INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706800001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: September 30, 2010
• Sequence Number: 1
• Publication Date: January 6, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Directorate of
Intelligence
6A"~~ ezo-~V
Weekly
International o
Economic & Energy
6 January 1984
t
D11EEW 84-001
6 January 1984
Copy 674
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
International
Economic & Energy
iii Synopsis
6 January 1984
1 Perspective-Western Europe: The Implications of High Unemployment
25X1
Weekly
Energy
International Finance
Global and Regional Developments
National Developments
nternational Financial Situation: Debt Arrearagesl 25X1
17 estern Europe: The Unemployment Crisis
29 /Iraqi Oil Export Options: Financing the War Effort
USSR: Andropov and the Consumer
DC Commodity Problems: Prospects for Natural Rubber
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligenc25X1
25X1
Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective-Western Europe: The Implications of High Unemployment
Western Europe is facing a prolonged period of high unemployment,. possibly 25X1
averaging 12 percent through the end of the decade. This will increase pressure
on political and social institutions within the region and could disrupt
economic, political, and security relations with the United States.
15 International Financial Situation: Debt Arrearages
This article in our series on economic and political aspects of the international
financial situation examines the sharp increase last year in debt arrearages. At
least 52 LDCs and East European nations were behind in their debt
repayments at yearend, compared to 36 countries a year earlier, and the total
amount of arrearages was $30-35 billion compared to $20 billion a year
earlier.
17 Western Europe: The Unemployment Crisis
circumstances.
25X1
Although the recent recession has aggravated the region's unemployment 25X1
problem, the primary causes are structural in nature-rapid labor force
growth, high labor costs, and an inability to restructure economies to changing
Iraq's deteriorating economy has prompted Baghdad to seek ways to expand its
crude oil exports and earn the revenues it needs to continue the war with Iran.
Iraqi Oil Export Options: Financing the War Effort
Secret
DI IEEW 84-001
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
35 USSR: Andropov and the Consumer
The Andropov regime appears to be taking a cautious approach on consumer
issues and does not view major improvements in consumption as an urgent
39 LDC Commodity Problems: Prospects for Natural Rubber
The OECD recession sent rubber sales into a tailspin and badly hurt LDC ex-
porters. Producers probably will be disappointed in the years ahead as
economic expansion in the industrialized countries is unlikely to raise rubber
prices much because of large stocks, increased plantings, and stiff competition
Secret iv
6 January 1984
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
International
Economic & Energy
Weekly
6 January 1984
Perspective Western Europe: The Implications of High Unemployment
Western Europe is facing a prolonged period of high unemployment, possibly
averaging 12 percent through the end of the decade. This persistent trend will
increase pressure on political and social institutions within the region and
could disrupt economic, political, and security relations with the United States.
Many West European countries may enter an era of oscillation between
governments of the left and right. High and rising unemployment has made in-
cumbent governments in Western Europe vulnerable to charges that they are
unable to devise solutions to unemployment. In polls throughout the region,
overwhelming majorities of respondents say unemployment is their countries'
leading economic problem and that governments are responsible for solving it.
With unemployment remaining high even after economies resume growth,
campaign promises of opposition parties will become more appealing.
Youth unemployment poses particularly serious long-term problems for West-
ern.Europe. Much of an entire generation faces poor employment prospects,
sustained periods of joblessness, and underemployment. Resultant feelings of
despair and discontent could engender disillusionment with democratic institu-
tions. College-educated youth, who normally would become their countries'
political and intellectual leaders, will be especially susceptible to political
alienation or extremism when they are unable to find jobs.
Persistent unemployment will exacerbate other social strains within and
among West European countries. Foreign workers are likely to be a particular
target of resentment. In a recent French opinion poll, 51 percent of the
respondents said the repatriation of foreign workers would be the best way to
solve the unemployment problem. The foreign guest workers problem already
troubles West Germany's relations with Turkey and-to a lesser extent-with
Yugoslavia. The issue of labor mobility is a stumblingblock in the European
Community's accession negotiations with Spain and Portugal.
With pressures mounting to reduce the number of unemployed, trade tensions
between Western Europe and the rest of the world-including the United
States-are likely to intensify. The recent disagreements over steel and
agricultural trade may become the rule rather than the exception, as West
1 Secret
DI IEEW 84-001
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Secret Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
European countries look for unemployment cures. The European Community
will take a careful look at imports from the United States that have made in-
roads into European markets, including such disparate items as corn gluten
feed and computers. Futhermore, the Ten will increasingly challenge what
they view as US attempts to take over third-country markets, particularly
The United States will be affected indirectly by West European-Japanese and
West European-LDC trade relations as well. In many areas of trade, Western
Europe views Japan, not the United States, as its chief rival. To protect jobs in
the automobile industry, for example, the United Kingdom, West Germany,
France, and Italy have for a number of years tightly controlled the import of
Japanese autos. More recently, Tokyo agreed to restrict exports to the entire
European Community of a number of products produced by EC industries
whose jobs are threatened. Japanese producers are likely to redouble their sales
efforts in the United States to compensate for sethackc in Western Europe,
Western Europe also
has restricted imports of steel and textiles from developing countries such as
South Korea and Taiwan, and, as a result, these producers may begin to push
sales in US markets more aggressively.
Continuing high levels of unemployment may cause West Europeans to view
trade with the Soviet Union and Eastern Europe more favorably. The
unemployment problem will put pressure on West European governments to
relax-or enforce less strictly-trade restrictions on sales to the Bloc. In
addition, Western Europe's disadvantage in high-technology areas may force
the region to look eastward to sell the less technologically advanced products it
Dim unemployment prospects will make it more difficult for West European
countries to meet their defense commitments to NATO. Expenditures result-
ing from high levels of unemployment have severely strained government
budgets. These expenses seem certain to continue, keeping the guns-versus-
butter issue in the forefront of public debate. With West European budgets
likely to remain tight for some time, pressure to curb defense spending will
mount. Opinion polls in Western Europe indicate strong support for cutting
defense spending and little support for curtailing social programs.
Secret
6 January 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
z
Egypt Adjusts Oil
Pts
Energy
Egypt has cut prices for its two medium crude export blends by $0.50 and
$0.25, respectively, to make them more competitive in European markets. The
price cuts-Egypt's Suez Blend now sells for $28 per barrel and Belayim is
$26.50-follow a similar move by the Soviet Union in early December.
Official. Egyptian prices are close to those in the spot market and serve to un-
dercut OPEC's official prices for similar crudes. The price differential plus
Egypt's comparative advantage in transportation costs should enable Cairo to
market its exports of 270,000 barrels per day. Although the Egyptian move is a
response to the general weakness in the market for those types of crude, a si-
multaneous decision to raise by $0.25 per barrel the price of its heavy Ras
Gharib crude-used primarily for fuel and industrial purposes-reflects
Uncertainty Surrounds Although initial hearings by the National Energy Board on Dome Petroleum's
Canadian-Japanese proposal to ship 4 billion cubic meters per year of liquefied natural gas to Ja-
'1VG Project pan have been completed, the issue of gas supply for the project remains
unresolved. Dome's President reports that volume and price discussions with
British Columbia and Alberta-the provinces expected to supply the gas-
could require an additional nine months. Canadian producers are concerned
that any cost overrun in construction of the LNG facilities will affect their re-
turn because the Japanese selling price has been set. According to the
Japanese buyers, uncertainty beyond mid-1984 could jeopardize the project.
Moreover, a recently proposed reorganization of Australia's LNG export
project to Japan would allow significant Japanese equity in both production
3 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Brazil: Soya Exports a
1980 1,239 5,493 523 1.9
1981 1,812 8,587 1,265 3.5
1982 739 8,130 908 2.4
a October/September marketing year.
b Estimated.
25X1
25X1
rospective Portuguese The Bank for International Settlements agreed last month to extend the
Gold Sale maturity date for Lisbon's short-term $300 million loan from December until
and marketing and could thus give the Australian project priority over the
Brazil's soya exports should reach a record-ty-
on1'he Upswing ing $3.5 billion in the 1984 marketing year (October-September) because of an
upswing in world prices. Since June 1983 world soybean prices have increased
by slightly more than 30 percent, largely because of the drought-reduced US
crop. Brazil plans to pursue export sales aggressively in the coming months, be-
fore next summer's US soybean crop-which is expected to be large-can
drive prices lower. Large soya earnings will help Brazilian efforts to meet its
- IMF target of a $9 billion trade surplus in 1984.
Soybeans Soybean Soybean
Meal Oil
some time in January or February, according to US Embassy officials. The
Soares government probably hopes to meet part of the payment with hard
currency, but an official at the Bank of Portugal expects Lisbon will sell all of
the 23 tons of gold pledged against the loan. The gold sale will lower Portugal's
gold reserves to about 612 tons. Under an agreement drawn up by the
members of the coalition government last year, total gold reserves were not to
drop below 600 tons. Lisbon probably will seek about $1.5 billion in
commercial loans this year to cover part of its projected $2.8 billion foreign ex-
change requirements. Existing commitments from the IMF and other multina-
tional institutions, bilateral assistance, and direct foreign investment should
cover the remainder.
