INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706920001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: November 15, 2010
• Sequence Number: 1
• Publication Date: March 30, 1984
• Content Type: REPORT

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Directorate of ~
Intelligence
International
Economic & Energy
Weekly
DI /EEW 84-0/3
30 March 1Q984
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17'
30 March 1984
1 /Perspective-Andropov's Economic Legacy
21 / USSR: Economic Performance in 1983
'I'ri les
directed to Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
Weekly
International
Economic & Energy
Energy
International Finance
Global and Regional Developments
- National Developments
ternational Financial Situation: Status of Argentine Debt Talks
International Financial Situation: Trade Surplus of Key LDC Debtors
USSR: Economic Plan for 1984
29 /~ndia: Economic Ties With the Soviet Union
33' /South Africa: Implications of Falling Gold Production
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International
?Economic & Energy
Weekly
Synopsis
Chernenko inherits the same set of economic problems that plagued Andropov,
s who laid only tentative groundwork for future changes in economic policy.
13 International Financial Situation: Status of Argentine Debt Talks
Buenos Aires has announced it will not meet the 31 March deadline for paying
overdue interest, but it apparently will continue negotiations with banks and is
planning to send a delegation to the IMF in April.
17 International Financial Situation: Trade Surplus of Key LDC Debtors Triples
We estimate that the aggregate trade sui~lus of 15 key debt-troubled LDCs
rose to $43 billion in 1983-up from $15 billion in 1982 and $2 billion in
1981-but a further sharp improvement is unlikely.
changes, and new additions of plant and equipment also played a role.
The pace of Soviet economic growth picked up somewhat in 1983. Better
weather was in part responsible, but the discipline campaign, managerial
25 USSR: Economic Plan for 1984
29
Soviet workers.
The optimistic economic goals announced at the Supreme Soviet meeting in
December could be accomplished if favorable weather continues and if a
continuation of the discipline campaign exacts increasingly greater effort from
careful look at economic ties with the USSR.
Stung by sharp cutbacks in Soviet purchases of Indian goods in late 1982 and
1983, Indian exporters and economic analysts have begun to take a more
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33 South Africa: Implications of Falling Gold Production
The more than 30-percent decline in South Africa's gold output since its peak
in 1970 has cast a shadow over the country's economic outlook
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Perspective
Weekly
International
Economic & Energy
Andropov's Economic Legacy
Andropov's accomplishments were modest. Although his discipline campaign
apparently spurred improved efforts from both management and labor, it was
soon toned down, and its long-term effects are uncertain. New personnel have
been placed in governmental and party ranks, but whether they are more
innovative than their predecessors remains to be seen. Moreover, the head of
the ministerial bureaucracy is still Nikolay Tikhonov-an old crony of
Brezhnev-who seems hardly the candidate to sanction, much less inspire, a
fresh approach to economic problems. In the pivotal area of correcting
systemic weaknesses, there is little evidence that Andropov's early call to
who laid only tentative groundwork for future changes in economic policy.
Chernenko inherits the same set of economic problems that plagued Andropov,
explore the experience of other socialist countries bore much fruit
growth to be compensated for by rising capital productivity.
Andropov probably deserves some of the credit for the moderate acceleration
in Soviet GNP last year. His emphasis on discipline and order, in addition to
management changes in critical sectors such as transportation, apparently paid
off in the better use of industrial capacity, improved coordination in planning
material supplies, and eased bottlenecks. Other key growth factors were not of
his making. Improved weather helped both industry and agriculture, and
investment growth substantially exceeded plan as it had done in the previous
two years. Such increases have been in direct violation of the spirit and letter
of the 11th Five-Year Plan (1981-85), which decreed low rates of investment
with Communist countries at the expense of trade with the West.
The economic plan for 1984 afforded Andropov an opportunity to place his
unique stamp on future Soviet economic policy. He did not. In the domestic
area, his strategy for production and resource allocation in 1984 hews close to
the pattern of growth achieved in 1983. In foreign economic policy, the
objective stated in the 1981-85 Plan continues to be followed-increased trade
Pursuing such a course has meant that the Soviet leadership continues to avoid
a direct confrontation with the hard economic issues of the 1980s:
? Slow Growth. By maintaining the fiction that GNP growth can be sustained
by unrealistically high productivity gains, Moscow implies that adequate
growth is ensured for consumption, investment, and defense.
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? Capital Productivity. An investment policy of equipment modernization is at
variance with the failure to grant necessary resources to the machine-
building sector or to provide adequate incentives for the introduction of new
technologies.
? Labor Productivity. Calls for greater efficiency from the Soviet worker are
not backed up by strong, well-defined programs that dangle the carrot or
wield the stick.
? Bottlenecks. Programs to deal with priority areas such as energy, transporta-
tion, and consumer goods contain solutions that are neither bold nor new.
Moreover, they are built on the present ministerial system-a serious
obstacle to solving problems that cut across sectoral lines.
? Economic Reform. Admission that the present system of planning, organiza-
tion, and incentives is inadequate for spurring intensive growth is followed by
changes that continue to be incremental and experimental.
? Defense Burden. Despite a slowdown in the growth of resources devoted to
the military since the mid-1970s, the burden of defense is still high-13 to
14 percent of GNP. The evidence suggests that the Soviets are determined to
bear this heavy burden throughout the 1980s.
The reasons for this conservatism probably lie in the leadership's perception
that the costs of pursuing a more dynamic economic policy outweigh the
benefits. Economically, they see few clear-cut, risk-free, or costless solutions.
Politically, they know that setting a different set of economic priorities
threatens to upset the always fragile balance between competing groups and
Andropov, then, as Brezhnev before him, left a legacy of stunted potential for
the Soviet economy. Chernenko faces slow growth and low efficiency for the
rest of this decade if present policies are maintained. His initial speeches and
comments as General Secretary have stressed continuity with Andropov's
policies. His past record suggests that he may take a more proconsumer stance
and deemphasize the discipline theme (although so far he has endorsed both
the discipline and anticorruption campaigns). Even if he decides that he wants
to do things differently, the impact will not be immediate. Politically, it will
take some time to consolidate power; economically, relatively long lead-times
are needed to accomplish major shifts in resource allocation.
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Iraqi Attack on
Oil Tanker
~ragi Oil Pipeline
Negotiations
Energy
repairs.
The Greek company Ceres Hellenic Shipping Enterprises, owner of the
85,000-dwt oil tanker Filikon L., confirmed that the vessel was struck by an
unidentified missile early on 27 March at a location approximately 100 km
south-southwest of Khark Island. The company claimed the missile put a
20-inch hole about 6 feet above the waterline on the starboard side of the ship,
damaging the number-four hold, which is leaking fuel oil. Apparently there
was no explosion, and none of the 26 crewmembers was injured. According to a
source of the American Embassy in Kuwait, the ship, chartered by the Kuwait
Petroleum Corporation, had departed Kuwait's Mina al Ahmadi oil export
terminal earlier in the day, bound for Sicily with a cargo of 80,000 tons of fuel
oil. The Embassy source indicates the vessel may be heading to Dubayy for
Officials in Baghdad claimed that Iraqi Super Etendard aircraft destroyed two
"large naval targets" on 27 March in the Iraqi-proclaimed exclusion area
southwest of Khark Island. The broadcast, however, made no mention of the
use of an Exocet missile in the attack on the ships. In air activity farther north,
Baghdad claimed to have bombed a pumping station near the town of Dezful,
apparently on the 750-km-long Trans-Iranian Pipeline, which carries crude oil
from Ahvaz north to Tehran.
conditions are not met.
Iraq's concern about the financing and security of the proposed oil pipeline
through Jordan apparently is causing a shift in favor of the alternative pipeline
through Saudi Arabia. The US Interests Section in Baghdad says that
discussions on the proposed pipeline from Iraq to Al Aqabah, Jordan, have
stalled because of Baghdad's resistance to asking Saudi Arabia and Kuwait to
provide guarantees for the financing. Without such guarantees, other private
financers of the pipeline will back out. Iraq also is insisting on US Export-
Import Bank financing and US assurances that Israel will not interfere with
the pipeline. Baghdad has implied it will abandon the Jordanian project if its
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Kuwaiti Proposal
~'`o Use Tapline
Kuwaiti oil officials have begun to look into the feasibility of using excess
capacity in Tapline, the trans-Arabia crude oil pipeline linking Saudi Arabia's
eastern oilfields to the Mediterranean at Sidon, Lebanon.
Due to damage to the export terminal
and sections of pipe in Lebanon, the Lebanese and Syrian portions of Tapline
have been abandoned, although approximately 40,000 b/d is still being sent
through the line to Jordan from Saudi Arabia. Under current Saudi planning,
this supply would cease in 1986 when Aramco intends to use the southern
portion of Tapline for other purposes. The remaining Saudi section of the line,
however, would still be available to carry Kuwaiti oil to the vicinity of Jordan's
Az Zarqa refinery, where it would be transferred to the Iraqi pipeline for
throughput to the Red Sea. Although still in a formative stage, the scheme
could .finally give Kuwait an alternative to exporting oil via the Persian Gulf.
Tapline's original capacity was 500,000 b/d, and, although cannibalization
and removal of pumps have apparently cut this by about half, we believe the
pipeline probably could again handle this volume of oil if the pump stations
Algeria Maneuvers To The Algerian natural gas monopoly SONATR~ACH last week asked US banks
St p Up LNG Exports
LNG-related debts and athree-year payment moratorium.
involved in financing Algerian LNG facilities to press the Trunkline natural
gas company to honor its LNG contract with SONATRACH. SONATRACH
claims that it cannot meet its annual debt service of $210 million on LNG fa-
cilities and tankers if Trunkline does not resume at least part of its liftings.
