(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707170001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: January 12, 2017
• Document Release Date: October 1, 2010
• Sequence Number: 1
• Publication Date: September 14, 1984
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
s--
DI IEEW 84-037
14 September 1984
Copy 6 9 3
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Secret
Weekly
International
Economic & Energy
14 September 1984
iii Synopsis
Briefs Energy
International Finance
Global and Regional Developments
National Developments
1 erspective-South American Debt, Trade, and Protectionism 25X1
15 7South America: Tenuous Financial Balance
19 Brazil: Lender Confidence Improving
23 Key Debt-Troubled LDCs: Trade Surplus Widens 25X1
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27 International Financial Situation: Political Update
/Prepared by analysts in ALA, OEA, and OG!
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olitical Unrest and Economic Conditions: A Preliminary Loo
L,4F I
Secret
14 September 1984
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 Synopsis
In recent weeks a spate of articles have appeared in the world press claiming
that the immediate debt crisis is over. While we agree that conditions have im-
proved for some of the debtors, we see problems on the horizon.F___-] 25X1
Higher interest payments, continued tight access to new credit, and-in most
cases-sagging exports will mean most South American debtor nations will
encounter deteriorating financial conditions through the rest of this year. We 25X1
believe that at least some financial rescue programs will have to be revised; we
also acknowledge a chance that the programs could begin to unravel.
Trade and payments improvements over the first seven months of this-year
have led to renewed confidence by foreign lenders and the IMF in Brazil's
ability to deal with its debt problems. We believe the government-with a
presidential election scheduled next January-may permit a moderate loosen-
ing of credit or wage controls, but will seek to comply as much as possible with
its adjustment program in hopes of getting favorable terms during debt talks
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Secret
International
Economic & Energy
Weekly
1 Perspective-South American Debt, Trade, and Protectionism
15 South America: Tenuous Financial Balance
19 Brazil: Lender Confidence Improving
this fall.
23 Key Debt-Troubled LDCs: Trade Surplus Widens
The trade surplus for the 10 key debt-troubled LDCs climbed in the first half
of 1984 to an annual rate of over $44 billion, compared with $31 billion in
1983. 25X1
27 International Financial Situation: Political Update
Major antigovernment demonstrations occurred this past month in the Philip-
pines, Chile, and Argentina, but they were not as effective as opposition groups
had hoped. In contrast, a three-day worker takeover of Bolivia's largest factory
was one of the most serious labor incidents in that country in more than a year.
iii Secret
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14 September 1984
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29 Political Unrest and Economic Conditions: A Preliminary Look
We have found that general economic conditions can worsen substantially
without sparking unrest, although we believe that government measures
designed to address. economic problems can provide a rallying point for public
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14 September 1984
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Perspective
'Weekly
International
Economic & Energy
14 September 1984
South American Debt, Trade, and Protectionism
nations.
In recent weeks a spate of articles have appeared in the world press claiming
that the immediate debt crisis is over. Much of the analysis focuses on the flex-
ibility shown by bankers in granting a multiyear rescheduling to Mexico with
reduced interest spreads and fees and the likelihood that similar arrangements
will be obtained by Venezuela and Brazil. Moreover, Mexico and its creditor
banks have worked out a procedure for IMF monitoring of the economy
without strict conditionality under a Fund-supported program. Behind much of
the confidence that progress is being made in resolving LDC financial
problems lies a dramatic improvement in the trade performance of debtor
OECD recovery. F__~
While conditions have improved for some of the debtors, there are potential
problems on the horizon. For one thing, the improvement in trade performance
will not necessarily be sustained. We believe, for example, that imports have
already been pared about as much as possible and that political pressures are
mounting to allow some import increases as a means of restoring growth. This
is especially the case in Argentina, Chile, Peru, and Bolivia. On the export
side, recent gains will be difficult, if not impossible, to repeat in the face of
lower prices for key export commodities and the expected slowdown in the
Another problem facing Latin debtors is the possibility of increased protection-
ism in their export markets. If, as many expect, the OECD recovery slows,
many LDCs fear that the industrial nations will be more willing to protect do-
mestic markets and jobs. Earlier this week, Colombian President Betancur, in
a letter to Latin Presidents in preparation for the 13 September Mar Del Plata
meeting on the financial crisis, stated that protectionism and other "external"
factors are largely responsible for the Latin American debt crisis. While Latin
political leaders probably realize that this overstates the impact of protection-
ism, the issue could become a rallying point for increased debtor cooperation.
growth.
Although undoubtedly relieved by the US decision not to restrict copper
imports, we believe the South American debtors are extremely sensitive to
developed country decisions to close export opportunities. A number of Latin
exports-soybean meal, textiles, and steel-already face restraints in Western
Europe, and South America has had only limited success in cracking the
Japanese market. With a US decision on steel imports looming next week,
South American governments will be looking for signs of industrial country
support for the current debt strategy, which relies heavily on GDC export
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Renewed external shocks also could quickly cause problems for the financial
rescue programs. We remain particularly concerned'that another increase in
US interest rates-already a politically sensitive subject in Latin America-
could undermine incentives to continue tough adjustment. Moreover, any
perceived intransigence on the part of banks to providing new money to absorb,
these shocks would again put the major debtors behind the financial eight ball.
Under these conditions, Latin governments-including the moderates-could
.begin to rethink their cooperation with IMF-endorsed programs. With their
economies still depressed and facing political pressure to lift austerity, we
believe the debtors may be less willing to meet scheduled repayments. Instead,
the debtor governments may decide to impose limits on repayments and tie
debt servicing to their ability to export.
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Energy .
OPEC Oil Production 1oil production in
OPEC countries in August averaged 15.7 million barrels per day. At this level,
production will slip below the cartel's ceiling for the first time this year. Iran's
Oil Minister claims Tehran voluntarily has cut its output by 50 percent as a
gesture toward OPEC unity. Marketing problems caused by Iran's refusal to
discount its crude by more than 80 cents per barrel probably caused
production to fall by about 700,000 b/d.
sagging oil exports.
OPEC's efforts to limit production to defend the benchmark price of $29 per
barrel will temporarily ease downward pressure on prices. Prospects for some
increase in world demand later this year and Saudi willingness to absorb any
further slack in the market should stabilize prices during the rest of the year.
Nonetheless, some producers will continue to discount' prices to support their
OPEC: Crude Oil Production, 1984
1984 Quota
First Half
July a
August a
Total
17.5
18.2
17.7
15.7
Algeria
0.725
0.7
0.7
0.6
Ecuador
0.2
0.2
0.2
0.2
Gabon
0.15
0.2
0.2
0.2
Indonesia
1.3
1.5
1.4
1.3
Iran
2.4
2.3
2.5
1.8
Iraq
1.2
1.1
1.2
1.2
Kuwait
1.05
1.0
0.9
0.9
Libya
1.1
1.2
1.1
1.0
Neutral Zone b
0.5
0.4
0.3
Nigeria
1.3
1.4
1.1
1.1
Qatar
0.3
0.4
0.4
0.3
Saudi Arabia c
5.0
4.9
4.5
4.0
UAE
1.1
1.3
1.3
1.1
a Preliminary.
b Production is shared equally between Saudi Arabia and Kuwait
and is included in each country's production quota.
C Saudi Arabia has no formal quota. It acts as swing producer to
meet world market requirements.
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I anian Oil Exports
ontinue at Reduced
Rate
Irish Gas Pipeline
Prgject Canceled
Australian Coal
Ex orts Up
attacks.
