(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707090001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 39
• Document Creation Date: January 12, 2017
• Document Release Date: October 15, 2010
• Sequence Number: 1
• Publication Date: July 20, 1984
• Content Type: REPORT

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Directorate of -Seemt--
Intelligence
Weekly
International
Economic & Energy
DI 1EEW 84-029
20 July 1984
0
Copy 6 7 8
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Secret
International
Economic & Energy
Weekly
20 July 1984
iii Synopsis
Perspective-Outlook for Global Population Conference
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
15 Israel: The Economy and the Elections
19 /World Population Conference: Problems and Prospects
23 sapid Population Growth: Consequences for the Developing World
27 IC Exports: Climbing the Technological Ladder
31 - / Longer Leadtimes: Soviet Problems With Western Technology
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Comments and queries regarding this publication are welcome. They may be 25X1
Directorate of Intelligence
Secret
20 July 1984
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International
Economic & Energy
Weekly
Synopsis
1 Perspective: Outlook for Global Population Conference 25X1
Representatives from UN-member countries will meet in Mexico City in
August to hammer out a consensus on global population and development
issues. Developing-country delegates will pressure the OECD countries-as
they did at the last world population conference 10 years ago-to increase
financial support for population and economic development programs. 25X1
15 Israel: The Economy and the Elections) 25X1
Neither of the major parties has specified its postelection economic programs,
but most Israelis expect strong measures. We are less sanguine, however, that
any Israeli government will muster the political courage to launch an effective
19 World Population Conference: Problems and Prospects 25X1
The "either development or family-planning" argument of the 1974 Bucharest
conference has, for the most part, given way to agreement that both economic
development and family-planning programs must be successful if population
growth rates are to continue to fall. Nonetheless, moves by the Soviets and sev-
eral unresolved substantive issues threaten to disrupt the conference.
23 Rapid Population Growth: Consequences for the Developing World I 25X1
World population will exceed 6 billion by the year 2000, 30 percent more than
the current total and nearly two-and-one-half times the 1950 level. These
increases have alarming implications for the economic health and social/politi-
cal stability of many LDCs.
27 NIC Exports: Climbing the Technological Ladder) 25X1
Exports of the newly industrializing countries (NICs) have shifted dramatical-
ly toward technology-intensive products over the past decade. We expect the
composition of NIC exports to become even more technology intensive as these
LDCs increase their technological capabilities and expand their lines of high-
tech products.
Secret
DI IEEW 84-029
20 July 1984
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31 Longer Leadtimes: Soviet Problems With Western Technology
Soviet use of Western plant and equipment has fallen far short of its potential
for improving the economy, largely because the Soviets take so long to acquire
and use many of these imports.
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20 July 1984
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International
Economic & Energy
Weekly
20 July 1984
Perspective Outlook for Global Population Conference
Representatives from UN-member countries will meet in Mexico City in
August to hammer out a consensus on global population and development
issues. Regional preparatory meetings showed that most African, Middle
Eastern, and Latin American delegates still view economic development as the
key to reducing fertility, mortality, and international migration. Developing-
country delegates will pressure the OECD countries-as they did at the last
world population conference 10 years ago-to increase financial support for
population and economic development programs.
The sharp differences between the North and South positions that divided the
1974 Bucharest population conference have narrowed:
? Developing-country policymakers have moved away from the rigid position
that economic development is the only means to reduce population growth
rates. Seventy-two developing countries now officially support family-
planning programs. .
? Developing-country optimism that OPEC's leverage-following the quadru-
pling oil prices-would propel the Third World to prosperity and lead to
lower population growth rates has evaporated. Many Third World policy-
makers now take the pessimistic view that economic progress will be slow
and difficult to sustain, and that in many countries population growth is
neutralizing per capita economic gains.
? Developing-country annual population growth rates declined from almost 2.5
to 2.0 percent during the past decade, but the decline resulted mainly from
China's halving its growth rate. The developing countries accounted for
nearly 90 percent of the three-quarters of a billion people added to the
world's population between 1974 and 1984.
Despite efforts by UN and Mexican conference organizers to orchestrate a
wide-ranging consensus before the August meetings, several unresolved sub-
stantive and procedural issues threaten to disrupt the conference:
? The Soviets will use Mexico City as a platform to attack the United States
on peace and disarmament issues. In preliminary meetings, Moscow and the
Eastern Bloc nations ensured that a formal resolution linking population and
economic problems to world disarmament and peace will be debated at the
conference.
1 Secret
DI IEEW 84-029
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? The Soviets prevented limiting national statements to seven minutes. We
expect Moscow to attempt to fill the developing-country press with lengthy
statements on disarmament.
? Religious groups from the Middle East, North America, Africa, and the
Vatican almost certainly will urge the conference to eliminate international
support for certain family-planning and women's programs that they view as
tantamount to state interference in private family decisions.
Despite the disruptions, we expect widespread delegate support and Third
World media coverage for a "1984 World Population Plan of Action" and a
"Mexico City Declaration" that:
? Call on the developed countries to increase financial support for developing-
country population and economic development programs.
? Note the urgent need for many developing nations.to accelerate declines in
their population growth rates and to stimulate economic growth.
? Finesse the politically sensitive conflicts between individual rights and state
authority by applauding both.
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Secret
Energy
OPEC Production OPEC production averaged 18.4 million b/d in the second quarter, 900,000
Update
b/d above the cartel's self-imposed ceiling. Output reached slightly over 19
million b/d in June-the highest level this year. Largely because of price
discounts, Iran was able to boost June production by 300,000 b/d over May
and is now producing at its assigned quota. Saudi production in June jumped
800,000 b/d above May levels, reflecting increased liftings from the Saudi
port at Yanbu outside the Gulf and an increase in Japanese purchases. Some
of the greater output was also earmarked for floating storage. We believe
Riyadh purposely kept production high before this month's OPEC ministerial
meeting to weaken spot oil prices and head off any attempt by other cartel
members to raise individual production ceilings.
a Estimated.
b Neutral Zone production is shared equally between Saudi Arabia
and Kuwait and is included in each country's production quota.
Saudi Arabia has no formal quota; it acts as swing producer to
meet market requirements.
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Secret
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fanada Modes
Natural Gas Export
Policy
VI
Update on Nicaraguan
Oil Supplies
Mexican Oil
Equipment Problems
Secret
20 July 1984
slide in gas export volumes.
Ottawa recently announced a new natural gas export price policy intended to
improve sales. The changes to the natural gas-pricing policy are the Liberal
government's first major policy announcement of the election campaign and
are aimed at increasing the Liberal's chances in western Canada. Beginning
1 November, Canadian exporters will have the option either of maintaining the
existing administered border price of $4.40 per million Btu and the volume-re-
lated incentive price of $3.40, or of negotiating new prices. Under the new poli-
cy, however, negotiated prices in long-term contracts must be at least equal to
the Toronto City Gate price, currently about $3.15 per million Btu, or to prices
of major competing fuels in the relevant sales market, whichever is greater.
Ottawa will allow spot gas sales with prices below $3.15 per million Btu under
special circumstances. All contracts remain subject to review by the National
Energy Board. Although preliminary data for first quarter 1984 indicate
Canadian gas sales to the United States fell about 3 percent from already
depressed year-earlier levels, we expect Ottawa's new price policy to halt the
250,000 barrels in early August.
