INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707040001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: October 5, 2010
• Sequence Number: 1
• Publication Date: June 15, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Directorate of
Intelligence
International
Economic & Energy
Weekly
Seeret
Secret
DI IEEW 84-024
15 June 1984
COPY 685
?
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Synopsis
International
Economic & Energy
Weekly
Secret
spective-Limited Oil Market Reaction to Persian Gulf Attacks
Energy
International Finance
Global and Regional Developments
National Developments
15
Japan: Nakasone Turning to Economic Issues
25X1
19
Israel: Persistent Economic Inefficiency
25X1
25X1
audi Arabia: Sectoral Implications of the Oil Slump
25X1
25X1
25X1
Comments and queries regarding this publication are welcome. They may be
directed to irectorate of Intelligence
Secret
15 June 1984
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective-Limited Oil Market Reaction to Persian GulfAttacks
The world oil market has responded rather calmly so far to attacks on oil ship-
ping in the Persian Gulf. In our view, the market will continue to react calmly
if attacks against shipping remain at the level of recent weeks.
15 Japan: Nakasone Turning to Economic Issues
As the November Liberal Democratic Party (LDP) presidential election
approaches, Prime Minister Nakasone will increasingly be forced to deal with
economic issues-his weakest suit.
19 Israel: Persistent Economic Inefficiency
For almost a decade, Israeli politicians have failed to address Israel's persistent
economic problems. We believe that the next government after the 23 July
elections will not seriously address them unless it wins an absolute majority or
faces a serious foreign exchange shortage.
23 Saudi Arabia: Sectoral Implications of the Oil Slump
Despite the sharp drop in oil revenue over the past two years, Saudi Arabia is
resisting across-the-board spending cuts that might undermine its major
objectives of boosting living standards and broadening its economic base.
Riyadh has focused investment cuts on the foreign-dominated construction
industry and is taking steps to support Saudi firms in financial straits. 25X1
Secret
DI IEEW 84-024
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
International
Economic & Energy
Weekly
Perspective Limited Oil Market Reaction to Persian Gulf Attacks
The world oil market has responded rather calmly so far to attacks on oil ship-
ping in the Persian Gulf. With the attack on a Kuwaiti tanker on 10 June, the
number of confirmed attacks since late March reached 12 and has caused an
increase in insurance and charter rates for shipping in the northern portion of
the Gulf. Yet, oil exports from the Persian Gulf were about 8.1 million b/d in
May, only 600,000 b/d less than during April, according to our analysis. With
the exception of the fall in Iranian exports of 300,000 b/d to 1.5 million b/d in
May, the drop probably reflected a seasonal decline in oil demand rather than
an unwillingness of tankers to enter the Gulf. Iranian exports, which fell to
about 800,000 b/d during the 17-24 May period as a result of uncertainties
over insurance premiums, rebounded later in the month to 1.5 million b/d
following Iranian price discounts of up to $2 per barrel.
Spot oil prices have increased slightly on several occasions following confirma-
tion of reported attacks, only to fall back to earlier levels. We believe the lack
of market response to date reflects:
? Failure of the attacks to inflict sizable damage or cause a noticeable
disruption in oil flows.
? Ample surplus capacity of 3 million b/d outside the Persian Gulf.
? A growing cushion of commercial and government-owned stocks, including
Saudi floating storage, in key consuming areas.
? Market belief that major Western powers, especially the United States, will
be quick to respond militarily to a disruption and also release oil from
stockpiles to prevent price escalation.
In our view, the market will continue to react calmly if attacks against
shipping remain at the level of recent weeks. A substantial escalation in the
number and frequency of attacks against tankers or oil facilities, however,
could change industry perceptions of the Gulf situation. Key indicators that
would signal market concern include:
? Sustained spot price increases for Nigerian or North Sea crudes of 50 cents
per barrel or more.
? Noticeable increases in production (200,000 b/d or more) from non-Gulf
producers including Nigeria, Mexico, Libya, and Venezuela.
? A noticeable increase in spot or government-to-government oil transactions
for key importers such as Japan, France, or Italy.
1 Secret
DI IEEW 84-024
15 June 1984
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
? Attempts by companies or governments to boost oil inventories, which would
cause an increase in overall OPEC crude production to a level in excess of 19
million b/d as compared with estimated May production of 17.4 million b/d.
We believe a major escalation of hostilities such as daily strikes against oil
tankers or Iranian attacks against the oil facilities of Iraq's Gulf supporters
would produce an immediate jump in spot oil prices. We believe it would be
only temporary given the present stock situation and surplus capacity outside
the Gulf. Should Iran succeed in severely damaging Gulf export capabilities or
sustain a partial closure of the Strait of Hormuz, we believe market reaction
would produce a more substantial ($10 to $15 per barrel) oil price hike.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Australian Coal
Exports Up
Energy
United States-historically the world's largest coal exporter.
Australian coal exports-Canberra's largest export earner-are headed for
another record year. Coal shipments are up nearly 25 percent in the first
quarter compared with year-earlier levels. Sales to all regions rose, with
Western Europe showing the sharpest growth. Coking and steam coal
shipments to Western Europe were up 42 and 50 percent, respectively. The in-
creases resulted largely from price discounts. The average export price of
coking coal to Europe in February, for example, was nearly 25 percent below
year-earlier levels. If present trends continue, Australian coal exports could
reach 74 million metric tons this year and possibly surpass coal sales by the
January-March
1983
January-March
1984 .
Percent Change,
1984 Over 1983
Far East
9,149
9,903
8
1,130
1,600
42
125
546
337
4,666
6,442
38
25X1
25X1
Canadian Heavy Oil After nearly two years of negotiations, Husky Oil, the federal government, and
Upgrader Gets the provincial governments of Alberta and Saskatchewan have agreed on a
Government Assistance financial incentives package for the $2.5 billion Lloydminster heavy oil project.
V11L1H1 L11V U51 VV111V11L, VLL4 rvU T1111 F/1V VA & U W-w 11...11.11 51411E 411.. 4Y Lv w-
million in loan guarantees while Alberta and Saskatchewan will provide $305
million each in loan guarantees. When completed in 1989, the project will
produce 42,000 b/d of synthetic crude from heavy oil deposits, reducing the
country's dependence on foreign oil.
3 Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Ottawa is eager for synthetic crude to play a larger role in meeting the
country's energy needs, and over the past year the federal and provincial
governments have offered similar incentives to get other capital-intensive
heavy oil and tar sands projects started. The Lloydminster facility, however, is
the largest undertaking to be proposed since the $12 billion Alsands synthetic
oil project folded in 1982. Indeed, the large capital costs involved .had
prevented Husky or other companies from going ahead without government
aid. With the financial package. in hand, Husky officials hope to attract other
companies into the venture. Texaco Canada earlier expressed interest in the
project and has indicated it will make a decision on its participation this
Doubts About Iraqi Saudi Arabia's recent decision. to increase the flow of oil through its pipeline to
Pip line Spur the Red Sea reduces a potential alternate route for Iraqi oil exports. According
rough Saudi Arabia . to press reports, Riyadh is now moving 1.5 million b/d through the pipeline,
more than double the previous rate of 600,000 b/d and close to the pipeline's
1.85-million-b/d capacity. In addition to security reasons, the Red Sea route
has become more attractive because of higher insurance rates for Gulf
shipping.
Costa Rica Facing
Power Shortage
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Iraqis are concerned with the risk of running a pipeline close to Israel.