Exports of crude oil continue from Iran's main oil-export terminal at Khark Is-
land, contrary to recent press reports. Although it was damaged by an Iraqi
airstrike on 24 June, the Sea Island loading facility on the west side of the is-
land is operational. Iranian oil exports fell from 1.9 million barrels per day in
July to 1.0-1.4 million barrels per day in August, probably because of
marketing problems and Iran's alleged intention to cut output to help stabilize
oil prices. Iran can use a jetty on the east side of the island, and Tehran proba-
bly is avoiding use of the Sea Island facility, which is more vulnerable to Iraqi
Dublin.
Northern Ireland Industry Minister Adam Butler last week terminated a deal
to buy natural gas from the Republic of Ireland's Kinsale field in the Celtic
Sea. Butler stated that the project was no longer economically viable at the
previously negotiated wellhead price of $4.00 per million Btu and that 'recent
marketing studies showed a major decline in Northern Ireland's potential
demand. Under an agreement signed in 1982 by the British and Irish
Governments, Kinsale gas was to be landed near Cork, piped through the Irish
gas system, and reach Belfast through a proposed 160-kilometer pipeline from
Coal exports-Australia's largest export earner-are headed for another
record year. Coal shipments were up 10 percent in the first half compared with
year-earlier levels. Steam coal exports rose significantly as a result of a one-
third increase in shipments to Japan and a nearly 30-percent rise in shipments
to Western Europe. The average price of steam coal exports to Western
Europe in June was 12 percent below year-earlier levels. Both prices and
shipments of coking coal remained relatively constant, as a decline in exports
to Japan was offset by increased shipments to Western Europe. If present
trends continue, total Australian coal exports could exceed 68 million metric
tons this year-surpassing the recordbreaking 1983 level of 61 million tons. At
these volumes, Australian coal exports possibly could equal or exceed coal
exports by the United States-historically the world's largest coal exporter.
.The US Consulate in Dhahran reports that the Saudi Government is
committed to allowing construction of the portion of the Iraqi-Saudi pipeline
between Az Zubayr and the East-West petroline. Moreover, the Saudis are
considering subsidizing the project through a long-term loan with very
generous terms. Riyadh has delegated responsibility for its interests in this
portion of the pipeline to Aramco.
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Petroleum Exploration Esso officials last week stated that they plan to resume exploration activities in
din Chad southern Chad by early 1985. N'Djamena has assured Esso that it will make
available whatever resources are needed to ensure the safety of personnel and
25X1
Progress on Mexican
Debt Rescheduling weekend, and Mexico City and its bank advisory board have begun their
early 1986.
Despite its reservations, Riyadh continues to pursue the pipeline with Iraq. If a
firm agreement and financing are secured in the next few weeks, construction
could begin before the end of the year. The pipeline could be operational by
equipment. According to the new commander of the French armed forces in
the Central African Republic, however, recent dissident activity in southern
Chad makes it unlikely that Esso will be able to begin work on time. The con-
sortium that Esso now heads ceased operations near Lake Chad and in the
southern regions in 1979 because of deteriorating security. President Habre
has consistently pushed for development of the concession, which produced
some oil but no major discoveries. Since Chad imports about 2,000 b/d, the
development of even a small field would prove significant to the local economy.
Final details of Mexico's multiyear rescheduling package were completed last
campaign to sell the package to over 500 other creditors this week.
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14 September 1984
OMexico City will prepay $1 billion of its 1983 $5 billion loan at year-
evaluate Mexico's performance against the targets it sets for itself.
under the rescheduling agreement Mexico will
submit the "unaltered results" of semiannual IMF reviews to a bank advisory
board through at least 1990. The first report each year will cover Mexico's
economic program to determine if it is compatible with Mexico's foreign
payments position and debt-servicing obligations, while the second will
the rescheduling agreement is
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Peru's Perilous
,Financial Situation
not completed. In this case the prepayment would be deposited in an escrow
account and disbursed to the banks when the final agreement is signed. 25X1
Finance Minister Benavides has publicly acknowledged that Peru will be 25X1
unable to meet the IMF performance targets
this year and wants to secure
easier terms.
With political pressures growing to relax austerity
measures before the elections next April, President Belaunde will have great
difficulty in upcoming negotiations with the Fund. Peru's large reserves of 25X1
close to $1 billion-more than six months' worth of imports-enable the
government to bargain hard for concessions from the IMF. A protracted delay
in reaching agreement, however, would jeopardize the pending commercial
debt-refinancing package, cut access to foreign credit, and-if Lima misses
the 5 October interest payment-may force US banks to begin placing
Peruvian loans in "nonperforming" categories. F____-] 25X1
Atozambique To Join Mozambique announced this week that it will join the IMF and World Bank
_,--IMF and World Bank later this month, according to press reports. Maputo had been negotiating on
possible membership with the two groups since last April. IMF membership 25X1
probably would facilitate the rescheduling of $1.4 billion worth of debts that
A depreciation of the rupiah in recent weeks has led to large-scale conversions
on jpdonesian Rupiah of assets into dollars. Although it is not clear why the rupiah has fallen-gov-
ernment officials claim that the decline does not reflect worsening foreign
payments-the strength of the US dollar probably has played a role. The
central bank delayed intervening to avoid a rundown of reserves, but public 25X1
criticism spurred the authorities to slow the decline. Jakarta remains reluctant
to announce another major devaluation because of the inflationary potential.
Indonesian officials have tried to reassure businessmen that the situation is
under control to avoid a loss of confidence that could lead to serious capital
flight. 0 25X1
Global and Regional Developments
Global Protectionism A decision by the US Government on whether protection should be granted to
on Steel Increasing
the domestic steel industry-expected sometime next week-comes at a time
when idle steel capacity in the non-Communist world is over 30 percent and
protectionism is mounting steadily. We believe capacity utilization of the non-
Communist steel industry probably will remain under 80 percent for some
time. 25X1
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Secret
Excess capacity has led many developed and developing countries to place or
consider restrictions on imports:
? The EC has minimum import prices and bilateral agreements with 14
countries to limit steel imports. Austria, Sweden, Norway, Finland, and
Spain have similar accords to limit steel imports from the EC. Portugal has
import controls.
? Colombia, India, Mexico, and Venezuela authorize national agencies to
regulate steel imports on the basis of the availability of domestic steel
n products. Brazil also restricts imports and applies a tariff to those products
that are permitted entry.
? South Africa is considering a request for import protection for a large
number of steel products.
? In April, India tightened controls on imported steel.
? In addition to current import controls. New Zealand has promised its local
steel industry protection if its share of the domestic market falls below
current levels.
? The Australian Steel Industry Authority recommended that tariff prefer-
ences given to developing countries be withdrawn for Brazil, South Korea,
and Taiwan.
? Even in Japan, where costs are low and no restrictions exist, protectionist
pressure is beginning to build against producers from developing countries.