The Managua refinery has resumed operations after a two-week shutdown
that resulted from inadequate crude oil supplies. On 8 July, Nicaragua
received 136,000 barrels of crude from Mexico and another shipment arrived
19 July. Mexican deliveries of crude have been cut from 13,000 b/d in 1983 to
approximately 5,300 b/d during the first seven months of 1984 because of
Managua's inability to meet Mexico's tighter payment terms. So far this year,
however, the Soviet Union-Nicaragua's only other supplier-has helped
cover the shortfall by supplying Nicaragua with about 50 percent of its 10,200-
b/d oil consumption. The Soviet Union has agreed to deliver approximately
Mexico has suffered an increasing number of
fires, explosions, and breakdowns in its oil and gas production and pipeline
facilities in recent months. So far, Pemex has been unable to identify any cases
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Secret
ebels Attack
Angolan Pipeline
ment problems apparently have not yet affected Mexico's crude oil production
or exports, persistent equipment breakdowns and restrictions on importing
foreign replacement equipment could interfere with future operations.
of sabotage. Because of its budget crunch, Pemex has cut back routine
maintenance-which was barely adequate even before the present reduc-
tions-and restricted imports of foreign equipment and replacement parts. As
a result, the company is pushing the use of equipment well beyond its normal
serviceability and cannibalizing equipment not in use. While Pemex's equip-
million in lost oil export revenues.
On 15 July, rebels of the Union for the Total Independence of Angola
(UNITA) damaged a small pipeline that delivers 10,000 b/d of crude oil to the
export terminal at Cabinda. The attack, part. of UNITA's overall plan to
maintain pressure on the government, was the first successful effort to damage
production facilities in.the Cabinda area. The pipeline was closed until
midweek due to repairs that included work required because tracked vehicles
ran over the pipeline. The attack cost the Angolan Government about $2
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Indonesia's Pertamina The government is moving to gain control over Pertamina's finances and
osing Autonomy operations following a series of senior personnel changes. 25X1
he Ministry of Finance is now reviewing all foreign oil company 25X1I
Oi Discovery in
orth Yemen
attractiveness to foreign oil companies. 25X1
exploration and drilling budgets submitted to Pertamina. The national oil 25X1
company previously retained a high degree of autonomy, although chronic
bureaucratic delays slowed oil company operations and increased costs.
Additional bureaucratic interference probably will weaken Pertamina's effi-
ciency even further, increase oil company costs, and reduce Indonesia's
The US Embassy in Sanaa confirms that Hunt Oil has discovered oil near
Marib in North Yemen. The first test well produced about 7,300 b/d from two
zones at 1,700 and 1,800 meters. On the basis of these results, the company
will accelerate its drilling program. Seismic studies suggest that reserves in
North Yemen could be as high as 4 billion barrels, and the company is
optimistic that sufficient reserves will be discovered to support crude exports.
Hunt Oil previously had been careful to avoid raising Yemeni expectations too 25X1
high, but after the production testing, Hunt urged President Salih to announce
the find. Salih's subsequent visit to the drilling site and announcement of the
discovery were widely publicized, and North Yemeni officials are ecstatic at
the prospect of leaving the ranks of the world's poorest countries. F___1 25X1
5 Secret
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Secret
Mexican Debt
Resclyeduling
International Finance
similar deals.
Debt rescheduling talks between the Mexican Government and representatives
of the creditor banks began this week in New York. We expect substantial
concessions from both Mexico City and commerical bankers before a settle-
ment is reached and convincing US regional and West European bankers to
accept an agreement will be difficult. bankers
are reluctant to give Mexico particularly favorable terms because they expect
other LDC debtors will be watching these negotiations closely and will seek
The thorniest questions revolve around amounts to be rescheduled, terms, and
how the agreement will be monitored:
private debt to the process.
? Amounts. Mexican financial authorities want to reschedule $48 billion in
public-sector commercial debt, and are also considering adding $12 billion in
? Terms. Mexico wants to reschedule all principal falling due through 1990 at
an interest spread of less than 1 percentage point above LIBOR.
? Monitoring. Bankers are demanding a continuing role for the IMF through-
out the rescheduling period, especially after the next administration takes
office in 1988. Mexico City, however, finds it hard even to agree to extend
conditionality beyond the current three-year IMF agreement.
geria After The slight increase in Nigeria's OPEC production quota will do little to help
he OPEC Meeting solve Lagos's economic predicament. The OPEC ministers agreed to allow
Nigeria to exceed its quota of 1.3 million b/d by 100,000 b/d in August and
150,000 b/d in September. Saudi Arabia, as OPEC's swing producer,
implicitly agreed to absorb Nigeria's production boost by cutting output. The
Isoft oil market is,likely to force Nigeria to discount prices to market the
increased output, and we believe Nigeria will be tempted to test OPEC's
tolerance during the next few months by boosting output beyond 1.5 million
b/d.
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Secret
Even if Lagos raises ouput to 1.5 million b/d through the rest of the year, Ni-
geria will earn slightly less than $14 billion-well below the $15.7 billion goal
set earlier this year. Moreover, the ever-present threat of food shortages and
fears that import-dependent industries concentrated in the south-currently
operating at only 30 percent of capacity-will have to close probably will
soften the government's determination to limit foreign purchases. We believe
Lagos in the months ahead will attempt to boost imports and give priority to
servicing medium- and long-term debt while continuing to neglect payments to
its trade creditors to whom Nigeria owes $6-9 billion.
/Peru Fails To Make Peru's failure to meet a $26 million interest payment to foreign banks on 5
July is jeopardizing the remaining $100 million tranche from its 1983 bank
loan. According to US Embassy reporting, Peru has requested a $90 million
bridge loan from its creditors, in part to cover this overdue payment. Peruvian
financial officials claim that the general strike in June halted government tax
collections and that the Central Bank cannot make the interest payment .
without violating targets under its IMF agreement. Lacking foreign exchange.
and with domestic political pressure building against austerity, President
Belaunde, we believe, will have great difficulty keeping Peru in compliance
with IMF performance criteria in coming months.
Global and Regional Trends
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China Buying
China is negotiating with both US and West European aerospace companies
Ooadcast Satellites for the $200 million purchase of two direct broadcast satellites, one to be
launched by the end of 1986 either on the US shuttle system or by the
European Space Agency's Ariane launch vehicle.
the US-designed satellite would weigh about 1,300 kilograms, while
the West European model would be about 1,900 kilograms. The lower weight
of US satellites provides an important advantage because China wants to
launch one of the satellites. China is developing a new series of space boosters
similar to the US Delta class and the European Ariane by lengthening the first
stage of current space boosters (CSL-2/CSL-3) and may add a solid rocket
strap-on in the future. Flown without strap-ons, the new vehicle should be able
to place no more than 1,500 kilograms into geostationary transfer orbit,
inadequate to launch the West European satellite. With strap-oris, the weight.
increases to about 2,400 kilograms
Boosted by Japanese exports of plant and machinery, Japan-China trade
reached a record $5.83 billion in the first six months of 1984--a 30-percent in-
crease over last year's rate. Chinese purchases totaling $2.88 billion were
roughly balanced by sales to Japan that included $1.15 billion in crude oil, a
16-percent increase. Japanese officials have said they expect total trade for the
year to surpass the previous record of $10.4 billion set in 1981.
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I
Mo Increasing According to Embassy reporting, a Soviet delegation visited Malta in early
--,Economic Ties With July to make arrangements for producing medical instruments for export to
Communist Countries the USSR. A delegation of Romanian officials visited Malta in June to discuss
tourism, and Hungarian and Cuban officials have visited recently to consider
ways to expand trade. In addition, Malta has a contract to produce two
merchant vessels for China, and the Chinese are assisting harbor construction.
Botswana has announced a 5-percent devaluation to maintain parity with the
evalues Currency declining South African rand. Even though Gaborone pegs the value of the
/ pula to a weighted average of several major currencies, it is most concerned
Eastern,.and; Southern
Africa Common
Market
Japa ,nese Recovery
PiUp Speed
value of the pula relative to the rand. would hurt Botswana's fledgling
industries by making them less competitive in South African markets.
about the rand-pula exchange rate because South Africa is its primary trading
.partner. Economic authorities in Gaborone have feared that the rise in the .
within the region over the next decade.
The 14 members of the Preferential Trade Area of Eastern and Southern
Africa met in Zimbabwe on 1 July to launch a regional common market. They
agreed to reduce tariffs by 10 to 70 percent for 212 traded items. To qualify
for the tariff benefits, however, products must meet stringent local content
requirements. The agreement also provides for the free flow of goods between
member states. The organization hopes gradually to eliminate tariff and
nontariff barriers to intraregional trade and improve the transportation system
National Developments
Developed Countries
Japan's economic recovery, boosted by private investment and strong foreign
demand, is proving more robust than most forecasters had expected:
? First-quarter GNP figures show real growth at an annual rate of 7.4 percent,
the strongest showing since 1978.
