(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707310001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: January 12, 2017
• Document Release Date: October 20, 2010
• Sequence Number: 1
• Publication Date: December 7, 1984
• Content Type: REPORT

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Directorate of cret
Intelligence
International
Economic & Energy
Weekly
Bret
DI IEEW 84-048
7 December 1984
Copy 697
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International
Economic & Energy
Weekly 25X1
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Synopsis
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Perspective-Western Europe: Economic Solutions Yet To Come
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Briefs Energy
International Finance
Global and Regional Developments
National Developments
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Big Four West European Countries: Slight Economic Upturn in 1985 25X1
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Persian Gulf: Impact of a Major Oil Price Decline
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Libya: Living With Less
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33 /Japan: Economic Relations With the USSR Stalled
37 $buth Africa: The Economy and Racial Reform
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Comments and queries regarding this publication are welcome. They may be 25X1
directed to irectorate of Intelligence
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7 December 1984
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International
Economic & Energy
Weekly 25X1
Synopsis
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Perspective-Western Europe: Economic Solutions Yet To Come 25X1
Europessimisn-the fatalistic view that the West Europeans have about the
region's poor economic prospects-may be gradually giving way to new efforts
to create a more competitive, market-oriented economy in the region, but more
fundamental changes in the region's economy will be necessary.
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Big Four West European Countries: Slight Economic Upturn in 1985 25X1
the West European "recovery" is shaping up as the weakest in the
postwar period. GNP growth for the four major West European economies-
West Germany, France, the United Kingdom, and Italy-is expected by most
forecasters to average 2.4 percent in 1985, up only slightly from this year's es-
timated pace of 2.1 percent.
19 Persian Gulf: Impact of a Major Oil Price Decline
This article speculates about the impact on Persian Gulf countries if oil prices
were to fall to around $20 per barrel. A major price decline would have
negative implications for US interests in the region.
23 Libya: Living With Less
Libya has weathered the soft oil market by cutting back sharply on imports,
scaling back the Five-Year Plan (1981-85), slowing payments to suppliers and
resorting to oil barter deals. As a result, Qadhafi will be less able to offer gen-
erous economic aid and trade incentives to strengthen ties with pro-Western
regimes and counter Washington's Libyan policy.
29 Debtor LDCs: Devaluations Slowing
The $26 billion increase in the collective trade surplus of 12 major LDC
debtors in 1982-83 can in large measure be attributed to the real devaluation
of their currencies. Preliminary 1984 data, however, indicate the pace of real
devaluation is slowing for this group.
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33 Japan: Economic Relations With the USSR Stalled
Despite recent gestures by the Japanese Government and business community
toward improved ties to the Soviet Union, the short-run outlook for bilateral
37 South Africa: The Economy and Racial Reform
The lackluster performance of South Africa's economy, in our judgment, will
be a factor limiting the pace of racial reform. Nonetheless, Pretoria will be un-
der pressure to sustain some. momentum of reform if the new constitution
granting limited political rights to Indians and mixed-race Coloreds is to gain
legitimacy among these nonwhite minorities.
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DI IEEW 84-048
.7 December 1984
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Secret
International
Economic & Energy
Weekly
Perspective Western Europe: Economic Solutions Yet To Come
Europessimism-the fatalistic view that the West Europeans have about the
region's poor economic prospects-may be gradually giving way to new efforts
to create a more competitive, market-oriented economy in the region. Al-
though these developments are encouraging, many more fundamental changes
in the structure of the region's economy will be necessary to achieve rapid
economic growth and lower unemployment over the remainder of the decade.
To loosen government control over the economy and promote competition,
some West European governments are moving to "privatize" state-owned
companies. Indeed, British Prime Minister Thatcher has made the selling of
many state-owned industries the centerpiece of her program to restructure the
British economy and increase competition. In a departure from past policies,
the Kohl government of West Germany has partially privatized its national oil
company and is planning to sell parts of Volkswagen and Lufthansa. Italy has
begun selling parts of its enormous state industrial holding company, IRI,
while the Socialist government of President Mitterrand has halted the
program of nationalizing private industries and is working to reduce govern-
ment subsidies to state-owned firms.
Efforts to encourage investment through changes in tax laws and other
incentives indicate the renewed importance West European governments are
placing on investment to stimulate economic growth. Bonn has eliminated
some taxes on new stock issues. London has lowered overall taxes on corporate
earnings this year. Rome is encouraging investment in small and medium-sized
firms by providing low interest rate loans to such enterprises; below-market
interest rates on loans for retooling and updating obsolete facilities in the
depressed machine tool industry also are being offered.
Another positive development is the recent slowdown in wage hikes. The rapid
escalation of wages in the 1976s has been a major factor contributing to the re-
gion's unemployment problem. High unemployment probably is the main force
holding back wage advances. Nonetheless, employers and union leaders
increasingly realize that if Western Europe is to improve its international
competitive position wage increases cannot outstrip productivity gains as in the
past. Recent data, however, indicate that productivity is continuing to rise at
about the same rate as in the 1970s.
1 Secret
DI IEEW 84-048
7 December 1984
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While these developments represent a favorable shift in the West European
economic climate, more fundamental changes will be necessary to alter the
region's poor long-run growth and employment prospects. The difficult
decisions to remove structural rigidities, such as government regulations
affecting the hiring and firing of workers, and to oppose entrenched interest
groups, including farmers and traditional industries, have yet to be made. For
example, West European governments continue to subsidize traditional indus-
tries, such as steel, textiles, and agriculture, while support for high-tech
industries remains limited. The EC spent more money in 1983 to subsidize
grain exports than it has earmarked to support high-technology research and
development over the next five years.
Despite rapidly rising unemployment in the past three years, almost no
progress has been made by West European governments in reducing the
nonwage portion of labor costs-payroll taxes paid by employers for social
welfare benefits. These taxes add 80 percent to wage costs in West Germany
and 60 percent in France, versus only 28 percent in the United States. Yet only
the United Kingdom, where payroll taxes are already among Western
Europe's lowest at 36 percent of wage costs, has attempted to reduce this
disincentive to hire workers by abolishing a 1-percent National Insurance
surcharge on employers.