The availability of at least 500,000 b/d in the Saudi pipeline is critical to plans
to build a spur from Iraq's southern oilfields to the Saudi pipeline. A pipeline
through Jordan is the only other option available to the Saudi route, but the
Hydroelectric plants in northwestern Costa Rica may have to be shut down,
reducing.power supplies in Costa Rica, Nicaragua, and Honduras. According
to the US Embassy, US and Panamanian engineers recently examined two
power.plants-which supply 50 percent of Costa Rica's electricity-and
reported that one hydraulic turbine has been damaged because of improper
debris filtration. To repair the damage completely, both plants would have to
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
shut down for four months, costing Costa Rica an estimated $1 million a day
in lost production. Although a final decision has not been made, interim
cleaning measures call for reducing the water flow to the generators to remove
ti
i
t
d
ffi
i
l
I
tit
t
El
i
Ri
C
pa
e
c
a
s, an
c
ns
u
e o
can
ectr
c
osta
debris. According to
shortages will result in rationing during peak hours, and sales have already
been supended for at least 15 days to Honduras and Nicaragua.
Mexico's Ambitious
Debt Initiative
While some influencial bankers support more favorable terms for countries
like Mexico that have made major economic adjustments, a quick accommoda-
tion is unlikely. Many other bankers-in particular those from US regional
and West European banks-are fundamentally opposed to generous conces-
sions on interest or to reconsideration of financial packages set during the past
two years. Bankers favoring concessions believe that flexibility will encourage
other case-by-case settlements and undercut momentum toward collective
actions by debtors. They see across-the-board debt solutions that could come
without bilateral concessions as undermining international financial discipline
and retarding progress on economic adjustments.
Mexican officials believe they are in a strong position, and will press hard on
all points. Mexican financial officials want to offset criticism from within their
government and from opposition politicians-who continue to call for debt
moratorium or repudiation-that de la Madrid has been too soft with foreign
bankers. Past endorsements of tough economic adjustments by senior money
center~bankers and Western monetary authorities have further emboldened
Mexico.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Dim Outlook for
Ni ria-IMF
A reement
international banks to reestablish normal trade credits.
Mexico's poor economic growth prospects will not be substantially improved by
debt rescheduling. Without continued fundamental economic policy changes
and some increase in savings, we do not believe that even favorable debt
rescheduling terms will be sufficient to boost investor confidence or encourage
will convince the Fund to reach an agreement.
General Buhari's government apparently intends to avoid reaching a final
agreement with the IMF for as long as possible while looking for other sources
of financing. Senior Nigerian financial officials will meet in Washington with
top IMF officials early next week. Devaluation still remains the major
obstacle, and Lagos continues to argue that a large devaluation would raise
prices to unacceptable levels.
Lagos probably hopes that the recent reduction in the
L ~ ~
___: money supply resulting from a currency conversion and a new austerity budget
.supported loan program.
Economic decision making within the Buhari government continues to be
haphazard and uncoordinated. The US Embassy reports that there is growing.
,domestic pressure on the government not to negotiate a Fund agreement.
Many: Nigerians increasingly view a hike in oil production and exports as a
preferable alternative to the painful adjustments required under an IMF-
Philippine Economic The economic austerity measures announced last week by President Marcos
Aust jy Package appear aimed at forcing a speedy conclusion to negotiations with the IMF and
moving forward with rescheduling debts to foreign banks and governments.
Marcos also is seeking to establish unpopular economic policies before the
opposition is seated in the new assembly and begins to debate his management
of the economy. The measures included floating the exchange rate, which
resulted in a 22-percent devaluation, a 10-percent import surcharge, a 30-
...percent tax on exporters' windfall profits, and a 5-percent budget cut. The
,.Philippines has failed to meet IMF monetary and fiscal preconditions during
almost a. year of negotiations. In a budget-busting preelection spending binge,
the government again overshot the IMF's targets.
IMF agreement on a standby loan is still unlikely before late summer; the
IMF will require at least six weeks to assess the new measures.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
25X1
25X1
25X1
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Global and Regional Developments
Honda To Build The Honda Motor Company last week announced plans to invest $79 million
Auto Assembly Plant in an automobile assembly plant in Ontario. Honda thus will be the first
in Canada Japanese automaker to produce cars in Canada, although Toyota is building
an aluminum wheel manufacturing plant in British Columbia. Initial produc-
tion of 19,000 cars is scheduled for 1987, with full production of 40,000
reached in 1989. The cars will be assembled from kits imported from Japan
and sold in the Canadian market. Future exports to the United States have ndt
been ruled out. Industry Minister Lumley estimates the Canadian content of
the automobiles initially will be about 23 percent, with Honda likely to
purchase items such as glass and batteries domestically. Honda also has
agreed to .assist Canadian parts firms in developing the technology and
capabilites to increase domestic content in the automobiles.
Ottawa has been pushing Japanese automakers to establish production
facilities in Canada and is enthusiastic about the deal. Nevertheless, the
limited production, low Canadian content, and few jobs created-the highly
automated plant will employ only 350 workers-indicate Honda's investment
was undertaken primarily to appease Ottawa and prompt relaxation of
Canadian quotas on Japanese automobiles. Canadian parts producers are not
optimistic that Honda will maximize its use of their products. Both the parts
industry and the UAW have been urging Ottawa to require 60-percent
Canadian content in all automobiles either made or imported in Canada and
expressed disappointment at the low level of Canadian content in the new
automobiles.
Airbus Industrie Western Europe's Airbus Industrie is moving to develop a wider range of
Approaches Japanese aircraft and is talking to Japan about joining the consortium on future designs.
Firms According to a recent Japanese press report, Airbus informally asked three
Japanese manufacturers if they would develop the main wing for two all new
designs-the TA-9 and TA-11. Airbus officials said they plan to market the
aircraft in 19;90 following introduction of the 150-seat A-320 design. The
TA-9 is a twin -engine 370 passenger version of the A-300 and the TA-11 is a
4-engine, 225 `passenger, transoceanic aircraft. These designs, coupled with the
launch of the A-320, indicate that Airbus is accelerating plans to expand their
product line in an effort to be competitive across the board with US
manufacturers: Despite the press reports, we believe Japan is unlikely to get
responsibility for the wing section. Britain, the builder of wings for current
airbus designs, would be unlikely to pass this business to Japan. More likely,
Airbus-knowing Japanese needs to improve abilities in this area-made the
offer as an inducement to gain Japanese interest in participating in other
aspects of the new aircraft.
7 Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
S eral Countries May A trend appears under way in several countries to ease recombinant DNA
ftelax Recombinant regulations and guidelines. Government groups in Japan, the Netherlands, and
DNA Regulations Sweden are recommending more relaxed conditions related to recombinant
DNA research because of a belief that the risks are no greater than those
posed by traditional micro-organism research. They also are calling for less
stringent regulations for the mass production of recombinant DNA-derived
products. Relaxed regulations would provide an incentive for corporations
from other countries, including those from the United States, to move their ba-
sic research and product testing and evaluation to these countries. Any such
moves would allow increased opportunities for technology transfer to occur and
could narrow the current US lead in the commercial application of biotechnol=
Chine a and Soviet China is purchasing high-grade manganese ore
Pur asing of for the. first time. Gabon reportedly will provide 140,000 metric tons and
anganese Ore Australia will ship 80,000 tons, both at the current world price of $1.43 per
ton. The imports probably will be mixed with domestic ore to produce high-
quality ferromanganese. China has abundant reserves of low-quality manga-
nese, but expansion of its domestic steel industry could require more imports of
high-quality ore.
capturing the benefits of higher value added.
