 1986
Copy 6 7 5
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Secret
International
Economic & Energy Weekly
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iii Synopsis
1
Perspective-Sub-Saharan Africa: Growing Debt and Fading Markets r) FX'1
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3 Sub-Saharan Africa: Increasing Budget Discipline for 1986/87 25X1
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7 USSR: Reduced Grain Import Needs
13
United Kingdom: Gambling on a High-Technology Future 9 X1
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19 Israel: Declining Fortunes for High-Technology Industries ')FXI
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to ]Directorate of Intelligence
Secret
DI IEEW 86-046
14 November 1986
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International
Economic & Energy Weekly 25X1
Synopsis
1 Perspective-Sub-Saharan Africa: Growing Debt and Fading Markets
The external debt of Sub-Saharan African countries has received increased
attention in international forums recently, largely on the initiative of the African
states themselves. While increased African requests for help would provide
continuing opportunities for the United States to expand its political and economic
influence on the continent, there is the risk that many African states are likely to
be acutely disappointed should US and other Western aid fall significantly short of
Sub-Saharan Africa: Increasing Budget Discipline for 1986/87
Most Sub-Saharan African countries appear to be continuing belt-tightening,
cutting back on planned government expenditures as well as trying to raise tax rev-
enues, albeit with only modest success. Although Sub-Saharan Africa's budget
austerity creates economic hardship for its people, we do not foresee significant
new waves of unrest in the region.
7 USSR: Reduced Grain Import Needs
We believe that this year's grain crop will be about 195 million metric tons, 2 mil-
lion tons above last year's output. Depending on the final grain outturn, the need
for imported grain will fall between 10 million and 25 million tons, compared with
the 30 million tons imported during the 1985/86 marketing year.
13 United Kingdom: Gambling on a High-Technology Future
Prime Minister Thatcher's Conservative government is making a concerted effort
to develop high-technology industries as a way to revitalize the manufacturing
sector and reduce unemployment-the Tories' major liability in the next election.
Although we see no policy that would dramatically improve short-term prospects
for British high technology, we believe Thatcher's policies, by addressing some of
the underlying problems, are improving the long-term outlook.
19 Israel: Declining Fortunes for High-Technology Industries
Israel has long touted the development of a high-technology industrial base as the
long-term panacea for its foreign payments deficits, unemployment problems, and
stagnant economic growth. Although high-technology industry still makes an
important contribution to the economy, its structural shortcomings and continued
funding problems will prevent it from achieving Israel's ambitious objectives.
Secret
DI IEEW 86-046
14 November 1986
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International
Economic & Energy Weekl~
Perspective Sub-Saharan Africa: Growing Debt and Fading Markets
The external debt of Sub-Saharan African countries has received increased
attention in international forums recently, largely on the initiative of the African
states themselves. The debt-totaling some $82 billion in 1985-has grown
rapidly over the past 15 years to become a key issue in the region's serious
economic problems and in its relationship with official and private creditors. We
expect the issue of Africa's economic crisis will be raised with greater frequency
over the coming months as the region's debt dilemma continues.
The region's debt problems have worsened with chronic current account deficits
attributable both to high oil prices throw h 1 and to stagnant export earnings
since 1980. in addition to adverse external 25X1
circumstances, inappropriate domestic economic policies have helped to restrain
economic growth. Consequently, Africa's debt burden, in our view, has outpaced
the continent's capacity to service the debt. 25X1
Although the region's debt is not large by global standards, it has serious
economic, financial, and political implications for each of the 45 countries. Most
states are caught in a dilemma: they cannot meet their debt service requirements
on existing terms; yet, failure to meet these obligations may jeopardize the inflow
of new funds from abroad necessary to maintain or improve the region's capacity
to repay. Moreover, there is often adverse political fallout over the domestic belt-
tightening that this debt servicing can impose.
We believe Africa's debt situation will remain serious for the foreseeable future.
Africa's ability to service its debts will continue to be hampered by weak export
markets over the longer term, despite market gains for some products. In any given
year, the burden of servicing the debt will depend not only on the level of hard cur-
rency earnings, but also on Africa's success in rescheduling debt service payments.
Prospects for private capital inflows are not bright, and the flows could become
negative before the end of the decade. In these circumstances, official bilateral and
multilateral sources will continue to bear the brunt of supplying foreign loans and
other capital to Africa. Accordingly, Africa's economic fortunes will depend
greatly on the support mechanisms that these sources can develop.
We anticipate that African countries will make increased representations to the
United States-given its leading role in endorsing economic recovery programs
that emphasize freer market systems and a reduced role for government-for
economic assistance over the next several years as these states try to solve their
Secret
DI 1EEW 86-046
14 November 1986
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debt and other economic problems. We believe many African states view
Washington's endorsement of their economic adjustment efforts as an implicit
promise of increased support. While increased African requests for help would
provide continuing opportunities for the United States to expand its political and
economic influence on the continent, there is the risk that many African states are
likely to be acutely disappointed should US and other Western aid fall significant-
ly short of their expectations.
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Sub-Saharan Africa: Increasin
Budget Discipline for 1986/877
Most Sub-Saharan African countries appear to be
continuing belt-tightening, cutting back on planned
government expenditures as well as trying to raise tax
revenues, albeit with only modest success. Nearly all
the countries of the region continue to have budget
deficits, but the deficits are increasingly being pro-
gramed to be reduced relative to GDP, and thus
brought more in line with available domestic re-
sources. In the meantime, the African governments
are relying heavily on foreign loans and grants in
FY 1986/87 to finance the budget deficits. Although
Sub-Saharan Africa's budget austerity creates eco-
nomic hardship for its people, we do not foresee
significant new waves of unrest in the region.
Balanced or Surplus Budgets
At least two of the better performing African coun-
tries plan to show a surplus or to balance their
budgets in the current fiscal year. Even so, their
budgets reflect a cautious approach:
? Following record revenues in 1985/86, because of
sharply increased receipts from diamond exports,
Botswana has presented a conservative 1986/87
budget with a surplus of $140 million. Revenues are
expected to rise 18 percent in nominal terms to $576
million; expenditures are programed to grow by 17
percent to $436 million, according to press
reporting.
? Cameroon's 1986/87 budget is in balance at $2.3
billion, according to press reporting. The budget is,
however, lower in real terms than that of 1985/86,
having grown by 8 percent, compared with a
15-percent inflation rate.
Budgets Consolidating Recent Economic Gains
After good economic performance last year, some
countries' 1986/87 budgets seek to consolidate the
gains and to promote future economic expansion. For
example, Ivory Coast has boosted its planned invest-
ment spending for 1986, after cutting it by one-third
in 1985. In the wake of a 4-percent economic growth
rate last year, Kenya's planned expenditures are up 16
percent to more than $2.4 billion, compared with an
expected inflation rate of 10 percent. Revenues are
projected to grow by 25 percent to nearly $1.8 billion.
The planned deficit of $655 million is slightly smaller
than the actual 1985/86 deficit. The budget contains
strong support for agriculture and private-sector eco-
nomic activity with duty concessions and new credit
schemes.
Budgets Driven By Economic Reform
The budgets of most other African countries are
providing a framework to accommodate and support
substantial economic reform. For example:
? The Gambia's budget incorporates IMF-supported
measures agreed to in June 1986 in connection with
a $15 million standby arrangement. Revenues are
projected to rise 22 percent, largely from improved
collection methods and the boost in local currency
export taxes that accompanied a major devaluation
of the dalasi subsequent to its February 1985 float-
ing. Measures to curb public spending include lay-
offs of more than 1,000 government employees.
Nevertheless, recurrent spending is projected to rise
by 44 percent, contributing to an overall deficit of
some $23 million, about 18 percent of GDP. The
Gambian authorities expect to finance the deficit
from external grants and partly from a $28-31
million World Bank structural adjustment loan.
? Malawi projects an overall budget deficit of $44
million, after foreign grants of $29 million. The
deficit will, however, be only 3.9 percent of GDP,
compared with 6.2 percent in the 1985/86 fiscal
year. Revenues are programed to rise by 13 percent
to $310 million, while spending growth will be held
to only 5 percent.