Government redtape continues to be complex, time consuming, and discourag-
ing. National laws governing the creation of new businesses and bankruptcy
proceedings are generally much more stringent than in the United States.
Moreover, despite the 27-year existence of the European Community, nontar-
iff barriers, such as differences in product and professional standards, still
prevent most EC companies from enjoying the economies of scale the 10-
member Community should offer. As a result, the Community remains a
collection of small to medium-sized markets. For those products that are
traded among EC countries, additional costs are incurred because of various
customs regulations. Unless the West Europeans more fully address these
structural rigidities to growth, Europessimism will become a self-fulfilling
prophecy.
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IFr nch Requirements
or Soviet Gas
To Maintain
European Gas Market
(,XSha're
Dutch Planning
N clear Power
xpansion
Energy
interests with the USSR.
Limited French demand for Soviet natural gas may reduce France's interest in
the further development of Soviet resources, at least for the next two or three
years. Officials of Gaz de France have told the US Embassy that the French
Government will not allow gas supplies from any single country to account for
more than 5 percent of total French energy demand and that deliveries under
present contracts effectively bar any new Soviet gas deals. The Embassy also
reports that French officials are disappointed with their failure to renegotiate
the price of Soviet gas under current contracts. If Moscow were to insist on
linking the purchase of French equipment and technology to signing new gas
contracts, there would be little incentive for France to support construction of
a second pipeline. Nonetheless, France almost certainly would not support any
embargo in view of its past opposition to embargoes and its other commercial
Union to increase gas sales to Western Europe in the next decade.
The President of Gasunie, the Dutch state gas-exporting company, publicly
confirmed that the Dutch plan to maintain their one-third share of the
European gas market for an additional 10 years. Dutch exports in 1983 to five
major European gas consumers amounted to over 35 billion cubic meters
(bcm). While new gas exports could be as high as the 35 bcm implied by
Gasunie, Embassy sources indicate that 25 to 28 bcm of new gas are more re-
alistic. By providing a low-cost alternative supply of future gas, the Dutch
announcement may delay development of high-cost Norwegian gas supplies.
Continued exports of Dutch gas could also lessen the ability of the Soviet
will be operational around 1994.
Dutch Government officials are completing plans for the construction of three,
or possibly four, additional 1,000-megawatt nuclear power plants intended to
replace existing oil- and gas-fired units. The government hopes that when they
are completed the Netherlands will be able to increase gas exports while at the
same time enhancing energy security. Parliamentary approval is by no means
assured. Supported by widespread public concern over safety, the opposition
Labor Party and a number of leftwing Christian Democrats oppose nuclear
expansion. To ease public concern, the Dutch are considering the unprecedent-
ed step of linking reactor orders-most likely with a foreign firm-to contracts
for the disposal of the spent fuel outside the country. A key member of
Parliament recently suggested a two-phase ratification-conditional accept-
ance now, with final approval delayed until 1987. This could keep the question
from becoming an issue in the 1986 election, but it increases uncertainty over
the final outcome. If approval is obtained next year, the first of these plants
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Japa To Sign Contract As a result of an agreement between Japanese utilities and Australian
for Australian LNG suppliers in November, a contract for gas deliveries is expected to be signed at
the end of this year or early in 1985, according to Embassy reporting. The
agreement calls for the delivery of 6 million metric tons of liquefied natural
gas (LNG) annually for 19 years beginning in 1989-90. Japan signed a letter of
intent in 1981, but financial difficulties among the Australian backers,
together with downward revisions in Japanese energy demand, delayed the
initial target date of 1986. When Mitsui and Mitsubishi became equity
participants earlier this year, the project's financial difficulties were eased.
Australian LNG is expected to provide for about 15 percent of Japanese LNG
demand after 1990, and will generate for Canberra about $1.5 billion a year in
export revenues. Tokyo now has sufficient supplies lined up to meet the
majority, of its natural gas requirements through 2000.
Libyan Offshore Oil Development of the offshore Bouri field, Libya's first offshore project and the
Development Scheduled largest oilfield yet developed in the Mediterranean, is proceeding steadily. The
Italian oil company, AGIP, is developing the field near the Tunisian border at
an estimated cost of over $2 billion. a
consortium of the Italian firm SAIPEM and the South Korean firm Hyundai
has been awarded a $155 million contract for fabrication and delivery of
processing and drilling facilities, while the Italian consortium Micoperi-Belleli
has a $230 million contract for the drilling and production jackets.F
Production from Bouri will be split 81 percent and 19 percent
between the Libyan National Oil Company and AGIP. If AGIP can keep the
project on schedule, the new capacity will come on line when some of Libya's
older fields begin to deteriorate sharply and most industry forecasters are
projecting an increase in world oil demand. I
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Big Seven Electricity-generation growth in the Big Seven countries in second quarter
Ele icity-Generation 1984 increased 7.5 percent-about 1.5 million barrels per day (b/d) oil
owth Remains equivalent-compared to the same period a year earlier. French electricity
Strong generation soared by nearly 10.5 percent in the second quarter, and more than
40 percent of this increase went to increased electricity exports. Power
generation also showed strong gains in Canada and West Germany, growing
by 8.0 and 8.5 percent, respectively. A near 70-percent increase in electricity
imports allowed Italy to meet increased demand with only a nominal increase
in electricity generation. We expect electricity-generation growth to remain
strong through next year, because West European economic recovery is
Cloudy Outlook Prospects are dimming for a multiyear debt restructuring agreement with
for Brazilian Debt Brazil's foreign bank creditors in the next few months. Before it leaves office in
Talks March, the Figueiredo administration wants to reach an accord similar to.the
Mexican agreement-rescheduling debt due during the rest of the decade for
14 years at interest rates 1.125 percentage points over LIBOR-to ensure
essential policy continuity under the new civilian government. Foreign banks
are generally willing but only if the new president elected next month-
probably opposition candidate Tancredo Neves-publicly pledges full support
for the accord.