News of the Chinese purchases follows recent reports of large manganese
contracts between the Soviet Union and Australia, Gabon, and Brazil. The
Soviets, the world's largest manganese producer, are reportedly experiencing
ore grade problems. Increasing demand for manganese by the Communist
countries provides one of the few bright spots in a market where excess
capacity, declining manganese usage per unit of steel, and a pessimistic long
term outlook for steel production suggest a rather slow recovery. The average
mine operating rate worldwide is only 60 percent and prices are 19 percent be-
low their 1981 highs. As a result, several ore producers-Brazil, India, and
Mexico-are starting or increasing ferromanganese production in the hope of
Sovi is Out of The USSR, one of the world's largest rice importers in 1979-82, has sharply
th Rice'Market
Secret
15 June 1984
curtailed purchases because of growing stocks and good harvests. According to
our estimates, the Soviet Union is likely to take only 450,000 metric tons this
year compared to a record 1.3 million tons of rice imported in 1981. Soviet rice
stocks are estimated to be equivalent to more than one year's consumption, and
a record harvest is expected this year, according to the US Agricultural
Attache in Moscow. The Soviets are likely to import only customary amounts
on barter from North Korea and India. Both the United States and Thailand
have made rice sales overtures to Soviet trade officials this year but have been
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Sugar Talks
Begin Anew
1978.
Low Soviet rice imports are bad news for exporters of high-quality rice, who
hoped that large Soviet purchases would bolster the sagging market. The
market for cheaper, low-quality rice is also depressed because many LDC
importers cannot afford rice imports. As a result, world prices have plunged
40 percent from a 1981 peak, and the US Department of Agriculture expects
world rice exports this year will fall to 11.8 million tons, the lowest level since
and quotas, prices will be difficult to sustain.
Talks began this week in Geneva on a new International Sugar Agreement to
replace the one which expires in December. There was little progress during
two earlier negotiating sessions because of disagreements over the size and
allocation of quotas, the role of stockpiles, the target price stabilization band-
currently 13 to 23 cents per pound-and Cuba's exemption from export quotas
for sugar sales to other Communist countries. The general pessimism of the
participants is reflected in the stance of the chairman of the negotiations,
Jorge Zorreguieta of Argentina, who reportedly has on hand an administrative
agreement that would maintain the International Sugar Organization but
without any specific economic provisions. Without such measures, prices could
be driven considerably below the current 7.5 cents per.pound should countries
with large sugar stocks-such as Brazil and India-dump surplus sugar.
According to press reports, Brazil is threatening such action and others
probably would follow suit. Moreover, industry experts are predicting another
bumper sugar crop in 1985 and, regardless of any agreement on buffer stocks
National Developments
Developed Countries
P ssible Lull in West West German real GNP in first quarter 1984 was up 3.6 percent from the
German Recovery year-earlier period because of very strong exports and investment. Some
leading indicators, however, already are pointing toward a lull in the recovery.
New orders fell sharply in March and April over the previous two months, and
the April survey of the business climate worsened-probably reflecting the 25X1
impending metalworkers' strike. The strike, which began 14 May, almost
certainly portends even gloomier data for May and June. We believe real GNP
will slow markedly in the second quarter but should then recover as in previous
years of major strikes and continue at a 2- to 3-percent annual rate for the re-
mainder of the year. 25X1
West G man Although West German industry still accounts for 43 percent of employ-
Indu rial Employment ment-the highest share in the Big Seven countries-the number of industrial
C tinues To Decline jobs continues to decline. Since 1971, the number. of industrial jobs in West
Germany has declined by 2.4 million while employment in services has risen by
1.7 million. Last year industrial employment fell 3.5 percent. Creation of
9 Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
employment rate hit a postwar high of 9.1 percent.
service-sector jobs-0.5 percent last year-was not able to offset the industrial
job losses. As a result, overall employment fell 1.7 percent in 1983 and the un-
West Germany's First A Siemens development team working on integrated circuits has founded an
High-Tech "Spinoff"
Jtalian Parliament
/Passes Controversial
Legislation
ITI Seeks Boost
in FY 1985
R&D Budget
urkish Prime Minister
Ozal s Policies
Under. Attack
Secret
15 June 1984
could be an important first step in efforts to catch up.
independent company to exploit its ideas. The new firm was established with
full cooperation from Siemens-which retains 25-percent participation
rights-and received financing from a Siemens-backed venture capital compa-
ny. Such spinoffs are common in the United States, but rare in most other
countries. For West Germany, which lags behind Japan and the United States
in several high-tech areas and in financing new ventures, the Siemens spinoff
The Italian Parliament last week passed a weakened version of a controversial
law limiting cost-of-living wage adjustments. The law is a key element of the
Craxi government's effort to control inflation-currently running at 12
percent. The legislation, which divided labor unions and met stiff opposition
from the Communist Party, sets a ceiling on wage adjustments for six months,
limits increases of some administered prices to 10 percent, and provides minor
tax relief-mostly to lower income workers. The law is weaker than the
government's original proposal and the Communist opposition already has
announced it will seek a popular referendum to repeal the six-month restriction
on wage increases. We believe the failure to pass a stronger measure will put
further pressure on wholesale prices that recently accelerated, in part, because
of the rise in the lira price of raw material imports. We doubt Rome will
achieve its goal of holding consumer price increases to 10 percent- this year.
the industry.
According to press reports, Japan's Ministry of International Trade and
Industry (MITI) is seeking a sharp increase in FY 1985 government funding
for high-tech R&D by attempting to free R&D spending from constraints
imposed by the Ministry of Finance. Such funding has grown slowly since
1981. MITI is concerned that budget increases for R&D are necessary. to
maintain the pace of technological innovation as well as MITI's influence with
of credit have created financial difficulties for many firms.
Prime Minister Ozal is under increasing attack both for rising inflation and for
his anti-inflation policies, according to the US Embassy. Since March, Ozal
has implemented a series of steep price increases on goods and services
provided by the public sector. While long overdue, the increases have helped to
boost inflation to a 50-percent annual rate and have drawn fire from a number
of quarters. In addition, businessmen-normally staunch Ozal supporters-are
criticizing his anti-inflation policies because high interest rates and a shortage
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Mexica Wage
Set ment
ty's decisive victory in local elections in March.
Despite the criticisms, Ozal has reaffirmed his intention to continue his tight
money, free market policies and continues to call for sacrifices. While the
tough measures are politically risky, he probably believes it is better to get
them over with quickly while he still has the public's support following his par-
Less Developed Countries
austerity under Mexico's IMF-supported loan program.
The small wage hike announced last week will help President de la Madrid
stick to his tough austerity program. The US Embassy reports minimum wages
will go up only 20 percent. To help ensure labor's assent, the government
agreed to freeze some utility prices for the remainder of the year and to
monitor price controls more rigorously. The next round of wage negotiations is
scheduled for December. 25X1
The government's ability to limit wage increases is likely to strengthen
Mexico's position with international bankers in debt rescheduling talks: The.
new wage settlement will reduce inflationary stresses and pressures on the
peso. The settlement-less than half of what union leaders originally had
asked for-underscores labor's close ties with the government. Although labor
faces its third consecutive year of falling real wages, its willingness to continue
making sacrifices is critical to de la Madrid's success in implementing
New lyx~raguan Recent economic measures to contain the government budget deficit will
olicies extend state control and heighten popular discontent:
/ ? The regime has announced stiff price increases on subsidized goods begin-
i
h
n
ng next mont
to eliminate most food subsidies.
? The US Embassy reports the government will create a retail sales network
for eight food products-six will become state monopolies--and will launch
a campaign to generate public support, claiming that the new distribution
system will ease shortages.
? The government has announced a crackdown on "hoarders and speculators."
The Sandinistas say neighborhood Defense Committees will play an increas-
ing role in monitoring retail trade.
? The regime has proposed a "consumer protection law" that would allow the
government to set prices or nationalize commerce on essential items.
? The government has begun implementing uniform national wage scales.
speculators" to increase nationalizations.