Trunkline purchased $380 million in Algerian LNG in 1983 before suspending
purchases last December. If Trunkline does not resume liftings,
SONATRACH probably will request restructuring the US-bank portion of its
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amaican Progress
Toward IMF
Agreement
Secret
30 March 1984
Prime Minister Seaga told US Embassy officials last week that Jamaica and
the IMF have completed negotiations for an $70 million standby loan. He said
that a conditional letter of intent will be formally signed within two weeks, af-
ter the IMF observes the new foreign exchange auction in operation. The US
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Embassy reported that the auction system worked as intended last week-its
first week of operation-resulting in an 8-percent devaluation of the Jamaican
dollar. The IMF loan still has to be approved by the Board of Governors, so
funds will not be disbursed until late May at the earliest.
Jamaican officials now are seeking rapid disbursement of loans that have been
withheld pending the IMF agreement. In particular, they have approached
Embassy officials regarding the remaining $25 million of a US emergency
loan and plan to seek disbursal of a $25 million IBRD structural adjustment
loan. Seaga stressed the urgent need for these funds, indicating that some of
Jamaica's commercial bank loans are approaching default because Kingston
has not made interest payments for nearly 90 days.
xlcan Bridge Loan Mexico has loaned Costa Rica the $50 million that San Jose has claimed is
or Costa Rica necessary to avert imminent technical default on its foreign bank debt. This
bridge loan is scheduled to be repaid by mid-June, according to the US
Embassy. Mexico, which wants to avoid problems with its own creditors, has
insisted that its support not be publicized. Although Mexico City has long
insisted that its economic aid is not politically motivated, this loan may be in-
tended to restore the appearance of fairness because other Central American
countries are aware of Mexico's substantial aid to Nicaragua. The loan
probably will allow Costa Rica to make payments on commercial loans for the
next few months, but one' US bank believes that it will merely delay a foreign
exchange crisis until midsummer. Costa Rica has, reached preliminary agree-
ment with the IMF on a standby loan for this year, but the IMF probably will
provide only half the credit it did last year.
Kuwait Clamps Down Kuwait's Ministry of Finance is prohibiting moneychangers and exchange
on Moneychangers and houses from trading foreign currencies on behalf of banks abroad and from en-
Exchange Houses gaging in domestic banking activities. The new restrictions are a belated
attempt to rein in Kuwait's freewheeling financial system and to curb capital
flight. Some Embassy sources believe that Kuwaitis used the exchange houses
to move currency abroad after the 1982 collapse of the Suq al-Manakh, the
unofficial stock market. According to local press reports, the government
wants to eliminate the widespread practice by moneychangers of purchasing
dollars from Kuwaiti banks and then selling them for a profit to offshore banks
in Bahrain. The government also wants to stop moneychangers and exchange
houses from competing.wth local commercial banks. These traditional
institutions have long been used by Kuwaitis to perform banking functions,
such as receiving savings deposits, issuing letters of guarantee, and extending
credit.
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Global and Regional Developments
Zaire and Zambia Set Zaire and Zambia, which together account for roughly 60 percent of world co-
New Cobalt Price bait output, recently announced a new producer price of $11.70 per pound. The
action probably was taken to stem the rapid rise in cobalt prices and to give a
sense of order to the market. In recent weeks, cobalt has traded as high as
$12.60 per pound on the spot market, about double its average price at the be-
ginning of this year. We believe the new price is high enough to assure both
countries adequate profits while being low enough to discourage new cobalt
mine startups and to head off a new round of substitution and conservation
measures similar to those that followed the dramatic price runups of 1978 and
The rapid rise in cobalt prices is apparently due to several factors. The near-
term supply situation is tightening as Zaire and Zambia begin initial
shipments of high-grade cobalt to the US Government stockpile. Between the
two countries, nearly 3,000 tons of cobalt-about one-tenth of world output-
are to be delivered this year. Output from the Philippines, Australia, and
Canada-where cobalt is produced as a byproduct-has fallen as a result of
cutbacks in nickel production. Due to improved business conditions, cobalt
demand in the developed countries has picked up considerably over the past
few months. Rumors of large purchases by the USSR and Eastern Europe
have no doubt contributed to speculative buying as well. Although temporary
shortages of high-grade cobalt may exist, producer stocks are plentiful. At
current non-Communist consumption rates, Zaire alone has at least a year's
supply on hand. Belgian metal traders are also believed to be holding sizable
cobalt stocks of Zairian origin. ~~ '~ '
S eden-USSR Trade Swedish and Soviet officials held annual trade talks this week amid troubled
~mmission Meets relations resulting from suspected Soviet submarine intrusions, the expulsions
of three Soviets last year, and the USSR's attempts to secure computer
technology through Sweden. The US Embassy in Stockholm says the Swedes
are seeking assurances that trade will be based solely on economic consider-
ations. They also want to improve economic and technological cooperation and
to reduce their persistent trade deficit resulting from large imports of Soviet
Despite efforts by senior members of Prime Minister Palme's government to
revive trade in 1983, economic relations are likely to remain depressed. The .
Soviets recently rejected a Swedish firm's bid for work in the Tallinn Port ex-
pansion project, a move Stockholm believes was in retaliation for Swedish
firmness. The Swedes probably will reject proposals to extend a Soviet gas
.pipeline from Finland to Sweden's east coast. The USSR presumably is
content with its favorable balance of trade with Sweden, and Stockholm
admits it has no specific proposals to offer that would be economically
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Austria Wants To Austrian officials and businessmen are making new efforts to expand exports
Expand Trade With the to the Soviet Bloc. Austria reduced its trade deficit with the East last year by
East_Bloc countries on plans to expand Austrian exports to the region.
Measures include selecting new commodity groups to penetrate CEMA
markets, scheduling scientific and technological conferences, and recruiting
experienced East-West traders to help small and medium-sized firms.
CEMA nations provide an important outlet for certain Austrian industries,
especially the troubled traditional sectors such as machinery and iron and
steel. The Austrians sell approximately two-thirds of their grain, over one-fifth
of their footwear, and about one-third of their iron and steel products in the
East, and gains in exports in 1983 came primarily in these areas. Austrian offi-
cials probably hope that their newer industries can maintain export growth to
the CEMA countries and thus pay for energy imports, nearly half of which
come from the East.
National Developments
viet Bloc more than half, largely because of a 13-percent jump in exports. US officials in
Vienna note, however, that the 1983 export total includes completion of a
number of long-term projects and that export growth is expected to decline in
1984. Possibly to counter this development, the Federal Chamber of Com-
merce recently briefed a group of Austrian commercial attaches assigned to
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Developed Countries
Early Israeli Elections An early elections bill received preliminary Knesset approval last week after
one of the small parties in the ruling coalition joined the opposition Labor
Party in support of the measure. TAMI Party leader Abuhatzeira said he
supported early elections because of the inflation rate-prices rose at an
annual rate of 354 percent during the first two months of the year-and the
need for a government with a more decisive mandate. The bill has gone to the
Likud-controlled constitution and law committee, which will set the election
date and return the bill to the full Knesset for three mandatory votes. Prime
Minister Shamir has said he will respect the decision of the Knesset and will
not try to bury the bill in committee.
The parties are now maneuvering over when the elections will be held. Shamir
wants to delay the elections as long as possible-preferably until November-
because he believes the economy will improve by fall. Labor Party Chairman
Peres-with support from TAMI-wants an election called for 22 May to
forestall a challenge over party leadership from former Prime Minister Rabin
and possibly former President Navon. Peres also wants to prevent the Likud
from introducing popular economic measures before the election as it did in
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 Strategy
government appears headed for a moderately expansionary budget for the
fiscal year that begins 1 July. The principal element of the budget is a cut in
personal income tax rates designed to placate organized labor, which has been
demanding such a move in return for its continued support of Hawke's wage
indexation scheme. The tax cuts will probably take effect in October or
November, early enough to boost Hawke's chances at the polls if, as we expect,
he calls early elections for late this year or early 1985.
Despite the tax cuts, we believe strong economic growth will boost revenues,
trimming the deficit. Still, government leaders are worried that this will do lit-
tle to ease pressures on interest rates, which have increased 3 to 4 percentage
points since December, a trend that ensures more political maneuvering on the
Belgium Plans The Social Christian-Liberal coalition plans to cut the budget deficit from 13
Greater Austerity percent of GNP in 1983 to 7 to 8 percent in 1986. The government seeks wide-
. spread expenditure cuts, including decreases in cost-of-living adjustments to
public- and private-sector wages and most social security benefits. Prime
Minister Martens agreed not to raise taxes to gain the support of his Liberal
coalition partners. The government plan to limit the growth of its wage bill
over the next three years through job sharing, part-time work, attrition, and
the adoption of a 38-hour workweek is an attempt by Martens to reconcile the
deflationary aspects of the budget with Belgian's high unemployment-which
topped 12 percent in 1983.
The US Embassy reports generally favorable business reactions. The opposi-
tion socialist parties and the socialist unions, however, term the plan antilabor
and a violation of a government promise made last September not to demand
cuts from the public sector in 1984 and 1985. At that time, Brussels was
seeking an end to wildcat public-sector strikes. The US Embassy also reports
that the Socialist Labor Federation has announced a protest action for 3 April.
Nonetheless, we believe most Belgian workers will conclude that they have
little choice but to accede to the government's new wage adjustment and job-
sharing proposals. The success of the austerity plan, however, will require
sustained economic growth to bolster government revenues.
Less Developed Countries
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ustralian Budget After a "Camp David"-style strategy meeting in mid-March, the Hawke
Brazil's Underground Brazil's growing underground economy is blunting some discontent with
Economy Booming austerity but is posing new difficulties for compliance with the IMF agree-
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30 March 1984
ment. According to the Brazilian Institute of Geography and Statistics, the
underground economy-transactions outside formal channels of taxation and
government control-grew to a record $17 billion in 1983, about 6 percent of
Brazil's measured GDP last year, up from 1 percent in 1980. Although the
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C~inpany Shares Embassy reporting, treasury officials briefed business representatives privately
government is concerned, Brasilia is unlikely to adopt widespread reforms to
curb the underground economy. Nearly 10 million people-equivalent to 20
percent of the work force-derive some income from the underground
economy, softening the impact of austerity on living standards. These "off-
record" transactions, however, reduce tax collections and circumvent govern-
ment controls necessary to ensure compliance with the IMF agreement. In the
heavily industrialized state of Rio de Janeiro alone, officials estimate that 10
to 15 percent of the state's 1983 GDP was produced in the underground sector,
causing a loss of more than $400 million in tax revenue.