Japanese-US
Discussions on
ultilateral Trade
Negotiations
In discussions with US officials on a new round of multilateral trade
negotiations, Japanese representatives last month expressed concern over the
US stance on the role of less developed countries in such negotiations. The Jap-
anese are committed to seeing that the LDCs become more involved in all
facets of the talks, from the preparations to the actual negotiations. Tokyo is
especially concerned that the US's "conditional most favored nation" concept
and US proposals to focus the negotiations'on such issues as services and high
technology-which are not of immediate interest to LDCs-will act to reduce
the number of LDC participants. The talks were part of preliminary prepara-
tions for a new trade round-proposed by the United States and Japan at the
London Economic Summit-and will continue next week at a ministerial trade
Developed Countries
Possible South African Black miners at eight of South Africa's 34 gold mines have announced they
Mine Strike will strike on Monday if their wage demands are not met. Last year the eight
mines accounted for 25 percent of South Africa's gold production and about 10
percent of its foreign exchange earnings. The mineowners have stated that
they will replace striking miners and that they will hold to their offer of a
14-percent wage increase-slightly more than the prevailing 12-percent
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Rome Raises
Discount Rate
the strike.
inflation rate. The National Union of Mineworkers is demanding an
18-percent wage increase. The union, which represents less than 20 percent of
South Africa's black miners, claims that many nonunion miners will support
government's difficulties in getting its budget in line.
The Bank of Italy, concerned that excessive growth of bank credit was
worsening the trade deficit, last week raised the discount rate a point to 16.5
percent. The move follows a freeze last month on the net foreign indebtedness
of banks at their level as of 30 June. Italy's trade deficit was $3.8 billion for
the first six months of 1984-a $1.4 billion jump from the same period last
year. The Italian business association Confindustria has criticized the interest
rate increase as premature and as a blow to Italy's economic recovery. If
Italy's external accounts erode further, however, Rome certainly will continue
to tighten credit and foreign exchange controls-particularly given the
Less Developed Countries
Philippine Typhoon Typhoon Ike last week caused widespread disruptions to communications and
Damage commerce, destroyed electric power lines, and caused $100 million worth of
direct economic damage. In the hardest hit Surigao provinces of northeastern
Mindanao, over 1,500 deaths were recorded, 80 to 90 percent of the coconut
trees were damaged, and 80 to 90 percent of the schools were destroyed or
damaged. Similar reports were received from Bohol and Cebu provinces.
Electricity is not expected to be restored for several months, and coconut
trees-a major source of income for farmers-normally take five to seven
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years to recover.
mount their own relief program in outlying areas. 25X1
Government relief efforts are likely to be complicated by budgetary problems
and the rural Communist insurgency. Damage from the storm forced Manila
to turn to foreign governments for disaster assistance-a step the government
has resisted in the past. At the same time, President Marcos authorized the re-
lease of $7 million in government funds to cope with the damage. Although the
guerrillas probably will not directly interfere with relief efforts to retain the
good will of the people, they may attempt to interdict government supplies to
Food Crisis in Chad Continuing drought, pillaging of food stocks by Army troops, and government
corruption have aggravated Chad's acute food shortage. After the failure of
this spring's grain harvest because of drought, grain reserves in the south-the
country's breadbasket-are depleted. Despite large infusions of food aid from 25X1
abroad, lack of storage facilities and transportation problems are likely to
result in an estimated shortfall of 136,000 tons. Food supplies also are being
diverted into the black market, while soldiers have pillaged many of the World
Food Program warehouses. 25X1
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Exports
South Korean
'ice Crop Losses
Burma probably will be forced to delay rice exports following recent civil
unrest over shortages in domestic rice supplies. The government is diverting
rice destined for the export market to the domestic market, and is counting on
the harvest in December to make up for the exports shortfall. The US
Embassy estimates, however, that the December crop will be down by 4
percent, leaving only about 500,000 metric tons for export after domestic
consumption. After meeting deferred export obligations of 150,000 metric
tons, Burma-the world's fourth-largest rice exporter-may have as little as
350,000 metric tons available for export next year-a 50-percent decline from
this year's total and the lowest level since 1978. ~
Severe flood damage to the South Korean rice crop last week could force Seoul
to increase imports from the United States. Losses thus far are estimated at
100,000 tons, according to estimates by the US Department of Agriculture,
but the full extent of damage will not be known for several weeks. The crop
will be susceptible to further damage until the harvest next month. South
Korean rice stocks are inadequate, and the losses may require Seoul to increase
purchases from the United States well above the average of 200,000 tons in
each of the past three years. Large South Korean rice stockpiles have
deteriorated in recent years and are thought to be chiefly of a type that has low
acceptability among Koreans. The type of rice Koreans prefer is expected to be
in tight supply next year outside the United States.
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Petroleum Price
Increase in the
yominican, Republic
The government's recent petroleum price hike of 20 percent could increase
revenue by as much as $40 million annually, but further austerity measures
will be needed to qualify for IMF funding. The reduction of petroleum
subsidies was a major IMF requirement for an unofficial, interim adjustment
program. This temporary program will'remain in effect until a formal standby
agreement can be put into place, perhaps as early as first quarter 1985. The
Fund nonetheless requires additional belt-tightening, including further cutting
in public spending and restructuring of inefficient government-owned enter-
prises. Meanwhile, the government is counting on the interim Fund accord-
which provides no new IMF credit-to attract, unrealistically in our view,
sizable new aid and investment. Initial public reaction to the price hike has
been muted, largely because of the widespread deployment of troops.
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Problyfns in Zaire's GECAMINES-Zaire's huge mining parastatal and principal source of
Min' g Sector export earnings-is encountering serious production, transportation, and mar-
keting problems. According to the US Embassy, 1984-85 production targets
are in jeopardy because of inefficiencies in the copper mines and problems in
moving ore to refineries. Reduced export revenues resulting from a deteriorat-
ing rail system and low water levels on major rivers also have made it difficult
for GECAMINES to make payments to creditors. In addition, a bureaucratic
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Mexico Loosens
Foreign Investment
ohcy
impasse over dissolving SOZACOM-Zaire's inefficient marketing parasta-
tal-may disrupt sales operations in the coming year. GECAMINES provides
about 50 percent of the government's foreign exchange earnings and 22
percent of its total revenue. A decline in payments to the government from
GECAMINES would threaten Zaire's ability to meet IMF-mandated guide-
lines and its hopes of moving from austerity to growth-oriented policies in
1985.1 25X1
To improve the climate for foreign investment, the Mexican Government
recently granted majority foreign-owned firms permission to raise money in
domestic capital markets, rather than borrowing abroad primarily from their
parent firms. Mexico also moved to allow brokerage houses to trade bonds and
other commercial paper of companies not listed on the Mexican stock
exchange. We believe the de la Madrid administration is trying to more 25X1
carefully monitor the commercial paper market, although the government is
emphasizing the benefits from lower interest rates and a bigger securities
market. In addition, Mexico City has announced limitations on the time the
foreign investment commission can spend reviewing applications, to overcome
potential investors' complaints that processing is slow. According to the
financial press, many potential investors remain skeptical of such marginal
policy adjustments and believe that Mexico City will tighten regulations once
economic recovery is under way. 25X1
Soviets Announce The USSR has reduced prices on selected consumer goods for the fourth time
RetaillPrice Reductions in 18 months. The latest cuts, effective 1 September and ranging from 17 to 30
percent, apply mainly to clothing, synthetic fabrics, and certain types of
, d ct' wiill save S ' t .,
/ m d'r' s Arcori dn to Sov'iet offci's1s 4a
e i ine
i
re u ions ovte
. g
,
consumers about $2.5 billion annually-somewhat less than 1 percent of the.