Secret
6 January 1984
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
N EC Steel
easures
Global and Regional Developments
The EC Council last week approved emergency measures to aid the Communi-
ty's ailing steel industry, primarily in response to West German complaints ofd
dumping by other EC producers. While the new measures may provide some
price stability to the EC steel market, they will not solve the key problems of-
weak demand and excess capacity. The new package replaces existing 25X1
guideline prices with mandatory minimum prices for steel products and
establishes a certification system to enable the Commission to monitor country
of origin for intra-EC steel trade. The minimum prices are below the old
guideline levels but still above current market prices. To enforce the new
minimum prices, steelmakers will be required to post a bond of $12 for each
ton of steel sold in the EC; the bond is forfeited if the EC Commission
uncovers a violation of the price guidelines. Although the minimum price
portion of the package went into effect 1 January, technical problems have
delayed implementing the bond and certification systems for at least a week.
Coal Policy in The EC coal industry enters 1984 in disarray. Coal stocks are still growing and
L.,,Disarray demand forecasts for coal use through the year 2000 are down. Cancellation of
the December Energy Council meeting has left several EC energy programs
affecting the troubled coal industry in limbo.
No successor is in place for the coking coal subsidy scheme
that expired at the end of 1983. Proposals are still under debate to provide
grants for coal industry modernization, to provide for worker retraining and to
help new industries locate in areas affected by mine closures. Britain and West
Germany are major proponents of these proposals, but France has been
strongly opposed to EC coal initiatives. The French presidency of the EC in the
first six months of 1984 will reduce prospects for agreement.
EC Agreement The European Community and Spain in mid-December reached agreement on
With Spain on the retention of Spanish controls on Japanese imports following Spain's entry
Janese Quotas into the EC. Madrid will be permitted to retain quotas on 37 Japanese goods
for a period of six years following Spain's planned accession in 1986. Details
on the items involved are being kept confidential while the entry negotiations
are under way. This agreement marks a small forward step in the negotiations,
but more contentious issues-particularly agriculture-remain. The accord
probably was facilitated by the Community's current protectionist attitude
toward Japan. Other EC members, primarily France and Italy, still retain
national quotas on Japan that existed prior to their EC entry.
5 Secret
6 January 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 With Big Seven Grows
Z
shut down operations on 1 January. In addition to relinquishing S-Bahn
operations, East Germany agreed to turn over 119 four-car trains and some
real estate. West Berlin takes over operating expenses and will pay the East
The accord resolves disputes over service and-subsidies that date back to 1945,
when Soviet occupation forces assumed control of rail operations throughout
Berlin. West Berlin Mayor von Weizsaecker called the agreement an "impor-
tant event for Berlin and East-West relations," and the pact received
widespread approval in West Germany. Although East Germany's primary
interest was financial-East Berlin reportedly lost DM 1.5 billion on the
system since 1970-the speed of the negotiations indicates the continued
desire by both East and West Germany to maintain intra-German relations
during the period of East-West tensions over INF deployments
25X1
25X1
25X1
B 71ish Market
demand for platinum group metals (PGM)
25X1
ftrospects,for Platinum
could more than double by 1990, while newly mined supply will grow by less
25X1
than one-third. Recycled metal will make up the supply shortfall.
the price of platinum could more than double by 1990,
while palladium's price could triple. Bullish demand prospects are attributed to
increased use of PGM-bearing catalytic converters as European countries
adopt auto emission standards similar to the United States. In addition,
analysts predict greater commercial use of platinum-using fuel cells, increas-
ing substitution of palladium for gold in electronics applications, and more
widespread popularity of platinum jewelry.
South Africa and the USSR-which account for 95 percent of world PGM
production-will be the primary beneficiaries if large price increases material-
ize. Since 1978 South Africa has earned from $400 million to $1 billion per
year-3 to 5 percent of total foreign exchange earnings-from PGM sales.
Secret 6
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
NIC Trade Surplus The six newly industrializing countries (NICs) recorded an $8 billion rise in
the trade surplus with the Big Seven in the first three quarters of 1983
compared to the same period in 1982. According to Big Seven trade data,
exports of the six NICs rose 8 percent in the nine-month period. Almost all of
the gain came in sales to the United States. Hong Kong and Taiwan led the
group, with export gains of 12 percent. A 7-percent drop in NIC imports
stemmed from cuts by the two Latin debt-troubled NICs-Brazil and Mexico.
In fourth-quarter 1983 and this year we expect NIC imports to approach
prerecession levels and exports to increase further in response to Big Seven
East Germany-West East Germany agreed in late December to transfer West Berlin operations of
Berlin Agree on the S-Bahn, an urban rail system, to West Berlin authorities. The deal
Rail-Line concludes negotiations begun in October after East Germany threatened to
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
NICs: Seasonally Adjusted Trade Balance With the Billion US $
Big Seven a
Exports
67.4
16.4
16.8
17.7
16.7
17.7
18.3
19.1
Imports
64.3
17.6
16.5
16.2
13.9
14.5
15.4
16.9
Balance
3.1
-1.2
0.3 .
1.5
2.8
3.2
2.9
2.2
Brazil
Exports
10.5
2.6
2.6
2.6 ?
2.5
2.5
2.8
2.8
Imports
7.1
1.8
2.0
1.8
1.4
1.4
1.6
1.4
Balance
3.4
0.8
.0.6
0.8
1.1
1.1
1.2
1.4
Mexico
Exports
18.3
4.2
4.3
5.2
4.7'
4.7
4.9
5.1
Imports
15.5
5.1
4.3
3.9
2.2
2.8
2.7
3.2
Balance
2.8
-0.9
0
1.3
2.5
1.9
2.2
1.9
Hong Kong
Exports
9.6
2.4
2.5
2.5
2.4
2.9
2.5
2.6
Imports
9.9
2.7
2.5
2.5
2.2
2.3
2.6
2.8
Balance
-0.3
-0.3
0
0
0.2
0.6
-0.1
-0.2
Singapore
Exports
5.0
1.2
1.3
1.2
1.3
1.2
1.4
1.5
Imports
9.9
2.6
2.4
2.5
2.4
2.6
2.7
2.6
Balance
-4.9
-1.4
- 1.1
-1.3
- 1.1
-1.4
-1.3
- 1.1
South Korea
Exports
10.6
2.7
2.7
2.7
2.5
2.7
2.9
3.1
Imports
11.8
2.8
2.8
3.1
3.2
3.1
3.2
3.6
Balance
-1.2
-0.1
-0.1
-0.4
-0.7
-0.4
-0.3
-0.5
Taiwan
r
Exports
13.4
3.3
3.4
3.5
3.3
3.7
3.8
4.0
Imports
10.1
2.6
2.5
2.4
2.5
2.3
2.6
3.3
Balance
3.3 .
0.7
. 0.9
1.1
0.8
1.4
1.2
0.7
a NIC exports to the Big Seven were derived by dividing imports
from the NICs by 1.1, while NIC imports were obtained using Big
Seven export data. Both import and export data are valued f.o.b.
b For some Big Seven countries, third-quarter data are estimates.
7 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 complex in Montana.
The Soviet Union has sold between $200 and $400 million annually. Higher
prices could reduce US reliance on PGM imports-currently about 85 percent
of consumption-by making domestic production feasible at the Stillwater
National Developments
Developed Countries
Pickup in Japanese Japan's GNP grew at a seasonally adjusted annual rate of 6.2 percent in the
z
1983, which began in April.
third quarter, well above the rate for the first half of the year. Domestic
demand contributed most of the increase as private consumption picked up and
private housing investment rebounded. Net exports, which were up by 9.4
percent, also continued to fuel the expansion. The third quarter results make it
likely that Tokyo will reach its target of 3.4 percent growth for fiscal year
For fiscal year 1984 the Economic Planning Agency is expected to announce a
growth target of at least 4 percent. The Ministry of Finance-which is trying
to hold down government spending to reduce the persistent budget deficit-
had lobbied for a target closer to 3 percent. The opposition parties' new
strength in the Diet following the December election; however, is likely to
increase pressure on the government to make fiscal policy less austere than
originally planned. Prime Minister Nakasone has endorsed the 4-percent
target, and private forecasters are calling for growth of 4 percent or more.
YJ/est German Business Business optimism, one of West Germany's most closely watched leading
kotimistic economic indicators, reached a four-year high in Nnvemher Accordin
to the
g
regular survey by the Ifo Economic Research Institute in Munich, manufac-
turing, retail sales, and construction were the sectors expressing the most
optimism. Ifo, along with almost all forecasters, recently raised its 1984 real
GNP projection to 2.5 to 3.0 percent. Resurgent exports and strong investment
are the main factors for the upward revision.