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Mexico Announces Mexico City is slowly clarifying plans to divest shares in over 300 companies
Divestiture ojPrivate acquired when the banks were nationalized in late 1982. According to US
confidence.
and have given them six weeks to review the government's offer. Press and
Embassy reporting indicate the former bank owners will be given first chance
to repurchase company stock, then present majority stockholders will have an
opportunity to buy the shares. In cases where the government owns less than
15 percent of a firm's stock, shares probably will be sold directly on the stock
market. Although Mexico City did not identify the 128 firms whose stock the
government plans to retain, press sources speculate they will include the bank's
real estate, credit analysis, and credit card subsidiaries. The private sector
views the disposition of company shares as a key indicator of de la Madrid's at-
titude toward business; a successful transfer will help restore business
The Philippines Faces Increasing evidence suggests that Manila's financial problems are affecting its
Un~rtain Oil Supply ability to import oil:
? Manila's oil supply contracts with one of its largest suppliers, Kuwait, I
elapsed in December, and negotiations to renew them have been stalled
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arrangements.
? Although supplies from Saudi Arabia are not in jeopardy, the Saudis have
refused recent Philippine requests for extended repayment terms.
? Traders are avoiding spot sales to the Philippines because the Philippine
National Oil Company is demanding lengthy repayment terms and will not
guarantee payment in dollars.
Government stocks, although low, have not required rationing.
BAs Manila's financial crisis drags on, however, we believe suppliers
will become even more reluctant to offer extended credit arrangements,
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Syrian Foreign
xchange Crunch
its Major Suppliers
Philippines on a 180-day deferred payment basis.
particularly while Manila seems incapable of reaching quick agreement with
the IMF. According to US Embassy reporting, Indonesian President Soeharto
has already parried a request from President Marcos to provide oil to the
TU-154 passenger aircraft from the Soviet Union.
Syria has missed payments to the USSR and Iran-its most important
suppliers-because of continuing foreign exchange shortages. According to a
US Embassy report, Syria now owes Iran at least $400 million for oil
shipments. According to the same report, Syria did not have the necessary
foreign exchange for an unspecified downpayment-due in January-on three
Damascus will probably be able to convince both Tehran and Moscow to
continue credit sales to Syria. Tehran, anxious that Assad continue to prevent
Iraqi oil from transiting the pipeline through Syrian territory, will probably
agree to longer payment periods. Early last year, the Iranians forgave Syria's
oil debt, yielding Damascus the equivalent of at least $750 million in aid.
Moscow initiated the aircraft deal and therefore would probably prefer to
reach an accommodation with Syria rather than see the arrangement collapse.
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E~iopian Economic Addis Ababa is facing growing hard currency shortages and a worsening
drought. The recent harvest and already-promised food aid probably will cover
food requirements in government-controlled areas of the country at least until
November, but continued scant rains will worsen prospects for the main grain
crop, to be planted in May or June. Continued large trade deficits and reduced
capital inflows have pushed foreign exchange reserves down to only two weeks'
worth of imports, according to the US Embassy. The government is scram-
bling to ease its cash crunch by issuing unbacked checks to foreign suppliers of
luxury goods and delaying the deposit of funds sent to resident foreign
personnel and organizations. Although Addis Ababa undoubtedly hopes that
traditionally high second-quarter coffee earnings will relieve the cash shortage,
we think the government will have to resort to additional stopgap measures, re-
duce planned imports, and press the Soviet Union for additional economic
assistance; eventually, they may still have to approach the IMF for payments
support.
Southern ~4frican
State Budgets
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30 March ! 984
Recently announced budgets for Botswana, Lesotho, and Swaziland reflect
efforts to control expenditures in the wake of drought and other natural
disasters and their continued dependence on the South Africa-backed South-
ern African Customs Union (SACU) for revenues. Payments from SACU are
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about 60 percent of Swaziland's total revenues, 50 percent for Lesotho, and 30
percent for Botswana:
? Swaziland's budget was presented last month but already is being revised
because of the recent typhoon damage to transport and agriculture. Lacking
new revenue sources, the deficit will be considerably larger than anticipated,
according to the US Embassy; the government probably will attempt to
increase its foreign borrowing.
? Lesotho is trying to reduce its foreign commercial borrowing and retire some
outstanding debts in response to an IMF recommendation in November
1983. Sharply increased SACU revenues-anticipated this year from tempo-
rary South African customs surcharges-represent an extraordinary "wind-
fall" that, according to the IMF, would allow this corrective action.
Although austerity measures have reduced planned expenditures slightly in
real terms in fiscal year 1984, actual spending could run much higher
because of continuing drought and political pressures prior to the national
elections announced for this year.
? Botswana's government revenues have been boosted by increased tax receipts
from diamond sales-the country's major export-and higher SACU re-
ceipts. This will allow a 5-percent real growth in planned expenditures.
Three years of severe drought have made water projects and drought relief
major budget items that could necessitate additional, unbudgeted expendi-
tures. ~~
Zimbabwe Puts Limits The government has announced major restrictions on foreign payments in the
~n Capital Ou4lTows face of foreign exchange shortages after suffering a current account deficit of
about $450 million last year. The remittance of rents and dividends on foreign
investments made in Zimbabwe before 1979-has been suspended for at least
one year. Some $180 million in foreign securities held by commercial banks in
Zimbabwe will be nationalized and the owners paid in Zimbabwean dollars.
-These measures and other minor restrictions are projected to boost the
availability of foreign exchange by about $215 million this year.
imported corn after three years of devastating drought. Zimbabwe will
continue its policy of allowing overseas remittances of up to 50 percent of
dividends on investments made since 1 September 1979. The new. measures
The moves were prompted by Zimbabwe's rapidly deteriorating balance of
payments, which has resulted from a 30-percent fall in exports since 1981,
heavy short-term debt repayments, reduced foreign aid, and a growing bill for
11 Secret
30 March 1984
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China's Farm Policies Beijing has issued a series of regulations that further liberalize current policies
Taxed allotting farmland to individual peasant families
Farmland l
h
b
.
eases
ave
een
lengthened from three years to 15 years in an effort to encourage investment
by farmers. Peasant families will be encouraged to specialize in growing one or
two marketable commodities. They also will be allowed to sublease their land
and move to towns to engage in privately owned service and transport
~iet Housing
Czechoslovakia
Encourages Private
1`~ydroelectric Power
eneration
Secret
30 March 1984
It is clear that Beijing wants less government control and more personal
responsibility in all sectors of the rural economy. The formation of individual
transport enterprises will help augment the inefficient system and, if developed
properly, eventually could lessen the demand for imported grain. Many
provincial- and local-level officials oppose a further relaxation of government
control, however, and implementing the new policies will be slow and may even
be ignored in some areas. Beijing has tried to prepare for such opposition by in-
cluding regulations making officials more accountable for promoting local
economic growth.
of building materials have been planned to encourage private construction.
According to data published in a leading Soviet statistical journal, the USSR
revised upward its 1983 housing construction goal, suggesting that the
Andropov regime's commitment to improving housing went beyond lipservice.
Residential construction reached the higher target, one of the few times in the
past 20 years the housing goal has been met. It was the fourth straight year in
which rural homebuilding increased but the first time in several years that
urban homebuilding rose..The 1984 plan calls for construction of 109 million
square meters of housing-less than actually constructed in 1983. The Soviet
leadership is accenting expansion of private homebuilding to help relieve the
housing shortage, particularly in rural areas. Large boosts in sales to the public
production in 1982.
Czechoslovakia's tightening energy situation is forcing the normally conserva-
tive regime to try innovative methods to boost domestic energy production.
According to a recent press article, private individuals and socialist organiza-
tions will receive incentives to produce hydroelectric power in excess of their
own requirements. Electricity produced by these individuals or organizations
must be sold to the state power company at fixed prices for up to 200,000
kWh. Private producers can earn up to $9,000-approximately three times the
average industrial wage. In addition, these earnings are tax free, and the state
will subsidize up to four-fifths of the purchase price of new generator
equipment. The program will at best contribute only marginally to overall
energy supplies; however, because of limited hydroelectric potential in the
country, hydroelectric power provided only 6 percent of electric power
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Status of Argentine Debt Talks
This article is part of our series focusing on the
economic and political aspects of'the international
jrnancial situation.
Buenos Aires has become increasingly tough in
statements about its negotiations with creditors,
publicly announcing it will not meet the 31 March
deadline for paying overdue interest and reacting
negatively to private proposals to resolve the im-
passe. If the 31 March date passes without pay-
ment, over one-half of all US bank loans in Argen-
tina-which total some $8.7 billion-could be
classified by the banks as nonperforming.
Despite the rhetoric and the fact that Argentina
is-among LDCs-best able to cope with a repudi-
ation of its debt because of self-sufficiency in
energy and food, we believe it will not choose to do
so. In fact, the available evidence indicates the
Argentines will continue negotiations with banks
and are planning to send a delegation to the IMF in
April.
Over the last month, Buenos Aires, particularly
Economy Minister Grinspun, has turned up the
rhetoric several notches in discussions over foreign
debt:'
? In mid-March, according to Embassy reporting,
Economy Minister Grinspun reacted harshly to a
US communique suggesting Argentine action to
prevent declines in earnings for some US banks,
and for the first time he indicated that Buenos
Aires might move to lead a debtors' coalition.
? Grinspun reemphasized to US Embassy officials
that Buenos Aires has insufficient reserves to pay
overdue interest unless banks disburse new loans
and added that the social and political costs of
depleting Argentina's liquid reserves to cover
interest arrearages are unacceptably high.
?Grinspun warned that the classification of Argen-
tine loans by the United States as substandard '
would be seen as an aggressive act and that any
legal action against Argentina by bankers would
force Buenos Aires to call immediately for a
unified Latin American front to resist bankers.
? Grinspun stated publicly this week at the Inter-
American Development Bank meeting in Uru-
guay that Argentina will not pay past-due inter-
est by 31 March.