value of total yearly sales in Soviet state retail outlets. F__~ 25X1
The move is aimed at winning favor for the regime. Government spokesmen
have stressed that the lower prices will raise the costs of subsidies in the state 25X1
budget. Soviet officials have played up the role of subsidies in promoting
consumer welfare in several recent statements. Many of the goods whose prices
were just cut are essential items, although past Soviet price cuts have often
been motivated by unwanted accumulation of goods spurned by Soviet
consumers at going prices. 25X1
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Soviet Go-Ahead for According to a Soviet press report, the State Planning Committee (Gosplan)
ajor Siberian River has ordered the Ministry of Land Reclamation and Water Resources to
version Project complete plans "as early as 1986" to divert water from,Siberian rivers to
water-short Central Asia. The project, probably the most ambitious of its kind
in the world and a controversial one in the USSR, calls for construction of a
2,400-kilometer canal to link Siberia's Ob and Irtysh rivers with the Aral Sea
Basin and other Asian regions of the USSR. The Aral Sea, the world's fourth-
largest lake, is drying up rapidly because water from the two rivers feeding
into it has been diverted for irrigation. The report said the project would take
12 years to complete but did not say when construction would begin.
ospects for Chinese
Grain Purchases
Vie amese Export
G owth Slows
Secret
14 September 1984
The decision to push ahead now after decades of debate apparently stems in
large measure from an exhaustive study that supposedly lays to rest fears that
the project would cause damage to the environment. Supporters for the project
contend that waters from the canal will:
? Lead to a large increase in the amount of land devoted to grain and other
foodstuffs growing in Kazakhstan and central Asia. 1
? Stimulate exploitation of other resources and industrial development "that
will ease the underutilization of manpower in the region.
The press report did not give a cost estimate, but earlier Soviet statements in-
dicated that outlays-although still not assured-could exceed $35 billion.
China does not intend to renew long-
term grain-purchase contracts with Argentina, Australia, Canada, or the
United States. Press reports indicate that Chinese officials do not want to sign
any new long-term agreement because of abundant Chinese harvests. Agree-
ments with the United States, Australia, and Argentina end this December,
and with Canada next August. Indications are that Beijing will continue to
play a role in the grain market without signing long-term agreements. China's
opposition to the new US textile regulations will hamper possible renewal of
the US-China agreement
to make payments on its foreign debt.
Recently released Soviet and Vietnamese trade statistics show that Hanoi's
export earnings rose only 10 percent in 1983 to $650 million. This is a sharp`
decrease from the 26-percent growth of the previous year and is well below the
60-percent increase in export earnings called for in Vietnam's economic plan.
The slowdown occurred in exports to both Communist and non-Communist
countries, and Vietnamese press reports indicate that the slower growth-
which resulted largely from Hanoi's reimposition of central control over the
export sector-is continuing this year. As a result, Vietnam will remain unable
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Proposed Diversion of Northward-Flowing Rivers
11
diverted water
Dam or dike
====Canal
Pumping station
Reservoir
25X1
MOSCO
Karaganda
i'Turgay
Gate Lake
Balkhash
Aial
Sea,
O e t Union( 11 ' Pavlodar
b
a Teclinnr4?
16
/0b' lrlysh Canal
(under coast.)
Line\ ,J r k i
`Chnese line
oi control
India
Pakistan`?
Secret
14 September 1984
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Laos ,Tightening
Co of Over the
E onomy
Secret
14 September 1984
According to the US Charge in Vientiane, Laos has stepped up its efforts over
the past several months to build a socialist economic system. The government
is accelerating the pace of agricultural collectivization-most farmland is still
privately owned-and plans to establish at least one agricultural cooperative in
each canton within a year. This spring Vientiane also sharply increased taxes
and license fees for private businesses and imposed stiff penalties for violations
of price-control regulations. In addition, Vientiane restricted foreign currency
transactions and increased customs duties significantly. Although the govern-
ment is stressing the voluntary nature of the collectivization program, the
crackdown on the private sector is likely to hinder efforts to revive the stagnant
economy. Attempts to force farmers to join collectives in 1976-79 caused many
to flee to Thailand and contributed to a sharp drop in agricultural production.
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South America:
Tenuous Financial Balance
Higher interest payments, continued tight access to
new credit, and-in most cases-sagging exports
will mean most South American debtor nations will
encounter deteriorating financial conditions
through the rest of this year. Although the largest
debtors-Brazil, Argentina, and Venezuela-will
have improved trade surpluses, financial strains
among the Andean debtors and even Argentina will
continue to grow. Political pressures for growth-
especially in Argentina, Chile, Peru, and Bolivia-
may encourage some deliberate debt-servicing in-
terruptions. We believe that at least some financial
rescue programs will have to be revised; we also
acknowledge a chance that the programs could
begin to unravel.
Financial Disappointments
To improve their payments positions, South Ameri-
can debtors counted on lower interest rates and on
improved commodity prices and world recovery to
increase exports. In turn, governments expected
bankers to support the region by restructuring
maturing debt and extending new money. Despite
some trade successes, South American debtors-
Argentina and the Andean countries, in particu-
lar-are facing increasing liquidity strains:
? Agricultural and mineral commodity prices actu-
ally fell during the first half, cutting into expect-
ed export recovery.
? A 2-percentage-point rise in world interest rates
increased the region's debt service burden.
? New lending has been difficult to obtain as
debtors encountered problems in implementing or
complying with IMF-supported stabilization pro-
grams.
South America: Billion US S
Trade Balance and Interest Payments
Trade
Balance b
Interest Trade
Payments Balance b
Interest
Payments
South America
18.4
21.0
23.4
23.9
Big Debtors
18.1
17.2
23.4
19.5
Argentina
3.5
5.5
4.0
5.9
Brazil
6.5
9.5
11.0
11.0
Venezuela
8.1
2.2
8.4
2.6
Small Debtors
0.3
3.8
0
4.4
Chile
1.0
1.6
0.6
1.8
Colombia
-1.8
1.0
-0.6
1.0
Ecuador
0.8
0.2
0.7
0.5
Peru
0.3
1.0
-0.8
1.0
Bolivia
NEGL
NEGL
-0.1
0.1
Estimated.
b Estimates derived from f.o.b. data.
On the basis of government statistics, we estimate
South America's trade surplus reached $13 billion
during the first six months of 1984, a 50-percent
improvement over the comparable period in 1983.
The gains, however, were concentrated among the
region's three largest debtors-Brazil netted $6
billion, Venezuela $4 billion, and Argentina $3
billion. The trade improvements of the smaller
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Andean debtors-Bolivia, Chile, Colombia, Ecua-
dor, and Peru-were limited by depressed com-
modity prices.
The trade success of the larger debtors has eased
payments pressures for Brazil and Venezuela, but
has not alleviated Argentina's financial problems.
Rising exports and access to foreign credit have
allowed Brazil to replenish its foreign exchange
reserves to over $5 billion, to eliminate arrearages,
and to keep current on foreign debt payments,
according to US Embassy reports. Similarly, Vene-
zuela has increased reserves to over $12 billion. Its
sizable trade surplus this year has enabled Caracas
to begin settling past-due debt service payments,
according to US Embassy reports. Argentina-
despite a substantial trade surplus built up by
tough import and exchange controls-still needs
$3-4 billion in new lending to eliminate arrearages,
and it must negotiate debt reschedulin under IMF
auspices to resolve payment problems.
The small trade surplus recorded by the Andean
debtors has meant continued cash strains. With
their access to new external credits still very tight,
the Andean debtors have chosen different ap-
proaches in dealing with liquidity strains. Bolivia
suspended all debt servicing to foreign bankers in
May, and Peru has missed interest payments since
June, according to US Embassy reports. Chile has
obtained a $780 million loan in support of its
adjustment program, but bankers indicate that
Santiago has also drawn on trade credits to finance
a 23-percent increase in imports to support its
economic reactivation efforts. Although Colombia
reduced its trade deficit, it drew down reserves by 4
percent to $1.8 billion by early August. Despite an
increase in oil exports, Ecuador has had to use
arrearages to fend off cash strains produced by
bankers' decisions not to lend new money until the
new administration was installed in August and a
revised IMF program was negotiated.