Isrgeli Budget'
7'aneuvering
Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Amid public threats by most of the small parties making up Prime Minister
Shamir's parliamentary majority to leave the coalition because of opposition to
Finance Minister Cohen-Orgad's austerity budget, the Cabinet last Sunday
agreed to an expenditure ceiling that would limit real outlays in FY 1984-be-
ginning on 1 April-to about the same level as the current budget. Although
budget allocations to individual ministries must still be negotiated, an
increasing share for debt-servicing costs will result in real declines in social
welfare programs. The smaller parties' opposition centers on proposals to
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
freeze settlement activities, to eliminate free high school education, and to
sharply curtail other social programs, according to press reports. TAMI, with a
low-income constituency, has reportedly presented an alternative program that
would boost taxes on higher income groups, including a proposal that would re-
quire Israelis earning more than $18,000 annually-less than 10 percent of all
households-to give up a month's salary.
Strikes and work slowdowns have increased recently, and more are planned as
workers demonstrate opposition to the erosion of real wages by record price
hikes in recent months and to Cohen-Orgad's call for a 12-percent cut in real
wages next year. Civil service workers in the Foreign Ministry were the latest
to join protest action in government offices by refusing to receive foreign
diplomats or members of the public, according to press reports; tax officials are
refusing to collect taxes, Interior Ministry workers are not issuing passports or
identity cards, and workers in the Ministry of Labor and Social Affairs have
stopped payments to institutions for delinquent youths and the mentally
handicapped. The Deputy Secretary of the Histadrut, the large labor organiza-
tion, told a US Embassy officer that he is afraid that the debate over cutting
real wages and the worsening economic situation could lead to widespread
New Turkish Economic Turkish Prime Minister Ozal last week announced measures that address his
Measures government's main economic goals-reducing inflation, minimizing state
intervention in the economy, and making the economy more responsive to
market forces. The new statutes:
? Permit Turks to hold unlimited foreign exchange deposits, whereas previous-
ly only Turkish workers abroad were allowed to do so.
? Direct the Central Bank to change up to $3,000 worth of lira for any Turk
traveling abroad.
? Lift restrictions on the number of foreign trips a citizen can make.
? Allow commercial banks to buy and sell foreign currencies in line with
margins set by the Central Bank.
? Make it legal for Turks to buy foreign consumer goods in Turkey.
Lifting foreign exchange controls is a first step toward making the lira readily
convertible on the world market. The hope is that this will attract needed
foreign investment. The easing of import restrictions are intended to dampen
inflation-currently running about 35 percent-by pitting Turkey's protected
manufacturers against foreign competition. The government hopes increased
competition ultimately will improve the quality of output and help boost
exports-critical to Ozal's longer term development plans.
9 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
South African
Fi 'ncial Woes
cracy.
The South African Government is looking for ways to deal with its budget cri-
sis. Pretoria has ordered spending cuts in
all areas except defense and education. The government reportedly will raise
the national sales tax from 6 to 8 percent next month as well. Pretoria has had
difficulty controlling spending in the fiscal year that ends on 31 March, in part
because of the costs of stepped-up military operations in Namibia and of
drought relief. Revenue, meanwhile, is lagging budget projections because of
recession-real growth declined by 3 to 4 percent last year-and low gold
prices. The budget situation is unlikely to improve much until later this year
unless gold prices rebound. the
government's financial problems could delay constitutional reforms set for
midyear because they will entail a costly expansion of the legislative bureau-
Less Developed Countries
Tyhisian Bread Riots The rioting that erupted late last week in Tunisia's poorer southern and central
Indian Inflation
Persists Despite'
Buyer Harvest
Secret
6 January 1984
the higher prices.)
regions was in anticipation of the 125-percent bread price increase effective
January 1. By early this week the riots-spurred by university and high school
students-had spread north to the capital and forced President Bourguiba to
declare a state of emergency and to order the military to quell the distur-
bances. Press reports indicate at least 20 casualties so far. The removal of
subsidies is part of efforts to reduce the budget deficit and ease foreign
payments problems. On Tuesday Prime Minister Mzali in a televised address
remained firm on the removal of bread subsidies but stressed that the middle
and poorer classes would receive welfare assistance to ease the adjustment to
pressures.
An upsurge in prices has heightened unrest and reduced the chances that
Prime Minister Gandhi will call for parliamentary elections early this year.
Gandhi and her advisers had expected recent record harvests to moderate price
rises and were considering elections a year before they are due. Increases in
wholesale food prices, however, accelerated from an annual rate of 6 percent
last spring to 11 percent in December. Although agricultural prices usually
taper off as the autumn crop reaches the market, this year price pressures have
remained strong because of higher procurement prices, strong domestic
demand for edible oils, and more buoyant international markets for traditional
agricultural exports such as cotton, tea, and spices. Even small food price
increases concern the government because the urban and rural poor are a
potent political force at election time. The opposition parties have been quick
to blame the unexpected price rise on extravagant government spending,
deficit financing, and corruption. In our view, Prime Minister Gandhi will
delay parliamentary elections until inflation subsides and may increase
imports as well as reduce exports of essential commodities to ease price
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Mexican Flexibility on Mexico City is showing flexibility in implementing new foreign investment
Foreign Investment
tough local content requirements.
guidelines. The strong reaction by foreign businesses to restrictive government
policies probably has caused this change. According to the US Embassy, a
major foreign auto firm in Mexico had threatened to close its operations. After
receiving favorable assurances from Mexico City, however, the company in
mid-December reached a preliminary agreement to stay and carry out earlier
investment plans. By dropping public opposition to government policies and
building a $500 million plant in northern Mexico, the company received
substantial financial incentives from the government and an exemption from
by line.
Mexico City for the second time has postponed publishing strict new regula-
tions on the production and marketing of pharmaceuticals. Business sources
have told the US Embassy that the government now expects the decree to be
published in February or March. In the meantime, industry representatives are
holding regular meetings with government officials to redraft the decree line
If Mexico City fails to take into account business views before the final
pharmaceutical decree is published, this would further sour the investment
climate. International businessmen believe nationalistic Mexican laws are a
major impediment to direct foreign investment. Although recent compromises
may encourage firms with large commitments to stay in Mexico, we believe
the government will have to go much further to attract new investors.
25X1
11 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Yu oslav Resistance to Prime Minister Planinc's warning in late December that Yugoslavia cannot
ome IMF adopt all of the IMF's policy recommendations in 1984 is meant to secure
Recommendations concessions from the Fund and to show domestic opponents that she will not
sacrifice national interests to secure foreign exchange. Government leaders
especially object to two IMF proposals. The Fund wants Yugoslav enterprises
to turn over to the National Bank all foreign exchange earned through export
sales, and it insists that Belgrade raise interest rates above the rate of inflation.
Belgrade is reluctant to adopt these measures partly because they would
undercut arrangements with the republics and provinces-achieved with great
difficulty-on foreign exchange and interest rate policies.
without providing a path for economic recovery.
Planinc has stated that Yugoslav authorities will establish a "demarcation
line" beyond which IMF proposals would constitute interference in the
country's affairs. According to US Embassy sources, the leadership has drawn
up a go-it-alone program in case negotiations with the IMF and foreign
creditors fail. We believe, however, the authorities realize that a breakdown in
negotiations with creditors would disrupt foreign trade and damage the
economy. Planinc's warning thus may be intended to deflect domestic critics
opposed to relying on financial ties to the West. It also is a plea for Western
understanding of the limits of her power in Yugoslavia's cumbersome decen-
tralized system. Go-it-alone policies would cause even greater hardships
Y oslav Price Hikes On 24 December the Yugoslav Government announced price hikes for certain
nd a Freeze essential products and a freeze on most other goods and services for six
months. Prices were raised for electricity, coal, train fares, petroleum products,
chemical products, laundry detergents, tobacco, and cooking oil in line with
IMF recommendations to eliminate underpricing of these goods. Belgrade's
reimposition of a general price freeze-five months after lifting a yearlong lid
on prices-is a desperation bid to suppress inflation, which is now running at
55 percent. Belgrade's inability to slow inflation was a major failure in
Yugoslavia's 1983 economic stabilization program. The new price freeze,
however, fails to attack its causes. Moreover, the government did not take
steps to control wages; enterprises soon could be constrained by fixed prices,
rising costs, and government pressure to increase industrial production for
export.
u
ff- ngary's Slow
Progress With
Stabilization
Secret
6 January 1984
Hungary's economic stabilization program for 1984, awaiting final IMF
endorsement, is unlikely to avert debt-servicing problems in the coming year.