Neves, however, is reluctant to associate himself with the debt negotiations,
and we believe this may derail a multiyear rescheduling.
IIn our judgment, Neves, for political reasons, wants to
avoid endorsing a multiyear accord negotiated by the current unpopular
government, but probably would honor it in his first year. As a result, the cur-
rent negotiations may result in a single-year rescheduling for 1985 and a
tougher fight later over repayment terms for subsequent years.
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Yugoslavian
scheduling of
negotiations
Last week's meeting with official creditors dashed Belgrade's hopes for a
multiyear rescheduling agreement and a reduction of the IMF's role in the
country's adjustment effort. Although the creditor group left its official
position on rescheduling terms vague, most governments indicated that they
oppose a single rescheduling of 1985-88 maturities. The creditors stood firm in
requiring an IMF standb ro ram for next year before any rescheduling
agreement is concluded.
year.
Belgrade's reluctance to accept another rigorous IMF program is likely to drag
out the rescheduling negotiations. The Yugoslav Finance Secretary has told
creditors that he is prepared to negotiate with the Fund. Prime Minister
Planinc, however, warned publicly last week that Belgrade will not accept a
strict 1985 program. Because of continuing high inflation, the IMF and
Belgrade's creditors will almost certainly insist on tough conditions again next
Global and Regional Developments
OPEC Imports From OPEC imports from the Big Seven industrialized nations fell 13 percent in
/trig Seven Fall first half 1984 from a year earlier. Imports by these countries from the Big
Seven dropped 18 percent for all of 1983. Imports of financially troubled Iraq
and Nigeria fell by about one-third. At the other extreme, the imports of
Ecuador and Venezuela rose substantially. While the Iran-Iraq war contribut-
ed to the decline, the import reduction was largely in reaction to the falloff in
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oil revenues-down an estimated 44 percent since 1980. With oil earnings
down slightly since midyear, OPEC imports almost certainly have dropped
First Half First Half
1983 1984
2,236 1,474 -34.1
536 334 -37.7
13,314 10,968 -17.6
2,389 2,011 -15.8
2,169 2,459 13.4
1 TT Annual Meeting After negotiations that press reports described as stormy and frantic, last
week's annual GATT meeting approved a new work program; Industrial
countries hope the program will prepare the way for a new multilateral trade
round and announced they would seek a special GATT session next summer to
start preparations. This session was not endorsed by developing countries-
they stood by their demand that the industrial countries implement trade
concessions before the LDCs will discuss a new round.
The key to the work program agreement was a compromise on services. For the
first time, the United States obtained assent for GATT Secretariat work on
services, including compilation and distribution of information generated by
national services studies. Discussions will begin in a year on whether GATT
rules should be expanded to cover services. Because the LDCs continue to deny
GATT competence to regulate services,. we believe services will remain a
contentious issue. Another important US issue, trade in counterfeit goods,'was
included in the work program.
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Incased EC Beef EC agricultural trade policies will be severely challenged at next week's
ports Burden International Meat Council (IMC) session in Geneva. As a result of its policies
orld d Market over the past decade, the EC has emerged as the world's largest exporter of
beef. High internal EC support prices and slaughter of dairy cows in response
.to stricter. dairy production quotas have led to massive beef surpluses and
subsequent dumping in the Middle East, North Africa, and Eastern Europe.
With EC beef currently priced well below that of other world suppliers, EC ex-
ports have jumped 62 percent in the past year alone. According to Embassy re-
porting, Argentina will propose a two-year phaseout of EC export subsidies
and a reduction in EC domestic prices to boost internal beef consumption. The
Community probably will offer to moderate export subsidy increases, but will
make no commitments on price reductions.
E94upport for Law The EC is likely to sign the UN-sponsored Law of the Sea Convention before
of the Sea Convention the deadline on 9 December. The convention permits an international organi-
zation to be a party to the accord, provided that a majority of its members sign
as individual states. West Germany announced last week that it would not sign
the convention but declared that it would not block Community assent. Since
the decision to sign the treaty has to be unanimous, Community approval rests
with the United Kingdom, which probably will be the only other EC member
to reject the convention. London is likely to agree to EC participation,
however, to maintain a common EC front and to avoid further antagonizing
the convention's Third World supporters. EC participation in the convention,
however,.would be mainly symbolic.
Japanese Corn Japanese firms have contracted to buy nearly 1 million metric tons of corn
Purchases From China from China, according to Japan's Ministry of Agriculture, Forestry, and
I,J(p Sharply Fisheries. The Japanese began buying cautiously earlier this year, but import
figures are expected to show a rapid rise beginning in November. Aggressive
Chinese sales tactics have begun to;overcome Japanese concerns about the
quality and reliability of Chinese supplies and offending major US suppliers.T
/After a
series of good harvests, the Chinese have a surplus of corn-mostly in
I onesia Considering
irect Trade With
China
Secret
7 December 1984
northeast China, with ports close to Japan.
Most key officials of the Soeharto government have endorsed the resumption
of direct trade with China, which was' halted in 1967. Armed Forces
Commander Murdani recently told reporters he foresaw no unmanageable
security ,problems from such a move. The Director General of Foreign Trade
told a US Embassy official in late November that the only remaining
requirement was a formal statement from President Soeharto. Although
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Chamber of Deputies, is designed to broaden the tax base and reduce evasion.
Labor unions, whose members believe they bear a disproportionate share of the
tax burden because of evasion by the self-employed, have held a series of
strikes in support of the bill.
significantly.