Pressures To Intensify
We expect added pressure on the region's payments
accounts through the second half of 1984. Higher
Secret
14 September 1984
interest rates are likely to add $500 million to
South America's debt service in the fourth quarter.
We believe that Brazil and Venezuela will be able
to absorb the increased interest charges, but Argen-
tina and the Andean debtors will have a much
harder time adjusting to the rates. Moreover, ac-
cording to the financial press, higher interest rates
are restricting inventory demand for commodities,
placing downward pressure on commodity prices.
The Andean countries and Argentina-highly de-
pendent on mineral and agricultural exports-face
the double punch of meeting higher interest pay-
ments with somewhat reduced export revenues.
Simultaneously, these countries are facing growing
domestic political pressure to increase imports to
spark economic recovery.
Meanwhile, press and US Embassy reports indicate
that tougher austerity measures required to prevent
payments shortfalls are becoming politically less
acceptable in Argentina and the Andean countries:
? Argentine President Alfonsin believes that debt
servicing must be reconciled with the need to
maintain social peace by creating more jobs and
raising real wages, according to various sources.
? Chile's President Pinochet feels economic revital-
ization is crucial to prevent a resurgence of
domestic opposition to his government, according
to US Embassy reports.
? In Peru, President Belaunde is facing election-
year pressure to relax austerity, and thus has
opted in the last couple of months to increase
public spending, despite commitments to the
IMF.
? Although Colombian President Betancur's recent
statements indicate the need for adjustment, he
continues to delay adopting an IMF program for
fear of a domestic backlash.
? Only Ecuadorean President Febres-Cordero has
publicly announced a willingness to continue
tough austerity to resolve debt difficulties.
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foreign credi-
terity, we fear that these debtors could coalesce 25X1
into a hardline camp advocating tougher tactics
against creditors.
tors are still reluctant to lend money to these
financially pinched debtors. Bankers continue to
emphasize that compliance with IMF-backed stabi-
lization plans is required for financial support:
? Argentina will be unable to get new loans to close
its projected payments gap until it obtains an
IMF-support agreement, according to various
sources.
? Chile faces a prospective cutoff in credit this
year-and will be denied new lending next
year-unless it complies with its IMF-supported
program, according to US Embassy reports.
? Peru probably will not obtain a debt-refinancing
package or be able to draw on $100 million in
embargoed loans until it hammers out another
agreement with the Fund.
? New credits for Ecuador, the US Embassy re-
ports, may not be forthcoming until February
1985, requiring continued resort to arrearages-
already at $300 million.
The Danger
Although continued cooperation is likely, willing-
ness of some South American debtors to sustain
current financial rescue programs could be eroding.
Argentina, for example, may try to maintain its
growth policies despite banker reluctance to lend
new money by continuing its suspension of debt
service payments. Chile has nearly exhausted its
trade credits and has begun drawing down reserves,
risking noncompliance with its IMF-supported pro-
gram. According to US Embassy reports, President
Pinochet-unhappy about rising interest rates and
low copper prices-has threatened a debt moratori-
um by the end of the year if bankers fail to provide
additional lending. With Bolivia and Peru already
demonstrating unwillingness to adjust through aus-
Such a development would test bank cohesiveness.
We fear that the smaller creditors will continue to
be less willing to cooperate with debtors, leaving
the rescue programs increasingly in the hands of
the largest international banks. Bankers are al-
ready considering more flexible debt arrange-
ments-such as longer maturities and.multiyear
reschedulings-to maintain rescue programs.
There is a possibility, however, that they will resist
any new lending to the intransigent South Ameri-
Implications for the United States 25X1
We believe persistent financial difficulties through-
out South America probably will cause the United
States to run a large bilateral trade deficit. US
sales to the region this year will be cut by $300
million from last year's already depressed level of
$10 billion. Meanwhile, US imports from the re-
gion will probably increase by 4 percent. Latin
countries fear that their* penetration of US markets .
will encourage increased US protectionism that, in
turn, would reduce their ability to service debt 25X1
payments to US banks. We judge that tough US
import restraints would encourage some debtors to
take action against US exports and remittances by
US businesses.
Under current US regulations, we believe that
nonperforming loans for US lenders to the region
may begin to pile up over the next six months. As
noted, Peru and Bolivia are already missing interest
payments, and Colombia and Chile could follow
.before the end of the year. Meanwhile, Argentina
may be unwilling to bring its payments current. If
these debtors begin to resort to unilateral payments
suspensions to relieve their payments problems, we
judge that US regulators will also face tougher
calls on the quality of these bank loans.
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14 September 1984
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Brazil: Lender
Confidence Improving
Trade and payments improvements over the first
seven months of this year have led to renewed
confidence by foreign lenders and the IMF in
Brazil's ability to deal with its debt problems. At
the same time, however, Brasilia is facing, domestic
criticism that austerity measures and triple-digit
inflation are suppressing economic activity and
hurting living standards. We believe the govern-
ment-with a presidential election scheduled next
January-may permit a moderate loosening of
credit or wage controls, but will seek to comply as
much as possible with its adjustment program in
hopes of getting favorable terms during debt talks
this fall.
Brasilia's IMF-supported program, combined with
economic recovery in OECD countries, has led to
impressive trade and payments gains, according to
the US Embassy. Brazilian officials report that the
current account deficit fell below $100 million
during the first half of 1984 from $3.3 billion over
the same period last year. This improvement re-
flects the record trade surplus through July, which
exceeded $7 billion, already 11 percent above the
entire 1983 surplus of $6.5 billion. The US Embas-
sy reports that imports have declined 8 percent-
growing domestic petroleum production has en-
abled Brazil to cut purchases of foreign oil-and
record exports have been stimulated by lower labor
costs and the devalued cruzeiro. Press reports indi-
cate that trade gains and new foreign lending have
enabled Brazil to increase international reserves to
over $5 billion and to keep current on foreign debt
Relations with foreign creditors are better than at
any time since 1981. Bankers are encouraged by
the Figueiredo administration's efforts to meet
payments on debt without seeking new money for 25X1
1984 and
were pleased by Brasilia's moderating. influence at
the Cartagena Conference of Latin debtor coun-
tries in June. The IMF has agreed to renegotiate
monetary and fiscal targets to facilitate Brazil's
compliance with its adjustment program, and the
World Bank has proposed a multibillion dollar
development loan, cofinanced with commercial
banks. This improved confidence in the Brazilian
economy also has reduced capital flight this year,
Inflation remains one of Brazil's major problems
and has complicated adherence to the IMF-sup-
ported adjustment program. The US Embassy re-
ports that consumer prices rose 218 percent in the
12 months ending in July, partly the result of
subsidy cuts and rapid cruzeiro devaluations, which
are quickly transmitted through Brazil's system of
indexed prices. In addition, monetary growth
through July exceeded IMF guidelines for the year
because the Central Bank continued extending
credit to ailing banks and favored economic sectors.
Moreover, inflation has pushed public borrowing
above IMF targets, according to the US Embassy,
despite spending cuts for public investment and
consumer subsidies.