The program calls for only a minimal slowdown in the economy from roughly
1-percent growth in 1983 to no growth this year. The main burden of
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
adjustment will fall on investment, which is to decline by 8 percent, while real
disposable income is projected to fall only 1 percent. Hungary's failure to meet
similar targets last year resulted from the buoyant private economy and
excessive credit expansion. The leadership plans to rely on more restrictive
credit policies, tougher restraints on wages, and reductions in subsidies. It
promises to begin a more comprehensive structural reform program later in
1984 25X1
The regime probably will cut corners in carrying out some of the toughest
measures of the program, jeopardizing the balance-of-payments targets. The
leadership remains reluctant to restrict consumption and continues to resist
reining in the expanding private sector, which provides a supplement for the
official economy. The IMF estimates that following the program could yield a
1984 current account surplus of $400 million, up slightly from the $300
million surplus last year. Budapest will need to borrow at least $1.1 billion-
including $450 million from the IMF-to cover the remainder of its debt
repayments of $1.5 billion. Failure to control domestic demand would generate
more difficult debt-servicing problems by increasing credit requirements.
oviet Efforts To Spur Two party-state decrees in early December sharply criticized the halfhearted
Labor Brigades way Soviet industry has introduced the brigade system of organizing labor-
small groups of workers that are assigned resources and tasks according to a
contract with enterprise management. The lack of success of the high-visibility
brigade program is another example of the difficulty Andropov has encoun-
tered in implementing even relatively moderate reforms. The new decrees
listed several incentives for brigade leaders, which are designed to breathe new 25X1
life into the system but failed to provide monetary rewards for enterprise
managers to encourage the introduction of brigades; this omission makes it
likely that the decrees will have minimal impact. 25X1
The Soviet leadership has been pushing hard for extensive use of brigades since
1979, touting the brigade method as an effective way to raise productivity
through enlisting worker self-interest. A worker's remuneration under the
brigade system is tied both to the output of the brigade as a whole and to his
individual contribution to that output. Andropov has given even greater
emphasis to the brigade system than Brezhnev, making it a key element in his
plans for revitalizing the economy. Although 60 percent of industrial workers
have been organized into brigades, most brigades, according to the December
decree, exist in name only or have not been integrated into actual production.
Only half of the brigades are operating under contracts, and wages continue to
be paid on an individual basis, ignoring the link with brigade performance. A
key reason for the limited use of brigades appears to be opposition by
ministerial and working-level managers, who see the contractual arrangements
of the brigade system as diluting their authority over workers.
13 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
International Financial Situation:
Debt Arrearages
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
The continuing international debt crisis is pushing
a growing number of countries into arrears on their
external debt repayments. At yearend 1983, at
least 52 LDCs and East European nations were
behind on their debt repayments, a sharp jump
from the previous high mark of 36 countries at the
end of both 1981 and 1982. We estimate the total
amount of debt arrearages to be $30-35 billion at
yearend 1983, a substantial increase from the 1982
total of $20 billion and the 1981 mark of only $7
billion. The $30 billion arrearage figure equals
about 20 percent of scheduled 1983 debt repay-
ments for these countries.
An important development during 1983 was the
emergence of large-scale arrearages in key debtors:
in arrearages in the past three years. About $7.5
billion of this total is owed to Western govern-
ments. Several West European countries are anx-
ious to conclude rescheduling agreements, but
Warsaw's negotiations with the Paris Club are
moving slowly. Another $5 billion in payments
are overdue to creditors in socialist countries,
Latin America, and the Middle East. Unlike
other problem debtors, Poland is roughly current
on payments to Western banks. Rescheduling
agreements have covered most of the payments
due to the banks between 1981 and 1983, and
Warsaw has devoted its limited resources to meet
the remainder.
Countries With External Payments Arrearages at
Yearend 1983
Argentina
Bolivia
Brazil
Chile
Costa Rica
Cuba
Dominican Republic
Ecuador
El Salvador
Guatemala
Guyana
Haiti
Honduras
Jamaica
Mexico
Nicaragua
Paraguay
Peru
Venezuela
Africa/Middle East
Benin
Cameroon
Central African Republic
Chad
Comoros
Congo
Egypt _
Gambia, The
Ghana
Guinea
Guinea-Bissau
Ivory Coast
Jordan
Liberia
Madagascar
Mali
Mauritania
Nigeria
Senegal
Sierre Leone
Somalia
Sudan
Tanzania
Togo
Uganda
Zaire
Zambia
Asia
Vietnam
Western Samoa
Poland
Romania
? Brazil's debt arrearages were estimated
to be between $2-3 billion in
late December 1983. Most financial observers
expect these arrearages to be eliminated when the
first tranche of the $6.5 billion loan from com-
mercial banks is disbursed, which we expect to
occur in January.
Brazil is likely to face a .
renewed buildup of arrearages during first-half
15 Secret
DI IEEW 84-001
6 January 1984
25X1
25X1
25X1 I
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
? Venezuela's arrearages were about $1 billion in
December
with most of the total consisting of
private-sector interest payments. Venezuela has
angered bankers by intentionally withholding re-
payments even though liquid foreign reserves are
estimated by one source to be $5.7 billion. Bank-
ers have insisted that interest arrearages be
brought current before beginning debt renegotia-
tions, and we do not expect a quick resolution to
this issue.
? Argentina currently has interest arrearages of
about $2 billion, according to press reports. The
most serious problem is in the private sector
where many arrearages are older than 90 days
and face nonperforming status in US banks,
We do
not expect Argentina's arrearages to be cleared
up until the current rescheduling efforts are
completed.
? Philippine debt arrearages have been mounting
since Manila initiated a moratorium on principal
repayments in mid-October 1983.
? Nigeria is in arrears on its short-term trade-
related debt by as much as $5 billion
Lagos completed two
refinancing agreements with its bank creditors
during the past six months, but arrearages have
remained at high levels. ~
~ Efforts to resume debt
negotiations by the new military government-
Secret
6 January 1984
which ousted former President Shagari last week-
25X1
end-are likely to be delayed as the new regime
consolidates its position.
25X1
In contrast, Mexico has sharply reduced its debt
arrearages over the past several months as a result
of successful debt reschedulings and improved eco-
nomic performance. We estimate arrearages to be
as much as $2 billion in late 1983, most of which
are accounted for by the private sector. We believe
further progress in private-sector debt rescheduling
efforts should allow Mexico to eliminate most of its
arrearages over the next few months.
The most important aspect of debt arrearages to
US commercial banks involves the delay of interest
payments beyond 90 days. If interest on a loan is
more than 90 days overdue, banks must classify the
loan as nonperforming and may need to set aside a
portion of their capital as a reserve against the
loan. Such a move on a large scale could severely
damage the profitability and the lending ability of
several large US banks.
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Western Europe:
The Unemployment Crisis
Western Europe is struggling with its highest levels
of unemployment since the reconstruction period
following World War II, and the situation is ex-
pected to deteriorate further over the rest of this
decade. As of mid-1983, 18 million workers-10.6
percent of the labor force-were jobless. Although
the recent recession has aggravated the region's
unemployment problem, the primary causes are
structural in nature-rapid labor force growth,
high labor costs, and an inability to restructure
economies to changing circumstances. Although
labor costs should rise less rapidly over the next
several years, weak economic growth and inade-
quate restructuring efforts likely will cause the
region's unemployment rate to rise slowly through-
out the decade and exceed 12 percent by 1990.
Severity of the Problem
Unemployment has reached record levels in nearly
all of Western Europe. The composition of the 18
million unemployed is nearly as disturbing as the
overall levels:
? By mid-1983 a full 40 percent of those unem-
ployed had been out of work for more than a year.
? Prime working-age males (aged 25 to 54) account
for about one-third of total unemployment.
? One out of every four persons between the ages of
15 to 24 is unable to find work in Western
Western Europe:
Midyear 1983 Unemployment
Rate
(percent)
Number Unemployed
(thousands)
Total
10.6
18,306
Big Four countries
10.1
9,577
West Germany
8.9
2,320
France
8.5
2,029
Italy
9.7
2,258
United Kingdom
12.4
2,970
Smaller countries
11.8
8,729
Austria
3.2
145
Belgium
11.9
510
Denmark
10.6
285
Finland
6.8
150
Greece
10.0
370
Iceland
1.3
1
Ireland
14.2
146
Luxembourg
1.3
2
Netherlands
17.4
841
Norway
3.4
61
Portugal
9.0
390
Spain
17.5
2,141
Sweden
3.4
135
Switzerland
0.8
52
Turkey
20.0
3,500
Europe.
The severity of Western Europe's employment
problems are even more apparent when comparing
US and West European job creation during the
1970s. During that period, when economic growth
was about comparable for the two areas, the West
Europeans added only 5.3 million new jobs, despite
an 11.7-million increase in the labor force; the
United States, meanwhile, added 20.6 million jobs
with a jump of 24.2 million in the labor force. If job
creation in the United States had been as poor as it
was in Western Europe, by 1980 the US unemploy-
ment rate would have topped 16 percent.
The Causes of Unemployment
Structural economic deficiencies are the main fac-
tors contributing to Western Europe's unemploy-
ment problem. During the 1970s, demographic
trends boosted the labor force growth rate at the
same time that economic growth slowed; wage and
Secret
DI IEEW 84-001
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Western Europe and the United States:
Employment
60 1970
Western Europe
-United States
nonwage labor costs rose rapidly, encouraging em-
ployers to trim work forces; and new industries
were created too slowly to offset jobs lost in
noncompetitive old-line industries. In 1982, these
structural problems are estimated to have account-
ed for slightly more than 40 percent of the region's
unemployment. The West European recession,
which started in late 1980, caused an additional 27
percent of the unemployed, and frictional factors-
normal labor turnover-accounted for the remain-
der.