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20 July 1984
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British Strikes
Jeopardize Economic
R covert'
Secret
20 July 1984
was down in the first quarter.
? With industrial production and corporate profits up, private plant and
equipment investment continued its sharp rise.
Personal consumption has remained. sluggish, however, and housing investment
management of economic issues
Most private forecasters have raised their projections of GNP growth to about
5 percent for Japan's fiscal year 1984, which began in April. This is well above
the official target of 4.1 percent. Strong growth should be a plus for Prime
Minister Nakasone, who will face a. Liberal Democratic Party presidential
election in November. Nakasone has generally been regarded as weak in his
estimate of the current account surplus and GNP growth in September.
The booming export sector is leading forecasters to raise their estimates of this
year's current account surplus. Most now expect the surplus to reach the $30-
35 billion range. The government-which originally had forecast; a surplus of
$23.5 billion, about the same as last year's-is expected to announce a revised
which has reached a historical low against the dollar.
Prime Minister Thatcher is under growing pressure to settle the coal and dock
strikes, by far the biggest labor disputes in her five years as Prime Minister.
According to the Bank of England, the 20-week-old coal strike shaved 2
percentage points off the growth rate for the first quarter, and financial
analysts in London have reduced estimates for 1984 growth from 3 percent to
2 percent. Combined with pressure from rising US interest rates, the strike has
led the monetary authorities to abandon short-term goals and let domestic
interest rates rise to the highest level in two years to slow the fall of the pound,
This could lead Thatcher to use troops.
The dock strike, now two weeks old, is of greater short-term concern. Unlike
the coal situation, where stocks were initially plentiful and a supply pinch will
not occur until this fall, all of Britain's major ports have shut down and foreign
trade has been virtually halted. Britain is heavily dependent on imported raw
materials and close to a third of GNP is derived from foreign commerce. The
government has threatened to use troops to move essential supplies if the
dockers continue their strike, but London is still hoping for an early settlement.
Although there is a risk to the Thatcher government that the two strikes will
feed on each other, the traditionally militant dockworkers probably are more
concerned with their job security than with supporting the miners. Port
employers are reluctant to give the dockworkers the absolute assurances
demanded by the union, but we believe that a reaffirmation of the existing
closed-shop agreement will be all that is needed to end the dockworkers strike,
perhaps as early as next week. The government probably hopes for an early
settlement to keep the miners isolated. Dockworkers' union leaders, however,
may be able to persuade their members that the time is right to force the gov-
ernment to make concessions to the miners and that the strike should continue.
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New French Prime President Mitterrand's appointment of Laurent Fabius as Prime Minister
MMMster shows the President's determination to continue his controversial economic
Economic Moves by the
New Labor Government
in New Zealand "
Inflation Increasing
Philippine Labor Unrest
political base in the Socialist Party.
policies. As Minister of Research and Industry, Fabius was one of the chief ar-
chitects of the government's austerity program. Under this program the
government has accepted high unemployment as the price for building a more
modern economy based on high technology. The appointment of Fabius
suggests that these policies will continue until the 1986 legislative elections.
Fabius's strongest asset is his unquestioned personal loyalty to Mitterrand. He
has had only limited experience in government and has no independent
On Wednesday, Prime Minister-elect Lange announced a 20-percent devalua-
tion of the New Zealand dollar, deregulation of interest rates, and a three-
month freeze on prices and fees for professional services. The move-
foreshadowed by the Reserve Bank's 15 July suspension of foreign exchange
trading-is intended to shore up New Zealand's sagging external accounts and
recapture capital outflows-estimated at $1.3 billion-that occurred after
outgoing Prime Minister Muldoon's mid-June call for early elections.j
already burdensome $11 billion foreign debt.
The
Reserve Bank since mid-June had been forced to spend more than $300 million
to support the dollar, forcing New Zealand to seek new loans and adding to the
Less Developed Countries
recommended monetary and fiscal targets.
Devaluation, rapid money supply growth, and legislated price hikes for basic
commodities have spurred inflation and depressed real wages, spawning unrest
among Philippine workers. Prices in May were 40-percent higher than a year
earlier. Despite three government-mandated wage increases, the real minimum
wage has declined by 10 percent in the last 12 months. Moreover, the
government has reported that 50,000 workers were laid off during the first six
months of 1984; some observers believe the figure is closer to 100,000.
Although the number of strikes has not increased dramatically, more violent
confrontations have occurred. Four workers were killed battling riot police
during a recent strike at a Manila garment factory, and additional confronta-
tions are likely. President Marcos has announced a get-tough policy against
"subversive elements" in the labor movement. In addition, the government
cannot grant further wage increases during 1984 without violating the IMF's
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I is Likely
,lTo Increase Rice
Imports.
Concern about rice shortages in the public distribution system in an election
year may force India back into the international market. India already has
purchased 675,000 metric tons of rice this calendar year-more than any year
since the mid-1960s-and is now inquiring about an additional 200,000 tons,
according to trade sources. Although India's rice crop this year was a record
59 million tons, initial public stocks were low after last year's drought and gov-
ernment procurement was slightly lower than expected. If India decides to
buy, it probably will purchase US rice because there is little Asian rice
available before the end of the year. India traditionally has shied away from
purchasing US rice because of its high price, but New Delhi could decide to
pay premium prices rather than risk allowing public rice stocks to run short.
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Zimbabwe Announces,
o
rn Price Increase
C
H rngary s CEMA
J?klations
months of Cabinet debate before being accepted.
To encourage greater corn production, Zimbabwe has announced a. 29-percent
increase in the guaranteed price that it will pay farmers for the crop to be
planted in November and harvested in April. Corn output had dropped from
the record 1981/82 harvest of 2.8 million metric tons to 1.3 million tons this
year because of three years of drought and reduced plantings by commercial
farmers. Corn reserve stocks were depleted earlier this year and the country
lias become a net grain importer for the first time since independence in 1980.
The price increase was opposed by Prime Minister Mugabe and required three
Budapest emerged from the CEMA summit last month with considerable
freedom to pursue its domestic and foreign economic policies, but with tougher
trade obligations to the Soviet Union. Hungarian leader Kadar reportedly was
surprised that General Secretary Chernenko did not strongly criticize Hunga-
ry's economic policies at the summit. Moscow
instead said it will tolerate Budapest's economic reforms and its active trade
and financial relations with the West
CEMA integration.
A senior
Hungarian official told the US Embassy that the Soviets also pressed for more
These arrangements reduce some differences with Moscow and- probably will
encourage the Hungarians to pursue their current negotiations with the EC
and the World Bank. Lingering disagreements over CEMA integration and
the Soviet hard line on East-West issues, however, could still trouble Hungar-
ian-Soviet relations. The USSR's demand for more and better quality goods
from Hungary-and its other East European trading partners-reflects the
new Soviet initiative to improve the availability of domestic consumer goods.