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DI IEEW 86-046
14 November 1986
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Selected African Countries: Government
Budget Profile a
Receipts 600
Expenditures
Surplus/Deficit
Values in national currencies have been converted to US S
at 1986 exchange rates.
Nigerian expenditures include revenue allocations to states.
Budgeted.
Estimated.
-1.0 1985/86 86/87c -5 1985'
Billion US $ Billion US $
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? Nigeria's 1986 budget, announced in December
1985, called for a 22-percent reduction in the overall
deficit to $2.6 billion, after the allocation of a share
of federally collected revenues to the states. The
subsequent collapse of oil revenues has caused a
marked departure from the original program, with
the budget situation tighter than before, in our view,
particularly since the announcement in June 1986 of
a two-year economic adjustment program.
? Sierra Leone's overall deficit is projected to fall to
$152 million in FY 1986/87, compared with $184
million in FY 1985/86. A major element in the
deficit reduction will be the abolition of gasoline
subsidies that accounted for 50 percent of last year's
deficit.
? Tanzania's 1986-87 budget reflects the economic
reform measures that facilitated a $78 million IMF
standby arrangement in August as well as continued
donor support. The budget calls for a 33-percent
currency devaluation and generous producer price
increases of 30 to 80 percent. However, the pro-
gramed overall deficit will be $543 million, which,
based on incomplete data, is substantially higher
than that of FY 1985/86. Foreign grants and loans
are expected to provide $428 million toward financ-
ing the deficit.
Budgets Less Influenced By Economic Reform
In our judgment, the budgets of at least two countries
do not reflect significant economic reform this year:
? Uganda's FY 1986/87 budget calls for a deficit of
$250 million, more than three times the previous
record deficit in FY 1985/86. Planned total spend-
ing is up by 119 percent, but below the expected
inflation rate of 150 percent. Revenue increases are
even smaller in real terms, being scheduled to rise
by 90 percent. According to press reporting, Kam-
pala intends to finance the deficit by borrowing
internally and through the sale of properties confis-
cated earlier from Asian residents. Foreign donors
are reportedly disappointed in Uganda's budget
program and are skeptical about the means of
financing the deficit.
? Zimbabwe's budget expenditures are programed to
rise by 22 percent to $2.4 billion-compared with
an expected inflation rate of 15 percent-because of
the government's social programs, military expendi-
tures, debt service, and the costs of special events
such as the Nonaligned Movement summit last
September. Revenues are projected to rise by only
15 percent to $1.8 billion. According to press re-
ports, Harare faces limited prospects for revenue
growth because of already high tax levels and an
expected slowdown in economic growth to 3 to 4
percent this year, after 7 percent in 1985.
Impact of Falling Commodity Prices
For a number of African countries the actual budgets
will depart substantially from the programs because
of the impact of declines in the prices of exported
primary commodities on government receipts. The oil-
exporting countries will be particularly hard hit be-
cause of their almost total dependence on oil receipts:
? Angola expects to lose roughly $1 billion with a 50-
percent drop in export earnings this year, according
to press reporting. As a result, the annual budget
drawn up in December 1985 has since been cut in
half.
? Nigeria's original 1986 budget was based on a $25
per barrel oil price. Oil prices currently average $14
per barrel after slumping to $10 earlier. Lagos's
export earnings are expected to fall by 30 percent
this year, according to press reporting.
? Congo and Gabon have also announced expenditure
cuts in the face of declining oil revenues.
Nonoil exporting countries have both been gainers
and losers from commodity price movements:
? Kenya's FY 1986/87 budget reflects the double
windfall of lower oil import prices and higher coffee
export prices. Although coffee prices have declined
from their first quarter 1986 peak, they remain
above last year's levels.
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? According to press reporting, falling cotton prices
have created a shortfall in Togo's 1986 budget, after
an earlier projection of a surplus.
In our view, although African states face political
risks from budget austerity and from economic reform
measures in general, we do not expect the latest round
of budget programs to trigger significant new waves
of unrest in the region. In the past, there have been
isolated protests against budget measures in Congo,
Ivory Coast, and Zaire, according to US Embassy
reporting. Some critics of Nigeria's reform measures
fear a loss of economic privileges while socialist-
oriented officials in Zambia and Tanzania reportedly
do not favor the reduced role of government in
economic activity implicit in budget reform. We
believe, however, that African leaders will, for the
most part, continue to implement budget austerity
and other economic reform, particularly because
Western donors and international financial institu-
tions regard these changes as requirements for the
continued economic assistance that will help the
African states to rehabilitate their economies
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USSR: Reduced Grain
Import Needs
Soviet agricultural performance has improved this
year and may well exceed the record 1983 production,
an accomplishment General Secretary Gorbachev will
undoubtedly highlight as a turnaround in the agricul-
tural sector.2 The improved performance is due to
continued growth in the livestock sector combined
with increased production of several major crops.
Recently, Politburo member Yegor Ligachev predict-
ed that the Soviet grain crop would be roughly 210
million metric tons. The figure, however, is a prelimi-
nary estimate as harvesting is still not completed and
final results will not be known for some time. Our
estimate based on meteorological data, satellite imag-
ery, and fertilizer production statistics suggest a grain
crop closer to 195 million tons. A higher figure would
indicate, among other factors, greater success with
the intensive technology program than we have esti-
mated. Depending on the final grain outturn, the need
for imported grain will fall to between 10 million and
25 million tons, compared with the 30 million tons
imported during the 1985/86' marketing year (MY).
USSR: Grain Imports, 1978-86 a
Crop Developments
Despite a mixed performance in various areas, the
Soviets appear to have done well overall with their
grain harvest this year. Meteorological data and
photography show that, following a 'promising start
last fall, the outlook for 1986 Soviet grain yields
worsened through the spring and summer because of
adverse weather in some key grain-growing regions.
In addition, the area sown to grain this year continued
the drop begun in 1980 as the Soviets further expand-
ed the area left fallow. According to recent photogra-
phy, however, very good yields in some late maturing
Estimates o the value of total agricultural production are derived
from the gross output of crops and livestock products, less feed.
sees, and waste, using 1970 average realized prices.
' The grain marketing year is July-June
0 1978-82 b 1983 1984 1985 1986
a Data based on a market year ending in June. Includes
wheat and coarse grains.
b Annual average.
c Estimated.
spring grain regions have brightened prospects for
what appeared to be a poor grain crop. In addition,
Moscow has benefited from a large-scale "intensive
technology" program, aimed at boosting average
grain yields by almost 1 ton per hectare on fertile
Secret
DI IEEW 86-046
14 November 1986
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The Soviet "Intensive Technology" Effort
The USSR expanded its massive intensive technology
program in grain production this year. Intensive
technology as defined by the Soviets includes many
farm management practices routinely performed in
the West-the use of high-yield varieties; planting
after fallow; implementing efficient transportation
schedules; and greater use of agrochemicals. The
program began in 1984 on selected test sites totaling
only 20,000 hectares and impressive results encour-
aged expansion to almost 17 million hectares in 1985
and to 29 million hectares-roughly one-fourth of
the total grain area-this year. Recent plans call for
intensive technology to encompass 36 million hect-
ares next year and 50 million hectares by 1990
Soviet comments on the success of the intensive
technology program must be approached with cau-
tion. Reported grain yields from areas under inten-
sive technology-averaging 40 to 50 quintals per
hectare, roughly 20 quintals higher than on compara-
ble lands-are selective and not representative of
results over the entire area. In 1985, Soviet officials
credited the program with adding 16 million metric
tons to Soviet grain output. We believe this figure,
however, represented the increased output on the
lands where intensive technology was employed but
did not take into account offsetting production de-
clines in areas from which resources were pulled. Net
production gains probably did not exceed 5 million
tons.
lands. We judge that net production gains of 10-15
million tons were achieved this year with intensive
technology.