The steep price hikes will be unpopular, especially among workers whose
wages have been frozen since 1982. Standardization of salaries will create
additional distortions in the economy and further weaken the role of the
independent unions. Moreover, we believe the new state monopoly on distribu-
tion will have little impact on shortages, but the regime may use the "war on
11 Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Drought Hits Kenya
Somalia Changes
Eco omic Team
The US Embassy reports that drought will reduce the main grain harvest this
fall and threatens a food crisis early next year. The government already is
planning to request food aid. The Kenyan Government estimates that corn
production will total no more than 15 million bags this year, far below the nor-
mal range of 20 to 26 million bags. The wheat crop has been similarly affected.
The dry weather also will reduce the output of agricultural export products, al-
though high world prices will soften somewhat the impact on foreign earnings.
Tea and coffee comprised almost one-half of exports last year, and output of
both is expected to be lower.
position to facilitate government approval of a Fund agreement.
President Siad's replacement of virtually his entire economic team during the
recent cabinet reshuffle results in large part from the protracted internal
debate over economic liberalization and relations with the IMF. Finance
Minister Addou, chief negotiator of the Fund program Siad rejected in
February, was made Minister of the Presidency. We believe the cabinet
changes will further delay serious negotiations with the IMF. There is a good
chance, however, that the new economic team-mindful of the lessons of the
past several months-will maintain better communication with the President
and other cabinet members. This ultimately could facilitate reaching an
accord with the Fund. New Minister of Finance Osman, according to US
Embassy reporting, generally has been in favor of the reforms recommended
by the IMF, and former Finance Minister Addou may be able to use his new
Chinese Playing the China reordered 340,000 tons of US wheat late last month after earlier
S Grain Market canceling orders for that amount.
contributed to a drop in prices an
The cancellation had
d China then quietly repurchased the grain.
This maneuver, the largest in several years, indicates the Chinese have
returned to active participation in the US market. Purchases will have to be
large in coming weeks for Beijing to meet its quota for 1984 under the Long-
Term Grain Agreement. To date, the Chinese have taken delivery of only one-
fourth of its 6-million-ton quota.
China Buying US Beijing recently reentered US fiber markets. China, the largest US polyester
Synthetic Fibers Again customer in 1982, dropped out of the US market in 1983 in retaliation for re-
strictions on Chinese textile exports and had been filling its needs from Japan
and other Asian suppliers.
could drive up petrochemical prices.
US producers believe the reentry into the US market probably
reflects Chinese concern that oil transportation disruptions in the Persian Gulf
Secret 12
15 June 1984
25X1
I
25X1
25X1
25X1
I
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
USSR Ends Legal A Soviet decision to discontinue legal imports of minicomputers from the West
Minicomputer Imports is unlikely to lead to any reduction in efforts to acquire advanced Western
Soviet Construction A recent joint decree of the Central Committee and the Council of Ministers
Decr harshly criticizes the Soviet construction industry and lists measures to
Get Pay Raise er education workers by 30 to 35 percent over the next few ;years. Teachers in
minicomputers'through illegal channels. The State Committee for Supply has
informed Soviet institutions that they no longer will be permitted to purchase
Western minicomputers, according to sources of the US Embassy in Moscow.
The new Soviet policy will not have any appreciable impact on minicomputer
imports from'the West, however, which declined dramatically after the US 25X1
imposed strict controls following the Soviet invasion of Afghanistan. Soviet
purchases fell from more than $50 million in 1979 to about $5 million in 1982.
Soviet-made?minicomputers are significantly inferior to their Western counter-
parts, and'Soviet customers tended to resist using them as long as Western
equipment was available. Nevertheless, for higher priority military research
and development applications where more capability, versatility, and reliability
are crucial, the Soviets can be expected to try to acquire export-controlled US
impact.
improve its performance. The decree is in line with a steady drumfire of
criticism directed at this sector, accompanied by several top-level personnel
changes over the past year. Published on 27 May, the decree cites such chronic
abuses as scattering investment resources over too many projects and the
accumulation of a huge backlog of unfinished projects. The decree calls for
greater centralization in the planning of overall construction, a larger banking
system role in controlling this activity, a review of investment plans, and more
emphasis on territorial-as opposed to ministerial-management of construc-
tion. Its language, however,. is vague, contradictory, and fails to come to grips
with the inadequate incentive system responsible for many of the shortcomings
of the sector. For example, the decree does not change the current performance
criteria in the industry-the gross value of construction put in place. Until
evaluation and financing of construction organizations is keyed to project
completion, rather than the gross value of output, other changes will have little
Soviet Educators To A decree issued in late May will raise wages and bonuses for teachers and oth-
grades one through four and boarding school workers will receive pay boosts on
1 September. Increases for the rest of the education work force will be phased
in over several years, starting in the northern and eastern regions of the USSR.
The pay hikes are one of several steps under last April's educational reforms to
attract more and better people into teaching, particularly for primary grades,
at the secondary vocational level, and in rural areas. Teachers are among the
lowest paid workers in the USSR and received their last pay raise in 1975.
Low pay and lack of prestige have kept the number of applicants to teachers'
colleges low; since 1970 the number of teachers in grades one to 10 has
declined.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Vietnam Opens Ship
Repair Facility
ao Pipeline
any ship in the Vietnamese naval inventory.
Vietnam's first large commercial shipyard, the Pha Rung complex near
Haiphong, was commissioned this spring-three years behind schedule. It
probably will not be fully operational until 1985. According to the Vietnamese
press,. the $33 million project, financed and constructed by Finland, will be
capable of repairing 35 12,000-ton ships a year. Although the repair facility is
intended to serve Hanoi's expanding commercial fleet, it can accommodate
Moscow agreed last month to build the Laotian portion of a 500-kilometer
pipeline linking Vientiane to the Vietnamese port of Vinh. Construction of the,
new pipeline, capable of carrying 2.2 million barrels of petroleum products
annually, probably will begin next year. We believe this project, along with re-
construction of a major road between Laos and Vietnam, is intended to reduce
Lao dependence on Thailand for strategic commodities. Vientiane currently
imports most of its petroleum products-about 330,000 barrels a year through Thailand. In 1979 Thailand closed its border with Laos for several
Secret 14
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Japan: Nakasone Turning to
Economic Issues
As the November Liberal Democratic Party (LDP)
presidential election approaches, Prime Minister
Nakasone will increasingly be forced to deal with
25X6 economic issues Overall, the
economic news in Japan-especially the recovery-
looks good. But the Diet session, which will extend
into the summer, must tackle such items as health
care costs, which can cause difficulties for the
LDP. Nakasone has little flexibility for dealing
with these problems because of the persistent cen-
tral government deficit.
Prime Minister Nakasone can look forward to
generally good economic news this year. Mainly on
the strength of domestic demand, GNP growth is
picking up and should top the 4-percent mark. The
official growth target for the fiscal year, which
began 1 April, was set at 4.1 percent, and we agree
with most forecasters that the Japanese will reach
this goal.' Indeed, most major private forecasters
are more optimistic than the government.
Our own estimate, based in part on econometric
model results, shows private demand-especially
private investment-on the rise, while government
spending continues to increase more slowly than
GNP:
? Housing investment will be up in 1984 after
several years of decline.
? Plant and equipment investment has also begun
to pick up as the recovery has pushed production
levels closer to capacity and profitability has
improved.
The weakest area of the domestic economy is
consumer demand, which accounts for nearly half
of GNP. Continued modest gains in real wages and
salaries will keep the rate of growth of private
consumption expenditures slow over the next sever-
al years.
Foreign Demand Losing Its Kick
In contrast to last year, when the external sector
accounted for nearly half of GNP growth, interna-
tional trade will give only a small boost to growth in
1984. The Economic Planning Agency (EPA) fore-
casts that foreign demand will make up only 0.5
percentage point of 1984's 4.1-percent projected
growth, with domestic demand accounting for the
rest.