The bill is causing divisions within the Socialist-led five-party coalition
government. Anticipating next spring's national elections, Christian Demo-
crats, Liberals, and Social Democrats are seeking to amend the bill to soften
the tax blow on affected constituencies. As a result, Prime Minister Craxi may
resort to a decree (emergency) law to have the bill go into effect at the
beginning of 1985. More important, the tax reform raises the threat of a
government crisis in Rome, since Republican Party leader Spadolini has
already threatened to bring down- the coalition if the bill is modified
acceptable procedures for direct trade links.
Jakarta's primary motivation is to boost its export earnings, no major gains are
likely. Indirect trade is already taking place through Hong Kong and
Singapore middlemen, and Jakarta and Beijing will need time to work out
National Developments
Developed Countries
Italian Tax Reform The Italian Senate last week approved a value-added tax (VAT) reform
Package Clears package that officials estimate could bring in about $5 billion in additional
arliamentary Hurdle revenues, about 9 percent of the 1983 budget deficit. The measure, now in the
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J ew Israeli
dget Cuts
million..
The Israeli Cabinet approved budget cuts last Friday touted to be $375
million. Because the Israeli fiscal year is already two-thirds over, however, the
actual budget reduction will only be about $125 million. Moreover, most of the
cuts will not materialize unless some enforcement mechanism is devised.
Defense Minister Rabin, who abstained on the Cabinet vote, publicly stated
that he does not know what the defense budget is, and, therefore, cannot judge
whether the $33 million defense reduction will damage Israel's security. Other
ministers traditionally have refused to pare their budgets in the absence of
defense cuts. Cabinet discussion continues on where to pare an additional $175
Less Developed Countries
/Mexican Imports Defense officials appear to be resuming substantial imports of equipment in
of Military Equipment 1985, despite the country's serious economic problems.
that plans are proceeding for a new order
ntensifies Pressures
on Government
Mexico has reached tentative agreements to purchase West European helicop-
ters, armored vehicles, and antitank missiles. Deliveries of this expensive
equipment, largely unsuited to current internal security needs, would be the
strongest indication to date of the armed forces' unusually favorable standing
under the de la Madrid administration. The military has already been granted
supplemental appropriations for force expansion and pay raises that far
outstrip civilian wage gains. The purchase of showy equipment would worsen
budget overruns that are already complicating IMF consultations and would
reduce .funds available for social expenditures before next year's elections.
of US F-5 jets, to cost more than $150 million.
The US Embassy says that the nationwide general strike on 29 November
which was called by Peru's Communist-controlled labor confederation, dis-
rupted normal economic, activity and prompted sporadic violence.
austerity policies and to gain publicity before the papal visit in January and
the strike was held to protest President Belaunde's
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quick reconciliation with international bankers..
before the presidential campaign intensifies. Meanwhile, a high-level govern-
ment delegation came to Washington this week to negotiate with the IMF,
bankers, and US officials for help with the country's critical economic
situation. Although the strike-did not attract strong popular support, unions
demonstrated their political influence. The administration is unlikely to bow to
the confederation's economic demands, but the work stoppage will reinforce
Lima's fear of imposing new austerity measures. This, in turn, will prevent any
Panama's Opposition Widespread opposition to President Barletta's recent austerity legislation has
to Austerity Program resulted in repeal and put the new civilian government on the defensive. The
L
requirements.
austerity program included a sizable. tax on services and a freeze on
government wages. Business and professional organizations threatened demon-
strations and a general strike, maintaining that the private sector was being
forced to bear the financial burden of government mismanagement and
military corruption. Following negotiations with his critics, Barletta agreed to
less drastic measures that would be drafted by 'a coalition of business and
government leaders. Nonetheless, last week some 50,000 demonstrators in
Panama City protested government overspending and corruption within the
military. This austerity setback will almost surely complicate ongoing negotia-
tions to reschedule $700 million in commercial debt. Bankers are already upset
with the size and terms of the proposed refinancing. Business and government
leaders will have to quickly design policies that will permit Panama to pay, in
the first six weeks of 1985, the $100 million it needs to comply with
refinancing terms required by the international banking community. An
economic upswing is essential if Panama is to meet international financing
Nigeria's Continuing Nigeria has agreed to make an interest payment on its $3-4 billion in
Struggle With outstanding short-term trade debt as part of an effort to gain the confidence of
Trade-Debt foreign suppliers without submitting to an IMF agreement. The payment of
about $350 million, due in January, will be equal to the interest accrued
during 1984 on those trade debts to private companies covered by official
guarantees of their home governments. Last April Nigeria agreed to convert
$6.5 billion in nonguaranteed trade debt to six-year loans with interest payable
quarterly at 1 percentage point above LIBOR. As a first step, the Nigerian
Central Bank last month issued notes to cover $258 million of this trade debt.
We believe that Nigeria is unlikely to have sufficient cash to cover its 1985
debt service payments because of probable lower oil earnings. Payments on its
$12 billion in medium- and long-term debt are already falling behind.
Nigeria's liquid foreign exchange reserves totaled only $464 million on 15-
November, an amount equal to imports for about one month. The net effect of
the bunching of short- and medium-term debt repayments will be to push
Nigeria's debt service ratio to as much as 50 percent within the next three
years.
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Iranian Budget Prime Minister,Mausavi presented a $42 billion budget to the Majles last
Reflects Problems week for the fiscal year starting in March. According to press reports, despite
a 6-percent decline in spending, the budget, which includes $14 billion in war-
related expenses, still projects a $3 billion deficit. Concern in the Majles over
original projections of a larger deficit led Mau"savi to make last-mmute b d t
U ge
cuts-mostly in spending on capital projects.
The smaller budget and foreign exchange restrictions reflect the constraints of
lower oil revenues. Iran is trying to reverse this decline by offering large price
discounts to increase oil exports. The Prime Minister stressed that the budget
aims at alleviating inflation, unemployment, and declining industrial produc-
tion despite heavy war spending. We believe this indicates growing government
Sudan Adopts
New Economic
easures
Thailand's
Postdevaluation
usterity
lenders for more drastic reform of Sudan's tottering economy.