In a recent Kremlin speech, Politburo member Yegor
Ligachev stated that the Soviet grain crop would be
roughly 210 million tons-a harvest that would be the
fourth largest ever and about 17 million tons more
than the average for 1976-85. This figure, however, is
a preliminary estimate. Harvesting is only now being
completed in Western Siberia, and it will be some
time before actual results are known.
Given the evidence from imagery and meteorological
data, we would have expected a grain crop closer to a
195-million-ton level. If the final Soviet figure is
closer to the 210-million-ton mark, it would suggest:
? The Gorbachev-backed intensive technology pro-
gram to increase grain production has been more
successful than we estimated.
? The Soviets have made gains in cutting the substan-
tial harvest losses that have plagued agriculture in
the past.
In addition to a good grain crop, the USSR is likely to
achieve near-record production of several major for-
age crops. As of 6 October, the last reporting date,
with some 93 percent of the crop in, the forage harvest
was running about 5 percent ahead of the record 1983
pace. Because harvested forages comprise slightly
more than one-half of the nutrient content of the
livestock ration, the outlook for feed supplies into next
year is very good. Prospects for other crops, however,
are mixed. Output of sugar beets, sunflower seed, and
cotton is expected to be less than last season, but the
vegetable and potato harvests are expected to be well
above last year's depressed levels.
Whether the harvest reaches the 210-million-ton level
or is somewhat less, it is likely that the Soviets will
import much less grain during the current marketing
year than they have in recent years. Indeed, Moscow
could import as little as 10 million tons or as much as
25 million tons.
Uncertainty over the exact size of the grain harvest is
not the only factor accounting for the relatively wide
range in import expectations. Initiatives in the agri-
cultural sector over the past few years have reduced
the amount of grain required in meat production.
Soviet farmers have been encouraged to boost forage
production as part of a greater campaign to increase
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USSR: Grain Production,a 1976-86
1976-85 1981 1982
Annual Average
a Measured in bunker weight; that is, gross output from the
combine, which includes excess moisture, unripe and damaged
kernels, weed seeds, and other trash. For comparison with US or
other countries' grain output, an average discount of 11 percent
should be applied. In 1986, the USSR for the first time in 5 years
released grain production data.
b Estimated.
c Coarse grains comprise rye, barley, oats, corn, and millet.
d Other grains include pulses, buckwheat, and rice.
the amount of overall feed per animal while reducing
the share of grain. With the probable shift in feed
composition that a large forage harvest will support,
the level of grain imports needed to meet Soviet
livestock production targets could be reduced by as
much as 2-3 million tons. In addition, if Moscow
continues to restructure livestock herds in favor of
animals that are not heavy grain consumers, the
demand for imported grain could fall by another 2-3
million tons.
Moscow also seems to be reducing the amount of
grain required for other uses:
? Lower alcohol production could trim overall grain
needs by as much as 1 million tons.
? Recent increases in the availability of other foods
have reduced overall consumption of grain products
such as bread and cereals.
? The decision to reduce the area sown to grain in
favor of fallow has resulted in a 2-million-ton
decline in the use of grain for seed.
Grain Purchasing Activity
Soviet grain purchases to date total about 10 million
tons. Adequate supplies of livestock feed mean that
Moscow does not face any great pressure to increase
the pace of its grain purchases. Financial constraints
may also be holding down grain buying. Low world oil
prices have cut into Moscow's principal hard currency
earner; sales of oil to the West this year are likely to
be only about one-half the peak level of $16 billion 25X1
just three years ago. Thus, the USSR is only covering
immediate grain needs while awaiting even lower
prices. With the current abundance of global grain
stocks, prospects are good that already low grain
prices will fall further.
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USSR: Nongrain Crops, 1981-86 Impact of Chernobyl'
Area ?
(million
hectares)
r ieiu
(quintals
per hectare)
rrvuucuuu
(million
metric tons)
1981-85
(annual average)
4.2
11.9
5.0
1984
4.0
11.5
4.5
1985
4.1
12.9
5.2
1986 b
4.1
12.0
4.9
Sugar beets
1981-85
(annual average)
3.5
218.0
76.3
1984
3.5
247.0
85.4
1985
3.4
241.0
82.1
1986 b
3.4
214.0
74.0
Vegetables
1981-85
(annual average)
1.8
161.0
29.2
1981-85
(annual average)
6.8
115.0
78.4
1984
6.8
125.0
85.5
1985
6.5
113.0
73.0
1986 b
6.7
121.0
81.0
1981-85
(annual average)
3.2
28.1
9.1
3.3
25.8
8.6
3.3
26.4
8.8
1986
3.3 b
24.2 b
8.0
Area figures are derived from production and yield values pub-
lished in SSSR v tsifrakh v 1985 godu.
b Estimated.
Ample grain supplies worldwide mean that the USSR
could obtain most of its import needs from non-US
sources if it so chooses. We believe, however, that
Analysis of data from a wide variety of sources
indicates that the Chernobyl' nuclear accident in
April had a negligible effect on Soviet grain
production.
? Agricultural land in the evacuated zone is minor
compared with the overall area of Soviet crop
production.
? Very little grain is produced within the affected
area, which consists largely of forest, grassland,
and swamps.
? According to Soviet press reports and photography,
planting of spring crops was not delayed and, as of
mid-July, field work on both farms and private
plots appeared to be normal outside the evacuated
area.
? Grain harvested from regions close to the evacuated
area may be slightly contaminated by wind-blown
radioactivity, but can be mixed with clean grain
during milling to reduce contamination to accept-
able levels.
Moscow will favor coarse grains this year.4 If so, the
United States may again supply a substantial share of
Moscow's corn needs because it is more reliable than
the other major corn suppliers, has much greater
supplies on hand, and can export year round. More-
over, US corn prices are fully competitive. Recent
purchases of EC and Canadian barley and feed wheat
and Yugoslavian corn, however, may signal a decision
Moscow's failure to exploit the US subsidy offer on
almost 4 million tons of US wheat-even while
purchasing Canadian and EC wheat-indicates that
Moscow will continue to buy from other, cheaper
wheat suppliers before coming to the United States.
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Given the outlook for sizable wheat availability from
other wheat exporters and their readiness to better US
price offers, Moscow may not purchase any US wheat
this marketing year.
Soviet hard currency outlays for grain will, in our
view, be substantially less than the $3.2 billion spent
during the past marketing year. Because grain prices
are expected to drop as much as 10 percent from the
current average level of $90 per ton, we believe
Moscow could cover the upper end of our estimated
need for grain with less than $2 billion.
11 Secret
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Secret
United Kingdom: Gambling
on a High-Technology Future
Prime Minister Thatcher's Conservative government
is making a concerted effort to develop high-technol-
ogy industries as a way to revitalize the manufactur-
ing sector and reduce unemployment-the Tories'
major liability in the next election. So far, her policies
have had a minimal effect; Britain continues to lag
the United States and Japan in this area and is
struggling to stay in competition with the rest of
Western Europe. Although we see no policy that
would dramatically improve short-term prospects for
British high technology, we believe Thatcher's poli-
cies, by addressing some of the underlying problems,
are improving the long-term outlook.
State of British High Technology
Since 1972, the United Kingdom has accounted for
about 10 percent of the OECD's high-technology
exports. While these have risen from $9 billion in
1975 to $26 billion last year, Britain's high-technol-
ogy trade surplus, after peaking at nearly $5 billion in
1980, fell sharply to near balance in 1984 before
recovering to $2 billion last year. Despite a relatively
good export performance, the high-technology sector
has fallen far short of London's expectations in terms
of its benefits to the economy. As a share of GDP,
high-technology output fell from 5.7 percent in 1975
to 5.1 percent in 1983. Probably more distressing to
British officials, however, has been the sector's poor
employment performance. Far from generating large
numbers of new jobs, high-technology employment
has fallen about 15 percent between 1975 and 1985,
Performance of the various industries in Britain's
high-technology sector has been mixed:
? Despite relatively fast growth and good profitability
during the late 1970s, the electronics industry has
declined relative to its competition. Some estimates
put the current value of British electronics produc-
tion at less than half that of West Germany, or
about 70 percent of French production. The United
Kingdom has essentially abandoned the consumer
electronics area to foreign producers.