We agree with the EPA assessment:
? There is little prospect that exports to LDCs will
pick up rapidly. Many of the countries that have
been Japan's growth markets in Latin America
and the Middle East are in economic trouble and,
in many cases, need to conserve foreign exchange
for debt repayment.
? The delayed impact of yen appreciation with
respect to the European currencies suggests ex-
ports to industrial countries are also likely to
show less strength. At the same time, the stronger
yen and continued economic growth will eventu-
ally boost imports, reducing net foreign demand
even more.
Nagging Current Account Surpluses
Although the growth of net exports in real terms
will be low, the gap between exports and imports in
nominal dollar terms continues to rise. We expect
Secret
DI IEEW 84-024
15 June 1.984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Alternative Scenarios
Several key assumptions about the yen's value and
external events underlie our trade forecast. Sud-
den changes in the cost of oil or the value of the
yen could sharply alter this year's trade outlook.
Yen Appreciation
We assume the yen will appreciate to 215 yen per
dollar by year's end: Major Japanese forecasters,.
in their trade projections published earlier this
year, were calling for an exchange rate in the. 220
to 230 yen per dollar range. The EPA used the
then-current rate of 234 yen per dollar.
The yen could appreciate against the dollar more
rapidly. In the short run, more rapid appreciation
probably would increase Japan's surplus, because
trade volume would not adjust immediately. If the
yen appreciated to 190 yen per dollar, we estimate
the current account surplus would reach $33 bil-
lion; if the yen remains at its current level of about
225 yen per dollar, the current account surplus
would be $24 billion, according to our model.
Oil Prices
Japan is vulnerable to drastic oil price changes
because its economy depends on imported oil for
over 60 percent of its total energy needs. Crude oil
imports in calendar year 1983 amounted to $40
billion. The two major oil price runups turned
large trade surpluses into deficits. We estimate
that a $5 per barrel increase, in oil prices this year
would reduce the current account surplus by $12
billion.
World Import Volume and Prices
We expect total world import volume to grow by
about 6.5 percent in real terms. A 1-percentage-
point change in the growth rate of world trade
would alter the current account surplus by $3-4
billion. A.5 percent average increase in raw materi-
al and food import prices above our baseline
increase of 2 percent would raise Japan's import
bill by $1.3 billion.
Protectionism Abroad
Protectionist measures by Japan's major trading
partners could also reduce the surpluses. Restric-
tions are already in place on a large proportion of
Japanese exports, however, and in many cases
exporters have been able to raise unit prices on
restricted goods, maintaining the total dollar vol-
ume of sales.
the current account surplus to reach $25-30 billion
in 1984 compared with".$24 billion last year. The
Economic Planning Agency has officially forecast a
surplus the size of 1983's, but the press has specu-
lated that the EPA may boost its forecast to $30
billion. Most other major forecasters expect it to be
in the $20-30 billion range. A few, including the
prestigious Japan Economic Research Center and
the Mitsubishi Research .Institute, expect it to top
$35 billion. These overall estimates include an
increase of at least $5 billion in the trade surplus
with the United States from last year's $20 billion.
Secret
15 June 1984
For 1984, stronger dollar export prices will account
for much of the increase in the current account
surplus. Export volume is expected to increase only
2 percent, but higher dollar prices for Japan's
export goods will push the value of exports up by
over 10 percent. Import volume, buoyed by the
domestic recovery, should be up by about 8 percent.
Assuming world oil prices and costs for other
important raw materials remain relatively stable,
however, the dollar value of imports will about
match the 10-percent rise in the value of exports.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Japan: Trade Indicators
Foreign Demand Contributions
to GNP Growtha
Percent
Foreign Balances a Yen/Dollar Exchange Rate
Billion US $ Yen per US $
0 Current Account ? Trade Balance
210
0 1980 1981
a Japanese fiscal years.
b Projected.
Despite the relatively good news on economic
growth, the Diet session this summer will focus on
some tough economic issues that must be balanced
against what is seen by most Japanese as an
excessive central government deficit. Fiscal policy
is constrained by the persistent deficit, which
amounts to about 25 percent of central government
expenditures.
Even with growth up, Nakasone is being criticized
for not doing enough to push the economy. Within
his own party, Director General Komoto of the
Economic Planning Agency-a potential rival for
the presidency of the LDP in elections this fall-
has called for more expansionary policies, including
a further tax cut aimed at business. According to a
press report, his goal is 5- to 6-percent growth. In
addition, the Ministry of International Trade and
Industry (MITI) favors a higher growth target.
The opposition parties-especially the Socialists
and Komeito-have criticized Nakasone for not
aiming for more rapid growth, and they were
particularly dissatisfied with the FY 1984 budget.
This year's budget provides little stimulus and calls
for the slowest growth in spending in 30 years.
Expenditures, at 50.6 trillion yen, are only 0.5
percent over the 1983 level, a decline of 2 'percent
in real terms
25X1
25X1
It now appears that the Diet debate this summer
will revolve around deficit-cutting measures and
funding of specific programs. The sharpest argu-
ments probably will be over a bill to reform the
national health program by instituting participant 25X1
fees in the health insurance system.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Secret Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
If growth should slow later this year, Nakasone
would be faced with additional problems. Because
of unhappiness over the deficit, Nakasone would
find it nearly impossible to stimulate the economy
using fiscal policy. To increase GNP by 1 percent,
for example, would require pump-priming expendi-
tures of around $6 billion-a far larger-, amount
than the increase in the entire government budget
A downturn in growth later this year could well
raise the question of Japan's long-term growth
potential and the need for fundamental change-
issues that can only provoke contentious debate.
Even with strong export performance, Japanese
growth rates have been falling since the mid-1970s.
From a level of about 10 percent per year in the
1960s and early 1970s, they have declined over the
past decade-mainly because of the two oil shocks
and changes in the structure of Japan's economy-
to about 3 percent. Tokyo's fiscal policy options for
boosting growth will remain constrained by the
central government's persistent budget deficit. In-
deed, deficit-financing bonds, which were issued in
the mid-1970s as a short-term expedient, are begin-
ning
to mature and will make government financ-
ing even more difficult.
Secret 18
15 June 1984
25X1
25X1I
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07 CIA-RDP97-00771 R000707040001-4
Secret
Israel: Persistent Economic
Inefficiency
For almost a decade, Israeli politicians have failed
to address Israel's persistent economic problems-
high inflation, low investment, large real wage
gains, sluggish productivity, and large current ac-
count deficits. During this same period the Israeli
public has become much more consumer oriented
and has come to expect an ever-increasing standard
of living. Each Israeli government has been loath to
confront these expectations, in part because of
generous US aid, and the primary focus of Israeli
economic policy has been to maximize consumer
welfare in the short run. We believe that the next
government after the 23 July elections will not
seriously address the country's economic problems
unless it wins an absolute majority or faces a
serious foreign exchange shortage.
A'number of laws, institutional practices, and
traditions inhibit the efficient functioning of the
Israeli economy. Many stem from the egalitarian
ethic of the country's founders. Israel's economic
problems include:
? A powerful labor union organization, the Hista-
drut, that consistently wins large real wage gains.
? An indexation system that protects most Israelis
from rapid inflation but reduces the government's
incentives to attack the price spiral.
? Interrelated wage agreements aimed at ensuring
that no group of workers obtains an "unfair"
salary advantage over others.
? Unwillingness to tolerate significant
unemployment.
? Lack of control over the money supply because
Israeli law requires the Bank of Israel to print
whatever amount of shekels is required to finance
the government's budget deficit.