Sudan has reportedly implemented a new set of fiscal measures designed to in-
crease government revenues. According to Embassy sources, Khartoum has
adopted new excise taxes designed to raise an additional $80 million in
revenues and has reinstituted the income tax. Sudan's Finance Minister told
Embassy sources that the price of gasoline would soon be raised.by about 70
cents per gallon and that sugar prices had been adjusted upward by 15 percent.
These measures, which were adopted without formal announcement, partially
reverse several of the Islamization policies initiated during the past year. The
Nimeiri regime took them to blunt further pressure from the IMF and other
labor groups in the coming months.
Having weathered the immediate political backlash from the 17-percent
devaluation early last month, the Thai Government has introduced additional
economic austerity measures to support the devaluation. Late last month, the
Cabinet cut the fiscal 1985 budget by 10 percent across the board and
postponed "nonessential" government projects. Bangkok has also reduced the
1985 ceiling for government-guaranteed foreign loans by 30 percent to $1.6
billion. These measures will make it difficult for Prime Minister Prem to keep
his promises to military and labor leaders to offset the inflationary effects of
the devaluation. As a result, Prem's coalition government will remain vulnera-
ble to renewed attacks by the political opposition, some military leaders, and
Philippines Planning According to USAID reporting, Manila plans to import between 300,000 and
Additional Rice 400,000,metric tons of rice in 1985'," in addition to imports of 350,000 tons this
Imports year-a significant departure from the modest rice exports achieved since the
mid-1970s. Philippine rice production is suffering from declines in acreage, a
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large stocks.
shift to low-yielding rice varieties requiring less imported fertilizer and
pesticides, and recent typhoon damage. The unexpectedly large rice pur-
chases-equivalent to 20, days of Philippine consumption-will further deplete
record-low" Asian export supplies and exert upward pressure on world prices.
Manila, which spent $93 million for rice imports this year, is seeking rice on
concessional terms from the United States, the ony major rice exporter holding
Chinese Sales Boost Global cotton trade in 1984/85 (August-July) is expected to increase by 5
Global Cotton Exports percent to more than 20 million bales, reflecting resumption of normal exports
by Pakistan, Mexico, and a sharp increase in cotton exports by China, the
world's largest producer. Exports from China this season are expected to reach
1.2 million bales, mainly to Asian markets, compared with only 750,000 bales
last year. This reflects estimated record Chinese production of 25.3 million
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TokyyTo Insure
Japanese Investors
in hina
bales, a 19 -percent jump from 1983/84. Greater Chinese sales efforts are
expected.
buyers.
CHINATEX is also
adopting the world standard bale size, a source of complaints from its foreign
treaty.
Japan's Ministry of International Trade and Industry (MITI) last month
began offering insurance for Japanese investments in China, making it the first
Communist country to be covered by MITI's overseas investment insurance
system. The program provides partial compensation for losses due to such acts
as nationalization and war. Fourteen Japanese investors, in such fields as
machine tool leasing and hotel management, have already applied for the
insurance. Tokyo's move was partly an attempt to compete with investors in
the United States, West Germany, and other Western countries that offered
similar insurance. The Japanese are wary of the lack of an adequate legal
framework and other problems with the investment climate in China, but did
not want to wait for the conclusion of ongoing talks on a bilateral investment
Cambodia's Rice We believe that it is too early in the crop season to confirm a serious shortfall
I
extended dry periods and no unusual flooding across large areas. Moreover,
in 1984/85 rice production, as predicted by Phnom Penh. In early November,
Cambodia's Agriculture Minister announced that drought and floods had held
rainy season rice sowing to only 1.2 million hectares, or 64 percent of the plan.
Extensive crop. destruction and damage had been reported since August. Our
preliminary assessment of Cambodia's rice prospects, however, is that reports
of sowing shortfalls and crop damage appear exaggerated. Our analysis ofL
weather data shows that this year's monsoon was normal, with no
most rice crops have
Secret
7 December 1984
additional sowing data to narrow or eliminate the shortfall, as it did last year.
not suffered significant flood damage. While provincial sowing progress
reports from summer and early fall show this year's rice area falling behind
the 1.4 million hectares achieved by the same time last year, we expect
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Big Four West European
Countries: Slight
Economic Upturn in 1985
GNP growth for the four major West European
economies-West Germany, France, the United
Kingdom, and Italy-is expected by most forecast-
ers to average 2.4 percent in 1985, up only slightly
from this year's estimated pace of 2.1 percent. The
slight acceleration in growth will almost certainly
be too small to keep jobless rates from rising.
Inflation appears likely to bottom out next year,
however, because of continued tight monetary and
fiscal policies and softness in commodity prices and
labor costs. A significant slowdown in US economic
activity or a dramatic fall in the dollar would
worsen Big Four growth. A drop in the dollar,
however, probably would be accompanied by lower
interest rates, easing the impact of reduced compet-
itiveness.
Growth Prospects
the West Europe-
an "recovery" is shaping up as the weakest in the
postwar period. Growth in consumption, which
makes up two-thirds of GNP, will lag because of
the small expected increase in the number of jobs
and in real aftertax income. Although lower wage
hikes should improve West European competitive-
ness and business profits, the expected slowdown in
US and Canadian growth will force West European
countries to rely on business investment and trade
among themselves and with other countries for
economic expansion.
Unlike past recoveries, Big Four GNP. growth
probably will receive only a small boost from
private consumption. Annual increases in real dis-
posable income this year and next are expected to
be only 1.2 percent-2 percentage points lower
than the annual average increase in the 1972-80
period
Big Four West European Countries: Percent
GNP Growth a
United Kingdom -2.6 -0.7 2.1 3.4 2.3 2.3
Italy 3.9 0.2 -0.4 -1.2 2.4 2.6
b Consensus forecasts
^
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To cut budget deficits without crippling investment
needed for restructuring, West European govern-
ments generally have chosen to shift more of the
tax burden from the business sector to the house-
hold sector while holding the line on transfer
payments. The exception has been the United
Kingdom, where 1982 income tax cuts spurred an
earlier start to its recovery. Moreover, anti-
inflationary monetary policies have helped keep
interest rates high-West European real rates are
about 3 percentage points higher than the average
of past recoveries-thereby dampening growth in
consumer spending, particularly for housing. On
the other hand, high unemployment in the Big Four
probably will continue to moderate wage increases.