Demographics
Western Europe's labor supply grew unusually fast
in the past decade. From 1970 to 1980 the labor
force expanded 7.7 percent-adding almost 12
million more, prospective workers-compared with
4.3 percent growth, or 6.3 million workers in the
1960s. Much of the rapid labor force growth was
Secret
6 January 1984
Western Europe: Population and Labor Force
Changes, by Age Group
Population
Labor force
caused by the changing age distribution of the
population. The number of people in the prime
working-age category-aged 25 to 54 jumped
dramatically and was coupled with increasing fe-
male participation rates. Moreover, in the 1975 to
1980 period, the number of youths aged 15 to 24
looking for work jumped sharply for the first time
in two decades because the downward trend in
youth participation rates leveled off.
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Surging labor costs depressed the demand for labor
during the 1970s. In the Big Four countries, total
real labor costs in manufacturing rose by an aver-
age of 60 percent between 1970 and 1980; in
contrast, real labor costs in the United States rose
only about 12 percent during the same period. With
this rapid escalation in the price of labor, compa-
nies increasingly found ways to get more output out
of each worker-either by buying more productive
equipment or by eliminating featherbedding. For
the most part, the productivity savings did not
result in direct layoffs; firms simply did not replace
retiring workers.
Labor costs in Western Europe rose rapidly be-
cause both wage and nonwage costs accelerated.
The increase in direct wages accounted for more
than one-half of the advance in total labor costs.
Unions in Western Europe were particularly pow-
erful in the early 1970s when economic growth was
buoyant and they were able to secure sizable wage
gains. For the decade real wages in Western Eu-
rope grew about 40 percent, whereas in the United
States real wages grew only 2 percent. Nonwage
costs, generally in the form of employer-paid fringe
benefits, were rising even more rapidly. For the Big
Four countries, these employer expenses more than
doubled in real terms over the last decade and in
several West European countries began to rival the
cost of direct wages.
Restructuring
Western Europe's inability to adjust its economic
base in the face of stagnant or declining output in
traditional industries such as steel and textiles
further depressed labor demand. Rapidly increas-
ing labor costs and the advancing industrial sophis-
tication of many LDCs have resulted in a number
of old-line West European industries losing domes-
tic markets to import competition. At the same
time, Western Europe's agricultural employment
has dropped dramatically-down 18 percent from
1970 to 1980. The region, however, has not moved
Big Four and the United States:
Index of Total Labor Costs, Wages,
and Nonwage Costs
Index: 1970=100
Labor costs, 'both wage and nonwage, rose faster in the
Big Four than in the United States ...
Real labor 200
costs
100 1970
Real wages 200
Real nonwage 400
costs
100 1970
West Germany
-France
-Italy
75
-United Kingdom
United States
Secret
6 January /984
80
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
rapidly enough into new employment areas such as
high technology and services-two areas of excep-
tional growth in the United States-to offset em-
ployment losses elsewhere.
The region's inability to shift from "smokestack"
industries to new, more advanced industries and
services is a result of a number of complex and
interrelated economic, political, and social factors:
? Much of labor and management in Western
Europe appears satisfied with the status quo,
preferring not to adopt new technology.
? A plethora of government regulations within
West European countries has added innumerable
delays and expenses to doing business and has
decreased the private sector's flexibility.
? Venture capital is not readily available in West-
ern Europe, and this has inhibited investment in
the innovative, emerging companies needed to
foster restructuring.
? The small size of individual West European
country markets forces many companies to seek
foreign markets, thereby adding more uncertain-
ty to corporate planning and increasing market-
ing and production costs.
Government Policies
For the most part, governments are concentrating
their efforts on relatively insignificant employment
programs-such as reducing working hours and
government subsidies for hiring long-term unem-
ployed. These do little more than redistribute the
present unemployment. Few countries are encour-
aging overall employment by holding down or
reducing labor costs. Moreover, governments are
continuing to prop up outmoded, uncompetitive
industries rather than promote investment in new,
more dynamic industries; according to the EC
Commission, subsidies by member governments to
their faltering steel industries totaled an estimated
Secret
6 January 1984
$20 billion between 1975 and 1981, and nearly that
much again is planned through 1985. A number of
West European governments are implementing
small-scale programs to promote new industries in
the high-technology area; these are unlikely to
advance significantly the region's high-technology
competitiveness. Indeed, the need for government
programs reflects on the lack of private initiative.
Prospects
Based on simulations of the CIA's Linked Policy
Impact Model we expect the unemployment rate in
Western Europe to remain in double digits through
the end of the decade. For the region as a whole,
the rate probably will edge up to 12 percent before
trending downward after 1990. This forecast is
based on several key assumptions:
? Labor costs will rise less rapidly than during the
1970s.
? More prospective workers will enter the labor
force than in the past decade.
? Economic growth for the region as a whole will
average 2.4 percent annually from 1985 to 1990.
? Restructuring will continue to proceed slowly.
Labor cost trends in the remainder of the 1980s
should have a positive impact on employment be-
cause a number of factors affecting both wage and
nonwage costs are working to limit the rise in total
labor costs. Excess labor will continue to flood
labor markets, thus putting downward pressure on
real wages. The French, West German, and Dutch
Governments already are cutting their generous
social welfare programs, which in turn should
reduce the growth in the employer's share of
payroll taxes. Other governments are likely to
follow suit.
Labor force trends, however, will be even more of a
problem during the 1980s than in the previous
decade. Projections by the OECD show that the
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Western Europe: Baseline Projection for Economic
Conditions and Unemployment
Real GNP growth rate
0.5
0.8
2.2
2.4
2.4
2.4
2.4
2.4
2.4
Labor/capital cost ratio
2.2
2.0
2.1
2.2
2.2
2.2
2.2
2.2
2.2
Labor force growth
0.8
0.8
0.8
0.8
0.8
0.7
0.7
0.7
0.6
Employment growth
-0.5
-0.7
0.7
0.5
0.5
0.4
0.5
0.5
0.5
Unemployment rate
9.8
11.1
11.2
11.5
11.8
12.0
12.2
12.4
12.5
Big Four
Real GNP growth rate
0.4
0.9
2.2
2.4
2.4
2.4
2.4
2.4
2.4
Labor/capital cost ratio
2.2
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
Labor force growth
0.6
0.6
0.6
0.6
0.5
0.5
0.4
0.4
0.3
Employment growth
-1.1
-0.6
0.5
0.3
0.3
0:3
0.3
0.3
0.4
Unemployment rate
9.4
10.5
10.6
10.9
11.2
11.3
11.4
11.5
11.5
West Germany
Real GNP growth rate
- 1.1
1.0
2.9
2.5
2.5
2.5
2.5
2.5
2.5
Labor/capital cost ratio
1.9
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
Labor force growth
0.3
0.3
0.3
0.3
0.2
0.1
0
-0.1
-0.2
Employment growth
-2.3
-1.5
0.3
1.0
0
0
0
0
0
Unemployment rate
7.5
9.1
9.2
9.4
9.6
9.7
9.7
9.7
9.5
France
Real GNP growth rate
1.9
-0.1
0.2
2.5
2.5
2.5
2.5
2.5
2.5
Labor/capital cost ratio
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
Labor force growth
1.0
1.0
1.0
1.0
0.8
0.6
0.6
0.6
0.4
Employment growth
-0.3
-0.2
1.0
0.6
0.5
0.5 _
0.5
0.5
0.5
Unemployment rate
8.5
9.6
9.6
9.9
10.2
10.3
10.4
10.4
10.3
Italy
Real GNP growth rate
-0.3
0.4
2.9
2.5
2.5
2.5
2.5
2.5
2.5
Labor/capital cost ratio
1.0
0.7
1.0
1.0
1.0
1.0
1.0
1.0
1.0
Labor force growth
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Employment growth
-0.4
0
0.1
0.2
0.4
0.6
0.7
0.8
1.0
Unemployment rate
9.3
9.8
10.1
10.4
10.5
10.4
10.3
10.0
9.6
United Kingdom
Real GNP growth rate
1.5
2.3
3.0
2.0
2.0
2.0
2.0
2.0
2.0
Labor/capital cost ratio
3.0
2.7
2.7
2.7
2.7
2.7
2.7
2.7
2.7
Labor force growth
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
Employment growth
-1.0
-0.4
0.5
0.3
0.3
0.2
0.2
0.2
0.2
Unemployment rate
12.3
13.3
13.5
13.8
14.2
14.6
15.1
15.5
16.0
Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
labor force will expand by about 13.7 million
people during the present decade-an 8.4-percent'
increase compared with a 7.7-percent increase dur-
ing the 1970s. In other words, Western Europe will
need to create 13.7 million new jobs just to keep
unemployment steady in the 1980s; during the past
decade employment rose by only 5.3 million work-
ers.