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USSR Seeks US
Teehnelogy for
Tire Cord
to manufacture high-strength plastics that can replace steel. 25X1
and the technology to manufacture nylon 6,6-salt, the basic raw material for
nylon 6,6 production. Using the more advanced nylon fiber, the USSR would
be able to produce 3-5 million truck tires per year for military and civilian ve-
hicles. The capacity of the proposed' nylon salt plant, however, exceeds the
requirements for the nylon fiber plant, and part of the nylon salt could be used
The USSR is exploring the purchase from a Western firm of a plant and
technologies to produce 25,000 metric tons per year of a high-quality nylon fi-
ber (nylon 6,6) for use in tire cord and for other industrial applications. The
USSR's current capacity for nylon 6,6 is only 6,500 tons per year and is based 25X1
on West German technology. The Soviets also are'interested in purchasing
from the firm a plant to provide the technology to manufacture hexamethylene
diamine (HMD), one of two chemical intermediates to manufacture nylon 6,6,
Ukrainian Work Losses Politburo member and party chief in the Ukraine V. V. Shcherbitskii, in a re-
C rt Last Year cent press article, said work time lost in Ukrainian industry and construction
fell by 25 percent in 1983 compared with 1982. The Shcherbitskii article gives
further evidence that increased hours worked played an important role in the
spurt in Soviet economic growth last year. Growth in Ukrainian industrial
production rose from 2.9 percent in 1982 to 3.8 percent in 1983, paralleling the
rise for the USSR as a whole from 2.8 to 4.0 percent, according to official So-
viet statistics. Although we do not know the extent of work time lost, we
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believe it is sizable, and a 25-percent reduction would substantially raise work
time. The article also indicates that trade unions, one of whose main ;tasks is to
ensure fulfillment of output targets, played an active part in reducing worker
absenteeism and in implementing Andropov's labor discipline campaign.
Soviet Concern Over A recent Soviet delegation visiting Kuala Lumpur expressed dissatisfaction
Trade Deficit over the growing imbalance of Soviet-Malaysian trade, according to the US
With Malaysia defense attache. According to the Malaysian central bank, Soviet purchases
from Malaysia rose in 1983 more than 25 percent while Soviet sales to
Malaysia decreased by almost 40 percent, resulting in a Soviet trade deficit of
$285 million. Moscow buys roughly 10 percent of Malaysia's major nonpetro-
leum commodity exports of tin, palm oil, and rubber. In response to Soviet con-
cerns, Kuala Lumpur is sending a military delegation to the USSR next month
to consider purchasing Soviet helicopters. We believe it unlikely that the
Malaysians will make any major purchases because bilateral relations remain
strained by Soviet support of the Vietnamese presence in Kampuchea.
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Israel: The Economy
and the Elections
On Monday, Israeli voters will elect a new 120-
member Knesset, following an unusually low-key
campaign.' Neither of the major parties has speci-
fied its postelection economic programs, but most
Israeli's expect strong measures. We are less confi-
dent; however, that any Israeli government will
muster the courage to launch an effective austerity
program. There is little evidence that Israelis are
willing to pay the price-to reduce inflation. More-
over, since a coalition government is likely, coali-
tion compromises almost certainly will preclude
tough austerity policies in the absence of a foreign
exchange shortage.
Economic Backdrop
Early elections were scheduled when the leader of
TAMI-a small partner in the Likud-led coali-
tion-said in March that he would support an
early-elections bill. The ostensible reason was the
accelerating inflation rate and the need for a
government with a more decisive mandate. We
believe the real concern was that Finance Minister
Cohen-Orgad's proposed austerity policies would
hurt TAMI's low-income constituency.
The economy is still suffering from the repercus-
sions of the October 1983 stock market crash. The
large devaluation and the subsidy cuts that were
initiated then have resulted in double-digit consum-
er price increases each subsequent month. Prices
have risen at an annual rate of nearly 400 percent
during the first half of this year. Real wages in the
,fl;
Judging by the plan, the plant entrance is some-
where below us
fourth quarter last year declined 16 percent from September 1983 figure. The unemployment rate
the third quarter because of the surge in inflation. reached a seasonally adjusted 5.7 percent in the
As a result, domestic retail sales plummeted; sales first quarter, the highest such rate in more than a
volume in February was 12 percent below the decade.
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A more rapid depreciation of the shekel since
October is reducing the trade deficit. In the first
five months of this year, the trade deficit was $1.1
billion, a $350 million improvement from the same
period in 1983. Israeli statistics indicate, however,
that the improvement was halted in June.
The government called a special session of the
Knesset on 2 July to pass legislation that prohibits
the government from worsening the terms-
amounts, interest rates, maturities, indexing, or
taxation-of financial assets. Labor reluctantly
voted for the legislation to prevent the Likud from
charging that Labor planned to tamper with finan-
cial assets after the elections.
Preelection Maneuvering
The opposition Labor Party has maintained a
substantial lead over the ruling Likud bloc in polls
published during the past few months.
Cohen-
Orgad is under great pressure from his Cabinet
colleagues to engage in "election economics." Some
members are urging Cohen-Orgad to take some
dramatic action, such as "dollarization" or elimina-
tion of the income tax, to improve the Likud's
standing in the polls, according to Israeli press
reports. Although he has resisted manipulating the
economy as blatantly as his predecessor did during
the 1981 campaign, Cohen-Orgad has succumbed
to some of the pressure and occasionally has been
overruled by other members of the Cabinet.
Recent government actions intended to capture
votes include:
? A generous 15-percent increase-on top of index-
ation-in most government salaries.
? Smaller-than-usual monthly price increases on
government-controlled items, such as bread, milk,
and gasoline.
? An increase in the level of income exempt from
income taxes.
In addition; the Ministerial Economic Committee
has recommended:
? A reduction in the minimum tax rate from 25
percent to 20 percent.
? Wage increases as high as 18 percent for regular
army personnel.
The electorate is worried that the new government
will tamper with the linkage system that protects
most financial assets from inflation. We believe
much of the impetus for the reemergence of a black
market in foreign currency in late April was a
desire by many Israelis to-protect themselves by
holding US dollars and other foreign currencies.
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20 July 1984
The economy, however, has forced the Likud to
take some unpopular steps. With the black-market
exchange rate exceeding the official rate by rough-
ly 20 percent, Cohen-Orgad tightened foreign cur-
rency regulations in late June. Israelis must now
show that they have paid the $100 travel tax before
they can purchase the $2,000 in foreign exchange
allowed an Israeli traveling abroad. The Finance
Minister also devalued the shekel by 2.5 percent on
25 June, the largest one-day devaluation since last
October.
Cohen-Orgad has refused to adjust tax brackets as
frequently as cost-of-living adjustments are paid.
He wants to dampen the inflationary impact of
recent wage gains. As a result, some Israelis are
being pushed into higher tax brackets.
June's 13.3-percent increase in prices over May
was a blow to the Likud's reelection hopes. The
Likud had expected a 'relatively low rate-June
typically has the smallest monthly increases-to be
announced when it agreed to the election date. A
surge in private consumption began in late May,
however, because Israelis feared that limits might
be placed on imports of consumer goods after the
elections. This spurt in domestic demand, combined
with the inflationary momentum started last Octo-
ber and the continuing depreciation of the shekel,
wiped out the impact of seasonally low fruit and
vegetable prices.
The Labor opposition has focused on Prime Minis-
ter Shamir's economic policies in its election cam-
paign, but the rhetoric has been low-key. Labor
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Economic Platforms of the Major Parties
Inflation Cut spending and re-
duce money growth,
including curtailment
of credit.
Package deal Freeze prices, ex-
change rates, and
wages. No massive de-
valuation of the shekel.
Cut government spend-
ing, particularly in Leb-
anon and the occupied
territories. Reduce the
amount of money being
printed. Halt political
handouts to coalition
partners. Continue the
Lavi aircraft project but
increase participation by
the civilian sector.
Strive for a national
wage agreement that al-
lows for a curbing of
prices, profits, tariffs,
and taxes, while main-
taining real wages.
economic leaders have said in a number of inter-
views that the budget needs to be cut to fight
inflation and improve the foreign payments, and
they believe these cuts could come from preventing
further settlement in the West Bank and removing
Israeli troops from Lebanon. They have also sug-
gested, as has Likud, a wage-price freeze. Labor
officials want to avoid specifics, however, because
they lost electoral support in 1981 after a Labor
economic spokesman indicated Labor would alter
the indexation system. Q
Israeli press commentary has often alluded to the
austerity that will come irrespective of the winner.
An austerity program under either party would be
more likely to differ in detail than in scope. Both
would try to pare the budget, but Labor would be
Financial assets Honor obligations. Increase savings to curb more likely to cut spending on defense and settle-
Gradually reform the inflation and increase in- ments while Likud would concentrate on social
capital market to raise vestment. Tighten con-
profits. trol over the capital welfare. Both camps have talked about a "social
market. contract" that would include a wage-price freeze.