? British telecommunications technology is equal to
its European counterparts, but Britain ranks only
fifth in the OECD in telecommunications
production.
? In the business machine sector, office machine 25X1
exports have done well, moving the United Kingdom
into second place behind the United States. Britain
is losing ground in computers, however. Since 1976
Britain's share of OECD exports has dropped by
one-third to about 7 percent and the software
industry is in danger of extinction.
? The United Kingdom is one of the world's premier
aerospace producers. Thanks to Rolls-Royce, Brit-
ain is a close second behind the United States in
engine technology and typically accounts for about
30 percent of the OECD's jet engine exports. Brit-
ain no longer produces commercial aircraft on its
own, but through the European Airbus consortium
holds a 12-percent share of the OECD export
market.
? Britain is one of five countries that dominate world
trade in pharmaceuticals, primarily because of
Britain's strong research position in biotechnology.
Consistently accounting for 13 to 14 percent of
OECD pharmaceutical exports, it has been the
third-leading exporter since 1976, behind the
United States and West Germany.
? The United Kingdom remains a strong competitor
in scientific equipment and basic chemicals. Over
the last decade it has increased its share of OECD
exports in both categories while consistently running
trade surpluses. Employment in both industries,
however, has plunged by approximately one-third
Secret
DI IEEW 86-046
14 November 1986
25X1
LZDAI
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United Kingdom: High-Technology Industries' Performance
1975
1980
1981
1982
1983
1984
1985
Exports (billion US $)
8.9
24.2
21.4
21.5
20.9
22.4
25.8
Business machines
1.0
2.6
2.1
2.3
2.8
3.7
4.6
Consumer electronics
0.3
0.5
0.4
0.3
0.3
0.4
0.5
Other electrical equipment
2.2
5.2
4.6
4.8
4.3
4.4
5.0
Pharmaceuticals
0.8
1.7
1.7
1.7
1.6
1.6
1.8
Scientific equipment
0.9
2.4
2.4
1.5
4.5
4.2
4.0
4.0
4.3
4.9
Trade balance (billion US $)
2.3
4.6
3.5
2.8
0.8
NEGL
1.8
0.7
1.0
1.8
2.0
1.5
1.3
1.5
Business machines
-0.1
-0.4
-0.9
- 1.1
-1.4
-1.4
-0.8
Other electrical equipment
0.8
1.6
1.2
1.0
0.2
-0.6
-0.4
Pharmaceuticals
0.6
1.2
1.1
1.0
0.9
0.9
1.1
Scientific equipment
0.2
0.4
0.4
0.2
0.2
0.2
0.4
Basic chemicals
-0.1
1.1
0.9
0.8
0.8
0.7
1.1
Employment (thousand persons)
1,486
1,417
1,319
NA
1,253
1,257
1,257
Aerospace
242
236
243
NA
212
207
208
Business machines
51
53
45
NA
44
46
48
Telecommunications equipment
305
299
281
NA
278
283
280
Consumer electronics and other
electrical equipment
468
467
414
NA
406
409
403
Pharmaceuticals
78
86
84
NA
84
84
85
Scientific equipment
155
107
99
NA
95
99
101
Basic chemicals
187
169
153
NA
134
132
132
Share of manufacturing employment
(percent)
19.4
20.0
20.7
NA
21.7
22.0
23.1
Share of total employment (percent)
6.4
6.3
6.1
NA
5.9
5.9
5.9
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United Kingdom: Share of OECD High-Tech Exports,
1972-85
Percent
Note scale change
11 Computers
High tech /\ ....,.~~
Non-high-tech
manufactures
r
Jet engines
I I I I I I I I I I I I I I I I I I I I I I j I I I I 11 1 1 1 1
0 1972 75 80 85 0 1972 75 80 85 0 1972 75 80 85
I I I I I I I I I I I I I I I -I. I I I
0 1972 75 80 85 0 1972 75 80 85 0 1972 75 80 85
0 1972 75 80 85 0 1972 75
10
I I I I I I I I I I I I I I I I I
80 85 0 1972 75 80 85
15
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Obstacles to High-Technology Development
Inadequacies of Universities and Training. While no
consensus exists among British experts about which
obstacles are the greatest, we regard education and
training as the most intractable impediments to That-
cher's goal of a high-technology future. A number of
academic studies argue that lack of productive links
between universities and industry in the United King-
dom has resulted in university research often being
unnoticed by industry or unrelated to industry's
needs. There is currently little cooperation between
industry and academia, and British universities turn
out an insufficient number of technically skilled grad-
uates. Britain graduates only about 8,000 professional
engineers per year compared with 70,000 in Japan,
65,000 in the United States, and 30,000 in France.
Inefficient R&D Spending. Although R&D spending
has fallen slightly since 1980 in real terms, the United
Kingdom still devotes more than 2 percent of GDP to
research and development-about the same as its
major competitors. One-half of government R&D
spending goes to defense-related technologies, howev-
er. Critics argue that this spending produces relatively
little technology with civilian applications, and, unlike
the US case, does not win sufficient export orders for
British industry. In addition, a large portion of British
R&D goes for fundamental, rather than applied,
research. Finally, in our view, past spending on some
high-profile areas-notably nuclear power-has been
out of proportion to the commercial sales that
resulted.
Shortage of Investment Funding. The growth of
British high-technology firms also has been retarded
by the lack of readily available financing. Over the
last decade Britain has devoted only about 18 percent
of GDP to capital formation, tying it with the United
States for last place among the Big Seven. A high-
technology seminar at Cambridge University recently
charged that because banks lack a thorough under-
standing of new technology they pay inadequate
attention to high-technology industries in their lend-
ing strategy.
Oil and the Exchange Rate. We believe that Britain's
emergence over the last decade as an important oil
producer has had a negative impact on most of the
manufacturing sector, including most high-technology
industries. The shift from oil importer to oil exporter
undoubtedly boosted the pound's value-hurting Brit-
ish competitiveness at home and abroad. While the
pound's real effective exchange rate has retreated
considerably from its 1981 peak, it remains well above
its mid-1970s level
Technology and the "Thatcher Revolution"
Prime Minister Thatcher has publicly labeled the
development and widespread application of high tech-
nology as essential if Britain is to maintain its position
as an advanced industrial nation. In promoting high-
technology innovation, however, Thatcher's basic phi-
losophy is to reduce the state's role in order to foster
private-sector initiative. Consequently the number of
government R&D workers was down to 61,000 in
1984, compared with 77,000 a decade earlier. Thatch-
er believes the best hope for increased commercializa-
tion of science is the development of the close univer-
sity-industry links that are common in the United
States. Nonetheless, spending on universities and
polytechnical schools was cut by 18 percent between
1980 and 1984.
London is also promoting international high-technol-
ogy cooperation, believing that, if Europe is to com-
pete with the United States and Japan, the approach
must not be purely national. As a result the United
Kingdom is very interested in participating in the SDI
program and has become involved in West European
high-technology research programs such as ESPIRIT
in information technologies, RACE in telecommuni-
cations, and, most recently, EUREKA-a European-
wide effort to promote civilian high technology.
Research and Development Funding. Despite That-
cher's cuts, the government provided $5.7 billion in
1985, almost 50 percent of British R&D funding. This
was about double the 1978 level in nominal terms
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Department of Trade and Industry
Research and Development by Activity,
1985/86
Encouraging Foreign Investment. The United King-
dom is also encouraging multinational investment in
high-technology industries. Since 1981, for example,
the Scottish Development Agency has run a program
Percent to attract foreign investment and encourage overseas
Alvey directorate-4.0
Materials, chemicals,
and minerals-5.2 --
electronics firms to establish manufacturing and
R&D activities in Scotland, attracting more than
$200 million annually.
Mechanical and
electrical
engineering-5.7
Research
establishments-6.7
Space technology-16.7 -
Civil aviation and
aeronautics-30.9
though little changed in real terms. The government
changed the emphasis of its R&D support program in
March 1985, however, making more funds available
for collaborative research, advisory services, and
schemes for improving technical skills, and less for
individual company projects.