Declining real wages have taken a toll on output
and employment. Business trade associations indi-
cate that retail sales of automobiles, furniture, and
electrical appliances fell by over 15 percent in the
first six months of this year, while output of
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14 September 1984
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Brazil: Selected Economic
Indicators, 1981-84
Real GDP Growth
Percent
Money Supply Growth
Percent
Gross Official Reserves
Billion US $
Real Per Capita GDP Growth
Percent
Consumer Price Growth
Percent
Official External Debt
Billion US $ ,
1981 82 83 84"
Brazil: Current Account Billion US $
-16.3 -6.9 -3.0
0.8 6.5 11.5
20.2 21.9 26.5
10.3 ' 10.6 12.5
9.9 11.3 14.0
19.4 1"5.4 15.0
consumer goods dropped 4.1 percent. Unemployed
or underemployed workers now account for over 25
percent of the work force, according to press re-
ports.
We believe that Brazilian trade and payment ac-
counts will continue to improve this year but that
overall economic activity will remain stagnant.
Strong gains in exports probably will reduce the
current account deficit to $3 billion and enable
Brazil to finance increased nonoil imports. Living
standards, however, will decline further if inflation,
as expected, remains around 200 percent.
Brazilian officials have indicated that they are
committed to the IMF-supported adjustment pro-
gram and will not make major changes in economic
policy. Nevertheless, pressure to relax austerity
most likely will increase during the fall presidential
campaign-the Figueiredo administration is pre-
paring to transfer power to civilian rule early next
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Secret
year-and we believe the government will loosen
controls on wages and credit. Although unlikely, a
major relapse in Brazil's adjustment program could
reverse current IMF flexibility in accommodating
policy shortcomings and encourage tougher bank
bargaining at Brazil's debt talks this fall.
Despite concessions aimed at preventing social un-
rest, Brasilia probably will continue to cut real
public spending, reduce subsidies, devalue the cru-
zeiro, and encourage savings through positive real
interest rates. These policies will help Brasilia
maintain the good will of bankers and the IMF
even if monetary and fiscal performance targets are
not met during the second half of 1984. Pressed by
domestic dissatisfaction with austerity and embold-
ened by its external payments strength, we expect
Brasilia will press creditors for a multiyear debt-
restructuring program and $2-3 billion in new
money for 1985 on considerably improved terms.
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14 September 1984
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Key Debt-Troubled LDCs:
Trade Surplus Widens
The trade surplus for the 10 key debt-troubled
LDCs ' climbed in the first half of 1984 to an
annual rate of $45 billion, compared with $31
billion in 1983. Most of the improvement stemmed
from a surge in exports, particularly to the industri-
al countries. The aggregate trade surplus of these
LDC debtors may continue to grow in the second
half, but at a slower rate. The recent decline in the
price of many key LDC export commodities and
the expected slowdown in the OECD recovery will
dampen second-half export gains, and imports
probably have been pared nearly as much as possi-
ble.
Exports Climb
Exports for most of the 10 key debt-troubled
countries rose in first half 1984. Total exports
amounted to $105 billion (annual rate) compared
with $97 billion in second half 1983. Among.the
debtor countries, the size of the export gain varied
widely. Brazil's exports-aided by the continuing
devaluation of the cruzeiro-were up 20 percent
over second half 1983, while Mexican exports rose
9 percent. Nigeria showed a moderate drop in
exports because of a decline in petroleum sales.
Venezuela and Ecuador-the other OPEC debt-
troubled countries-had increases, amounting to 6
percent and 12 percent, respectively. We estimate
that most of the remaining debtors posted moderate
foreign sales gains of 6 percent or less.
The OECD recovery, particularly that of the Unit-
ed States, underpins nearly all of the export gain
recorded by the key debt-troubled LDCs. We
estimate that first-half Big Seven imports from
these LDCs were running at an annual rate of
around $78 billion compared with $69 billion for all
' The 10 countries include Argentina, Brazil, Chile, Colombia,
Ecuador, Mexico, Nigeria, Peru, the Philippines, and Venezuela.
The Paradox of Declining Commodity
Prices and Robust Economic Growth
In the midst of the recovery, commodity prices have
taken an unusual turn-they are falling. Since May,
the Economist index of industrial materials has
fallen by 11 percent and the metals index by 8
percent. Food prices, which are more seasonal than
cyclical, began to turn downward in June. A number
of unusual factors seem to be combining to produce
the drop in commodity prices:
? High interest rates are depressing investment de-
mand and discouraging inventory building.
? The appreciated dollar has dampened prices by
forcing US producers to offer commodities at lower
prices to remain competitive in international
markets.
? Low inflationary expectations are playing a role by
discouraging commodity users from building large
stocks as protection against accelerating prices.
Technology has also reduced metal consumption per
unit of economic output in many applications as
substitution of nontraditional materials like plastics
and composites erodes metals' traditional markets.
For agricultural commodities, forecasts of bumper
crops in market year 1985 (July-June) are the main
factors behind currently depressed prices.
of last year. US purchases from these countries
amounted to $46 billion (annual rate) in the first six
months, up sharply from the $39 billion total for
1983. Over the same period, Japan increased its
imports from these LDCs by 19 percent. The
remaining Big Seven countries showed a moderate
rise of about 5 percent.
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Key Debtor Trade and
OECD Economic Activity, 1979-848
._ Semiannual data, seasonally adjusted at an annual rate.
b Projected.
Imports Leveling Off
Imports continued to decline in the first half, but at
a much slower rate than in 1982 and 1983. Foreign
purchases plunged from $115 billion in 1981 to $64
billion in 1983. Total imports for the 10 key LDCs
fell only slightly in the first half of this year to an
annual rate around $60 billion. A few of the debt-
troubled countries increased their foreign pur-
chases in the first six months of this year. We
estimate that the imports of Chile and Ecuador
were up one-third over second half 1983, while
Mexican imports climbed 12 percent. On the other
hand, Nigeria slashed its foreign purchases by 26
percent in 1984.
Net Effect:
Trade Surplus Widens
The substantial gain in foreign sales combined with
a slight decline in imports led to a hefty increase in
Secret
14 September 1984
the trade surplus of the key debt-troubled LDCs.
The aggregate trade surplus, which tripled last year
to $31 billion, widened further to an estimated $45
billion, on a seasonally adjusted annual basis, in the
first six months of this year. The four oil export-
ers-Ecuador, Mexico, Nigeria, and Venezuela-
registered a $30 billion surplus, up from $26 billion
last year. The surplus for the nonoil exporting
debtors tripled to $15 billion. Most of the increase
reflected the estimated $11 billion surplus for
Brazil. Among the debt-troubled countries, only
Colombia and the Philippines had deficits. For both
of these countries the deficits, however, were small-
er than in 1983.
The swing from a $4 billion deficit in 1981 to more
than a $45 billion surplus has helped the debt-
servicing problems of these LDCs. The rise in
export revenues has helped to offset increases in
interest payments on the debt. Brazil's projected
surplus should cover roughly all of its scheduled
interest payments in 1984, compared with only 70
percent in 1983. Mexico's estimated trade surplus
should exceed its interest payments by $4 billion in
1984.
In our judgment, a further sharp increase in the
trade surplus is unlikely in the second half. Foreign
purchases for some countries probably will rise,
especially for imports used in export industries.
Mexican officials, for example, are projecting an
acceleration in foreign purchases in the second half.
For these debtor LDCs, imports have been cut 48
percent from their 1981 level and probably cannot
be reduced much more.
While exports may grow further, several factors
could inhibit sales gains. The drop in the price of
key export commodities such as copper will hamper
the trade improvement of countries like Chile and
Peru, while a continued weak oil market will limit
export gains for the OPEC debtors. Most impor-
tantly, the pace of the OECD recovery may slow.