Development A sharp drop in private A five-year program.
plans consumption this year, leading to an $8 billion
with a slow increase in increase in the GNP
1985-87. Exports will over current levels, a $7 Contrary to widespread expectations, we do not
be raised, not the billion rise in exports, believe that either major party, even with an
standard of living, with and a reduction in the
guaranteed employ- goods and services defi- absolute majority, will soon launch an austerity
ment and savings. cit of $3 billion. program. Israelis have prospered, even with triple-
Wages 'Real wages should re- digit inflation. As long as the pervasive indexation
main the 1983 level,
with any gains ns linked system protects their income and savings, the
to increased productiv- Israelis, in our opinion, are not willing to pay the
ity. cost of higher unemployment and lower living
Export growth Boost exports. Real standards that would be required to fight inflation.
wage increases should
also be linked to export A wage-price freeze would be ineffective and short
growth. lived because inflationary pressures are too strong
Economic
growth,
Expand the tax base,
with tax cuts for export-
ers, workers on evening
and night shifts, and
those leaving service-
sector jobs for industrial
ones. Tax collection will
be improved.
Foster economic growth
through expansion of in-
dustry, particularly
high-technology and ex-
port firms. Encourage
domestic and foreign
investment.
and Israelis would quickly find alternatives-such
as bartering and black marketeering.
The special interests of likely coalition partners
almost certainly will prevent budget cuts. A coali-
tion government dependent on religious parties, for
example, would find it difficult to pare social or
religious programs. Only a drastic shrinking of
foreign exchange reserves is likely to force the hand
of a coalition government.
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No Israeli government can hope to solve the coun-
try's economic ills without cooperation. from the
Histadrut-the large labor organization. The La-
bor Party stands a greater chance of. working out a
wage arrangement because of its close institutional
ties to the Histadrut. Nevertheless, we believe
Histadrut officials would balk at the real wage cuts
that would be required. A Histadrut official recent-
ly told US Embassy officers that the price labor
would be willing to pay as part of a "social
contract" would be to forgo additional real wage
gains. He said that higher unemployment and
lower real wages are not acceptable.
Many younger rank-and-file members of the Hista-
drut might repudiate compromises agreed to by
their leaders. The more militant second- and third-
echelon leaders believe that the Histadrut's pater-
nalistic approach to social issues is outmoded and
that it instead should promote their self-interest.
These younger leaders, particularly. in government-
sector unions that would be most seriously affected
by an austerity program, have been agitating for
wage settlements substantially in excess of agreed
Histadrut guidelines. We have not seen evidence
that Histadrut leaders are trying to convince the
more militant rank and file of the need for belt,
tightening or. compromise with the government.
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World Population Conference:
Problems and Prospects
Delegates from about 150 countries will meet in
Mexico City for the International Conference on
Population, 6-13 August. The meeting, pushed by
the developing countries, will assess progress since
the Bucharest conference in 1974 and will endorse
further action on. population issues. Mexico's Inte-
rior Minister Manuel Bartlett is to chair the con-
ference which will address such contentious issues
as:
? Reducing rates of population growth that devel-
oping nations view as detrimental to their eco-
nomic goals, while endorsing the right of couples
to determine their family size.
? Managing rural-to-urban migration but protect-
ing individuals' rights to move freely.
? Affirming the preeminence of national immigra-
tion laws, while urging that families of interna-
tional migrant laborers and refugees be permitted
to join them for humanitarian reasons.
The Bucharest conference was held at the behest of
the developed countries to encourage developing
countries to reduce high rates of population growth.
Delegates from Algeria, Argentina, and Brazil,
amid heated North-South and East-West rhetoric,
turned the conference into a long, acrimonious
debate over whether resources should be put into
restraining population growth or into accelerating
economic development.
Many developing-country delegates argued that
only more rapid economic development-which.
they contended would require a restructuring of the
world's economic system-would cause a reduction
in their national population growth rates. At the
end of the two-week conference, delegates agreed
to a "World Population Plan of Action" that
stressed investment in economic development. Con-
ferees agreed that couples should have the right to
decide freely and responsibly the number and
spacing of their children and to have the informa-
tion, education, and means to carry out their
decision.
1974-84: A Decade of Change
The "either development or family planning" argu-
ment of the 1974 Bucharest conference has, for the
most part, given way to agreement that both
economic development and family-planning pro-
grams must be successful if population growth rates
are to continue to fall. Unlike 1974-the year of
quadrupled oil prices and developing-country opti-
mism that OPEC leverage would propel them to
prosperity and lower population growth-1984 is a
year with a weak oil market and growing pessimism
in many developing countries that economic growth
will be slow and difficult to sustain. Developing-
country statements in the 1980s, while continuing
to stress that accelerated economic growth will
stimulate demand for family-planning services,
more frequently note that rapid population growth
is neutralizing per capita economic gains.
The latest evaluation of global trends by the United
Nations Population Division shows that the world's
population growth rate edged downward from 1.9
to 2.0 percent in the early 1970s to the current rate
of 1.7 to 1.8 percent. The number of developing
countries with organized family-planning programs
increased, however, from 55 to 72, and most devel-
oping countries sustained modest rates of economic
growth during the 1970s:
? Much of the global decline reflects the change in
China, which halved its growth rate in the past
decade by enforcing programs to limit childbear-
ing to one or two children per family and by
sustaining economic growth.
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Bucharest to Mexico City: A Decade of Population
Change 1974 and 1984
Change in
Population
Increment to Total Sh
Population During Wo
are of
rld Growth
Growth Rate
1975-84 (thousands)
World
2.03
1.67
-0.36
766,003
10
0.0
More developed regions
0.89
0.64
-0.25
78,012
10
.2
Less developed regions
2.46
2.02
-0.44
687,991
89
.8
Western Africa
2.98
3.11
0.13
45,348
5
.9
Americas
1.87
1.73
-0.14
109,173
14
.3
Latin America
2.51
2.30
-0.21
84,587
11
.1
Caribbean
1.98
1.51
-0.47
4,343
0
.6
Tropical South America
2.51
2.39
-0.12
48,020
6
.3
Northern America
1.05
0.89
-0.16
24,586
3
.2
Asia
2.35
1.73
-0.62
467,191
61
.0
? For the rest of the developing countries, the
average annual growth rate remained roughly
constant during the decade at about 2.4 percent.
? In Africa, population growth rates increased from
2.7 to 3.0 percent between 1974 and 1984, as the
decline in the death rate outpaced the fall in birth
rates.
Percent
(except where noted)
Nearly three-quarters of a billion people have been
added to the world's population since the Bucharest
conference:
? Ninety percent of the increment live in the less
developed regions-60 percent in Asia.
? Despite China's progress in achieving dramatic
declines in its rate of growth, 17 percent (130
million) of the addition to the world's population
occurred in China.
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Regional Priorities
Discussions in UN-sponsored preparatory meetings
during the past year indicate that the regional
delegations have different priorities for the Mexico
City conference.
Africa. Delegates to the Second African Population
Conference identified rural-to-urban migration and
corollary problems of rural development and agri-
cultural self-sufficiency as their highest priorities.
African delegates view the Mexico City meeting as
a conference on rural economic development, not
fertility reduction. In their plan of action, "The
Kilimanjaro Objectives on Population," they af-
firmed support for child-spacing as a health meas-
ure and indicated interest in fertility reduction as a
consequence of economic development.
Middle East. The "Amman Declaration on Popu-
lation and Development" stresses the inseparability
of population change and socioeconomic develop-
ment. Conferees agreed that families must perceive
improved living standards before they limit family
size.
Possible Disruptions
Despite efforts by the conference organizers to
achieve consensus before the August meetings,
several unresolved substantive and procedural is-
sues threaten to disrupt the conference. The USSR
is likely to present a major problem.