Assistance for Innovation. As part of Thatcher's
program, the Department of Trade and Industry has
shifted away from aiding older, "smokestack" indus-
tries and is concentrating on newer, more innovative
sectors. In dollar terms, government financial assis-
tance for innovative technologies has more than dou-
bled since 1982 and now exceeds $500 million a year.
The government's major high-technology initiative
offers grants of up to 25 percent of a firm's investment
in introducing new technology in the areas of office
automation, computer-aided design, and robotics. To
promote information technology, London is planning
to provide $280 million over the next five years to help
fund the Alvey fifth-generation computer program,
doubling the level of information technology research
Support For Training and Education. The Thatcher
government is also attempting to increase the pool of
people skilled in high technology. It has, for example,
launched the London Center for Biotechnology to
train manpower and do research in conjunction with
industry and academia. London is also working with
industry to train skilled workers for the information
technology sector, making an additional $60 million
available over the next three years for more higher
education slots in information technology and engi-
neering.
Outlook for a High-Technology Future
We do not believe there is one single strategy the
Thatcher government could take that would quickly
and significantly improve the outlook for British high
technology. Scientists have traditionally been among
the British elite, but engineers and entrepreneurs, the
people needed to commercialize technology, have not.
The government and industry will find it difficult to
encourage the adoption of new technologies as long as
such traditional cultural attitudes remain an impor-
tant part of British life.
The Thatcher government's initiatives have produced
some positive results, but on balance we believe they
have so far failed to significantly stimulate high-
technology development. Efforts to cut government
spending include reductions in the support for science
and technology, and funding for EUREKA will come
out of existing research programs. British scientists
have begun a campaign to protest government science
policy, pointing out that cuts in basic research will
damage Britain's ability to develop new technologies.
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While Thatcher continues to believe that the private
sector will take up the slack as direct government
support falls, we do not think this is likely over the
next few years.
although many large firms are heavily in-
volved in financing R&D, most still assume this is a
government function. In addition, in the current
macroeconomic climate in Britain, companies do not
appear ready or able to support a near-term surge in
civilian R&D spending.
Ironically, Thatcher's free market principles could
also have a short-term negative impact on some
British high-technology producers by cutting into
their domestic market. To reduce costs the Ministry
of Defense is looking abroad for equipment it previ-
ously purchased from British firms, while British
Telecom, since being deregulated, is doing the same.
Implications for Thatcher and the Economy
The mediocre near-term prospects for the high-
technology sector mean that it will not play a major
role in British economic growth during the next two
years. High-technology employment will probably re-
main stable while the sector probably will continue to
increase its share of total manufacturing output.
Looking ahead to the 1990s, the high-technology
sector is likely to make a more significant contribu-
tion to economic growth and employment. It still will
not make a dramatic impact, however, simply because
it is too small-at 5.1 percent of GDP-to pull the
rest of the economy.
One of high-technology's major positive impacts on
the economy could come through its effect on indus-
trial relations. Trade unions have so far had little
success in unionizing high-technology workers, and
the example could spread to other emerging sectors-
especially services-and further reduce the influence
of British unions.
We believe Thatcher's high-technology policies, like
her other economic reforms, have set the stage for
improved British economic performance in the long
run, but she must stand for reelection no later than
June 1988. Public impatience could risk a rejection of
her programs and damage long-term prospects for
technology development. The Thatcher government
will be particularly open to criticism if unemployment
remains high. Opposition leaders especially condemn
Thatcher for pushing high technology while neglect-
ing older industries where employment is shrinking.
The Labor Party's main criticism is that Britain is
being turned into a services economy of low-paying
jobs, and that Tory policies are inadequate to prepare
the United Kingdom to compete in world markets as
North Sea oil production declines during the next
decade.
If Thatcher loses, a government led by either the
Labor Party or the Social Democratic-Liberal Alli-
ance, despite rhetoric about the need to promote high
technology, probably would divert funds to older
industries as a quick fix for joblessness. In our view,
Labor in particular would be under pressure from
unions to adopt policies to increase job security in
older industries at the expense of assistance for
technological innovation.
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Israel: Declining Fortunes
for High-Technology
Industries
Israel has long touted the development of a high-
technology industrial base as the long-term panacea
for its foreign payments deficits, unemployment prob-
lems, and stagnant economic growth. After nearly a
decade of rapid growth, however, many high-technol-
ogy industries are now caught in a recession because
of declining exports, scarce domestic investment
funds, and the government's austerity program.
Although high-technology industry still makes an
important contribution to the economy, its structural
shortcomings and continued funding problems will
prevent it from achieving Israel's ambitious objec-
A chronic foreign payments problem is the catalyst
behind Israel's drive to develop high-technology in-
dustries oriented toward export markets. National
security concerns also inspired the government to
develop high technology for defense to maintain mili-
tary superiority over its Arab adversaries. Highlight-
ing the importance Israel places on defense, more
than one-half the R&D budget is earmarked for 0 76 77 78 79 80 81 82 83 84 85a 86a
military programs. Besides improving its near term
self-sufficiency for sophisticated weaponry, Israel
Estimated.
wants to expand its capability to export arms
Israeli policymakers and industrialists agree that
building a civilian high-technology sector based on a
scientifically and technically skilled work force is the
key to increasing exports. Officials believe such ex-
ports will eventually solve foreign payments problems,
boost employment, and promote economic growth.
The government program calls for civilian high-
technology-related exports to expand from $1.8 billion
in 1984 to $4.4 billion by 1990.
High-Technology Takeoff
ready availability of investment funds. Government
R&D expenditures increased about 50 percent from
1976 to 1985 to approximately $390 million-
accounting for more than 3 percent of GNP compared
to about 2.7 percent in the United States. Bank-
associated finance groups such as the Direct Invest- 25X1
ment Corporation, independent industrial groups, and
public sales of stock also provided money. Larger
Israeli high-technology industries grew rapidly during
the past 10 years on the strength of broad-based
government support, robust foreign demand, and a
Secret
DI IEEW 86-046
14 November 1986
Israel: Research and Development
Expenditures, 1976-86
Million US S ? Civilian IJ Military
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Secret
Israel: High-Technology Exports
I I I I I I I I
0 1976 77 78 79 80 81 82 83 84 85 86a
firms also reinvested a sizable share of company
profits into their R&D programs. Foreign partners,
particularly in the United States, took advantage of
Israel's attractive loan and tax incentives and contrib-
uted funds.
High-technology industries became the major source
of growth in export and employment. Flush with
capital, the number of high-technology companies
climbed from 154 in 1976 to about 770 today. As the
industry grew, high-technology-related exports shot
up from $456 million in 1976 to about $1.9 billion last
year.
Since the formation of the National Unity govern-
ment in 1984, high-technology industries have fallen
on hard times, despite government programs to pro-
mote this sector. As part of Tel Aviv's stabilization
program, former Prime Minister Peres opted to con-
tain inflation and budget deficits at the expense of
R&D spending in both civilian and defense-related
high-technology industries. Budget expenditures for
defense, Israel's largest industry, fell from $3.2 billion
in the fiscal year ending in March 1983 to $2.6 billion
in FY 1986. The sharp cut in military orders coupled
with a scaled-down R&D budget helped throw many
high-technology industries into a recession. A price
freeze and a clampdown on loans and grants aggra-
vated the cash flow problems of an industry that is
critically dependent on new capital.
At the same time, a slowdown in high-technology
exports has compounded the financial woes of many
enterprises that need foreign buyers because of
Israel's small domestic market. Many overseas cus-
tomers are saturated with high-technology products.
Meanwhile, competition for new market shares from
other international suppliers, especially Japan,
Taiwan, and South Korea, is fierce. The government
did not help the situation when it reduced export
subsidies by $77 million and maintained a fixed
exchange rate earlier this year. As a result, the
growth in high-technology-related exports is likely to
come to a near standstill this year compared with
about a 9-percent average annual growth rate during
1980-85.