? Inability of government to cut expenditures or
even to enforce spending ceilings.
Because most financial instruments are linked to
increases in the consumer price index, we believe
many potential entrepreneurs put their funds into
financial holdings that guarantee positive real rates
of return rather than into plant and equipment
investment that has a much less certain payoff.
According to Israeli statistics, plant and equipment
investment has grown 1 percent annually over the
last decade; its share of GNP has declined from 21
percent to 17 percent since 1973.
The poor investment performance has been a major
factor contributing to sluggish productivity, which
has grown only 1.2 percent annually since 1972.
Other factors include:
? Hesitancy of Israeli employers to lay off workers
for fear of being caught short when demand
strengthens.
? High marginal tax rates that reduce worker
incentives.
? An increasing amount of worktime spent
juggling personal financial portfolios to beat
rapid inflation.
Lagging productivity and a strong appetite for
imported consumer goods have undercut efforts to
improve the foreign payments. The civilian goods
and services deficit has doubled from $2.1 billion in
1980 to an estimated $4.2 billion last year. For
example, press reports indicate that Israelis have
been buying video cassette recorders in such large
volumes that Israel now has more of them per
capita than any other country in the world. Real
wage gains, combined with sluggish productivity,
increase the costs of Israeli exports, reducing their
competitiveness abroad.
Secret
DI IEEW 84-024
15 June 1984
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Shamir and Cohen-Orgad-
Solid Rhetoric, Poor Performance
Prime Minister Shamir was forced to deal with
-economic issues immediately upon taking office last
October. The Tel Aviv Stock Exchange had
crashed because Israelis were selling their stocks,
particularly bank stocks, to purchase US dollars. In
a speech to the Knesset when his Cabinet was
approved, Shamir said that the government would
reduce public and private consumption, cut subsi-
dies, and raise labor productivity. He warned
Israelis that the standard of living-would not
improve until production increased.
The Finance Minister, Yoram Aridor, was forced
to resign two days later amid the furor created
when his plan to make the US dollar legal tender in
Israel was reported in the Israeli press. Cohen-
Orgad replaced him a week later. Cohen-Orgad
had publicly supported many of the measures re-
quired to deal with Israel's economic problems and
called for a reduction in real wages of at least 10
percent, large budget cuts, and increases in fees
for a wide range of public services. He declared
that improving the foreign payments was his first
priority.
Using our model of the Israeli economy, we project
that the civilian goods and services deficit would
have declined this year to $2.8 billion, compared
with $4.2 billion in 1983 if Cohen-Orgad's policies
had been fully implemented. This projected im-
provement would cost a decline in real GNP of 2.6
percent and an increase in the unemployment rate
to 5.7 percent compared with 4.5 percent in 1983.
In the more than six months since taking office,
however, Shamir and Cohen-Orgad have failed to
put their plan into effect. This failure resulted from
a lack of support from within the Cabinet and from
Histadrut officials. For example, the US Embassy
reports that on 25 January Cohen-Orgad was
forced to make concessions to TAMI-a small
party in the coalition with a low-income constituen-
cy-on increased social welfare spending to keep
TAMI's support on a no-confidence vote.
Secret
15 June 1984
Even the one major policy change Cohen-Orgad
has carried out will be ineffective, in our view.
Foreign currency controls were instituted in early
November and have since been tightened. Israelis
traveling abroad can purchase no more than $2,000
worth of foreign currency; holdings of foreign
securities, bank accounts abroad, and gold are
prohibited; and a limit of $2,000 on charges made
abroad has been imposed on credit card holders.
We believe that these moves will have at best only a
marginal impact on the foreign payments because
Israelis have long been adept at getting around
such controls.
The decision to hold elections on 23 July has ended
any chance that Cohen-Orgad might implement an'
austerity policy. Indeed, US Embassy sources in
the Finance Ministry report that Cohen-Orgad is
under pressure from his cabinet colleagues to en-
gage in "election economics." We believe Cohen-
Orgad will try to avoid blatant manipulation of the
economy prior to the elections, but he probably will
succumb to pressure to hold the line on govern-
ment-controlled prices and to ignore overspending
by cabinet ministers.
After the Election-
The Same Old Problems
Whatever government takes office, it will face the
same economic dilemmas that plague the current
one. If current economic trends were to continue,
we project that private consumption would grow at
an annual average rate of 6.6 percent in 1985-87,
helping to produce GNP growth averaging nearly 4
percent. Even though recovery in Western Europe
and the United States would boost exports by an
annual rate of 7 percent, continued strong domestic
demand would increase imports, resulting in a
civilian goods and services deficit of $5.3 billion in
1987 compared with $4.2 billion last year. The
foreign financial gap-the sum of the civilian goods
and services deficit, self-financed military pay-
ments, and debt repayment-would reach $7.9
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
- Finance Ministry Resignations
The resignations this week of two top Finance
Ministry officials, including the director general,
were prompted by Finance Minister Cohen-Orgad's
preelection economic concessions, according to
press reports. The Cabinet recently increased the
monthly pay of 20,000 civil servants by $50, and
raises as high as 18 percent are under discussion
for regular army personnel. The opposition Labor
Party will use the. resignations to bolster its asser-
tion that the Likud is unable to manage the
economy.
billion in 1987 compared with $5.4 billion last year.
In the absence of additional US aid, this scenario
indicates foreign commercial banks would have to
increase their exposure more than we believe is
likely, or Israel would have to draw down foreign
exchange reserves to unacceptably low levels.
We have projected several alternate scenarios
based on programs a new government might use to
confront Israel's economic problems. An effective
program to increase labor productivity, for
example, would stimulate the economy. Real GNP
would increase at an average annual rate of 6.2
percent. Although higher domestic demand would
boost imports, much of the additional output would
be available for exports, and the financial gap
would change little from our projections of current
trends.
If the new government tried to boost investment-
through low-interest loans, rapid depreciation al-
lowances, or lower income tax rates, for example-
the domestic economic benefits would be substan-
tial but at the cost of even larger foreign deficits.
Assuming real investment increases 10 percent
annually in 1985-87, we project that GNP would
grow by an average annual rate of 6.1 percent, 2.
percentage points higher than current trends would
indicate. By 1987 the unemployment rate would
decline to 2.4 percent. The foreign financial gap,
however, would increase to $9.0 billion in 1987,
$1.1 billion more than would be the case if present
In either of these scenarios, the financial gap would
nearly deplete foreign exchange reserves as early as
1986, necessitating austerity measures. If the new
government pursued an austerity program soon
after the elections, and if real private consumption
and government civilian and domestic military
consumption declined 2 percent annually in
1985-87 and real exports increased by 10 percent
annually, the financial gap in 1987 would still be
$4.3 billion compared with $7.9 billion if current
trends continue. Among the costs of such an auster-
ity program would be a drop in real GNP growth to
an average of less than 1 percent annually and an
unemployment rate of 6.1 percent. in 1987.
If either Labor or Likud wins a majority in the
Knesset-which we believe is unlikely-an auster-
ity policy could be put in place relatively soon. A
big Likud victory would give Cohen-Orgad the
political strength to carry out the policies he has
been advocating. A large Labor Party victory could
open the way for budget cuts and a wage pact with
the Histadrut, with which Labor has close ties.
A serious austerity program is unlikely if neither
the Labor Party nor the Likud bloc wins a majority
and there is another coalition government. A coali-
tion government forced to rely on the continuing
support of TAMI or the religious parties to stay in
power, for example, will find it almost impossible to
pare social or religious programs. Nothing short of
a drastic shrinking of foreign exchange reserves, in
our view, could force the hand of a coalition
government.