We believe the Soviets have maneuvered deliber-
ately since their withdrawal from the Los Angeles
Olympics to build a platform at Mexico City from
which they can assail the United States. The Soviet
Union has a resolution before the conference that
states that the problems of population growth and
economic development can be resolved successfully
only under conditions of world peace, disarmament,
security, and cooperation among nations. The Sovi-
et and Eastern Bloc delegations emphasized in all
preparatory sessions that East-West disarmament
and security matters should override population
and economic development issues. The United
States and other conference organizers were unsuc-
cessful in moving the Soviets' peace and disarma-
ment language to the preamble of the conference
document where formal debate and action would
not be required.
Latin America. Delegates to the Havana prepara-
tory meetings emphasized the primacy of the fam- Moscow, in our view, will try to dominate and
ily in population matters. Papers and discussions manipulate developing-country media coverage
underscored the rights of couples to freely decide during the conference. The Soviets and their East-
the number and spacing of their children. The ern Bloc allies may commandeer large chunks of
consensus was that countries in the region suffering the roughly 40 hours available for plenary debate
from problems caused by the depressed global to embarrass the United States with peace and
economic situation could not fully implement so- disarmament speeches. The USSR successfully in-
cial, population, or development programs roduced language to weaken the organizers' plans
o limit each delegation's remarks to seven minutes
Asia. Delegates to the Asian Forum of Parliamen-
tarians drafted a declaration that-in contrast to
other regional positions-calls for determined in-
tervention by governments to reduce population
growth and migration. The legislators identified the
following goals:
? A reduction in the overall Asian growth rate to 1
percent by the year 2000.
? A decrease in mortality rates, particularly infant
mortality, by 50 percent by the year 2000.
A balanced distribution of population through
policies to accommodate planned urban growth as
on all action items. Conference delegates will be
told only that it is "desirable" that they limit their
remarks to seven minutes.
Differences between the developed country and the
developing-country delegations on the relative im-
portance that they attach to the two strategies for
reducing population growth rates-economic devel-
opment and family planning-may polarize the
conference along North-South lines as they did in
well as to retain population in rural areas.
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1974. Moreover, representatives from major reli-
gions have indicated that they will urge Mexico
City conferees to eliminate support for specific
family-planning programs that they view as state
interference in private family decisions.
The Mexican hosts, with the support of the OECD
and most developing-country delegates, are likely
to be successful in constraining Soviet disruptions
so a consensus on population issues can be
achieved.
We expect widespread delegate support and Third
World media coverage for a "1984 World Popula-
tion Plan of Action" and a "Mexico City Declara-
tion" that:
? Call on the developed countries to increase their
bilateral and multilateral financial support for
developing-country population and economic de-
velopment programs.
? Note the urgent need for nations to accelerate
declines in their population growth rates and
increases in their economic growth.
? Finesse the politically sensitive conflict between
individual rights and state authority by applaud-
ing both.
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Rapid Population Growth:
Consequences for the Developing
World
World population will exceed 6 billion by the year
2000, 30 percent more than the current total and
nearly two-and-one-half times the 1950 level. Nine-
ty percent of this growth will occur in the LDCs
and will increase their share of global population
from 75 to 80 percent. These increases have alarm-
ing implications for the economic health and
social/political stability of many LDCs.
Population Dynamics
Rapid population growth in the LDCs during the
last 30 years is the product of the wide gap between
high birth rates and reduced death rates. The
expanding number of women of reproductive age in
LDCs-this group is expected to be 85-percent
larger in 2000 than in 1985-has created a demo-
graphic momentum that will continue to drive
population growth, even if hoped-for declines in
fertility rates are achieved. No LDCs are projected
to achieve stable populations by the end of the
century, and only a few are expected to reach
replacement fertility rates.
Attempts to reduce fertility in the developing coun-
tries have been the subject of international debate
and controversy for several decades and this dispute
will continue at the World Population Conference
in August in Mexico City. Population issues remain
highly political. Population size is often equated
with national strength, and attempts to reduce the
growth rate encouraged by developed countries are
viewed by some developing nations as a threat.
Birth control programs are often opposed for cul-
tural and religious reasons, as well as for internal
political reasons, especially when competing ethnic
groups are growing at different rates. Many fam-
ilies throughout the Third World view children as
economic assets and respond to self-interest rather
than to longer term notions of national interests.
India, which initiated population control programs
in 1952, reduced efforts during 1975-76 following
accusations of serious abuses of individual rights.
Concern after the 1981 census revealed no reduc-
tion in growth rate during the previous decade,
however, has led to new efforts combining family-
oriented social programs along with contraceptives.
According to recent press reports, resistance to
sterilization techniques remains strong, and pro-
grams are falling short of their goals. In Pakistan,
an integrated program involving social attitudes
and family-planning services is part of the Sixth
Five-Year Plan initiated last year. Most observers
believe, however, that little will be accomplished
until the government changes public opinion. So
far, however, Islamabad has been unwilling to push
family planning. Some Third World governments
are willing to provide family-planning services, but
are reluctant to endorse the goal of fewer children
while others have adopted a position of complete
nonintervention.
Diminishing Educational Opportunity
The worldwide primary/secondary school age
group (6 to 17) is projected to increase by nearly
200 million between 1985 and 2000. Almost all-
97 percent-of this growth will occur in the Third
World and will place additional pressure on already
overextended school systems. Some countries are
beginning to restructure and augment their formal
educational systems to meet population pressures.
In 1979, for example, Indonesia initiated a group
study program to reduce illiteracy.. More than 5
million people-15 percent of the illiterate adult
Indonesian population and 3 percent of the total
population-reportedly were taught to read and
write.
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Population Growth to the Year 2000 a
Mid-1982 Population
(millions)
Projected Average Annual Population Projected 2000
Growth Rate (percent) (millions)
In most LDCs, the expansion of educational serv-
ices at a rate commensurate with future growth will
be difficult; the number of illiterate adults is
already nearing 850 million. Among the African
nations we surveyed,' both the adult literacy rates
and the primary/secondary enrollment ratios are
extremely low, while population growth rates are
Secret
20 July 1984
very high. For Nigeria to equal Indonesia's suc-
cess-an LDC with comparatively, high adult liter-
acy that has already achieved some success in
lowering birth rates-Lagos would have to enroll
10 percent of its total population in special pro-
grams. We believe such an effort is beyond the
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Secret
government's resources and abilities. Many devel-
oping nations are turning to the international com-
munity for assistance, and some Communist coun-
tries have exploited this opportunity. Cuba, for
example, is currently training 27,000 young people
from 70 Third World nations, including large
numbers of teenagers. The Cuban program accepts
foreign students as young as nine. Five thousand
Cuban teachers working abroad reach an addition-
al 400,000 LDC students.
Not Enough Jobs
Unemployment and underemployment are critical
problems for most developing economies. Employ-
ment statistics are particularly grim in urban areas,
where open unemployment ranges from 15 to 30
percent. Among the 24 key LDCs we surveyed, the
proportion of working-age people actually em-
ployed fell between 1960 and 1980, and only one
country, Venezuela, posted a gain during the peri-
od. Recent projections indicate that the employ-
ment situation will remain precarious through the
end of the century, and in 21 of the 24 survey
countries the proportion of working-age people
employed is highly likely to continue to decline
because of the large increments to population of
working age.
Since World War II, many LDC governments have
looked to industrial growth to create employment.
The failure of industrialization to absorb a growing
labor pool, however, has led to alternative schemes.
The development of labor-intensive technologies for
the rural and informal urban sectors are gradually
being adopted within many LDCs. Although these
plans are aimed in the right direction, their magni-
tude falls far short of Third World needs, and
governments' ability to implement them is limited.
Food Insecurity
In 1980 the populations of only half of the 24 key
LDCs we surveyed received the daily minimum
number of calories recommended by the World
Health Organization (WHO). Although poor
weather is the most common cause of production
declines in the short term, rapid population growth
and domestic food policies pose a more serious
long-term threat. Subsidies for urban consumers,
for example; have kept prices artificially depressed.