Investment already is making an important contri-
bution to Big Four growth-a trend that should
continue in 1985. Cost cutting and rapidly growing
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Big Four West European Countries:
GNP Forecasts by the OECD Secretariat
Percent
Public
0.1 -1.2
1.3
Private residential
3.7 1.8
1.2
Private nonresidential
-0.1 5.3
5.6
Stockbuilding
-0.1 0.5
0.4
Exports of goods and services
1.5 5.9
5.7
export demand have helped revive West European
profit margins. Lower inflation rates have bright-
ened the outlook for reduced nominal interest rates,
which will cut the cost of financing plant and
equipment and make financial assets relatively less
attractive as an alternative for capital. Capacity
utilization rates have risen substantially since the
recovery began,-in part because. outmoded plants
have been closed; if the effects of the West German
metalworkers strike are taken into account, capaci-
ty utilization in the European Community was 81
percent in the third quarter of'1984 only 3 percent-
age points below the 1979 peak.
According to
EC data, industrial investment should increase next
year by about-10 percent in real terms in France
and the United Kingdom. West German and Ital-
ian intentions suggest much less robust industrial
investment, with real increases this year of 2
percent and 1 percent, respectively.
Much of the intended increase in investment will be
channeled into restructuring traditional-industries,
according to the EC surveys. French executives this
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7 December 1984
Big Four West European Countries: Percent
Consumer Prices a
Big Four
13.1
11.4
9.8
7.2
6.1
5.9
West Germany
5.5
5.9
5.3
3.0
2.7
2.9
France
13.6
13.4
11.8
9.6
7.6
6.8
United Kingdom
18.0
11.9
8.6
4.6
5.3
5.8
Italy
21.2
17.8
16.6
14.6
11.3
10.1
a OECD Secretariat data.
b Consensus forecasts(
year plan to invest a whopping 75 percent more in
real terms in the metallurgical industries, while
West.German and British metal companies intend
to spend at least 15 percent more. Investment in the
British textiles, footwear, paper, and plastics indus-
tries is slated to rise 20 percent in real terms, while
the Italian food processing industry should invest
15 percent more in 1984 than in 1983.
The Big Four countries are expected to continue
benefiting from the recovery in world trade. In the
first half of 1984; world trade volume expanded 20
percent at an annual rate; US import volume grew
a 'phenomenal 40 percent during the period, ac-
counting for about one-third of the increase. Soft
commodity prices and the competitive edge given
West European producers by the strong dollar have
helped improve business profits and set off the .
investment surge. The West Europeans expect. to
continue winning market shares worldwide because
of continued strength in the US dollar. Thus,
forecasters believe that the foreign trade sector will
give the Big Four economies :as much, if not more,
of a boost next year despite the projected slowdown
in US import demand.
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Big Four West European Countries:
Unemployment Rates a
the line on the unemployment rate. The OECD
forecast implies an increase in the number of
jobless in the Big Four of 550,000; the largest
rise-about 325,000-should occur in France,
where nationalized companies are paring their
work rolls in line with government directives to
Big Four 7.5
West Germany 4.6
France 7.3
United Kingdom 9.5
Italy 8.7
8.7
9.4
9.8
10.3
6.7
8.2
8.3
8.3
8.0
8.2
9.3
10.6
11.0
11.5
11.6
11.8
9.1
9.7
10.1
10.5
a OECD Secretariat data.
b Forecast.
Inflation appears likely to bottom out in 1985,
according to the Blue Chip survey. Commodity
prices, including that of oil, show few signs of
firming up. Indeed, spot oil market prices have
been falling in recent weeks, and the financial press
has reported speculation on more cuts in official oil
prices. Moreover, with moderation in wage hikes,
Big Four unit labor costs to grow
much slower than the annual average for the past
10 years. Last, continued tight monetary and fiscal
policies should contain inflationary pressures.
operate at a profit.
Forecasters point to several factors that would
cause them to reassess their 1985 projections. For
example, a fall in oil prices of $2 to $5 per barrel
would shift growth among countries and industries
but would keep the average Big Four growth rate
virtually unchanged. As a net oil exporter, the
United Kingdom would experience slower growth,
while the other three economies would enjoy a
somewhat faster expansion. On the other hand, if
OPEC countries significantly cut back their im-
ports-which are weighted toward capital goods-
much of the gain from lower oil import bills would
be offset.
The US economy poses greater uncertainty for the
West European economies. Most projections of US
growth in 1985 are clustered close to the Blue Chip
average of 3.3 percent. Although recent US eco-
nomic performance has been below expectations,
causing some forecasters to hedge, most analysts
still seem to think that US import demand will not
fall enough to reduce Big Four GNP growth signif-
icantly.
The slight increase in Big Four growth projected
for next year almost certainly will be insufficient to
keep unemployment-Western Europe's most se-
vere economic problem-from rising. Efforts to
restructure traditional industries are expected to
continue; more layoffs thus can be expected as
businesses cut costs by shedding excess capacity
and seeking more labor-saving means of produc-
tion. According to the OECD Secretariat's latest
draft forecast, jobless rates in three countries of the
Big Four should top 10 percent in 1985; only West
Germany is expected to have a chance of holding
Future movements in the dollar also could influ-
ence West European growth prospects. Most fore-
casters are assuming a slight fall in the value of the
US dollar, but they have been expecting it for more
than two years. If the dollar falls more than
expected, Big Four international competitiveness
would deteriorate, thus reducing economic growth.