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Trade Trends in Key Debt-Troubled LDCs a
1981
1982
1983 b
First
Half
First
Half
Second
Half
1984 c
Balance
-3,710
10,410
28,610
33,080
44,560
Imports
9,430
5,340
4,600
4,420
4,250
Balance
-290
2,280
2,890
3,980
4,570
Brazil
24,080
21,070
17,020
16,660
15,120
Exports
2,920
3,020
2,910
3,090
3,000
Imports
5,200
5,480
5,240
4,700
3,940
Exports
2,540
2,140
2,270
2,130
2,390
Imports
2,250
1,990
1,470
1,480
1,960
Balance
290
150
800
650
430
Mexico
Exports
3,250
3,260
2,980
3,030
3,060
Imports
3,480
3,600
2,500
2,520
2,160
Balance
-230
-340
480
510
900
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Trade Trends in Key Debt-Troubled LDCs a (continued) Million US $
1981
1982
1983 b
First
Half
First
Half
Second
Half
1984 c
Exports
20,980
17,570
15,490
14,820
15,700
Imports
12,100
11,950
'6,500
5,780
6,660
Balance
8,880
5,620
8,990
9,040
9,040
a Exports f.o.b. and imports c.i.f. are on a customs basis derived
from the IMF International Financial Statistics and other sources.
Imports for Nigeria and Venezuela are estimated from trade
partner data.
b Data for 1983 and 1984 are semiannual figures expressed at an
annual rate.
c Estimated.
The OECD secretariat, for example, is currently
forecasting a drop in the real GNP growth rate for
the OECD in the second half. A slowdown in the
recovery of the industrial countries would dampen
the growth of exports of LDCs, which, in turn,
would prevent a substantial improvement in their
trade balances.
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International Financial Situation:
A Political Update
Major antigovernment demonstrations occurred
this past month in the Philippines, Chile, and
Argentina, but they were not as effective as opposi-
tion groups had hoped. In contrast, a three-day
worker takeover of Bolivia's largest factory was one
of the most serious labor incidents in that country
in more than a year, and included the mistreatment
of hostages. President Jorge Blanco of the Domini-
can Republic was able to avoid a repeat of last
April's violent riots over food price increases by
taking massive security precautions before his an-
nouncement of IMF-recommended oil price hikes.
Nigerian Head of State Buhari is emphasizing
nationalism and discipline on a nationwide tour to
deflect criticism of his regime's inability to effec-
tively handle mounting economic problems. Liberi-
an Head of State Doe faces serious public and
military unease over his crackdown on political
opponents.
In the Philippines antigovernment demonstrations
commemorating the anniversary of the assassina-
tion of opposition leader Benigno Aquino were
peaceful and turned out over 500,000 protestors.
The demonstrations attracted a broad range of
participants. We believe the Supreme Court's deci-
sion to grant permits for the protests defused much
of the tension by keeping the military at arm's
length from the demonstrators. Although the Com-
munist Party had a strong influence on the protest's
program, its front organizations did not cause
disruptions.
Marcos's political opponents are likely to focus
their criticism increasingly on his government's
mismanagement of the economy. With the signing
of an IMF agreement and the prescribed austerity
program imminent, Marcos will be vulnerable to
charges from the left that he has "sold out" the
country to the IMF, international bankers, and
multinational corporations. His moderate oppo-
nents are likely to demand a review of the debt
crisis in the National Assembly as they prepare to
capitalize on the public's dissatisfaction with the
economy's continuing slide.
A two-day antigovernment protest in Chile on 5-6
September failed to attract the middle-class sup-
port needed to reestablish political momentum. The
protests were to be a major test of whether opposi-
tion groups could overcome differences sufficiently
to challenge the regime before political activity is
suspended in December for the summer holidays.
Organized by the moderate Democratic Alliance,
opposition labor, and the Communists, the nation-
wide protest did not achieve its aim of paralyzing
major cities. Most businesses and factories stayed
open during at least part of the protest. More
shopkeepers and truckers participated than in the
past, however, largely because of economic griev-
ances. Violence was largely limited to spontaneous
rioting by youths in slum areas and clashes between
students and police. We judge that Pinochet will
use the rioting as a pretext to intensify his crack-
down on the radical left.
In Argentina, the effects of a 24-hour general labor
strike last week have been mixed. The strike was
about 80-percent successful in key industrial areas
but had little impact in some provinces and on
banks, schools, and government offices in Buenos
Aires, according to press reports. Government offi-
cials had hoped to win business and labor agree-
ment on a four-month plan of wage and price
controls for combating the country's soaring infla-
tion. Although labor spokesmen told reporters after
the strike that they were still interested in negotia-
tions on economic measures with the government,
we believe that this first national strike since
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ber is likely to embolden labor opponents further
and diminish prospects for a national accord on key
Alfonsin may be able to turn the strike to his
political advantage by pointing out the low turnout
in some areas and by accusing the Peronist labor
leaders of irresponsibility in tackling the economic
crisis. Moreover, he may calculate that the Peron-
ist's apparent weakness would enable him to better
weather the political fallout of an IMF agreement.
Although wage policy was the main issue, the strike
was probably politically motivated, in our view.
Almost all strike organizers will soon face union
elections and probably calculate that a continued
tough posture is vital in attracting support.
The takeover of Bolivia's largest factory by workers
demanding a 150-percent wage increase last week
is contributing to private-sector anxiety about the
government's ability to maintain order. According
to the Embassy, workers held more than 100
administrators and managers hostage at the Cocha-
bamba shoe factory. The local Chamber of Indus-
try declared a state of emergency and has issued
statements critical of the government's ability to
protect its citizens and manage the economic crisis.
An agreement freeing the hostages awarded work-
ers an immediate 20-percent wage increase that is
to be modified depending on the new wage policy
adopted by the COB-Bolivia's powerful union
confederation-at its national congress currently
under way. For President Siles, the incident aggra-
vates tense labor-government relations, making im-
pending austerity measures even more costly politi-
cally.
Strong security measures, including the arrest of
radical leftist and labor union leaders and troop
deployment in major cities prevented major demon-
strations against Dominican Republic President
Jorge Blanco's 31 August announcement of an
increase in oil prices. In late April the government's
announcement of food price hikes as a precondition
for the second year of an IMF Extended Fund
Facility program triggered riots for several days in
which more than 80 people died. Continued infight-
ing in the ruling party, however, threatens the
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14 September 1984
administration's efforts to carry out an unofficial
IMF-approved austerity program. The President
had tried to convince the public that belt-tightening
is necessary, but his ability to build a national
consensus is being complicated by conflicts among
ruling party leaders over presidential succession
and economic policy.
Head of State Buhari has begun a nationwide tour
of Nigeria to project more visible leadership and
improve the military regime's image. To help deal
with pressing economic problems, the government
is contemplating moves to boost oil sales, including
price discounts, according to Embassy reporting.
The government also has been taking an increas-
ingly authoritarian tone to stifle criticism and
forestall unrest, particularly within the military.
Discipline and nationalism are being emphasized
through decrees prescribing stiff punishments for a
range of offenses. While this more aggressive style
may temporarily forestall reactions to deteriorating
economic conditions, the decrees run counter to
Nigerian political traditions and will be difficult to
enforce.
Liberian Head of State Doe's popularity has plum-
meted over his use of soldiers last month to quell
student protests against Doe's arrest of opposition
leaders accused of coup plotting.
lbelieve Doe's crackdown on political
opponents is heightening public alienation and
jeopardizes relations with Western donors. In addi-
tion to increasing political disaffection, Doe is
finding it difficult to comply with official creditor
conditions to satisfy an IMF-supported stabiliza-
tion program.