Bankers are continuing to hold up disbursement of
$1 billion of a $1.5 billion loan until Argentina
reaches an agreement with the IMF on a letter of
intent. Nonetheless, the US Embassy reports that
Grinspun still expects banks to make a disburse-
ment of the funds before the 31 March US regula-
tory deadline just as they did last quarter in the
absence of a Fund accord. Non-US banks in the
consortium, however, are holding out for an IMF
pact
The US Embassy reports that Argentina has made
some progress toward an IMF accord but that it
will not meet the 31 March deadline.
' Once a bank classifies a loan as nonperforming, US regulators
may classify the loan as substandard, which means that banks have
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Argentine Economic Vulnerabilities
We believe Argentina's greatest short-run econom-
ic vulnerability is to cutolls of key industrial
imports, especially thoselrom industrial countries.
Although the Argentines could absorb large import
cuts, UN trade data reveal several commodities
that are consistently imported in large amounts.
The Argentines have been large importers of chem-
icals, plastics, steel products, and high-technology
goods since 1979. Most oJthese items comelrom
the United States, Europe, and Japan.
In our opinion, the Argentines are less vulnerable
to sanctions against their exports as was shown by
their ability to circumvent European trade mea-
sures during the Falklands cor~7ict. 1982 trade
data indicate that nearly 65 percent of Argentina's
$7.6 million 1982 exports wereloodstu/ls. Their
agricultural commodities are shipped worldwide,
with the USSR and European Community being
sizable markets. About 25 percent of Argentine
exports were manufactured products, much o.J'
which was sold to the United States. The United
States imports large quantities of Argentine petro-
leum products, steel, leather, and chemicals.
From a longer run perspective, however, the Argen-
tine nuclear, arms, and industrial sectors might be
dealt some setbacks i,T sanctions are applied. For
example, Argentina depends on Swiss heavy water
for its nuclear program, European ships and sub-
marines for its Navy, and Western advanced man-
a4facturing technologies to boost productivity in its
industrial and energy sectors.
there is some recent evidence that the Argentine
bank advisory committee is seeking a compromise
to prevent an impasse. Banks have stated a willing-
ness to disburse one-half of the frozen $1 billion
loan if Argentina sends a letter of intent to the IMF
and agrees to pay back the $500 million along with
an additional $110 million out of reserves; the
banks seem to have relaxed their demand for an in-
Secret
30 March l 984
place IMF pact. This move would bring interest
payments current through early January and re-
move the need for banks to downgrade their loans.
The remaining $500 million would be disbursed
when the IMF Executive Board approves an
Argentine stabilization program, and Argentina
would put up another $100 million at that time.
Given the lateness of the hour, however, a compro-
mise may not be reached in time.
The Immediate Implications
If the 31 March deadline passes without payment,
US banks probably will place about half~of their
Argentine loans in a nonperforming status, a move
required by US banking rules. Such an action
would depress bank earnings only slightly because
many banks already have set aside reserves for such
an eventuality;
Having to place their loans in a
nonperforming status, nonetheless, is likely to cause
some deterioration in bankers' attitudes toward
Argentina. They may become more intransigent in
future negotiations, which would make it more
difficult for Argentina to settle past-due payments
and reach an IMF letter of intent by the end of
June, Buenos Aires' deadline for concluding its
international financial negotiations.
From the standpoint of Argentina, the classifying
of US loans as substandard may be perceived by
the Argentines as an act of "economic aggression."
Grinspun has indicated that such an action would
lead Argentina to call immediately for a unified
Latin American front against bankers. Although
this course of action seems unlikely, we believe he is
trying to avoid a public perception in Argentina
that the government is caving in to foreign creditor
demands. He may feel pressed to lead the Argen-
tines to take some rash action, such as a temporary
postponement of negotiations, if US loans are
reclassified.
The Longer Run
Despite the recent Argentine hardline rhetoric, the
available evidence to date suggests Buenos Aires
wants to continue to work toward a solution:
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? President Alfonsin has not participated in the
increased hardline rhetoric
? Finally, Buenos Aires has not taken steps, such as
moving of assets to safehavens, that would indi-
cate aplan to "close its economy."
Argentina's public; posturing will cause some dete-
rioration in its relationship with creditors. Never-
theless, we believe, the probability remains low that
Argentina will pursue more radical actions, such as
declaring an extended moratorium on principal and
interest, or that some creditor banks will seek to
attach Argentine assets.
Even if the worst is avoided, we believe the current
problems in Argentina may have wider implica-
tions.
Other Latin
American countries are closely monitoring the de-
velopments in Argentina. We believe that the Gov-
ernments of Brazil and Mexico in particular are
concerned that Argentina's behavior could affect
their own creditworthiness.
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International Financial Situation:
Trade Surplus of Key LDC
Debtors Triples
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
We estimate that the aggregate trade surplus of 15
key debt-troubled LDCs 'rose to nearly $43 billion
in 1983, up from $15 billion in 1982 and $2 billion
in 1981. A sharp drop in imports was the underly-
ing factor behind the trade balance improvement.
Exports declined for a third consecutive year, pre-
venting an even further increase in the surplus. For
1984, we expect the key LDC debtors to sustain
their surpluses. A further sharp improvement is
unlikely because the steep decline in imports may
have bottomed out and only modest export gains
are expected.
Imports Decline in 1983
Imports of the 15 debt-troubled LDCs plummeted
last year. For these countries, imports fell $31
billion in 1983-a drop of 28 percent from 1982
and 41 percent from the 1981 peak. Total foreign
purchases of the oil-exporting debtors-Mexico,
Ecuador, Indonesia, Nigeria, and Venezuela-fell
37 percent. Venezuela reported the steepest de-
cline-an estimated 50-percent drop-followed by
Mexico and Nigeria with declines of 44 percent
and 41 percent, respectively. Among the remaining
LDC debtors, Argentina, Brazil, Chile, and Kenya
had 1983 import drops ranging from 16 to 26
percent. Since 1981, foreign purchases by Argenti-
na and Chile have fallen by more than half. Only
Costa Rica and Zaire managed to increase their
imports in 1983:
Despite the sharp overall drop in 1983, the two-
year decline in imports may finally be ending.
' The 15 countries we examined are Argentina, Brazil, Chile, Costa
Rica, Ecuador, Indonesia, Ivory Coast, Kenya, Mexico, Morocco,
Quarterly data for 1983 show imports mostly un-
changed in the second half from the low point
reached in the second quarter. The leveling off in
imports may signal that most of the LDC debtors
have pared imports as much as is feasible. Among
the key debt-troubled countries, the import trend
varied widely over the course of the year. Argenti-
na, Indonesia, Peru, and the Philippines cut imports
throughout the year while Chile, Nigeria, and
Venezuela registered strong fourth-quarter in-
creases. Mexican imports recovered slightly in the
second quarter and remained at that level the rest
of the year.
Exports Continue To Decline
Exports for this group of debtor LDCs performed
poorly in 1983, despite a midyear rise in primary
commodity prices and increased imports by the
industrial countries. Total exports fell 3 percent in
1983-about $4 billion-on the heels of an 8-
percent drop in 1982. A plunge in oil exports early
last year was largely responsible for the overall
1983 decline. Exports of the five oil-exporting
debtors fell by more than $5 billion in 1983. Most
of the remaining debtors turned in unimpressive
export performances. Even with a record wheat
harvest, Argentina managed only a 3-percent ex-
port gain. Only Brazil reported a substantial gain,
with a $1.6 billion or 8-percent increase.
Despite the generally poor export performance of
these debtor LDCs, sharp import cuts led to a huge
rise in their aggregate trade surplus to nearly $43
billion. In the last three quarters of 1983, the trade
surplus ran at about a $47 billion annual rate. The
five oil exporters saw their surplus rise to $37
Nigeria, Peru, the Philippines, Venezuela, and Zaire
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Trade Trends in Key Debt-Troubled Countries a
Argentina
Exports
9,030
7,620
7,880
7,740
7,340
7,500
8,950
Imports
9,530
5,390
4,530
4,300
4,860
4,800
4,140
Balance
-500
2,230
3,350
3,440
2,480
2,700
4,810
Brazil
Exports
23,280
20,210
21,860
20,890
23,000
22,320
21,240
Imports
24,140
21,090
16,760
17,550
16,340
17,040
17,040
Balance
-860
-880
5,100
3,340
6,660
4,200
4,200
Chile
Exports
3,980
3,810
? 3,870
3,670
4,160
3,890
3,750
Imports
.6,400
3,560
2,790
2,820
2,680
2,670
2,970
Balance
-2,420
250
1,080
850
1,480
1,220
780
Costa Rica
Exports
960
870
860
790
800
990
850
Imports
1,210
860
960
900
980
970
1,000
Balance
-250
10
-100
-110
-180
20
-150
Ecuador
Exports
2,520
2,150
2,200
2,230
2,310
2,080
2170
Imports
2,240
1,990
1,470
1,550
1,420
1,310
1,600
Balance
280
160
730
680
890
770
570
Indonesia
Exports
22,240
22,150
20,970
18,810
22,120
21,270
21,660
Imports
16,710
17,280
13,690
15,350
13,610
13,720
12,080
Balance
5,530
4,870
7,280
3,460
8,510
7,550
9,580
Ivory Coast
Exports
2,540
2,300
2,170
2,410
1,730
2,300
2,230
Imports
2,390
2,180
2,020
2,110
1,770
2,080
2,140
Balance
150
120
150
300
-40
220
90
Kenya
Exports
1,140
1,020
800
820
800
760
820
Imports
1,960
1,620
1,200
1,070
1,140
1,280
1,300
Balance
-820
-600
-400
-250
-340
-520
-480
Mexico '
Exports
19,460
21,580
21,170
20,040
21,160
21,860
21,620
Imports
24,120
14,620
8,160
6,550
8,770
8,630
8 680
Balance
-4,660
6,960
13,010
13,490
12,390
13,230
12,940
Morocco
Exports
2,350
2,060
2,040
2,020
2,050
2,030
2,060
Imports
4,400
4,320
3,620
3,700
3,420
3,800
3,560
Balance
-2,050
-2,260
-1,580
-1,680
-1,370
-1,770
-1,500
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Trade Trends (continued)
Exports
19,23C
16,370
14,630
10,080
14,930
17,700
15,830
Imports
17,410
13,230
7,840
8,650
7,080
7,470
8,150
Balance
1,820
3,140
6,790
1,430
7,850
10,230
7,680
Peru
Exports
3,260
3,260
3,150
2,680
3,250
3,250
3,390
Imports
3,480
3,610
2,440
2,570
2,430
2,400
2,380
Balance
-220
-350
710
110
820
850
1,010
Phili
ppines
Exports
5,660
4,960
4,900
4,680
4,790
4,970
5,160
Imports
8,450
8,300
7,830
8,230
8,200
7,690
7,190
Balance
-2,790
-3,340
-2,930
-3,550
-3,410
-2,720
-2,030
Ven
ezuela
Exports
20,980
17,500
15,600
15,030
17,000
15,090
15,290
Imports
12,060
12,720
6,290
8,220
5,130
5,170
6,650
Balance
8,920
4,780
9,310
6,810
11,870
9,920
8,640
Zaire
Exports
670
570
560
620
560
540
520
Imports
670
~ 480
490
370
610
480
500
Balance
0
90
70
250
- 50
60
20
Tota
l
Exports
137,290
126,450
122,650
112,520
126,000
126,530
125,560
Imports
135,180
111,240
80,090
83,940
78,450
78,550
79,370
Balance
2,110
15,210
42,560
28,580
47,550
47,980
46,190
a Exports f.o.b. and imports c.i.f. Quarterly data are seasonally
adjusted at an annual rate.