West European governments, however, could take
advantage of a weaker dollar to cut interest rates,
which would offset some of the effects of lower
sales growth at home and abroad.
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Persian Gulf:
Impact of a Major
Oil Price Decline
The oil market will remain vulnerable to an unrav-
eling of prices for at least the next few years
because of increasing output from non-OPEC sup-
pliers and attempts by some OPEC producers to
maintain their market shares through price dis-
counts and barter deals..If oil prices were to
plummet, there is a good chance that the Iran-Iraq
war would escalate, instability would grow in the
Arab Peninsula states, and US interests in the area
would be harmed. This article is not an oil market
forecast, but instead speculates about the impact on
Persian Gulf countries if oil prices were to fall to
around $20 per barrel.
Impact on Iran-Iraq War
Iraq would be the Gulf country most seriously
affected by a major oil price decline. A drop in
prices to $20 per barrel would cost Baghdad slight-
ly more than one-fourth of its revenues-30 percent
of the loss would result from the lower value of
Saudi Arabian and Kuwaiti oil sold on Iraq's
behalf. Iraq will be unable to increase oil exports to
offset a drop in prices until the war's end allows
reconstruction of Iraq's Gulf terminals, the oil
export pipeline through Saudi Arabia is completed,
or the Iraq-Turkey pipeline is again expanded. In
the meantime, sharp austerity that would be re-
quired to offset large revenue losses would increase
the risk to President Saddam Husayn of serious
domestic unrest.
In contrast, Iran has more than enough excess
productive capacity to offset the impact of $20 per
barrel oil. Rather than risk imposing tough auster-
ity measures, we believe Iran would ignore its
OPEC production ceiling and employ aggressive
marketing tactics to sell as much oil as it needs to
maintain food and military imports. In our judg-
ment, only if Iranian efforts to maintain essential
imports failed and the regime came to believe its
hold on power was threatened by economic prob-
lems, would Tehran consider ending the war with
Iraq.
If Baghdad faces revenue shortfalls and austerity-
induced unrest while Iran maintains earnings, we
would expect Iraq to intensify attacks against .
Iranian oil shipments, and perhaps even oil facili-
ties. After all 20 Exocet-equipped Mirage F-1
aircraft are received from France during the next
few months, Baghdad will be able to attack tankers
and Iranian economic targets almost daily. Al-
though Baghdad has preferred low-risk conserva-
tive tactics, it probably would delay an escalation
only briefly while making one more try at ending
the war through diplomatic channels.
If a desperate Iraq escalates the war, Iran would
respond. Although constrained by its smaller and
less effective Air Force, Iran has the ability to
increase attacks on tankers carrying Arab oil,
particularly in the lower Gulf beyond the range of
Saudi air patrols. If Baghdad attacks and seriously
damages Khark Island oil facilities or halts tanker
traffic to Khark, Tehran probably would launch
commando, terrorist, or air attacks against the
Iraqi-Turkish pipeline or Arab oil facilities.
Unpleasant Choices for Saudi Arabia and Kuwait
Saudi Arabia and Kuwait might seek to restrain
Baghdad by providing additional massive financial
transfusions. Such aid, however, would magnify the
problems posed by their own large oil revenue
losses and make decisions on domestic spending
cuts, foreign asset drawdowns, and oil production
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levels even more difficult. An escalation of the Gulf
war, however, would pose serious risks as well,
particularly for Kuwait, whose oil facilities are a
likely target if Iran retaliates for Iraqi attacks. On
balance, we believe the Saudis and Kuwaitis would
decide ultimately to make up some of the Iraqi
revenue losses. Nonetheless, the likely delays in
providing aid and the failure to offset Iraq's finan-
cial losses totally would keep the risk of escalation
high.
We believe the Saudis are ill-prepared to deal with
the economic reversals that would stem from a
major oil price decline. Saudi Arabia has coped so
far with declining oil earnings by putting develop-
ment projects on hold, paying bills late, reducing
foreign aid, and drawing down assets by $15 billion
a year. Although the Saudis still have about $120
billion in official foreign assets, they do not
want reserve drawdowns to accelerate, because
reserves are considered an endowment for future
generations.
to a wide range of government subsidies and im-
provements in living standards. Saudi citizens
would not welcome the belt-tightening necessary
after a sharp fall in revenues, especially if the royal
family does not share the burden.
Sharply lower oil prices also have the potential to
generate serious tension within the Saudi Govern-
ment about its commitment to OPEC. The Saudi
role in OPEC has benefited the kingdom and has
ensured a place of leadership within OPEC councils
and in making international oil policy. Faced with
painful spending cutbacks, however, some Saudi
leaders are likely to argue that Saudi national
interests come first and that oil production should
be increased even if this harms other OPEC states.
A sharp fall in oil prices would cause Kuwait fewer
financial problems than other oil-producing coun-
tries. Kuwait's nearly $70 billion in foreign assets
provides a more-than-adequate buffer for its small
population. Moreover, extensive foreign equity in-
vestments in the West probably would rise in value
as oil prices fall. Nonetheless, Kuwaiti citizens
would blame the government for any cuts in domes-
tic spending caused by lower oil revenues and
increased aid to Iraq. Although Kuwait has the
productive capacity to increase oil output to offset
lower prices, such increased production would only
put additional downward pressures on oil prices.
The other Arab peninsula states that depend heavi-
ly on oil revenues also would need to cut spending.
Their decisions on foreign asset drawdowns and oil
production would be similar to those faced by
Saudi Arabia and Kuwait. Each has special prob-
lems that would be made worse by lower oil prices:
? Strains within the UAE between "have" and
"have not" emirates would worsen.
? Oman would have to reconsider expensive mili-
tary purchases, primarily from the United
Kingdom.
? Qatar's Amir, determined to avoid a recurrence
of the brief recession of 1983, would almost
certainly violate OPEC production quotas and
would further delay paying foreign aid commit-
ments to Iraq, Syria, Jordan, and the PLO.