Slow economic growth will be another factor keep-
ing unemployment high. For the remainder of the
decade real GNP growth will do well to average 2.4
percent a year for the region as a whole, compared
with an average of 3.3 percent annually during the
The pace of industrial restructuring in Western
Europe is likely to pick up somewhat as the recov-
ery gets under way, but not by enough to apprecia-
bly change the region's employment prospects.
Venture capital may become more available as
domestic stock markets expand. Investment by
existing companies in new production methods
should increase as the economic recovery proceeds
and profits improve. Businesses increasingly appear
more willing to pursue joint ventures with US and
Japanese companies to acquire new technology.
Governments are just now beginning to address the
economic rigidities created by excessive regulation.
The West German Government, for example, es-
tablished an interagency group to identify and
eliminate regulations and requirements that inhibit
market adjustment and increase costs for the pri-
vate sector: Although these various factors are
moving in the right direction, we believe many
more economic, political, and social adjustments
would be necessary for industrial restructuring to
proceed fast enough to significantly reduce the
unemployment problem.
Secret
6 January 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Iq
Next 4 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Iraqi Oil Export Options:
Financing the War Effort
Iraq's deteriorating economy has prompted Bagh-
dad to seek ways to expand its crude oil exports and
earn the revenues it needs to continue the war with
Iran. With its export capacity limited to the single
pipeline through Turkey to the Mediterranean,
Baghdad is trying to win approval for a new
pipeline through Saudi Arabia or Jordan. Even if a
new pipeline is built, however, Iraq may still opt for
a dramatic military strike in the hope of bringing
about a resolution of the conflict with Iran. A
separate pipeline to the Red Sea would enhance the
security of Western oil supplies by providing an
alternative to the vulnerable shipping routes
through the Strait of Hormuz.
Options To Expand Exports Through Existing
Facilities
Iraq is in a serious financial bind because of the
war-related loss in oil export earnings. We estimate
that Iraq's foreign exchange reserves were about $5
billion at the end of 1983-compared with $35
billion before the war-and that the current ac-
count deficit in 1984 will reach $10-12 billion
despite large cutbacks in development spending and
imports. Reduced revenues resulting from the weak
oil market have also led to cutbacks of about 80
percent in direct financial aid by Baghdad's Arab
supporters since 1981. As a result, Baghdad has
begun to examine methods of expanding crude oil
exports.
Prior to the war, Iraq's crude oil export network
was the most flexible in the Middle East, with a
total system capacity of about 5 million b/d-some
1 million b/d above Iraq's prewar productive ca-
pacity. Over 3 million b/d of the capacity was
located in the two sea-island export terminals of
Mina al Bakr and Khawr al Amaya, which were
severely damaged at the onset of the war. By
utilizing single-point mooring buoys, a temporary
export facility with a capacity of 1.5-2.0 million
b/d could be operating in about 10 months. With-
out a cease-fire, however, Baghdad would find it
difficult to hire the Western expertise needed to
install the temporary loading equipment or rebuild
the permanent structures.
The 1.2-million-b/d Iraqi pipeline across Syria was
closed by Damascus in April 1982 in support of
Iranian attempts to topple Saddam Husayn; there
is little hope the line will be reopened soon. Cur-
rently, Bagdad's sole oil export route is the Iraqi-
Turkish pipeline to the Mediterranean. In the midst
of a capacity-expansion program, Iraqi officials
claim the pipeline is currently capable of carrying
900,000 b/d of crude oil and will reach the planned
maximum of 1 million b/d by mid-1984.
New Export Options: Pipelines Through Saudi
Arabia and Jordan
The Iraqis appear to have little likelihood of sub-
stantially increasing oil flows through their export
system as it currently stands. The best hope Bagh-
dad has for increasing oil exports now appears to be
the construction of a new pipeline through either
Saudi Arabia or Jordan.
The Saudi Link. The most timely option to increase
oil exports is to construct a link to Petroline, the
Saudi oil export pipeline to the Red Sea. This
option would require a 640-kilometer connector line
to Petroline to utilize a portion of the excess
capacity in the line, ranging up to 1.6 million b/d
in recent months.
Secret
DI IEEW 84-001
6 January 1984
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
ly $4.5 billion.
linkup point to the Red Sea. This phase would take
about four years to complete and cost approximate-
The Jordanian Connection. During the past year
Baghdad and Amman have been exploring the
possibility of an export route across Jordan to the
Red Sea. Few details of the project-which has
received only a preliminary study-are available,
The trans-Jordan pipeline apparently
Phase Two.. The Parallel Line. Baghdad views a
link to Petroline as only the first phase of the
project and hopes to eventually construct a separate
pipeline parallel to Petroline, extending from the
at a higher cost.
would run from the vicinity of Baghdad to the port
of al Aqabah. We believe its capacity most likely
would be about 1.5 million b/d, similar to that of
the proposed Saudi line to the Red Sea. Although
no detailed design work has been done on this
proposal, a US Embassy source in Amman estimat-
ed it would cost at least $1 billion and take about
three years to complete. We believe some shorten-
ing of this work schedule might be possible, albeit
current prices.
The View From Baghdad. Baghdad is seeking new
sources of oil revenue; the most attractive alterna-
tive is the pipeline link to Saudi Arabia's Petroline.
This project has the potential to provide an addi-
tional $5 billion in annual revenue by 1985, assum-
ing exports of 500,000 b/d. The Iraqis may also
feel that existence of the line might increase the
likelihood of approval to construct the second phase
of the project-the 1.5-2.0-million-b/d parallel
pipeline to the Red Sea-which could provide as
much as $20 billion a year in extra oil revenue at
security concern for Iraq.
Iraqi Government officials, for their part, appear to
prefer the Saudi pipeline option. In recent months
key Iraqi officials-including Iraqi President Sad-
dam Husayn-have publicly stated their preference
for the construction of a spur to Petroline. We
believe the Jordanian pipeline is less attractive to
Iraq because it offers no economic relief for at least
two years. Because of the uncertainties involved,
the cost also almost certainly will be greater than
the $1 billion mentioned. Moreover, the proximity
of a Jordanian line to Israel would pose an added
Secret
6 January 1984
25X1
I
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Iraq: Petroleum Export Options
Export Option
Volume
(thousand b/d)
Leadtime
(months)
Cost
(million US $)
Saudi Petroline
link
300 to 1,200
10
700
Iraq-Red Sea
pipeline
1,600
54
3,600 to 4,500
Jordan pipeline
1,000 to 1,500
36
Over 1,000
Persian Gulf single-
point mooring buoy
1,500 to 2,000
10
-
110
Throughput volume depends on where the connection
with Petroline is made; average throughput is cur-
rently estimated to be 500,000 b/d. Cost estimate is
based on an accelerated construction schedule.
Line is still in preliminary study stage.
Based on current plans, which assume no further
damage and sufficient onshore pumping capacity.
Funding for either project does not appear to be a tate Iraqi oil exports to the Red Sea.
major problem.
A key unanswered question for Baghdad is the net
revenue gain expected with any of these options.
The potential $5 billion gain from a Saudi connec-
tor line could be offset by reduced Kuwaiti-Saudi
oil sales on Iraq's account-currently estimated at
about 250,000 to 300,000 b/d, or up to $3 billion
annually-and a further decline in Arab financial
assistance. Although larger scale projects offer the
eventual promise of significant oil.revenue gains,
they are probably at least two to three years away.
In the meantime, Baghdad must continue to fi-
nance its domestic economic programs and pay for
the war with Tehran.
The Saudi Perspective
Saudi Arabia apparently has agreed in principle to
Iraqi requests to build a pipeline that would facili-
Secret
6 January 1984
We believe the Saudis are now willing to allow
construction of the spur to Petroline. In our judg
ment, Saudi leaders probably calculate that they
can maintain full control over the spur, given its
limited capacity and "dependence" on the existing
Saudi pipeline. Given the outlook for continued
weak oil demand and Saudi concerns over oil
prices, Riyadh may believe such an option would
also provide it with some control over the level of
Iraqi exports. Riyadh probably hopes that its ap-
proval of such an arrangement-while offering no
immediate financial relief to Baghdad-would ease
Iraqi concerns over current export limitations, di-
minish Baghdad's growing sense of desperation,
and preclude a major military escalation by Iraq in
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
25X6
the war with Iran. Saudi leaders may also envision
some financial dividends accruing to them from a
linkup to Petroline through oil transit fees and the
need for reduced economic aid to Iraq.
We do not rule out the possibility, however, that
Riyadh will drag out negotiations over the spur and
try to postpone implementation of the project.
We believe it is highly unlikely that the Saudis will
agree to the establishment of a separate Iraqi
pipeline to the Red Sea.
The Jordanian Viewpoint
An Iraqi pipeline through, Jordan offers a number
of opportunities for Amman
Oil transit fees would give the
government much-needed additional revenue. An
Iraqi pipeline would also provide an alternative to
Saudi Arabia's Tapline as a source of crude oil for
Jordan's Zarqa refinery and offers promise for the
development of a petrochemical industry within the
country. In addition, King Hussein probably views
the project as strengthening Jordanian economic
ties with Baghdad and an opportunity for Jordan to
recoup some of the financial losses incurred as a
result of the slowdown in both entrepot and direct
trade with Iraq since 1982.