Shrinking profit margins or outright losses have
forced many high-technology firms, especially in de-
fense, to retrench. The resulting loss of high-technol-
ogy jobs has become a major concern among officials
associated with Israel's R&D programs, according to
the US Embassy. Last year, high-technology employ-
ment fell 3 percent to 37,100. From the Israeli view,
protracted unemployment could lead to a net emigra-
tion of many skilled workers whom Israel considers to
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Secret
be a vital asset. Moreover, Israel must provide attrac-
tive employment opportunities for new college gradu-
ates entering the labor force if it is not to aggravate an
unemployment rate currently more than 7 percent
nationally.
With the prospect of continued weak foreign demand
and a shortage of investment capital, high-technology
exports will remain in the doldrums for at least the
next year. Many of Israel's high-technology firms are
too small and lack the sophisticated plant and equip-
ment needed to compete internationally. Of the more
than 700 existing high-technology firms, 4 percent
control almost three-fourths of the export market.
This situation makes Israel's export capability espe-
cially vulnerable to downswings should the largest
Without sufficient startup capital, new firms will find
it extremely difficult to penetrate existing markets no
matter how sophisticated or competitively priced their
products are. Even the largest firms will be at a
disadvantage because they lack the vital marketing
expertise and overseas sales network needed to attract
new customers or protect existing market shares from
foreign competition. Although still an important per-
former-high-technology-related exports account for
almost one-third of Israel's total sales abroad-we do
not believe such exports will grow rapidly enough to
eliminate Israel's trade deficit.
High-technology industries probably cannot count on
the government to provide enough new business or
other assistance to bail them out of their financial
difficulties. Prime Minister Shamir so far remains
committed to the stabilization policy of his predeces-
sor. At this point, the FY 1987 budget seems likely to
repeat the spending pattern of the previous fiscal year.
Despite industry demands for a devaluation, the
government will oppose major changes that would
destroy fragile gains in economic stability.
Still, Shamir will be careful to balance austerity
against the need to prevent a deeper recession that
would provoke voter resentment-the latest populari-
ty polls indicate unemployment remains a serious
concern with the populace. The government approved
a $109 million supplemental aid package last June
that included $50 million in R&D funding, according 25X1
to the press. The threat of more industrywide bank-
ruptcies already has prompted the Minister of Indus-
try and Trade to propose several export subsidies to
the inner Cabinet, according to the Embassy.
The lack of ready capital from other domestic sources
will remain one of the main obstacles to high-technol-
ogy development. The Tel Aviv Stock Exchange still
has not fully recovered from the bank share debacle
that led to its collapse in 1983. More important, the
government has continued to monopolize the capital
markets to ensure enough money is available to cover
its deficits. Despite recent government moves to relax
its control, including a recent decision to raise the
share the private sector is permitted to borrow, it will
be years before stock market reform reaches the point
that it meets high-technology investment needs.
Despite Israeli efforts to attract more foreign venture
capital, the prohibitively high risk of starting a new
firm in the face of intense competition has been a
strong disincentive for foreign investors. Many foreign
firms probably are also unsure of Israel's ability to
make its tenuous stabilization policy stick over the
long term. Moreover, the Arab boycott and the
possibility of another Arab-Israeli war will remain
overriding concerns in foreigners' reluctance to invest
in Israeli high-technology industries.
Implications for the United States
The new coalition government probably will lobby the
United States for additional debt refinancing and
other assistance to help Israel's foreign payments
problems now that the bloom is off high-technology
industries. By the end of 1986, Israel will have
received another $750 million in emergency US aid,
the second half of a total $1.5 billion package agreed
to in 1985 and the main reason the balance of
payments is now in the black.
Tel Aviv also is likely to seek greater financial
cooperation with the United States, specifically with
the Binational Industrial Research and Development
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Fund, a jointly funded organization whose purpose is
to support US-Israeli R&D partnerships with poten-
tial for commercialization. In addition, Israel may ask
for a more rapid expansion of its Free Trade Agree-
ment to allow high-technology products to enter the
US market duty free.
Tel Aviv also is likely to plead for more US aid-in
addition to the $1.2 billion already provided-to help
cover the cost overruns of the Lavi fighter aircraft.
Largely because the program already employs about
5,000 workers-almost half of whom are scientists
and engineers-the government is committed to the
aircraft's development, which it hopes will attract
foreign investment and create new export markets.
Israeli officials believe that the program will generate
$2 billion in aircraft orders and Lavi-related sales
abroad, according to the defense attache in Tel Aviv.
In addition, Israel will expect the United States to
provide lucrative research contracts in keeping with
the Strategic Defense Initiative (SDI) memorandum
signed last June. The Israelis anticipate that SDI
eventually will provide its financially beleaguered
high-technology defense firms new sources of revenue
and employment and generate spinoffs for the civilian
sector in the form of research funds and commercial
opportunities. Israel already has submitted several
proposals for SDI contracts.
SDI, however, will provide no easy fixes to Israel's
problems. Because of the small scale of most high-
technology firms, their orientation to specific military
applications, and their weak financial base, Israeli
SDI contracts are likely to be for small or specialized
projects and software and thus make only a modest
contribution to improving high-technology-related ex-
ports.
Secret 22
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Secret
Briefs
Philippine Debt
Rescheduling Delayed
According to press reports, negotiations between Manila and foreign banks to
reschedule more than $8 billion in debt repayments have stalled. 25X1
the bankers-convinced that sluggish domestic investment, not a 25X1
Mexican
Debt-Equity Swaps
Asian
Borrowing Declines
shortage of foreign exchange, is the critical barrier to economic growth-are
reluctant to agree to unusually low interest rates and long repayment terms. In ad- 25X1
dition, bankers are worried that such terms would set 25X1
a precedent in negotiations with other major debtor countries. Although ample
foreign exchange reserves-equivalent to about four months of imports-allow
Manila to weather a delay, the deadlock comes at an awkward time for President
Aquino. The pause in the rescheduling talks is yet another deterrent to business-
men who are holding off investing in the Philippines because of concern over
widely publicized coup plotting and the economy's continued weak performance.
the Central Bank's conversion of dollar-denominated debt into pesos.
Mexican officials believe they will be able to swap between $750 million and
$1 billion of foreign debt for equity this year given the progress made so far. Since
the program began in May, Mexico City has carried out 20 debt-equity swaps
totaling $500 million. The swaps provide attractive terms for financing invest-
ments and repaying loans in Mexico-foreign companies buy public-sector foreign
debt at a discount on the secondary market abroad and exchange the debt for pe-
sos at a smaller discount from the Mexican Government. Under the program,
foreign firms have invested $220 million in automobile plants, and another $130
million auto investment is pending. Additional investments have been made in
hotels and assembly plants, but most of the remaining swaps were aimed at paying
off foreign subsidiaries' loans from Mexican banks. In view of Mexico's restrictive
foreign investment climate and limits on the use of the swaps, however, the
program is unlikely to trigger significant new investments. Government officials
may even cut back debt-equity swaps if inflationary pressures emerge as a result of
Medium- and long-term syndicated borrowing by Asian LDCs dropped to $6.8
billion in January-August 1986, from $8.9 billion for the same period in 1985.
Hong Kong and South Korea reduced their foreign borrowings this year even
though lenders have offered more favorable terms.
Financial observers believe this reflects the benefits
to both countries of lower oil prices and interest rates, and the stronger yen, which
makes their exports to the US market more competitive with those from Japan.
23 Secret
DI IEEW 86-046
14 November 1986
25X1
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Zaire Clarifies
Economic Policies
Bangladesh Pressed
To Improve Loan
Recovery Rate
slower commercial borrowing this year.