Implications for the United States
To stave off a foreign exchange crunch, we believe
the next Israeli government will take the same
approach as past governments-turn to the United
States for more aid. Israeli officials will take the
position that any additional aid should be grants
trends continue.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Israel: Alternative Economic Scenarios
Real GNP Growth
(percent change)
Unemployment Rate
(percent)
Financial Gap
(billion US $)
1984
1985
1986
1987
1984
1985
1986
1987
1984
1985
1986
1987
1.9
2.8
3.6
4.9
5.2
5.0
4.6
4.0
6.4
6.7
7.3
7.9
Higher investment
1.9
4.6
5.8
8.0
5.2
4.8
3.8
2.4
6.4
7.3
8.3
9.0
Higher labor productivity
1.9
4.0
5.9
8.7
5.2
5.0
4.6
4.0
6.4
6.8
7.3
7.8
Austerity
1.9
0.3
0.8
1.4
5.2
5.3
5.6
6.1
6.4
5.7
5.0
4.3
rather than loans, citing the US administration's
recommendation for aid to Israel in FY 1985-
which is entirely grant-as a precedent. The Israeli
Government may also ask for a rescheduling of
debt owed to the US Government. This debt is
almost half of the $22.5 billion outstanding at the
end of 1983. Principal repayment on Foreign Mili-
tary Sales loans will begin to increase in 1986 when
the 10-year grace periods start to lapse.
Israeli officials believe that their "special" relation-
ship with Washington precludes their having to
turn to the IMF. Israel does not want to agree to
austerity under an IMF-supported loan program.
Moreover, some Israeli officials appear to believe
that Saudi Arabia has disproportionate influence
within the IMF and are loath to deal with an
institution that they regard as having too much
The Israeli Government may try to persuade Jews
living abroad, particularly those in the United
States, to increase their contributions to Israel.
American Jews, however, have not, in the past,
significantly increased their giving in response to
economic crises. According to Israeli statistics,
donations soared in 1974 after the 1973 October
War but fell back to traditional levels in 1975 and
1976 when Israel was in a severe foreign exchange
crunch. This, plus the minimal response to Israel's
appeals after its invasion of Lebanon, suggests that
foreign Jews increase their contributions only when
they perceive the survival of the state is at stake.
Saudi influence.
Secret
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Saudi Arabia: Sectoral Implications .
of the Oil Slump
Despite the sharp drop in oil revenue over the past
two years, Saudi Arabia is resisting across-the-
board spending cuts that might undermine its
major objectives of boosting living standards for all
Saudis and broadening its economic base.' Riyadh
has focused investment cuts on the foreign-domi-
nated construction industry and is taking steps to
support Saudi firms in financial straits because of
the current economic slowdown. In order to better
export the country's petroleum resources, the petro-
chemical and oil export refinery projects at Yanbu
and Jubail remain on schedule. The slump in oil
revenues, however, has forced the government to
give greater weight to price in awarding contracts,
an approach that puts US companies at a disadvan-
tage compared with European and Asian competi-
tors.
has delayed progress payments to firms by as much
as four months, according to various press reports.
As a result, construction companies increasingly
are looking to commercial bank loans and
suppliers' credits to meet ongoing expenses.
press reports claim that local.
banks give out loans based on a government rank-
ing of project priorities.
The impact of the cuts is being felt by both foreign
and domestic contractors- articular) smaller
Saudi firms.
According to the US Embassy, the government
brake on project spending has ended the boom in
construction, the largest sector other than oil.
Particularly hard hit have been housing, commer-
cial offices, and transport. An Aramco index meas-
uring overall expenditures on construction indicates
that outlays declined 18 percent during the fiscal
year that ended in April. Other indicators, such as
raw materials imports, also are down.
To slow construction activity, the government is
using with greater frequency a law requiring open
bidding on contracts. The Saudis have relied.on this
technique to scale down some of the more grandiose
projects. The Kingdom also has cut in half the
ceiling for advance payments to contractors and
Some
suppliers, unable to sell idle equipment inventories
and other materials, also are feeling the crunch,
according to the Embassy. Most major contractors
are relying on their backlogs and cash from ad-
vance payments to weather the current slowdown.
Some are shifting from construction into operations
and maintenance work.
The rising number of financially troubled Saudi
firms has prompted Riyadh to take steps to allevi-
ate the situation. One protectionist measure re-
quires foreign companies to subcontract.at least 30
percent of new government jobs to domestic firms.
Revised bidding procedures also give local compa-
nies a better opportunity to win contracts. More-
over, the Foreign Capital Investment Committee
(FCIC) decision last November to place a moratori-
um on new joint venture companies reflects the
Secret
DI IEEW 84-024
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Saudi Arabia: Real GDP Growth,
by Sector, 1981-83 .
Percent
1981
1982
1983
8.0
1.7
-10.8
3.6
-9.4
-37.2
10.3
10.1
-6.2
7.8
1.3
-12.2
The soft oil market and the need to pare expendi-
tures have had a major impact on the oil industry,
which accounts for about 50 percent of GDP.
Aramco, the Saudi-owned producing company, al-
ready has reduced its maximum sustainable oil
productive capacity from 10.5 million b/d in 1981
to 8.0 million b/d
These reductions will not impair
Riyadh's ability to respond to a tighter oil market;
we estimate the Saudis could restore productive
capacity to a maximum sustainable level of 10
million b/d ina year.
regime's view that the construction industry has a
surfeit of foreign companies. The FCIC is accept-
ing foreign bids only for high-priority projects such
as schools, hospitals, and electric power, according
The continued slump in construction activity will
result in substantial layoffs of foreign workers. As
many as 500,000 expatriates, 20 percent of foreign
workers, could be out of work this year, according
to the US Embassy. Most of those affected will be
non-Arab unskilled personnel. Many will try to find
temporary employment in other areas of the Saudi
economy rather than return home. The layoffs are
unlikely to cause serious problems for the govern-
ment, in our judgment, because the expatriates
know the Saudis can easily jail or deport malcon-
tents.
The Saudis so far have avoided serious political
repercussions in the adjustment to reduced oil
revenues. Although local entrepreneurs frequently
complain about the business climate, according to
the press, and blame the recession partly on the
government, their discontent has not approached an
intensity that would threaten the regime. Most
firms begrudgingly accept current stringencies, but
remain confident construction prospects will im-
prove in the future. Many Saudi officials-espe-
cially Western-educated ones-even regard the
slowdown as an opportunity to control runaway
development programs.
Secret
15 June 1984
Neither do we believe that the drop in productive
capacity will create shortages of natural gas needed
for the Kingdom's domestic industries. Natural gas
requirements this year for electric utilities, desali-
nation plants, and existing petrochemical complex-
es will average about 45 million cubic meters per
day. This volume can be met by the gas produced
with oil output at current levels, 4.7 million b/d in
May. Even if oil production fell to as low as 2.5
million b/d, most facilities could switch to alterna-
tive liquid fuels,
The government has kept up expenditures for the
industrialization program. Construction of eight
petrochemical projects and two refineries at the
new industrial cities of Jubail and Yanbu is largely
on schedule, and one methanol facility and a
nitrogenous fertilizer plant already are in opera-
tion.
The Saudi Government has three petrochemical
plants scheduled to begin operations next year:
? The Saudi Petrochemical Company (Sadaf), a
$2.9 billion joint project with a local affiliate of
Shell Oil.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
? The Al-Jubail Petrochemical Company, a $1.1
billion plant jointly owned with a subsidiary of
Exxon.
? The National Methanol Company, a $380 million
facility shared with two US companies, Celanese
and Texas Eastern.
These plants will have a capacity of 2.7 million
metric tons per year of petrochemical products.
Most output is to be taken by the foreign partners.
A Japanese company already has signed a long-
term contract with Sadaf for about 75,000 tons per
year of products, according to press reports.