billion in 1983. The nonoil debtors' more than $5
billion aggregate surplus was the first positive
balance in at least a decade. Forty percent of the
total trade balance improvement for the 15 coun-
tries came from Brazil and Mexico, with each
showing a gain of about $6 billion. Nigeria and
Venezuela increased their surplus by an average of
$4 billion. Only the Philippines, Kenya, and Mo-
rocco continued to run a significant trade deficit.
We believe that a further sharp increase in the
trade surplus is unlikely. Imports probably will rise
slightly in 1984. Many LDC governments face
strong domestic pressure for increased imports to
relieve shortages and revive economic growth. Con-
tinued foreign exchange constraints and a dearth of
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Secret
Debt-Troubled LDCs: Recent
Trade Trends, 1980-848
60
I~~~I~~~I~~~I~~~
50 1980 81 82 83
trade financing, however, will limit the extent of
the increase. Exports of these countries should
recover slightly this year. Nearly all of the debtor
countries devalued their currencies in real terms
last year, and the OECD recovery will aid debtor
LDC exports; however, surplus stocks of many
commodities and the moderate pace of industrial
country recovery may prevent a strong export
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Secret
Soviet economic growth accelerated slightly in
1983, as it had in 1982. We estimate that the
increase in GNP last year was about 3 percent,
compared with 2.6 percent in 1982 and 2.1 percent
in 1981.' Better weather, the discipline campaign,
managerial changes, and substantial additions of
new plant and equipment contributed to the econo-
my's improved performance.
Soviet consumers benefited from the economy's
faster growth. Per capita consumption rose roughly
1.5 percent following a small decline in 1982. As in
1981 and 1982, capital outlays grew more rapidly
than consumption and GNP as a whole.
Industry
Industrial production increased by about 3.5 per-
cent, asubstantial improvement over the 2.3-per-
cent rise the previous year. Output of over 90
percent of the nonfood industrial items for which
the Soviet Central Statistical Administration gives
figures was greater in 1983 than in 1982. In 1982,
output of only about two-thirds of these products
increased, and then only modestly. Sharp increases
were registered in chemicals, foods, machine build-
ing, and ferrous metallurgy. Production of crude
and finished steel increased 4 percent, compared
with negligible growth in output in 1982.
Performance in the critical energy sector was
mixed. After three decades of growth, oil produc-
tion is leveling off. Output grew by about one-half
of 1 percent and averaged 12.3 million barrels per
day in 1983. Although gas output grew by about 7
percent, raw coal output fell to 716 million tons, 7
USSR: Growth of Gross Average annual percent
National Product,
by Sector of Origin a
1976-80b
1981
1982
Preliminary
1983
Gross national product
2.6
2.1
2.6
3.0
Agriculture b
1.2
0.5
6.1
3.7
Nonagricultural
sectors
3.0
2.5
1.9
3.0
Industry
3.2
2.4
2.3
3.5
Construction
1.9
2.l
0.8
3.5
Transportation
3.5
3.8
0.9
2.7
Communications
5.8
5.0
3.2
3.2
Trade
2.9
2.4
0.7
2.2
Services
2.8
2.5
2.2
2.3
Other
2.6
2.1
2.6
3.0
a CIA estimates valued at factor cost.
b Excludes infra-agricultural use of farm products but does not
make an adjustment for purchases by agriculture from other
sectors. Value added in agriculture grew at an average annual rate
of 0.5 percent in 1976-80, -0.3 percent in 1981, 7.1 percent in
1982, and 2.8 percent in 1983.
million tons below plan. The combined output of
major fuels-oil, gas, and coal-increased less than
2.5 percent, compared with the 3-percent rate of
growth attained in 1982.
Agriculture
Because of a larger grain harvest and sizable gains
in the livestock sector, farm output rose by over 3.5
percent last year, compared with a 6-percent rise in
1982. These calculations of growth in farm output
are subject to considerable uncertainty, largely
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Industrial production
Preliminary
1976-80 1981 1982 1983
a CIA estimates except as noted.
b Includes oil, natural gas, coal, hydroelectricity and nuclear
electricity, peat, oil shale, fuelwood, and other renewable energy
sources.
Calculated from official Soviet data.
because the Soviets have not published grain crop output grew by 6 percent to an all-time high of
figures since 1980.2 Of the crops reported on, more than 96 million tons, reflecting the mild
output of sugar beets and potatoes was up marked- 1982-83 winter and unusually good forage crops in
ly; cotton and vegetable crops, however, were down 1982 and 1983. At the same time, the number of
from 1982 levels.0 livestock rose to new highs, reflecting both the
better harvest in 1983 and the leadership's strong
A particularly good performance was turned in by emphasis on the building of herds.
the livestock sector. Meat output reached a record
16 million tons, up 4 percent from 1982. Milk
Although the Soviets have not disclosed the size of the 1982 grain
harvest, we recently increased our estimate from 165 million tons to
180 million tons because of additional information received from
Soviet press reports on yields and state purchases in 1982.
Secret
30 March 1984
Quality foods were in greater supply last year as a
result of the improved agricultural performance,
although not enough to relax the informal rationing
system for some food items. Surveys of private
farm markets and state retail stores showed in-
creased supplies of most foodstuffs. Still, private
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USSR: Production of Selected Farm Products
Milk 91
Eggs (billion units) 68
Livestock herds a 121.5
a USDA estimate.
n End of year (1970 ? 100).
growth.'
farm market prices rose slightly, a sign that the
increased supplies of food were not sufficient to
meet the additional demand generated by income
Transportation
1982.
The transportation picture was also rosier in 1983.
Total freight turnover increased about 5 percent,
with all modes of transport showing marked im-
provement. Most significant was the turnaround in
the performance of the railroads, the backbone of
the transport system. Rail freight turnover in-
creased 4 percent after falling over 1 percent in
Highways
6
1
2.5
Oil pipeline
4
3
4
Gas pipeline
14
13
12
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Foreign Trade
We estimate that the value of Soviet imports grew
about 5 percent and the value of exports approxi-
mately 7 percent in 1983, with most of the gains
coming from increased trade with Communist
countries. Moscow's hard currency current account
position is estimated to have remained at about the
1982 level-a surplus of about $4 billion. The
Soviets boosted oil exports last year to counteract
the fall in oil prices, increased arms deliveries to
less developed countries, and restricted the growth
of imports.
Reasons for the Better Performance
The somewhat improved economic performance
owes much to last year's return to normal weather,
which helped boost farm production. In addition, a
relatively benign winter and spring with warmer-
than-normal temperatures and below-normal snow-
falls benefited nonagricultural sectors. The more
favorable conditions bolstered industrial production
by permitting some rebuilding of stocks of fuels and
other inputs less in demand when the weather is
mild. The weather also helped ease transportation
snarls, which, in turn, relieved industrial bottle-
necks.
Another factor that contributed to improved per-
formance was the substantial addition to new pro-
ductive capacity in the last two years. The new
plant and equipment brought on line increased by a
hefty 5.2 percent in 1982 and at roughly the same
Policy and personnel changes introduced by the
new regime also played a part in the more .rapid
growth. Andropov's discipline campaign appears to
have compelled greater effort from both labor and
management. Management changes may have been
a particularly significant factor in the turnaround
in rail transportation, asector which seems to have
suffered from especially lax leadership during the
Brezhnev era. The new Minister of the Railways,
Nikolay Konarev, not only tightened discipline, but
Secret
30 March /984
also instituted several new programs-such as en-
listing industrial enterprises and other shippers in
the repair of damaged freight cars-that apparent-
ly paid some dividends.
Capital investment rose by 4 or 5 percent last year,
thereby absorbing a larger share of GNP, as it had
in the first two years of the 11th Five-Year Plan
(1981-85). For 1981-83 as a whole, average annual
growth in new fixed investment was about 4 per-
cent, compared with about 2.7 percent for GNP.
The 11th Five-Year Plan, however, called for slow-
er growth in investment than in overall economic
growth. The rationale was that lagging investment
growth would be offset by rising capital productivi-
ty based on more efficient use of capital and
speedier technological progress. The consistently
faster increase in investment than in GNP suggests
that this strategy was abandoned or ignored. Plan-
ners also may have been unable to control invest-
ment from the center, particularly new construction
activity.