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Political Unrest
and Economic Conditions:
A Preliminary Look'
On the basis of our examination of economic
conditions and political unrest in 28 Third World
countries,' we have found that general economic
conditions can worsen substantially without spark-
ing unrest. We have found, however, that govern-
ment measures designed to address economic prob-
lems can provide a rallying point for public
discontent. Indeed, cuts in subsidies on key con-
sumer commodities and government-mandated
wage controls seem to be key trigger points for
political backlash. Given the extent to which LDC
governments are being forced to initiate austerity
measures as opposed to simply allowing economic
erosion, we expect more economically. induced un-
rest in this decade
Causes of Unrest
According to experts, a wide range of factors-
economic, political, and sociological-explains po-
litical unrest. Noneconomic factors thought to con-
tribute to political unrest include:
? Tensions between various ethnic and racial
groups such as the Sinhalese and Tamils of Sri
Lanka, various tribes in Africa, and the ethnic
Chinese in Indonesia and Malaysia.
? Conflict between religious factions such as the
Shia and Sunni Muslims, the Hindus and Mus-
lims of India, and the Catholics and Protestants
of Northern Ireland.
? Loyalties to a subnational group such as the
Basques in Spain, the French separatists in Que-
bec, and the Sikhs in the Punjab.
They are Argentina, Brazil, Chile, Colombia, Egypt, El Salvador,
Greece, Guatemala, Honduras, Indonesia, Iran, Iraq, Kenya, Mexi-
co, Morocco, Nigeria, Pakistan, Panama, the Philippines, Peru,
Saudi Arabia, Somalia, South Africa, South Korea, Spain, Turkey,
? Power struggles among elites, such as between
the military and businessmen or between intellec-
tuals and the government.
? Externally inspired and financed instability, such
as Syrian support for various factions in Lebanon.
Without discounting these noneconomic factors,
many contend economic conditions play an impor-
tant role in fomenting unrest. In periods of strong
economic growth, rising expectations could cause
problems if the benefits are not shared. Further-
more, a number of experts believe that unrest
caused by economic motivations is quite likely after
an abrupt interruption in economic growth. Ac-
cording to this theory, in the least developed na-
tions activities focus on subsistence, and people
demand very little; in wealthier societies most
people act to maintain the status quo. The develop-
ing nations in which rapid growth has occurred are
the most volatile. In these countries, many have
benefited from rapid economic growth and many
more have seen its promise. Therefore, when eco-
nomic growth slows or reverses, expectations con-
tinue to rise, a large expectation gap is formed, and
a potential source of unrest is created.
The Historical Impact of Economic Conditions
To systematically examine Third World unrest and
its relationship with economic conditions, we de-
vised an overall measure of unrest using a political
events data base on protest demonstrations, riots,
strikes, armed attacks, deaths from domestic vio-
lence, assassinations, political executions, and at-
tempts to overthrow the government. We then
analyzed the association between key measures of
economic stability and our measure of unrest.
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Economic Expectations and
Political Unrest
Low, stagnant Rising Falling
GNP
Specifically, we calculated the statistical linkages
between the measure of political unrest and: the
change in consumer prices; the level of and changes
in real per capita income; and the level of and
changes in real per capita imports. These measures
were chosen because they reflect general economic
conditions in terms of both overall production and
prices. In addition, they should reflect trends in
other economic variables that affect political un-
rest, but for which data are not readily available.
Changes in unemployment, for example, should be
inversely related to the movement in per capita
income levels. Likewise, changes in industrial pro-
duction and import requirements should show a
positive correlation.
In our analysis, we looked at the political and
economic data from 1971 to 1982 in three different
ways. First, we looked at the data head-on: political
data for 1981, for instance, were studied against
economic data for that same year. We then ap-
proached the data using a lag of one year to see if
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the economic conditions of 1981 affected political
unrest in 1982. This allowed time for the impact of,
perhaps, a rising inflation rate. Finally, we looked
at fluctuations in political and economic data com-
pared to what was typical in an individual country.
One or two protest demonstrations, for example, in
a highly repressive country would have a greater
impact on stability than 10 demonstrations in a
society that allows freedom of expression.
military, or social upheavals.
In all approaches, the analysis indicated few direct
linkages historically between periods of unrest and
periods of deteriorating economic conditions. These
results were consistent for each of the 28 countries
we examined and for each of several political
instability thresholds we used. Our findings showed
that although over the past 10 years economic
deterioration occasionally has led to unrest, there
have been just as many times when it has not.
Sharply increasing prices, or declining real income
and employment levels by themselves, therefore,
are not particularly good predictors of political,
Importance of Government Policy Shifts
Although aggregate economic performance is not
closely related to political instability, specific eco-
nomic events can spark unrest. In particular, sud-
den government economic policy changes-some-
times designed to deal with general economic
difficulties-are more likely to generate a public
reaction than broad negative economic develop-
ments. Numerous anecdotal examples in press and
Embassy reporting support this conclusion:
? In Egypt, increased bread prices, caused by subsi-
dy cuts, led to bloody urban rioting in 1977.
? Guatemalan land reform in 1978, viewed by
many as collusion between wealthy landowners
and the government, led to violent protests.
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? In June 1981, a cut in food subsidies led to riots
in Morocco; 100 were killed and 300 were in-
jured. Again, in 1983, austerity measures led to a
25-percent increase in food prices, and riots left
over 100 dead.
? In Sudan, a decision in 1982 to lower sugar
subsidies by 60 percent led to demonstrations and
21 deaths.
? In May and June 1983, over 100,000 Brazilian
civil servants marched to protest austerity mea-
sures that included wage adjustments and cuts in
public jobs spending.
? Last fall austerity-inspired policy changes by the
Bolivian Government led to widespread protest.
Early this year, labor unions led a 72-hour strike
to protest cuts in spending and dramatic increases
in the price of government-subsidized food.
? Earlier this year in Tunisia, the government
removed subsidies on wheat and bread. Rioting
resulted in 100 deaths.
? In April 1984, bloodshed occurred in the Domini-
can Republic during food riots protesting govern-
ment-subsidized food.
Although these examples do not indicate that each
change in economic policy leads to political insta-
bility, they show that specific policy measures that
hit key interest groups can have serious political
repercussions.
Conclusions and Implications
Our preliminary evidence has shown no statistically
significant relationship between general economic
conditions, such as recession and inflation, and
political unrest. We believe, however, that specific
government economic measures that directly hurt
large segments of the population stand a much
greater risk of leading to political unrest. We
believe the different outcome here is that action by
a government agency provides a tangible rallying
point for opposition.
We expect more economically induced unrest
through the 1980s as LDC governments impose
austerity measures. Indeed, adjustment pro-
grams-whether self-imposed or coordinated with
the IMF-could precipitate increased unrest since
the policy changes required by austerity programs
are the type that trigger protests and uprisings.
Generally, these programs rely on higher taxes,
increased fuel and utility prices, and decreased
government spending and subsidies-the sort of
direct government actions that can lead to direct
public reaction.' Furthermore, an IMF-supported
austerity program can provoke nationalistic reac-
tions as the domestic government is seen as subser-
vient to Western, and especially US, interests.
Conditionality programs also make the IMF-and
often the United States by association-an actor in
domestic politics; opposition parties can accuse the
government of selling out to foreign interests.
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