Outlook and Implications for the West
conflict.
Even the completion of a link to Petroline would
not eliminate the pressure on Iraq's Arab allies for
continued financial assistance, and Baghdad would
still be forced to maintain its economic austerity
program and keep imports at reduced levels-in
1984 about 40 to 50 percent below the 1981 peak of
$20 billion. For military and political reasons,
however, Iraq cannot indefinitely fight a war of
attrition with Iran, and solving Baghdad's revenue
needs does not guarantee that it will not eventually
attempt a dramatic military strike to resolve the
Should the Petroline link fail to materialize, we
expect Iraq to persist in its effort to establish
another alternative to exporting oil through the
Persian Gulf. Construction of a separate pipeline to
the Red Sea that resulted in increased Iraqi exports
could have major implications for the West. If the
project were completed in the next two to three
years when most forecasters expect oil demand to
remain weak, oil prices could come under down-
ward pressure in the absence of production re-
straint by other producers. Over the longer term,
the Persian Gulf is expected to account for over
one-third of non-Communist oil supply availability.
Any new export outlet that provides an alternative
to shipping this oil through the vulnerable Strait of
Hormuz will enhance the security of Western oil 25X1
supplies and potentially reduce the impact of an oil
disruption.
Secret
6 January 1984
25X1
I
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
USSR: Andropov and the Consumer
The Andropov regime appears to be taking a
cautious approach on consumer issues. Without
impinging on defense or industrial investment, it
has little room for maneuver until the Food Pro-
gram pays some return and more resources can be
spared for consumer goods. Moreover, the regime
does not view major improvements in consumption
as an urgent necessity. Andropov has been careful
not to raise consumer expectations, downplaying
the material aspects of consumption and stressing
instead the role of socialist values and popular
commitment to the system as determinants of the
overall "quality of life." As a result, Soviet con-
sumers cannot look forward to better housing,
improved services, or more widespread car owner-
ship this decade.
What Andropov Inherited
Among the most difficult challenges facing Andro-
pov when he became General Secretary one year
ago was improving worker performance just as the
increase in real consumption had virtually come to
a halt.
Although the standard of living had improved
substantially during the Brezhnev era, by the late
1970s the Soviet Union was clearly in the midst of
a slowdown in economic growth that tended to
force greater attention to investment in priority
sectors like energy, transportation, and heavy in-
dustry. In addition, four successive years of disap-
pointing agricultural production, combined with
continuing growth' in personal disposable income,
led to widening gaps in demand for and supply of
"quality" foods. Queueing; informal rationing; and
special distribution of meat, butter, and milk
spread widely during 1979-82.
What Andropov Has Done
The range of responses that Andropov considers
appropriate and feasible to deal with the stagnation
in consumption is limited. Under Andropov, the
regime has generally followed the Brezhnev ap-
proach to consumption problems: it has endorsed
the 1982 Brezhnev Food Program, it is slowing
aggregate income growth, and it is pursuing admin-
istrative measures intended to force enterprises to
produce a better quality and assortment of consum-
er goods. Since early last year, several decrees
relating to consumer goods and services have ap-
peared; their general tone indicates high-level frus-
tration and irritation that the variety, quality, and
general availability of consumer goods and services
are not improving. But the decrees do not appear to
provide many, if any, additional resources.
Finally, Andropov is trying to grapple with a
situation apparent in the last years of the Brezhnev
regime: having relied increasingly upon material
incentives instead of discipline, the regime had
neither strong positive or negative incentives at its
disposal to influence worker performance in a
period of slowing growth of. real consumption.
Although Andropov would like to have both, he
recognizes that the economy is not going to provide
much consumption growth in the near future, and,
accordingly, he has taken several disciplinary
measures to improve worker effort.
The most recent measure dealing with worker
discipline and incentives was a decree in August
calling for tougher measures against absentees,
drunks, and other offenders. It provides for loss of
pay and vacation privileges, demotion, or even
dismissal for those guilty of such offenses. Al-
though initially the concept of worker discipline
Secret
DI JEEW 84-001
6 January 1984
25X1
1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
was applied to blue-collar workers and directed
largely at absenteeism, drinking on the job, and
high labor turnover, Andropov has extended it to
society at large. The concept of discipline now
implies social order and popular commitment to the
system.
Although the discipline campaign provides the neg-
ative incentives, Andropov's approach toward re-
muneration is designed to be a positive motivator.
Andropov has harshly attacked wage leveling, and
he is making a stronger effort to link remuneration
to the contribution of each worker. So far, however,
little movement in the direction of broader pay
differentiation has occurred. Instead, factory man-
agers and trade union leaders have been told to
reward better workers with more bonuses and
privileges.
What Andropov's Policies Will Achieve
The consumer welfare policies and approaches es-
poused by Andropov to date are not likely to result
in significant benefits for Soviet consumers. F_
The Food Program. Although the Food Program
has long-run potential for more efficient food pro-
duction, implementation probably will be slow.
Even if the program's 1990 targets for per capita
consumption of quality foods are met, consumption
of desirable foods would still remain substantially
below present per capita intake achieved in coun-
tries with comparable levels of economic develop-
ment. In addition, because of high demand for
quality foods and because personal disposable in-
come will continue to grow, the supply-demand gap
for these products is likely to remain large.
Adjusting Enterprise Incentives. The pronounced
disequilibrium in markets for individual consumer
goods and services can be traced to the inability of
the planning system to ensure a mix of goods that
would satisfy consumer demand at existing prices
and to the failure of quality control at all stages.
Enterprises generally lack interest in the marketing
side of their operations, despite an extensive history
Secret
6 January 1984
of government efforts to change this attitude. A
new performance indicator that tasks heavy indus-
try to produce a specified amount of consumer
goods per ruble of the enterprise's wage fund is not
likely to help much because it does not relieve
enterprises of the obligations to meet their primary
output targets.
Labor Discipline. Andropov's efforts to improve
discipline will not endure unless some way of tying
worker remuneration to performance is devised.
Although a revision of wage norms to reward
higher skill levels and output would be necessary to
carry out Andropov's intention of promoting pro-
ductivity, this step would not be sufficient. Labor
productivity growth is hampered by several prob-
lems outside the individual worker's control, such
as late deliveries of supplies, equipment break-
downs, and faulty technical specifications. As it is,
workers receive only one-half their wages when
they are standing idle through no fault of their
own, a situation that contributes to poor morale
and falsification of output statistics by managers
unwilling to antagonize their workers. Finally, even
if the wage system is eventually structured so that
payment corresponds more closely to contribution
to production, better workers will be left with the
quandary of how to translate their relatively higher
incomes into an improved standard of living if the
desired consumer goods are not available.
Slowing Wage Growth. Andropov has stressed pub-
licly that the consumer economy is plagued by
excess purchasing power. The imbalances in the
Soviet consumer goods market, however, are more
the result of shortages of specific goods desired by
consumers than the consequence of excess purchas-
ing power. Slower wage growth thus will help
contain inflationary pressures but have little impact
on specific shortages.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Looking Ahead
The Andropov regime, while trying to dampen
consumer expectations and to instill a more consci-
entious attitude among workers, still hopes to
achieve some slow growth in the availability of
consumer goods and services. The 1984 economic
plan and the discussions surrounding the compila-
tion of the 1986-90 plan will provide more clear-cut
evidence regarding Andropov's intentions. We
judge that Moscow would be highly reluctant to
allow consumption levels to decline from their
present level and will continue to import substantial
quantities of consumer goods, in part by pressuring
its CEMA partners for more deliveries.
37 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
LDC Commodity Problems:
Prospects for Natural Rubber
During his visit to Washington next week, Malay-
sia's Prime Minister Mahathir is likely to broach
the issue of renegotiating the International Natural
Rubber Agreement (INRA), which expires in 1985.
Mahathir believes that natural rubber producers
need "fair" remuneration and may push the United
States to support an increase in rubber prices at
next June's INRA negotiations. The OECD reces-
sion sent rubber and other commodity prices into a
tailspin, which, together with sizable declines in
export volumes, severely crimped revenues. Com-
modity exporting LDCs will be watching Maha-
thir's Washington meetings closely, looking for
encouragement to press their demands for other
commodities.
Rubber: A Case Study
The difficulties experienced by natural rubber pro-
ducers are typical of problems facing most com-
modity-producing countries. In the mid-1970s,
however, industry experts predicted a great future
for rubber. They believed:
? Skyrocketing oil prices would limit competition
from synthetic rubber.
? Giant strides being made in natural rubber pro-
duction technology would boost yields by up to 50
percent.
? The establishment of the Association of Natural
Rubber Producers would benefit producers.
? Enormous surpluses that plagued other commod-
ities such as copper and sugar could be avoided
by natural rubber producers.