Meanwhile, Malaysia and Indonesia boosted their borrowing in the Eurocurrency
markets to $1.5 billion during the period, more than double the total for all of 1985
despite stiffer loan terms. The credit ratings of these debtors have plunged because
of falling oil and commodity prices. Indonesia, for example, paid an average spread
of 0.64 percentage point above LIBOR this year compared with 0.29 percentage
point last year. Worsening loan terms-a doubling of the average spread and a
shortening of the average maturity from 11 to eight years-contributed to China's
ern backers do not relax their credit terms
President Mobutu told foreign creditors and donors last week that Zaire would
meet all debt service commitments through the end of this year, but he wants to re-
negotiate Paris Club, IMF, and World Bank agreements for 1987. According to
the US Embassy, Mobutu proposed sending a delegation to Washington later this
month to begin talks with all concerned parties aimed at reducing Kinshasa's debt
payments. The Embassy reports that Mobutu has instructed his new Finance
Minister-who reportedly drafted the ruling party's recent economic proposals
that prompted the IMF and the World Bank to suspend credit disbursements-to
prepare Zaire's negotiating position. Mobutu's recent endorsement of well-
publicized attacks on the austerity program suggests that he is under considerable
pressure to win concessions from international lenders and that negotiations
probably will be contentious. Mobutu abandoned economic reform programs
several times in the past and is likely to threaten to do so again if IMF and West-
rates.
Bangladesh may decide to make some politically sensitive economic reforms to
avoid interruption of balance-of-payments support from the World Bank. The
Bank wants Dhaka to improve agricultural loan recovery rates. According to the
US Embassy, the present rate of recovery is only about 26 percent; the Bank would
like a 60-percent rate before further funds will be disbursed-the IMF has
imposed similar conditions. Dhaka's loan problems reflect crop failures, lack of
institutional support for pursuing defaulters, and loans for political patronage.
President Ershad announced before the recent presidential election that the
government would soon implement an interest forgiveness program if the principal
is repaid by February 1987. Dhaka probably believes that by initiating this
program it will retain Bank and Fund support, even if it fails to improve recovery
Secret
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Secret
Insects Potential
Threat to African
Crops in 1987
Canadian Government
Criticized Over
Aircraft Contract
Global and Regional Developments
According to press reporting, a $35 million multinational effort has prevented
insects from destroying crops in East, Central, and West Africa. The UN Food
and Agriculture Organization (FAO) estimates that, in the Sahel region alone,
extensive insecticide spraying may have saved enough grain to feed 1.2 million 25X1
people this year. Only southern Africa still faces a possible current threat of insect
damage. While spraying may have prevented a catastrophe this year, Africa still
faces potential food shortages caused by its worst insect problem in 60 years. With
next year's rains, eggs laid by this year's record insect populations will hatch. In
addition, spraying in some West African countries was done improperly-actually
increasing the likelihood of insect problems in 1987. To reduce the danger of food
shortages next year and to avoid another costly rush to treat insects, donor nations
may be asked to begin allocating funds and to pre-position resources now for insect
control in 1987. 25X1
National Developments
Ottawa's choice of a Quebec contractor in the hotly contested bidding for the
CF- 18 jet fighter maintenance program may cost the Mulroney government some
of its western political support. The decision in favor of Canadair of Montreal-
which could lead to contracts totaling $870 million over a 20-year period-has 25X1
been labeled unfair by competing Bristol Aerospace. In economically strained
Manitoba, where Bristol is located, politicians have pointed out that the govern-
ment's own review of bids showed that the Winnipeg firm offered greater technical
competence at a lower cost. Government officials, however, contend that the bids
were very close and that the decision was based on the winner's ability to turn
technological spinoffs into exportable products. Bristol executives have countered
that such spinoffs were not an issue when bids were being tendered, but were only
emphasized to justify the government's final decision. Under political pressure
from both provinces, the Mulroney government apparently has opted to bolster its
Quebec support and depend on the $725 million aid package already promised to
farmers to maintain its standing in the west. 25X1
Secret
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Japan Targets
Life Sciences
Tokyo is seeking foreign participation in its Human Frontiers Program-a large
life sciences research effort showcasing Japan's willingness to contribute to world
science. According to the US Embassy, MITI and the Science and Technology
Agency have agreed to cooperate, possibly at Nakasone's insistence, rather than
continue to vie for control of the program. Both agencies see Human Frontiers as
the core of Japanese biotechnology-a field that has been targeted as a key to fu-
ture growth despite limited Japanese research capabilities. Prime Minister Naka-
sone has promised that Human Frontiers will receive "appropriate" funding in the
fiscal year beginning 1 April 1987, but the Ministry of Finance has insisted that
the program be funded within existing budget limits. This would require substan-
tial cuts in projected expenditures of $10 billion over the first 10 years. European
countries, which have also targeted biotechnology as a key to growth and have re-
cently announced their own cooperative program, may be reluctant to participate
in the Japanese program. Thus, the program's future may depend on the United
States for funds and research capabilities as well as for an international dimension.
London To Ease
Fiscal Policy
Secret
14 November 1986
London's announcement last week that it will increase government spending is
undoubtedly designed to improve Tory electoral chances by boosting economic
growth and improving Prime Minister Thatcher's image. In his annual Autumn
Economic Statement, Chancellor of the Exchequer Lawson said the government
will spend an extra $14.2 billion over the next two years on education, social
security, health, and housing. While most observers expected the government to
ease fiscal policy somewhat in the run up to the next election, the size of the in-
crease took many by surprise. Expenditures will grow by 1.25 percent in real
terms-the government originally planned to keep real spending constant. Lawson,
claiming the government remains committed to fiscal responsibility, kept this
year's public-sector borrowing requirement target at $10 billion-which is not
likely to be met-but did not mention a target for next year. The spending hike
will force Lawson to either abandon plans for a tax cut in the budget due in March
25X1
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Secret
West German
Unemployment
Developments
New Egyptian
Prime Minister
Iranian Antiregime
Activities Increase
men condemn it as an attempt to buy votes.
or raise the deficit target significantly. Political commentators are calling the
Chancellor's statement a classic preelection budget ploy, while opposition spokes-
that will sharply reduce the labor supply.
Seasonally adjusted unemployment in West Germany dropped slightly in October,
shrinking for the eighth consecutive month. The downward trend in joblessness
during 1986 has undoubtedly boosted the Kohl government's prospects in Januar-
y's federal election. Beyond the election, however, Bonn probably expects little
additional improvement. West Germany's five leading economic institutes and the
President of the Federal Labor Bureau estimate that unemployment will remain
above the politically sensitive 2 million level next year. Moreover, the Economic
Ministry's forecasting unit believes that 3-percent annual real growth over the next
five years-which it considers to be the maximum possible-will be insufficient to
markedly reduce unemployment. The Ministry has concluded that major reduc-
tions in joblessness must await the demographic shifts expected in the late 1990s
Less Developed Countries
Under the increasing pressure of economic decline, President Mubarak has
appointed Dr. Atif Sidqi as Prime Minister after arranging the resignation of Ali
Lotfy and his Cabinet. Sidqi, like his predecessor, is an economist with no proven 25X1
political skill. US Embassy officials have found him pro-United States, practical,
and honest, but more of a team player than a star. Mubarak probably hopes that
replacing the discredited Lotfy with another technocrat will convince the United
States that he is serious about economic reform and deserves emergency assistance
to help Egypt through its short-term cash crunch. Sidqi's political inexperience,
however, may hamper efforts to forge a unified reform policy among senior
economic ministers. One-third of the 32-member cabinet is new, including
ministers for the important economic and finance portfolios. Moreover, if Sidqi
cannot put his house in order soon, the changeover may seriously disrupt Egypt's
negotiations with IMF and World Bank officials in pursuit of debt rescheduling
and increased aid. 25X1
Popular disturbances are increasing throughout Iran because of fuel rationing,
food shortages, and growing war weariness. 25X1
the imposition of gasoline rationing early last month led to protests in Tehran, 25X1
Esfahan, Mashhad, Shiraz, Bandar-e Abbas, and Gorgan. Protesters clashed with
security forces in some cities after blocking major intersections with their vehicles.
residents in some poor neighborhoods in Tehran 25X1
regime has eased some of its rationing guidelines, removed from office some clerics
who have criticized the regime, and organized progovernment demonstrations. The
growing unrest among the urban lower classes, until now the mainstay of the
clerics' support, strikes at the regime's political base. Tehran might attempt to
took tote streets at night to shout antiregime slogans and to protest food and fuel
shortages. In response to the unrest, the 25X1
Secret
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Tanzania Faces
Wheat Shortage
Shortages and
High Prices
in Kabul
Thailand Scales
Back Eastern
Seaboard Project
Secret
14 November 1986
and hardliners who want a major offensive to win the war quickly.