The Saudi Government, through its oil marketing
company Petromin,.,is moving ahead with Mobil
and Shell to bring two oil refineries for export on
stream by the end of this year. The facilities will
enable Saudi Arabia to boost exports of refined
products from 75,000 b/d currently to 575,000
b/d. The Saudis have indicated they will follow
Kuwait's strategy of buying retail outlets and refin-
eries in Europe to assure secure downstream mar-
kets. Earlier this year, Riyadh presented prospec-
tive buyers with a proposed pricing schedule for
products loosely aligned with current market
prices,
Riyadh continues to emphasize the development of
nonoil light industry. The Saudi Industrial Devel-
opment Fund (SIDF), a government agency that
extends soft loans to the private sector, has been
steering investment away from construction into
more technically advanced and diverse areas, espe-
cially import substitution projects, according to the
press. As an incentive, the SIDF provides industrial
investors interest-free loans for as much as 50
percent of initial capital requirements. The govern-
ment also grants local firms a 10-year tax holiday
and duty-free imports of raw materials and other
inputs..
Agricultural production has not lost momentum
despite some funding cutbacks and delays in gov-
ernment price support programs.
the Saudis expect the 1984
wheat harvest to jump from about 691,000 tons in
1983 to-as much as 1.5 million tons this year,
enough to make the Kingdom self-sufficient, ac-
cording to Saudi officials. The Saudis probably
used the claim of a bumper crop as a pretext to
reduce wheat subsidies paid to farmers by as much
as one-third to $760 per ton. The subsidy still is
extravagant; the world market price for wheat is
about $180 per ton. If the bumper harvest does
materialize, paying wheat farmers will exhaust
budget allocations for all agricultural programs.
Implications for the United States
Saudi Arabia's development plans have important
implications for the close Saudi-US relationship.
The Saudis will be entering a depressed petrochem-
ical market and will have to offer competitive
prices. This could cause price wars and stir protec-
tion sentiments in some importing countries. Saudi
Arabia already has warned the United States pub-
licly that it will retaliate should Washington im-
pose protectionist measures against Saudi petro-
chemical imports.
US commercial opportunities in Saudi Arabia are
likely to rebound slowly. The impact of a more
competitive bidding environment, in our opinion,
will fall on construction. We anticipate that the
cost-conscious Saudis are likely to focus on price
and financial arrangements. A more price-oriented
approach could give a strong advantage to Europe-
an and Asian firms that have lower labor costs and
government-supported concessional financing. At
the same time, a more restrained development
program should have little direct impact on most of
the US firms already in Saudi Arabia; the Embassy
reports that most are not primarily involved in
construction.
Secret
15 June 1984
25X1
25X1
25X1 I
25X1
I
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Major Soviet 1,420mm Gas Pipelines, 1981-85
Italy
Yugoslavia
Bulgaria
G ree
Finland
Petrovsk
Sea
Complete
--- Under construction
Baltic
Sea
MOSCOW* Vyksa
To Yelets ~ 41
Cyprus
Gryazovets
'\ Jo19~,~ j
izhnyaya Tura
Soviet
Union
,Aral
Sea
Secret
15 June 1984
The United States Government has not recognized
the incorporation of Estonia, Latvia, and Lithuania
into the Soviet Union. Other boundary representation
is not necessarily authoritative.
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Status of the Soviet 1,420-mm
Gas Pipeline Program
Pipelaying is completed on the Siberia-to-Western
Europe natural gas export pipeline and on four of
the five domestic gas pipelines planned for 1981-85.
Three of the domestic gas pipelines probably are
operating at or near design capacity.The natural
gas export pipeline is operating at less than full
capacity and limited throughput will continue until
compressor stations are completed. The USSR has
delayed replacement orders from Western firms for
the control panels damaged in the January fire at
the head compressor station of the export pipeline.
Instead, Moscow reportedly is considering the op-
tion of using Soviet equipment. During 1984-85, we
believe the USSR will have adequate supplies of
pipe and gas turbines to complete the scheduled
Compressor Station Construction
We believe that nearly all of the compressor sta-
tions planned for the Urengoy-Gryazovets,
Urengoy-Petrovsk, and Urengoy-Novopskov gas
pipelines are operational. Most of the compressor
stations on these pipelines are equipped with Soviet
GTK-10 gas turbines. These bulky 10-MW units
weigh nearly as much as a US-designed 25-MW
unit and are far less fuel efficient.
line compressor stations on the gas export pipeline
are operational.
25X1
25X1
25X1
25X1
construction program.
Pipelaying Operations
recently completed pipelaying operations on the
Urengoy-Center I (Yelets) gas pipeline-the fourth
of five domestic gas pipelines planned for 1981-85.
Pipelaying on the fifth (Urengoy-Center II) has
begun and is scheduled to be completed next year.
Since 1980, the USSR has laid about 17,000 km of
1,420-mm gas pipeline.
The Soviet press has reported recently that con-
struction of a major gas pipeline from the Yamburg
gas deposit (north of the Urengoy gasfield) is
scheduled to begin in 1985. The gasfield at
Yamburg is very large, with reported reserves of
3-4 trillion cubic meters. We estimate that reserves
at Yamburg are adequate to allow production of
150 billion cubic meters annually; this would re-
quire the construction of another two or three gas
The Soviet press has reported that 16-MW aero-
derivative gas turbines are being installed on the
export pipeline. We have no evidence to back this
the January 1984 fire was
contained within the control-center building and
did not damage the turbine /compressor sets.
The USSR has delayed order-
ing replacements for the damaged Mark II
Speedtronic control panels, and we have reports
that the Soviets are considering the use of their own
equipment. Initially the Soviets could rely on gas-
field pressure to sustain pipeline throughput to the
first line station, located about 100 kilometers from
the start of the pipeline.
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
pipelines.
Secret
DI JEEW 84-024
15 June 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
The GPA-Ts-16 is a mechanical-drive industrial
turbine derived from aircraft engines taken from
the TU-154 and IL-62 passenger airplanes. The
aircraft engine is converted to an industrial gas
turbine by the Kazan' Turbomotor Production
Association assigned to Kazan' Aircraft Engine
Plant 16 of the Ministry of the Aviation Industry.
According to Soviet media reports, 55 GPA-Ts-16
gas turbines were scheduled for assembly. during
1983-compared with five units in 1982.
Availability of Gas Turbines
In addition to the 120 US-designed
Frame V gas turbines originally ordered for the gas
export pipeline, the Soviets have purchased another
21. Frame V gas turbines from the Italian power-
equipment firm Niiovo Pignone.
We estimate that the USSR probably will complete
installation by early 1985 of at least 18 Soviet
GTN-25 gas turbines at six compressor stations on
the gas export pipeline. To accommodate increased
output of the GTN-25 gas turbine, we believe the
Soviets have had to delay production of some
turbines intended for the electric power industry
and the chemical industry.
We believe that the GTN-25 is less efficient and
less reliable than the US-designed Frame V gas
turbine.
Secret
15 June 1984
This will tend to minimize the
effects of operating problems with the GTN-25.
Pipe Supplies
Soviet pipe supplies are ample. This year, as in the
recent past, the USSR will import about 2.6 million
metric tons of large-diameter pipe (LDP), primarily
from Japan, West Germany, Italy, and France. The
USSR has negotiated prices 30 percent below the
average price paid during 1979-83, cutting import.
expenditures to $1 billion in 1984.
The low prices reflect hard Soviet bargaining with
foreign LDP suppliers.
Moscow threatened to reduce sharply
purchases from the major West German pipe sup-
plier unless the firm accepts Soviet price demands.
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Iq
Next 5 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4
Secret
Secret
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707040001-4