Although growth in consumption continued to in-
crease at a slower rate than GNP, the consumer
fared better in 1983 than in 1982, with per capita
consumption rising roughly 1.5 percent. Serious
imbalances in consumer markets continued in
1983, however, reflecting the mismatch, between
output mix and consumer demand. In addition,
mostly because of previous price increases, inven-
tories of some nonfood goods rose, causing Moscow
to reduce prices on selected consumer items three
times last year.
Soviet data yielded no direct information on alloca-
tion of resources to the third major end-use compo-
nent of GNP-defense. The official defense budget
for 1983 did not increase over the previous year,
but this figure is of little significance; it is' far lower
than actual defense expenditures and incompatible
with known Soviet force levels and military pro-
grams.
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USSR: Economic Plan for 1984
The optimistic economic goals announced at the
Supreme Soviet meeting in December could be
accomplished if the weather continues favorable
and if a continuation of the discipline campaign
exacts even greater efforts from Soviet workers
The 1984 plan is conservative. It points to no
significant changes in resource allocation policy
and contains no initiatives for altering the way the
Soviet economy is run. The 1984 plan is unlikely to
be affected significantly by Andropov's death.
With 1984 already well under way, Chernenko is
not in a position to introduce major changes this
year and has not indicated any disposition to do so.
1984 Targets
Soviet plans imply a GNP growth rate in 1984 of
about 3 percent,. Planned growth in industrial
production is 3.8 percent-roughly equal to our
estimate of actual growth of about 3.5 percent in
1983. Of those sectors for which goals have been
published, the key machine-building sector is
scheduled for the most rapid growth-5.8 percent.
In the energy sector, the targeted rates of growth
for oil and natural gas are 1.3 percent and 7.8
percent, respectively. Both goals are probably over-
ly ambitious-oil output grew only about one-half
of 1 percent in 1983. Indeed, production from the
key Tyumen' region failed for the first time last
year to reach planned output. Annual increases in
natural gas production of about 7 percent have
been more typical in recent years. The 723-million-
ton goal for coal production is the same as the 1983
target. Coal production declined from 718 million
tons in 1982 to 716 million tons last year.
USSR: GNP Growth Average annual percent
1981
2.1
1982
2.6
1983
3.0
1984 Plan
3.0
1981-85 Plan
4.0
Plenty of soil moisture so far this year bodes well
for both the winter grain crop and for spring
planting. The mild winter weather experienced so
far also holds out the prospect of an improved
performance by the livestock sector in 1984. But
favorable weather conditions must continue if agri-
cultural output this year is to exceed the 1983 level.
The plan calls for growth in rail freight turnover to
slip to below 2 percent from 4 percent in 1983. This
projected decline, despite plans to maintain the
1983 GNP growth rate, probably reflects Soviet
intentions to markedly improve efficiency of the
railroads by reducing the amount of "irrational"
hauls through new incentives, decentralizing man-
agement, and stepping up the pace of moderniza-
tion. In addition, it could indicate continuing ef-
forts to raise the share of freight carried by other
modes of transport.
Prescriptions for Meeting Goals
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Agricultural output is to rise by roughly 5 percent,
above the 3.7-percent gain calculated for 1983.
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productivity, greater resource conservation, "a de-
cisive turn" toward scientific and technological
progress-but offered little on how these require-
ments are to be met. Nor have Chernenko's speech-
es and comments since he replaced Andropov given
any guidance on how this is to be done.
The speech delivered on behalf of Andropov at the
December Central Committee meeting repeated
previous appeals for stricter worker and manage-
ment discipline and increased efficiency in the use
of labor, plant and equipment, and raw materials.
It called for the growth in labor productivity to
exceed by a percentage point the targets laid down
in the plan itself (3.4 percent for labor productivity
in industry, 3.3 percent in construction, and 8.5
percent in socialist agriculture-far above what the
Soviets have actually achieved in recent years).
Andropov's speech likewise urged an additional cut
in production costs of half a percentage point
beyond the cost reduction targets in the plan. The
purpose in tacking on these additional requirements
is perhaps to dramatize the need for greater effi-
ciency.
Demands for higher labor productivity are rising as
the labor supply squeeze intensifies. Total .civilian
employment increased by 0.6 percent in 1983-0.5
percent in industry-compared with an average
annual rate of growth of 1.2 percent during 1976-
80 and of 1 percent during 1981-82. The plan
indicates even slower growth-about 0.4 percent-
in 1984.
The plan also lays down tougher conservation goals
for energy, metals, and raw materials, but they are
unlikely to be reached. Enterprise managers proba-
bly will concern themselves foremost with meeting
output targets.
Andropov's December report urged more rapid
"scientific and technological" advances. But noth-
ing in Andropov's remarks suggested an intent to
make significant changes in the Soviet planning
and incentive system, which discourages innovation
and retards technological progress.
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30 March 1984
Little Change in Policy Implied
In his short tenure, Andropov repeatedly and can-
didly acknowledged that the USSR was plagued by
serious economic problems. Despite his demands
for bold action to deal with them, he basically
continued Brezhnev's policies, although Andropov's
mark is evident in selected areas-the discipline
campaign, for instance. In 1984, under Chernenko,
continuity will apparently remain the hallmark of
the USSR's economic program. For the most part,
the 1984 plan merely reemphasizes programs and
initiatives inherited from the Brezhnev regime
Resource Allocation. The 1984 plan calls for a
3.9-percent increase in fixed capital investment.
Because investment growth has run well ahead of
plan each year since the 11th Five-Year Plan
began, however, the actual increase in investment
in 1984 may well be greater. The 1984 plan does
not indicate major changes in the allocation of
investment resources among the major claimants.
Finance Minister Garbuzov indicated that capital
investment will go "in the first place" for projects
in energy and the agro-industrial complex, metal-
lurgy, machine building, chemicals, transport, and
consumer goods. With the exception of consumer
goods and chemicals, these sectors are the same
ones singled out for priority attention in the 1981-
85 Plan.' Investment in energy is to grow by 11
percent this year. This is in line with the five-year
increase of 50 percent originally targeted for ener-
gy in the 11th Five-Year Plan.
Several of the planned goals imply a 4-percent
increase in consumption in 1984, compared with a
rise of almost 2.5 percent in 1983. Fulfillment of
the consumption plans will depend in part on
availability of foodstuffs, and, therefore, on agri-
cultural performance. The planned acceleration in
growth of consumption is to be accompanied by a
continuing decrease in wage growth to help contain
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a buildup of unspent purchasing power should
targets for consumer goods and services not be met. USSR: Average Annual Growth in
T___!__ T__J_ tl_~_____ ..
No targets for military spending are given except in
the meaningless defense budget, which is essential-
ly the same as the ones published for the last three
years. The only reference to defense in the Andro-
pov speech presented to the party plenum last
December stated that "everything necessary has
been done to maintain the country's defense capaci-
ty at a proper level."
Agricultural Policy. Soviet agricultural policy ap-
pears unchanged. No new plans for crop production
were promulgated, and support for the Food Pro-
gram apparently will be continued. The agro-
industrial complex is to receive a huge share of
total investment-about one-third-with large in-
creases going to support activities such as rural
transportation, storage facilities, and production of
agricultural machinery and fertilizer.
Foreign Trade Policy. The foreign trade plan sug-
gests that Moscow is still bent on increasing trade
with its Warsaw Pact partners and other Commu-
nist countries at the expense of trade with the
West. In his annual report to the Supreme Soviet,
Gosplan Chairman Baybakov said that the volume
of trade with "socialist countries" would increase
10 percent and would reach 61 percent of total
Soviet trade turnover. It amounted to 54 percent in
1980. He implied that trade with capitalist coun-
tries would drop about 10 percent. Aside from the
desire to reduce the reliance of CEMA countries on
the West, an important factor in Moscow's policy is
a longstanding desire to limit its borrowing from
the West. The regime also may be anticipating
some decline in its hard currency earnings this year
because it expects reduced earnings from oil and
e Calculated from Soviet data expressed in constant prices.
b Estimated.
Soviet statements are unclear as to whether 1984 plan figures are
stated in constant or nominal terms.
modest economic reforms already instituted or
announced before December. The Andropov speech
to the Central Committee, for example, called for
continuation of the drive to expand the use of small
labor brigades in industry, construction, and agri-
culture. In addition, it strongly endorsed the "in-
dustrial experiment"-announced in mid-1983 and
given mounting publicity since then-that gives
increased autonomy to enterprises in five industrial
ministries. The experiment began 1 January 1984.
Both the brigade system and the main elements of
the five-ministry experiment are essentially contin-
uations of programs and experiments introduced
under Brezhnev.
Andropov undoubtedly faced both economic and
political obstacles-such as a conservative ideology
and an entrenched bureaucracy-in his efforts to
introduce change. In addition, however, other fac-
tors may help explain why Andropov did not
introduce a more dynamic economic program:
arms exports.
The 1984 plan and the accompanying comments by
Soviet leaders-including those by Chernenko
since he became General Secretary-indicate that
the leadership does not intend to go beyond the
? The somewhat improved performance of the
economy in 1983 may have increased Moscow's
confidence that actions already taken had been
sufficient to ensure more rapid growth in the
_years ahead.
? Andropov may have been mustering his resources
for the 1986-90 planning period.
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? Andropov may have been forced to slow the pace
at which he was proceeding in exchange for
gaining the appointment of "his team" to key
party and government posts.
? Failing health also may have prevented Andropov
from pushing for more vigorous measures.
For the moment, the watchword under the Cher-
nenko leadership is continuity. It is difficult to
know what approach to the economy the new
General Secretary might take in the longer run,
particularly since his past statements do not sug-
gest aclearly defined or comprehensive economic
philosophy or strategy. He has been aligned with
those urging more attention to consumer welfare
and corresponding increases in the availability of
consumer goods. He thus might opt, in the 12th
Five-Year Plan, for some redirection of investment
toward consumer goods and services sectors. He
has also advocated regional administration of spe-
cific economic programs, such as the Food Pro-
gram. He apparently prefers regional to ministerial
organization. In 1982 he attacked the autonomy of
the' ministries, which he said "eats away like rust at
the economic mechanism." There is nothing in his
background or past pronouncements to indicate an
inclination toward bold systemic change that would
significantly reduce centralized planning or man-
agement.