the international market to finance more imports, but these steps are likely to
bring only a temporary respite. The decline in public confidence is likely to
sharpen divisions in the regime betweeen those who want to wind down the war
alleviate shortages by drawing down further its foreign reserves or by borrowing on
economic crisis will cost it politically important urban support.
unrest is unlikely, the Mwinyi government's slow response to the most recent
With 50 percent of its 1986 wheat crop destroyed by army worms-roughly
25,000 metric tons-Tanzania lacks sufficient wheat stocks to last until the next
harvest, according to the US Embassy. Tanzania has asked the United States and
Canada for emergency food assistance. Canada already has promised 12,000 tons
of wheat now scheduled to arrive in January or February, according to an
Embassy source, but Tanzania does not have the capacity to mill such large
quantities. Until the remaining shortfall is made up by foreign donors, the
government plans to sharply decrease the amount distributed monthly from
government stocks, adding to the hardships imposed by austerity measures adopted
under the new IMF program. This and the almost certain upswing in the unofficial
market wheat prices will hit the urban poor-many of whom eat a morning and
evening meal of only bread and tea-particularly hard. Although widespread civil
controls, according to the US Embassy.
A market survey conducted in Kabul in late October by the US Embassy indicates
some important commodities-including wheat, milk, and kerosene-are in short
supply. The survey also shows that the prices of bread, flour, vegetable oil, and
fresh produce have increased substantially over the last two years. The shortages
probably reflect hoarding by Kabul residents in preparation for winter and the
poor agricultural situation in northern Afghanistan. The Embassy believes,
however, they may also be a sign that the Soviet capacity or willingness to support
the Afghan regime through the provision of goods to Kabul is flagging; in recent
years, imports from the Soviet Union have accounted for an increasing share of the
goods available in Kabul markets. To improve the situation, the regime has begun
to enforce regulations prohibiting the transport of foodstuffs out of Kabul.
Government troops now operate checkpoints on all major roads and are inspecting
all civilian vehicles leaving the city. The regime also is considering official price
Japanese investment as a result of the stronger yen.
According to press and US Embassy reporting, Prime Minister Prem's financially
pressed coalition government has pared down the expensive development program
on Thailand's Eastern Seaboard. In a victory for technocrats who had opposed a
controversial fertilizer plant on economic grounds, Bangkok withdrew its financial
backing for the National Fertilizer Corporation-a move that is likely to end plans
to build the plant and a deep-sea port at Map Ta Phud. Construction on another
port and an export-processing zone near Laem Chabang, however, is slated to
begin in mid-1987. Faced with a tight budget, Bangkok is counting on the private
sector to provide much of the financing for the facility and is hoping for increased
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Secret
South Korean Auto
Sales to US Swell
Trade Surplus
Indonesia Denies
Planning Exchange
Controls
China Cutting Back
US Timber Imports
Chinese Conservation
Fee for Agricultural
Lands
South Korea sold 17,000 Hyundai cars in the United States last month, raising the
number to 130,000 since the line was introduced to the United States in March. A
major forecasting firm predicts that South Korea will ship about 350,000 cars
primarily to the United States next year, when Kia and Daewoo begin their export
drive. South Korea is targeting the inexpensive car market once dominated by
Japanese automakers. South Korean auto sales have set a record for a new import
in the US market. They will account for one-third of the $1.7 billion increase this
year in Seoul's bilateral trade surplus, which will reach about $6.5 billion. Seoul
probably hopes that equity and marketing arrangements with US auto firms will
limit trade complaints from Washington. Seoul has designated autos a strategic
industry that could help absorb a rapidly growing work force; strong US sales are
essential to South Korea's automakers, whose domestic and alternative foreign
Speaking before a group of Indonesian financiers, Finance Minister Prawiro last
month reiterated that Jakarta would not impose foreign exchange controls as a
followup to the 31-percent devaluation in September.
exchange controls might be necessary to support the cheaper rupiah.
some bank depositors were
shifting their funds overseas for fear that the government might freeze bank
deposits. His remarks, however, are not likely to assuage depositors' fears. The
government's credibility is already low following its repeated insistence in
September that no devaluation was contemplated. Some economists also contend
that the devaluation was unjustified on economic grounds-suggesting that
225X1
China-which bought 25 percent of US log exports in 1985 and early 1986-has 25X1
cut back severely on US log purchases while increasing overall wood imports by 15
percent over last year. 25X1
China's total log demand exceeds domestic
supply by 30 percent, and, despite ambitious plans to increase forest cover from 12
to 20 percent of China's land area, China will more than double its wood imports
units from building on the limited agricultural land.
For the first time, individual peasants and collective units that use cultivated land
for nonagricultural purposes in Guangdong Province will be required to pay a
user's fee into a land reclamation fund. Key state construction projects and
enterprises with foreign involvement will be exempt. Guangdong officials plan to
use the fund for reclaiming wastelands and barren hills; and, if successful, the idea
could be adapted by other provinces. Because China's modernization-especially
in industry and transport-requires the use of some cultivated land for expansion,
Guangdong is probably using the fee to restrict the more prosperous peasants and
Secret
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Secret
China Plans
To Improve
Patent Protection
China Licensed
To Produce
West German Buses
China's First
Natural Gas
Cogeneration Plant
Vietnam
Devalues Currency
regulations.
Beijing plans to bolster its fledgling patent system. At a national meeting last
week, the director of China's Patent Bureau said Beijing is drafting supplementary
regulations governing patents for organic engineering, computer software, medi-
cines, and chemicals. The official also said China is establishing a new training
center and a nationwide computer system to handle patent information. China has
received almost 29,000 applications-one-third from abroad-and granted 2,000
patents since initiating its system in April 1985. Foreign firms have been
increasingly distressed at the lack of protection under current law in in such areas
as software and agricultural chemicals, but relief will probably take some time.
Moreover, Chinese officials recently told US Embassy officers that it may take
five years before a copyright law is finished. More pressing concerns, including
bankruptcy and labor reform legislation, may also delay consideration of patent
to ease passenger demands on the railroads.
The Chinese firm NORINCO recently concluded a licensing agreement with the
West German firm NEOPLAN to build 10,000 intercity buses in China over the
next 10 years. The buses will be powered by air-cooled diesel engines-normally
used in armored vehicles-which NORINCO now produces under West German
license. The deal also provides engineering and production assistance, to include
modernization of the Chinese factory. In addition to having the right engine,
NORINCO has the necessary hard currency-probably obtained from arms sales.
NORINCO's expansion into bus production is a good example of the use of
technology and excess production capacity in Chinese military production facilities
for commercial gain. The civilian transport sector desperately needs intercity buses
An imported US natural gas cogeneration power plant recently went on line at
China's largest oilfield, Daqing. The 85-megawatt plant will use the field's excess
natural gas to produce electric power and some of the byproduct steam will be
reinjected into the wells to stimulate oil production. Daqing is an old field with a
growing need for electric power to support water-injection techniques to maintain
production.
are good prospects for additional sales.
The Chinese have purchased an
identical plant for the Karamay oilfield in Xinjiang Province, and we believe there
dimmed by its dismal record to date.
Vietnam's devaluation of the official exchange rate from 15 to 80 dong per US dol-
lar on 8 November will do little to restore the troubled economy. Although the
move coincides with intensified efforts to implement a coherent economic reform
program in preparation for the Sixth Party Congress in December, the black-
market exchange rate is already more than 400 per dollar. Vietnam's leaders have
been trying for the past year to reform the bureaucratic, corrupt, and overly
centralized economy, but their piecemeal approach has succeeded mainly in
spurring inflation and creating shortages of both consumer and producer goods.
The leadership probably will replace numerous middle- and lower-level cadre at
the Party Congress in an effort to spur the reform program, but prospects for
restoring public confidence in the government's ability to manage the economy are
Secret 30
14 November 1986
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Secret
Secret
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