This has reduced the incentive for-greater produc-
tion and frequently led to waste.
Ten of the 24 countries surveyed experienced per
capita production declines during the 1970s and
now have an increasing dependence on food
imports:
? In Egypt, per capita food production fell by 7
percent while consumption increased in response
to.rising incomes.
? In Sub-Saharan African countries, grain imports
increased from 1.2 million metric tons during the
early 1960s to 8.6 million tons in 1980 as popula-
tion growth-especially in urban areas-greatly
outpaced increased food production.
? In Latin America, where favorable climate and
substantial areas of underused land offer the
potential for greater food security, both produc-
tion and nutrition increased during the 1970s.
Nonetheless, the 1980 caloric consumption level
was only slightly above the WHO minimum, and
grain imports have increased dramatically since
1976 because of rising incomes and populations.
cultural output.
Most developing countries are vulnerable to harvest
shortfalls, and most LDC governments, for fear of
consumer backlash, are reluctant to raise procure-
ment prices to increase production. As Third World
populations continue to grow and the cost of im-
ports rise, food-deficit countries-many of which
are already overburdened with debt-will increas-
ingly turn to the developed world for both financial
and technical assistance io improve domestic agri-
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We believe that the developing countries will suffer
from rapid population growth well into the next
century:
? The growing number of women of child-bearing
age will drive rapid population growth for many
decades despite programs to lower fertility.
? The sheer size of the school-age population means
that education will remain inadequate or unavail-
able in many areas, and that the number of
illiterates will grow unless economic development
progresses much more rapidly than in the past.
? Without such economic development, labor sup-
ply will continue to exceed job creation, precipi-
tating both internal and international migration.
Policies promoting rural development, small busi-
nesses, and labor-intensive industries probably
will not produce enough jobs without greatly
accelerated infusions of Western capital and
technology.
? In these circumstances, landlessness and unem-
ployment, preconditions for civil disobedience and
political instability, will spread, and governments
could' be pressed to adopt harsh methods to
maintain order.
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Secret
NIC Exports:
Climbing the Technological
Ladder
Exports of the newly, industrializing countries
(NICs) have shifted toward more technologically
sophisticated goods (hereafter referred to as
technology-intensive products) over the past de-
cade.' Exports .of technology-intensive products.to
the Organization for Economic Cooperation and
Development (OECD) grew from 10 percent of
total NIC sales -to these countries in 1970 to 21
percent in 1982.1 Trade statistics for the four
largest industrial countries indicate that this trend
continued into 1983. , W e expect the composition of
NIC exports to become-even more technology
intensive as these LDCs increase their capabilities
and-expand their, lines of high-tech products-Al-
though this expansion is unlikely to pose an across-
the-board competitive threat to OECD producers,
major market penetration could occur in certain
product lines such as. microcircuits.
We estimate that NIC exports of technology-
intensive products to the OECD have grown by.
more than. twentyfold since 1970. These exports to,
the OECD grew from about $800 million in 1970
to nearly $18 ; billion .in 1982. This accounts .for 21.
percent of total N.C exports to the OECD coun-
tries. Trade. data for the four largest industrial
countries show,a sharp : increase. in 19.83 as the
recovery boosted developed country imports
South Korea, and Taiwan.
I Definitions of technology-intensive exports vary widely. We use
product categories that would be considered technology, intensive
from the standpoint of the NICs. The groups chosen-including
chemicals, transport goods; and consumer electronics-generally
embody more sophisticated technology than traditional LDC manu-
factures such as textiles, apparel, and footwear. From an industrial-
country viewpoint, many of the NIC high-tech product lines would
be considered low tech.)
The upward trend in exports of technology-inten-
sive products to, the OECD countries is evident
across the board in the NICs:
? Brazilian exports grew from $52 million-2.2
percent of its total OECD sales=in 1970 to, $1.8
billion or 13.4 percent in 1982.
? Hong Kong's sales climbed from $230 million in
1970 to $2.2 billion in 1982.
? Singapore's exports rose from $53 million in 1970
to $2.9 billion in 1982; these products now ac-
count for about 45 percent of sales to the OECD.
? Mexican high-technology exports grew nearly
fifteenfold between 1970 and 1982. Their share
of total exports to the OECD, however, was little
.changed because of increasing oil and gas sales. to
the OECD countries, particularly the United
.States.
? South Korea's :exports grew from $48 million in
1970 to $2.8 billion in 1982; the share of total
South Korean sales to .the OECD grew from .6.9
percent to 21.5 percent.
? Taiwan's sales increased. over twentyfold; in.1982
these products accounted for 28 percent of Tai-
wan's exports to these countries.
Trade data for selected NICs indicate that the
trend toward more technology-intensive exports
extends beyond sales to the OECD. For instance,
Brazilian exports of these products to non-OECD
countries grew from $84 million=.13 percent.of its
non-OECD exports in 1970-to $2.4 billion in
1982-a 30-percent share. Similarly, Singapore's
technology-intensive exports to non-OECD coun-
tries rose. from just $160 million,.or 18 percent, of
total non-OECD exports.in 1-970, to $3.4 billion, 27
percent, in 1982.
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NICs: Exports of Technology-Intensive
Goods to OECD Countries a
Million US $ South Korea: A Case Study
Plastics
3
32
223
296
Medicines
15
77
175
167
Machinery
452
2,499
8,541
10,856
Of which:
Telecommunications
equipment
60
445
1,867
2,157
Computers
14
290
446
448
Scientific instruments
12
91
446
538
Transport goods
35
.277
1,17.9
1,699
Cars
0
4
110
284
1
28 .
55
157
Consumer electronics
208
1,006
3,319
3,393
Of which:
Televisions
59
240
813
794
Radios
130
553 "
1,842
1,827
South Korea exports a wide range of technologi-
cally sophisticated products including telecom-
munications equipment, electronic microcircuits,
digital central processing and storage units, X-ray
apparatus, and even numerically controlled metal-
Working machine tools. The value, as well as the
range of these exports, has grown rapidly in recent
years. For example, in 1980, South Korean exports
of complete digital data processing machines, cen-
tral processing units, and central storage units
totaled only $6 million. By contrast; in 1983,' .
South Korean exports of these goods exceeded $25
million. Although South Korean exports of higher
technology goods to the OECD are dwarfed by US
or Japanese sales, South Korean exports represent
a substantial move up the technological ladder.
equipment, and consumer electronics-accounted
for over a third of the increase in NIC technology-
intensive exports in 1983.
Role of Foreign Investment
Share of total exports to 10.2 17.5 19.6 20.8 The NICs achieved the export gains largely by
the OECD (percent) attracting foreign investment. The East Asian
a Excluding Iceland, New Zealand, Portugal, and Turkey. NICs, in particular, have been very successful in
Composition of the Increase
The largest share of NIC technology-intensive ex-
ports is in electronics. NIC sales of telecommunica-
tions equipment to the OECD, for instance, in-
creased thirty-five-fold between 1970 and 1982.
Over this same period, sales of consumer electron-
ics rose from $200 million to $3.4 billion, with more
than half the increase in radio exports. Import
statistics for the four largest industrial countries
show that increased electronics exports-defined
here as transistors, computers, telecommunications
Secret
20 July 1984
this area. Besides having an, inexpensive, highly.
skilled, and motivated labor force, these countries
have offered financial incentives to foreign compa-
nies. Singapore, for instance, provides accelerated
depreciation on fixed investment, tax holidays, and
tax exemptions on export profits to foreign firms
investing in electronics, aircraft components, and
advanced medical equipment. Because of these
incentives, foreign investors accounted for 70 per-
cent of the total funds committed to Singapore's
manufacturing sector during the 1970s.
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Secret
NICs: Exports to the OECD
Consumer
electronics
Electronic
equipment
Machinery
0
N
M
a
a
a
In many cases the foreign companies have initially
established plants for the assembly of products to
be sold in industrial-country markets. Over time,
foreign operations in the NICs have shifted to the
production of components, as well as the assembly
of finished products, by increasing the technologi-
Technology-Intensive Exports as a Share of Total
Sales to OECD
cal capabilities of these countries.