Secret
30 March 1984
The first major Central Committee resolution pub-
lished by the new regime suggests a hostile attitude
toward challenges to basic elements of the econom-
ic system. The resolution chastises the Institute of
Economics of the Academy of Sciences for superfi-
cial and misguided research and analysis and urges
the Institute to undertake work with more practical
application. The attack on the Institute appears to
be a veiled, high-level warning to academic econo-
mists generally to cease openly proposing radical
and sweeping changes. The resolution could signal
an end to the candid, far-ranging public discussion
of economic issues encouraged by Andropov, at
least in his early months as General Secretary. ~
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India: Economic Ties With the
Soviet Union
Stung by sharp cutbacks in Soviet purchases of
Indian goods in late 1982 and 1983, Indian export-
ers and economic analysts have begun to take a
more careful look at economic ties with the USSR.
Many Indians now believe that Indian industry has
outgrown the need for less sophisticated and low-
quality Soviet products and that agreements requir-
ing abalance in bilateral payments are becoming a
burden. We believe, however, that mounting pay-
ments for Soviet military equipment will soon
stimulate Indian exports to the USSR. Arms trade
will help solidify economic and political links with
Moscow but may strain India's overall balance-of-
payments position.
Economic Relationship
India's economic relations with the Soviet Union
are governed by agreement to balance all bilateral
payments. All transactions are made in Indian
rupees through the Indian banking system, elimi-
nating the need for hard currency.
To avoid large or persistent payment imbalances,
the two governments negotiate annual and five-
year targets for merchandise trade. The actual
value of imports and exports depends on separate
contracts signed and implemented by public- and
private-sector organizations. Trade targets are not
always met, and a payments balance is not always
achieved.
If the USSR runs a surplus, Moscow
invests in Indian Government securities.
Bilateral trade patterns have changed markedly
since the mid-1950s, when the agreements began.
Machinery and equipment once accounted for
about 75 percent of Indian purchases. Now that
New Delhi has built up its heavy industrial base,
The Political Impetus,for Trade
India's economic agreements with the Soviet Union
provide a symbol o,/'mutual cooperation as well as
a mechanism for regulating trade. In our judg-
ment, most Indians view rupee payments arrange-
ments as evidence of Soviet support. For Moscow,
the political benefits of being seen as a friend of
India probably outweigh any economic advantages
or disadvantages.
The political overtones of trade induce both gov-
ernments to try to achieve the required payments
balance by expanding imports or exports. A
planned cutback would be interpreted by the Indi-
an press-and by us-as evidence of a souring
political relationship.
local manufacturers are capable of supplying much
of the country's requirements. Officials and busi-
nessmen frequently spurn Soviet capital goods in
favor of better quality equipment and more ad-
vanced technology from Western suppliers.
A new phase in New Delhi's economic relations
with Moscow began in the mid-1970s, when the
Soviet Union agreed to sell India more petroleum,
including some Middle Eastern crude. The scope
for growth in Indian exports is now determined by
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India: Trade With the USSR, 1960-83
purchases of crude oil and petroleum products,
which account for 80 percent of New Delhi's
imports from the Soviet Union.
A surge in Indian exports set the stage for recent
problems, according to press reports. Soviet trade
organizations began a buying spree in India in 1981
when they were faced with hard currency shortages
but ample rupee earnings., Indian firms and subsid-
iaries of multinationals expanded output of manu-
factured consumer goods in order to cater to Soviet
demand and take advantage of export subsidies and
production incentives offered by the Indian Gov-
ernment. By 1982, however, the price of crude oil
began slipping, and the Indian trade surplus grew
much larger than needed to cover military and
civilian debt service. At its peak, sometime in late
1982 or early 1983, the payments imbalance proba-
bly exceeded the equivalent of $500 million. India
was lending large sums of money to the Soviet
Union.
Secret
30 March 1984
The huge payments imbalance provoked painful
corrective measures. Indian exporters bore the
brunt of bringing the account into balance. Accord-
ing to the Indian press, sales of cashew nuts,
pepper, and tobacco were sharply reduced. Indus-
tries that. had expanded to serve the Soviet mar-
ket-especially detergents, cosmetics, pharmaceu-
ticals, and woolen knitwear-were forced to curtail
output. Exports of cotton textiles also slumped,
though a prolonged strike in Bombay mills contrib-
uted to the decline.
Reappraisal of Economic Ties
Disruption of exports has led Indian businessmen
and economic journalists to reassess the gains from
trade with the Soviet Union. The tenor of extensive
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press comment is that India got a good deal in the
past but may be handicapped in the future by the
requirement to balance bilateral payments.
India:
Annual Military Import Payments
Additional exports are the principal benefit India
receives from its economic agreements with the
Soviet Union, in our judgment. Moscow accepts
low-quality or high-cost products, partly produced
from surplus capacity, that are of little interest to
other countries. Indian suppliers with weak market-
ing skills especially appreciate the ease of selling to
the Soviet Union. We doubt that Moscow would
buy so much from India if it were not bound by an
1975-79
175-325
150-225
25-100
Current
500-600
300-400
200
1985-89 a
800-1,500
500-1,000
300-500
e The wide range of our estimates reflects uncertainty about the
pace of future deliveries and lack of complete information about
prices and credit terms.
obligation to balance bilateral payments.
In return, India imports goods that policymakers in
New Delhi consider essential-aid-financed equip-
ment to develop ,public-sector industries at first and
now petroleum. The USSR offers cheap credit for
military purchases and assists India with domestic
military production. New Delhi has sometimes
turned to the Soviet Union after access to Western
supplies or aid was curtailed.
We believe the disadvantages of the trade arrange-
ment with the Soviet Union have usually been less
evident. India may pay slightly higher prices for
nonmilitary goods, according to academic studies.
In addition, public-sector officials are alert to the
danger that industrial expansion based on inferior
Soviet equipment could lead to technological obso-
lescence. Finally, Soviet purchases of particular
commodities vary widely from year to year. Since
1982, exporters have become acutely aware of the
risk of a sharp decline in sales. Producers who cater
primarily to the Soviet market are especially vul-
nerable.
The balance of gains and losses from bilateral
economic agreements is now shifting to India's
disadvantage, in the view of many businessmen and
economic journalists. A consensus now emerging in
the Indian business press holds that petroleum
imports cannot sustain continued growth in bilater-
al trade, and India does not need other products the
Soviet Union is willing to offer. Yet, the obligation
to balance bilateral payments means that exports to
the Soviet Union cannot grow if imports stagnate
or fall. Therefore, many in the business community
argue that New Delhi should break the link be-
tween imports and exports by revising economic
agreements with the Soviet Union and settling any
payment imbalances in hard currency.
The Indian business community probably does not
need to worry about a loss of Soviet markets. In our
view, the overall trading relationship will be sus-
tained by sharply rising Indian military payments,
which will generate new export opportunities. By
our estimates, agreements signed since early 1980
and those now being negotiated will greatly in-
crease annual payments for military purchases over
the next several years, perhaps by as much as $700
million. In addition, interest and amortization pay-
ments on past equipment deliveries will continue.
If our higher estimates of military payments prove
correct and if petroleum exploration efforts contin-
ue to be unsuccessful, New Delhi could have
difficulty balancing the bilateral account through
increased exports. In that event, it could revise the
bilateral payments agreement or shift oil purchases
to the world market. Such a shift would increase
India's already sizable hard currency deficit.
The rise in military payments will coincide with"
increased payments to the IMF and to commercial
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Arms Imports
We estimate that India has ordered more than $14
billion in arms since 1970, nearly $10 billion since
Prime Minister Gandhi's return to power in 1980.
The more recent orders indicate, in our view, a
strong government commitment to building a more.
modern and powerful military, concern about de~-
ciencies in Indian defense industries, and a reac-
tion to US arms sales to Pakistan.
Although New Delhi. remains willing to purchase
limited quantities ofselected high-technology arms
from the West, 70 percent of recent purchases have
been,from the Soviet Union. Imports have included
aircrgJ't, helicopters, missiles, armored.fiQhtinQ
vehicles, artillery, and warships.
the Indians are negotiating with the
Soviets.for the procurement oJa wide variety of
additional arms and increased defense coopera-
tion, which we value at several billion dollars.
Moscow is offeringNew Delhi some oJits most
advanced military hardware and technology at
.favorable prices and repayment terms.
bankers and with stagnation in concessional aid
receipts. We believe that Indian officials will blame
any balance-of-payments strains on reduced US
support for Indian borrowing from international
financial institutions rather than on their own
military purchases.
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~ecrer
South Africa: Implications of
Falling Gold Production'
The confidence of white South Africans has long
been sustained by a sense of the fundamental
economic strength of their country, based on the
world's richest endowment of gold and a long
history of economic growth. The implications of the
long-term decline in South African gold production
since 1970 suggest that such confidence is not well
founded.
In our judgment, South Africa's conservative eco-
nomic policymakers will continue to prefer short-
term financial stability to riskier policies aimed at
boosting growth over the longer term. This means
that they will continue to manage demand for
imports at levels that can be financed by gold
earnings, which are likely to be volatile. As a result,
we think the South African economy will grow at
little more than 2.5 to 3.0 percent annually through
the rest of the 1980s.
Slow growth will limit the resources available to
the government and increase feelings of insecurity
among South African whites. We doubt, however,
that South Africa's economic predicament will give
Washington much leverage over the way Pretoria
conducts its domestic or regional policies.
Background
Gold mining has been the major factor in South
African economic development since the discovery
of large reefs of gold in 1886 in the area around
which Johannesburg has developed. The more than
30-percent decline in the country's gold output
since its peak in 1970 has cast a shadow over
Pretoria's economic outlook. Although gold produc-
tion increased slightly last year and we expect
similar rises in 1984 and 1985, annual gold output
probably will resume its long-term downward trend
thereafter, dipping below 600 tons annually by the
early 1990s.