These promises went largely unfulfilled, and in the
past few years the outlook has soured. A key
problem was the drop in demand and price caused
by the prolonged recession in the major OECD
markets. From a record high of 80 cents per pound
in 1980, rubber prices plunged nearly 50 percent by
November 1982, severely crippling export earnings.
Not all natural rubber producers were hurt equally.
Thailand and Sri Lanka benefited from expansion
projects that began in the late 1970s, which en-
abled some increases in export volumes. Even so:
? Thailand's earnings from natural rubber fell by
nearly one-third over the 1981-82 period to $413
million, even though sales volume grew by nearly
one-fifth.
? Sri Lanka's export earnings from natural rubber
fell to $109 million in 1982, one-third lower than
the peak level reached in 1979. This occurred
despite a 2-percent increase in sales volume.
Other producers experienced the full brunt of the
recession.
? In comparison with 1980, Malaysia's 1982 export
earnings from natural rubber fell 45 percent to
$1,144 million, the lowest level since 1977.
? Indonesia's sales of natural rubber brought in an
estimated $555 million last year, down more than
50 percent from the peak year of 1980.
? Liberia's estimated export earnings from natural
rubber of $50 million in 1982 were the lowest in
nearly a decade.
After previous recessions, exporters were able to
look forward to a sharp rebound in prices and sales.
Producers may be in for a major disappointment,
however, because the demand factors that caused
the recent falloff in consumption seem likely to
continue throughout the current recovery. Beyond
1984 prospects for world economic growth of
Secret
DI IEEW 84-001
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
roughly 3 percent per year over the next decade .
suggests a long-term demand growth rate of at best
about 1.5 percent per year for natural rubber. This
is half the 1960-79 average.
Even if the rate of world economic growth and the
demand for rubber from the transportation sector
increase more than expected, natural rubber may
not benefit:
? Markets are being eroded substantially by new
technology. Competition from synthetic rubber,
which already holds 70 percent of the rubber
market, is likely to intensify. Declining profit
margins have forced synthetic rubber producers
to become even more efficient, and to develop
new products and markets.
? Shifting demand, due to energy conservation
efforts and changing tastes, has reduced markets.
The downsizing of cars, increased use of mass
transit, and longer wearing tires are cutting back
Of these two factors, we believe the challenge from
synthetics is more significant. Synthetic rubber
producers are in a better position to rapidly expand
output; industry data show that nearly one-third of
rubber-producing capacity currently is idle. As long
as oil prices remain relatively stable, prospects are
bleak that natural rubber producers can reverse the
shift toward greater use of synthetic rubber. More-
over, the backward integration by tiremakers and
forward integration by petrochemical producers
into synthetic rubber production further encourage
the production and consumption of synthetic rather
than natural rubber.
Producer Response
Despite the slowdown in world demand, rubber
producers have 'increased production. Since the
early 1970s output has grown by about 1 percent
per year. Investment projects now under way are
aimed at maintaining this level of output growth:
Secret
6 January 1984
? Thailand has successfully implemented its pro-
gram to replant 160,000 hectares of rubber trees.
As a result, industry experts expect output to
grow by 20 percent between 1982 and 1985.
? Indonesia announced in 1979 a plan aimed at
replanting 250,000 hectares in the smallholder
sector between 1981 and 1985. Jakarta has re-
cently announced that it will open up new areas
to encourage planting of 180,000 hectares on
some of the smaller islands. Together, these two
programs could add about 15 percent to Indone-
sia's rubber output by the early 1990s.
? Malaysia has already begun implementing plans
that call for some 50,000 hectares of new plant-
ings a year between 1981 and 1985, about double
the rate achieved in the 1970s.
To protect export earnings in the face of declining
prices, the major natural rubber producers banded
together in 1980 under UNCTAD auspices to
establish the International Natural Rubber Agree-
ment. At roughly the halfway mark in the first five
years of its scheduled operation, the INRA has
experienced more problems than successes:
? Buffer stock purchases have failed to keep prices
from falling below the lower limit of the stabiliza-
tion band during the first two years of INRA
operations. Purchases had to be suspended be-
cause of a shortage of funds, and members are
refusing to provide additional monies for this
purpose, according to trade journal reports.
? The large quantity of rubber already in the
official INRA stockpile-about 260,000 tons-is
having a depressing effect on the recovery of
rubber prices.
? Rubber price fluctuations have not been appre-
ciably reduced. In the first three years of the
agreement, average yearly fluctuations have been
about 25 percent, greater than the average of the
last 10 years.
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
fib
Synthetic 53% Synthetic 69%
Natural 31%
Other 21% &Ihow-h, Malaysia 41%
Natural Rubber Prices
US cents per pound
0 1972 75 80
d Eastern
Europ
e 10%
China 8%
Japan 12%
Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
More importantly, the key producers cannot agree
on a future course of action. Malaysia, which
produces nearly twice the rubber of its nearest
competitor, is pushing for renegotiation of the
current agreement that expires in October 1985.
Kuala Lumpur would like a new agreement based
on production and export controls rather than on a
buffer stock. This would serve to guarantee Malay-
sia's current market share. Indonesia and Thailand,
with greater potential to increase output, are press-
ing to retain the buffer stock but with higher floor
and ceiling prices. In our view, these issues will be
hotly contested at future INRA meetings as posi-
tions are prepared for the first UN Rubber Rene-
gotiating Conference scheduled for June 1984. F_
Lessons From the Rubber Experience
Technological change will continue to undercut
LDC commodity producers. Just as the develop-
ment of a wide range of inexpensive synthetics has
cut sharply into natural rubber's traditional mar-
kets, new processes and products are displacing
other traditional commodities in the marketplace,
some at an astonishingly rapid clip. For example:
The sweetener market has been radically trans-
formed by the introduction of a continuous enzy-
matic process for mass production of high fruc-
tose syrup made from corn (HFCS). By 1985 or
1986, industry analysts predict that HFCS con-
sumption in the United States will have captured
one-third of the domestic caloric sweetener mar-
ket. This trend will soon spill over to the other
OECD countries, greatly hurting world sugar
demand.
? Optical fibers made of silicon glass are outcom-
peting copper wires in communications applica-
tions because of their greater message-carrying
capacity.
? Composites (fiber-reinforced plastics), single-
crystal and amorphous metals, and ceramics are
displacing traditional materials such as iron and
Secret
6 January 1984
steel, aluminum, cobalt, and superalloys in air-
craft and automobile bodies and engines. The
technology to build an airframe entirely out of
composites has already been demonstrated. The
rate at which these exotic materials penetrate the
metals market now depends only on cost factors.
? Manmade fibers have revolutionized the markets
for thread, cloth, yarn, carpeting, and upholstery.
From only 2 percent in the 1950s, manmade
fibers rose to 44 percent of total world fiber
output in 1982. In the United States, synthetics
now hold 75 percent of the overall textile market.
The easing of oil prices will help keep synthetics
costs competitive.
The LDCs, in response to this technology on-
slaught, have continued to push for commodity
agreements incorporating price controls, buffer
stocks, quotas, and other market-sharing devices-
not only in rubber, but in most commodities. Under
the aegis of the UNCTAD Integrated Program for
Commodities, the LDCs still hope to eventually
bring 18 key commodities under some form of
control, financed by a Common Fund. Although
the rubber agreement is the only commodity agree-
ment established through UNCTAD's efforts, talks
and negotiations are continuing for cotton, hard
fibers, jute, tea, tropical timber, bananas, and
bauxite.
The problems the rubber agreement is having serve
to illustrate some of the deficiencies of all commod-
ity agreements. These include:
? Direct cost. Industry specialists estimate, for
example, that a 500,000-metric-ton buffer stock
would be needed to defend a 10-percent price
band. At 50 cents per pound, the cost would come
to about $550 million.
? Inefficiency. Commodity agreements that rely on
quotas based on historical production or export
averages to allocate market share tend to penalize
new, more efficient entrants into the market.
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
? Indirect cost. Because the effect of most com-
modity agreements is to raise the long-run aver-
age price above what it would otherwise be, they
raise the cost to all consumers of products using
the controlled commodity and encourage substi-
tutes.
The LDCs are unlikely to achieve higher earnings
by pushing commodity agreements. For most pro-'
ducers, however, the costs-both economic and
political-of shifting out of raw materials with a
dim future are high, especially given the foreign
financial bind many of them face. Any adjustments
taken now would come at a time when governments
in debt-troubled LDCs are being asked by creditors
and the IMF to tighten their belts until they can
get their foreign finances in order.
US support for additional multilateral commodity
agreements might ease LDC earnings problems in
the short run but would perpetuate the basic excess
supply problem of most commodities. Eventually,
the commodity producing LDCs will begin to re-
structure their economies. Although we doubt that
the LDCs will give up on their push for commodity
agreements, we believe they will primarily seek US
support in the form of development financing and
market access for the products they produce in
place of commodities.
43 Secret
6 January 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Iq
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
 ~f .
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1
Secret
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000706800001-1