Implications for the Industrial Countries
Despite such impressive gains, the NICs do not
seriously threaten the industrial countries' domi-
nance in these product areas. In 1982 the NICs
accounted for 2 percent of OECD imports of
chemicals and transport goods, and slightly less
than 5 percent of their machinery imports. Pur-
chases of scientific equipment and computers from
the NICs accounted for just 3 percent of OECD
imports of the goods. Even where the NICs made
the greatest strides-consumer electronics and tele-
communications equipment-their sales to the
OECD still accounted for only about one-fifth of
total OECD imports of these goods.
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Longer Leadtimes:
Soviet Problems With
Western Technology '
Soviet use of Western plant and equipment has
fallen far short of its potential for improving the
economy, largely because the Soviets take so long
to acquire and use many of these imports. Average
leadtimes for projects in the civilian economy are
much longer than in the West and show no signs of
diminishing.
Soviet end users generally can save time by import-
ing a product embodying new technology rather
than waiting for its development in the USSR. We
believe, however, that the diffusion of a new tech-
nology throughout the economy may be faster with
indigenous technologies. The Soviets seldom begin
the needed research and development to embody
imported technology in Soviet-produced equipment
until the import has been operated in a "prototype
factory." Initial interest to factory operation gener-
ally takes two to seven years.
The USSR is trying to accelerate the assimilation
of new technology in the civilian economy through
various reorganizations and special bonuses.
Chronic official complaints, however, indicate dis-
appointing results. We believe improvements are
unlikely without a major overhaul of the system of
incentives to promote modernization.
Background
Despite great self-sufficiency, the Soviet Union has
traditionally imported Western technology to help
ease bottlenecks, raise efficiency, and modernize its
economy. Imports of Western plant and equipment
expanded rapidly in the 1970s, as Moscow in-
creased its emphasis on these goals in,response to
increasingly severe material and expected manpow-
er shortages
31
Technology imports have significantly benefited
certain sectors. They contributed to the substantial
enlargement of the natural gas pipeline network
and the major advances of defense industries. But
the Soviets hoped that Western technology also
would stimulate productivity, not only in the indi-
vidual plants, but also more generally throughout
the economy. This has not happened.
The Import Process
Legal acquisition and use of Western plant and
equipment for the civilian economy can be divided
into six stages:
? Discovery and initiation of interest.
? Request for funds.
? Negotiation by a Soviet foreign trade organiza-
tion with Western suppliers.
? Delivery, installation, and use.
? Assimilation by the original end user.
? Diffusion throughout the economy.
Several factors prolong the leadtimes at each stage:
? Divided responsibility. The lack of a single body
to coordinate all stages of the import acquisition
and absorption process fosters redundancy and
prolongs negotiations.
? Administrative barriers. Reluctance to permit
contacts with foreign suppliers isolates production
managers from important information, often ,
causing improper installation and prolonging the
adjustment.
? Accounting practices. The small interest charge
on capital assets (both domestic and imported)
offers small penalties for delays.
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? Incentives. The Soviet emphasis on volume of
output discourages technological change.
A study of the Soviet chemical industry done in the
late 1970s showed that the time between initial
inquiries about import contracts and the operation
of the purchased plant and equipment is two to
three times as long as in the West. A study of the
machine tool -industry showed that the time be-
tween contract inquiry and first production is more
than twice that of Western firms
For the Soviets, the slow assimilation rates may be
less-important than whether they can assimilate, an
imported technology more quickly than. a domestic
one. Importing saves time if the technology is not
available domestically. Assimilation probably is .
speedier, however, when Soviet equipment is avail-
able. Even in this case, however, Soviet enterprises
sometimes prefer Western suppliers because they
are believed to be more reliable.
Successful diffusion of an import within the civilian
economy is rare. Diffusion usually requires that a
new technology be embodied in Soviet-produced
equipment. This can take considerable research and
development and often does not even begin until
after assimilation. This can take anywhere from
two to seven years, and by then the diffused
technology is often obsolete. Consequently, West-
ern technology has not produced dramatic changes
in the economy, and technological advances in
Soviet industry continue to depend primarily on
domestic research and development.
Several Western studies have shown that a high
level of imports has tended to perpetuate depend-
ence in the Soviet chemical industry. Our study
shows that the machine-building industry has made
only limited progress in producing specialized
equipment that the chemical industry has been
importing for 20 years. This prolonged dependence
ensures a continued lag of Soviet technology.
The Soviets seem dissatisfied with their perform-
ance. The chemical industry's handling of imports
was derided in an August 1981 Pravda cartoon
showing a plant buried under crates of machine
Secret
20 July 1984
Leadtimes in the Chemical Industry:
Imported Plant and Equipment
Contract inquiry
through negotiations
The end of negotiations to
initiation of production
In the
USSR
6.7
1.5
In the
West
a Research, development, testing, evaluation, and achievement of
normal-capacity operation.
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tools. The accompanying story stated that the
Novopolotsk Production Association "Polimer" had
not used imported equipment valued at 674,000
rubles and that in 1969 the Usolskiy "Khimprom"
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Secret
Association had received imported equipment
worth 650,000 rubles that had never been installed
and had deteriorated beyond repair while in stor-
age. In 1979, Soviet authorities checked 45 petro-
chemical complexes and found 24 at which equip-
ment awaiting installation, was lying unprotected.
Attempts To Accelerate the Process
Leadtime problems persist even though the Soviets
seem to assign a higher priority to the assimilation
of Western equipment. In September 1979, they
established a basic bonus of 3 percent of the total
value of construction and installation work for on-
time project completion and provided a 25-percent
increase to this bonus for projects using large
amounts of imported equipment. In October 1983,
a separate resolution ordered ministries to install
and operate imported equipment within the war-
ranty period.
The Soviets have attempted to speed up the intro-
duction and diffusion of new technology-both
imported and domestic-through scientific-produc-
tion associations (NPOs) that integrate research,
development, and production responsibilities. They
claim that NPOs, currently more than 250, have
reduced leadtimes by 50 to 65 percent. This proba-
bly refers to the time between the R&D phase and
first use of the technology in an NPO plant, not,
between R&D and economy-wide use. Additional-
ly, NPOs are often assigned normal production
quotas in addition to their experimental work to-
ward speeding up innovation. Sometimes they have
been ordered to cease experimental work entirely to
make up for losses elsewhere.
The extremely slow pace at which imported West-
ern technology is assimilated and diffused in the
USSR sharply limits modernization. Even in some
high-priority civilian areas-such as imported gas-
lift equipment used in oil production-delays have
reduced equipment effectiveness.
Oil Equipment Delays
In 1978, the Soviets contracted with a French firm
(Technip) to install gas-lift equipment in 1,800
wells at Samotlor-their largest oilfield. Similar
equipment was purchased for 600 wells at the
Federovo field. Completion of these projects was
scheduled for 1985, but has been delayed for one
or two years. If installed on schedule, this equip-
ment could have provided an additional 200,000 to
300,000 b/d of oil. Due to the delay, the most
effective use of this equipment has been missed,
because the water cut (the amount of water mixed
with the oil) at Samotlor and Federovo is now
higher than optimal for extraction by gas lift.
Soviet planners will continue to recommend im-
ports of Western technology and equipment to ease
bottlenecks and modernize domestic industries, as
the pinch on the USSR's labor, capital, and natural
resources tightens and the leading edge of Western
technology continues to advance. Nevertheless, we
believe Moscow will find. it increasingly difficultto
catch up with the general level of technology in
advanced Western countries. Many of the imports
do not embody state-of-the-art technology and are
bought simply to improve the average quality of the
USSR's own plant and equipment. Even importing
the latest technology stands little. chance of elimi-
nating the Soviet lag. In addition to time lags and
the rarity of widespread application of such im-
ports, Soviet engineers, unfamiliar with the design
behind the imported equipment, will remain ill-
prepared'to improve the technology.
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