Impact of Declining Gold Production on Economic
Growth
The fall in South African gold production has been
a drag on the country's economic growth:
? The decline has shrunk the contribution of min-
ing to real GDP from 18 percent in 1970 to 11
percent in 1983.
? The fall in gold production has limited the
amount of foreign exchange available for imports,
including capital goods critical to economic
growth; earnings from gold sales nevertheless '
enable South Africa to import at one-and-one-
half to two times the level that would be possible
without gold.
? This foreign exchange constraint has induced the
government periodically to adopt fiscal and mon-
etary policies that deliberately sacrifice economic
growth in order to stifle demand for imports.
Foreign exchange shortages caused by the fall in
gold production would have been much more severe
except for steep, speculative increases in the price
of gold. Increased earnings from gold sales-from
an average of. $1.5 billion a year in the early 1970s
to $10 billion annually so far in the 1980s-offset
slightly more than half of a $16 billion increase in
the cost of imports and net services during the same
period.
To meet severe current account deficits in 1970-71,
1975-76, and 1981-82, economic policymakers in
Pretoria followed essentially the same pattern of
behavior each time: initially selling gold from the
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The Outlook for South African Gold Production
According to South African mining experts, most
of the easily mined ores in the country were
exploited long ago; remaining ores are largely at
extreme depths and of low grade. Average yields
dropped from 11.2 grams per metric ton of ore in
1970 to 6.4 grams in 1982, and we expect that ore
grades will continue to decline. Mining experts do
not foresee any major new discoveries.
Production rose slightly last year and will proba-
bly do so again this year and in 1985, but we
believe this is only a temporary development. The
decline in gold prices since 1980 has induced
companies to bypass lower grade ores that could
have been mined profitably at higher prices.in
order to concentrate on dwindling veins of relative-
ly high yield ore. In addition, the price surge in
1980 induced several companies to expand their
capacity to mill ores and led to the development of
one additional mine that is just now coming on
The Mines
The top dozen South African gold mines, which
include all of those that produced over 25 tons of
gold in 1982, account for nearly two-thirds of the
country s gold production. Nine of these are more
than 20 years old and beyond their peak produc-
tive years, but they are still workingfairly rich and
extensive ore deposits and should be able to keep
producing-albeit at a lower rate Jor the next 10
to 30 years.
Ore bodies have been substantially depleted and
ore grades are falling rapidly in almost all of
South Africa's other 28 gold mines. We estimate
that at least 12 of these accounting for about one-
seventh of total production will be closed by the
early 1990s.
Unless gold prices soon regain high levels-$800
an ounce or more for a sustained period, we
estimate that the level of new investment in South
African gold mines will decline. New projects are
becoming increasingly expensive to bring into pro-
duction. Projects scheduled for startup over the
next several years consist primarily of extensions
to existing mines. Moreover, the depletion of the
richest ore reserves is inducing the mining industry
to shift its attention from gold to coal, according to
the South African Chamber of Mines.
government's stock,z then using monetary and fiscal
tools-higher interest rates and reduced govern-
ment spending-that constrained economic growth
to reduce demand for imports.
We believe that Pretoria's policy of periodically
stifling growth was the principal cause for the
decline in the average rate of South African eco-
nomic growth from 5.7 percent in the 1960s to 2.8
percent since 1970. Moreover, in our judgment,
' Although Pretoria generally exports its annual production of gold
to maintain a reputation as a reliable supplier to the international
market, it allows sales to exceed production when necessary to help
reduce current account deficits. Pretoria has drawn down its stock
of gold in government vaults by 60 percent, that is, 350 tons, since
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30 March 1989
Pretoria's reactions made it all the more difficult
for South Africa to adjust to the peaks and troughs
that have wrenched the world economy since the
early 1970s. Even ignoring the past three years-
when the South African economy reeled under the
combined impact of worldwide recession and severe
drought-the average annual rate of South African
economic growth (1971-80) was still less than 4
percent. Without the relief that the two gold price
surges of 1974 and 1980 provided for the foreign
exchange constraints on Pretoria, the rate of South
African economic growth during the years 1971-80
would in all likelihood have been less than 3
percent.
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South Africa: Gold Production
and Prices, 1960-83
Production Prices
Metric tons US $ per troy ounce
1,100 720
South Africa: Current Account
Trends and Real GDP Growth,
1970-83
Current Account Real GDP Growth
Billion US $ Percent
South Africa's Options
So long as South African gold production continues
to fall, we doubt that Pretoria will be able to avoid
payments predicaments in the future; Apart from
hoping for large new gold discoveries, which we and
.South African mining experts believe to be highly
improbable, or for large, sustained gold price in-
creases, which would be strictly fortuitous, we
believe that South Africa has essentially only two
alternatives to its established policy of periodic
clampdowns on growth: heavy borrowing from
Western banks or trying to accelerate the growth of
nongold exports.
The first option-increasing substantially public
and private borrowing from Western banks-prob-
ably already is a source of concern to economic
decisionmakers in Pretoria; South Africa's foreign
debt increased from about $7 billion in 1980 to $15
billion in mid-1983, according to statistics pub-
lished by the Bank for International Settlements.
Further increases-particularly large ones that
might threaten South Africa's solid international
credit rating-are unlikely because:
? They would mark a significant departure from
the pattern of economic fine-tuning that the
government has carried out successfully since the
decline in gold production began.
? They would clash with the Calvinist-based tenets
of the government's Afrikaner leaders, who tend
to view heavy debt as immoral.
? Heavy foreign debt in the perception of South
Africa's leaders would be a potential source of 25X1
leverage for foreign critics of the South :~frican
racial system.
Policymakers in Pretoria have lung recognized that
their second and most desirable option would be to
increase nongold exports enough to offset the loss
of the economic boost that steadily rising gold ?
production once provided. This would help the
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South African economy~sustain a higher level of
growth without a heavy burden of foreign debt or a
South Africa: Major Exports Million US $
need for sharp periodic curbs on growth.
Nearly all of South Africa's nongold exports con-
sist of raw and intermediate goods. Six product
groups~oal, diamonds, platinum-group metals,
metallic ores, ferroalloys, and corn-normally ac-
count for about 40 percent of the total. South
Africa has found it cheaper and easier to increase
exports of raw. ;and intermediate goods than to
produce and market finished consumer goods
The;long-term performance of South Africa's non-
gold exports has been good but not good enough to
make up for the combined effects of the fall in gold
production and inflation in import prices. The
country's nongold exports grew by an average of 20
percent annually during the period 1971-80-about
the same rate as that of total export growth in the
United States, the United Kingdom, and Japan.
This was well behind the export performance of
such fast-growing LDCs as Singapore and South
Korea, however, which achieved average annual
export growth rates of 31 percent and 34 percent,
respectively, in the same period
Moreover, South Africa's nongold exports have
declined by more than one-fifth since 1980. This
decline-the first in 25 years-resulted from re-
duced demand because of economic recession in the
principal markets for South Africa's nongold ex-
ports-Western Europe; the United States, and
Japan-and because of severe drought in 1983,
which halted corn exports.
We doubt that South African nongold exports will
achieve the kind of performance that would make
up for the loss of the growth stimulus that rising
gold production formerly provided. Although pros-
pects in foreign markets for coal and South Africa's
other five major nongold exports are fair to good,
they would have to be outstanding to fill the gap
created by the probable decline in export earnings
from gold.
Total
3,651
24,455
18,725 '
Gold ~
1,617
11,902
8,925
Nongold
2,034
12,553
9,800
Of which:
Coal
16
932
973
Diamonds
274
1,622
1,184
Platinum group
metals e
NA
900
700
Metallic ores
132
716
463
Ferroalloys
48
503
358
Corn
75
538
162
In our judgment, the South African Government .
will continue to restrict economic growth from time
to time in order to minimize current account
deficits caused by fluctuations in gold earnings. As
a result, South Africa's annual real economic
growth during the years 1984-90 probably will
average no more than 2.5 to 3 percent.
Implications
It has long been an article of faith among observers
of South Africa that economic hard times increase
the potential for political and social unrest. This
argument, however, has not held up well in the face
of the actual pattern of racial unrest in South
Africa. Although the Soweto riots in 1976 occurred
during an economic downturn, they were triggered
by noneconomic factors, particularly student griev-
ances over forced instruction in the Afrikaans
language. The extraordinary spurt in economic
growth in 1980, on the other hand, was accompa-
nied by a notable increase in major acts of protest,
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including an upsurge in strikes, school boycotts,
and riots. By contrast, during the severe economic
contraction of 1982 and 1983, outbreaks of racial
violence were relatively few in number and small in
scope.
We believe the potential for major racial distur-
bances will remain high under almost any economic
circumstances. Indeed, racial unrest-including the
small-scale labor strife and violent crime that occur
practically every ~ day in South Africa-may even
become more common and' extensive during periods
of rapid economic growth, which tend to intensify
black frustration and resentment over fundamental
social and political disparities that cannot be allevi-
?i ~~
ated by short-term economic gams.
In our view, the long-term leveling off of economic
growth that we expect will have some predictable,
albeit from the US standpoint, mixed effects:
? The financial burden of extensive military activi-
ties, such as those South Africa has undertaken in
Angola, and of maintaining administrative con-
trol over Namibia will become more onerous.
? Pretoria will also have fewer resources to spend
on domestic social and economic reforms.
? Business opportunities for the 400 US firms that
have subsidiaries, branches, and affiliates in
South Africa will be reduced, although US banks
may find increased opportunities for making
commercial loans to South Africa.
? Pretoria will likely seek balance-of-payments as-
sistance periodically from the IMF.
Neighboring southern African countries may
seek additional aid from the United States and
other foreign donors because of reduced growth
in South African demand for imports of manu-
factured goods (important to Zimbabwe) and for 25X1
migrant labor (from Lesotho, Mozambique,
Botswana, and to a lesser extent Swaziland and
Zimbabwe).
We doubt, however, that South Africa's economic
predicament will give Washington much leverage
over the way Pretoria conducts its domestic or
regional policies. South African leaders will proba-
bly not allow economic constraints to stop them
from protecting those things they regard as vital to
their country's security or to Afrikaner political
control.
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