? Bahrain's dependence on Saudi aid would
increase and the ruling Khalifa family probably
would face increased Iranian-sponsored dissi-
dence among Bahrain's 70-percent-Shia
population.
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Implications for the United States
A major price decline would have negative implica-
tions for US interests in the Persian Gulf region.
Governments friendly to the United States would
face greater problems dealing with troubled econo-
mies and popular discontent. They also would be
less able to meet their foreign aid commitments to
pro-Western Third World countries. For its part,
the USSR might gain increased leverage in Iraq
and perhaps Kuwait by offering favorable terms on
military equipment. An escalation of the Iran-Iraq
war would generate pressures for greater US mili-
tary involvement. Although this might create op-
portunities for closer US cooperation with states in
the region, it also would have the potential for
confrontations between US and Iranian forces.
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Libya: Living
With Less
Libya has weathered the soft oil market by cutting Libya: Economic Indicators, 1980-84
back sharply on imports, scaling back the Five-
Year Plan (1981-85), slowing payments to suppli-
ers, and resorting to oil barter deals. Economic
activity in real terms is below that of 1979. Despite Note scale change
rising popular unhappiness over the cause of the Real GDP Growth
slowdown, Libyan leader Qadhafi has consolidated Percent
his control over the small population and further 30
implemented his revolutionary ideals. The regime's 20
still substantial foreign reserves and sizable mili-
tary arsenal also allow Qadhafi considerable flexi-
hilitv in sunnortinu dissident urchins worldwide- and
Consumer Price Growth
Percent
the continuation of present oil market conditions
will not limit his ability to support international
terrorism. He will be less able to offer generous
-20 -
economic aid and trade incentives, however, to
strengthen ties with pro-Western regimes and -30 1980 81 82 83 84a
counter Washington's Libyan policy.
Qadhafi's guns and butter economic policies have
been dealt a stiff blow by soft oil market conditions
since 1980. Oil is the mainstay of the economy and
the source of Qadhafi's international influence.
Petroleum exports account for virtually all foreign
exchange earnings, 55 percent of GDP, and 80
percent of government revenues. Real GDP has
declined for the past three years, causing a 30-
percent decline in per capita GDP. Overall econom-
ic activity has fallen below the 1979 level. Libya's
foreign trade position has deteriorated sharply
since the oil boom ended. Projected 1984 exports of
$10 billion and imports of $8 billion are off by half
from their peak in 1980 and 1981 respectively. A
positive trade balance has been maintained by
adjusting imports. Declining investment receipts
Petroleum Production
Million b/d
a Estimated.
b End of period, excluding 3.578 million ounces of gold.
Financial Reserves b
Billion US $
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10.9
8.6
a Estimated.
b Earnings from official-assets only.
-2.4
6.8
and growing service costs associated with financing
Libya's share of oil industry investments, however,
contributed to current account deficits in two of the
past three years. Foreign exchange reserves have
been drawn down by $10 billion since June 1981
and are now nearly $3 billion.
Government efforts to deal with the decline have
placed an increasing burden on-the population.
Most basic consumer goods are available albeit at
reduced quality and greater inconvenience. Import
restrictions on a wide spectrum of consumer goods
and luxury items have been in place since early
1982. Food imports have been cut over 50 percent,
causing shortages and sharply higher prices. Ration
Secret
7 December 1984
books have recently been distributed to prevent
hoarding. Nominal wages have been reduced as
much as 20 percent and currency restrictions im-
plemented to curb consumption and. help finance.
priority development projects.
the population is increasing-
ly pessimistic about the future as a result of the
economic, decline. and the growing restrictions on.
traditional lifestyles.
Libya's domestic problems are compounded by
Qadhafi's chaotic efforts to nationalize the econo-
my. These measures, in combination with Libya's
fading oil wealth, have sapped domestic morale and
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curtailed individual incentive. The system of na-
tional supermarkets, established to replace tradi-
tional.bazaars, has exacerbated already serious
distribution problems and added to food shortages.
Qadhafi recently mandated the creation of neigh-
borhood food cooperatives to improve distribution
and reduce growing corruption. Plans to socialize
agriculture, the last major economic activity still in
private hands, have been delayed because of vigor-
ous opposition by farmers, who resent the regime's
meddling with traditional Islamic land policies.
Libyan cities have been inundated by dirt and
uncollected garbage since the government decision
last spring to dismiss sanitation workers-primarily
Tunisians and Turks-and require citizens to col-
lect their own garbage and clean the streets. The
popular disdain for such work and Libya's already
poor sanitation system have compounded the trash
problem and hastened the spread of related disease.
Libya is urgently negotiating the purchase of sub-
stantial amounts of rat poison to combat a serious
rodent infestation in major urban centers
Tightening the Domestic Belt
The development budget has been another casualty
of the revenue shortfall. Official estimates state
that development spending has declined by one-
fifth since 1980, but actual
spending probably has been 40 percent lower than
stated levels. The administrative. budget also was
trimmed slightly this year, the first time since
Qadhafi came to power. These cuts have caused
great confusion among government administrators,
who are unable to meet development goals.
While the soft oil market has prompted the govern-
ment to reassess development goals, several prestige
projects continue to have priority, although comple-
tion will be delayed. Heading the list is the $11
billion Great Manmade River, which will bring
water from southern Libya to coastal regions con-
fronted with severe water shortages. Completion of
this project, along with that of other large-scale
development programs-the multibillion-dollar
steel mill at Misratah, an aluminum smelter at
Zuwara, and the large petrochemical facility at
Ra's al Unuf-has been delayed for several years
to conserve foreign exchange. Agriculture retains
Qadhafi's personal interest, but-poor planning
caused grain production to fall 10 percent this year.
The impact of the development slowdown on the
average Libyan, however, is limited. Much of the
labor force is foreign-about 40 percent-and the
affected projects are not oriented toward producing
goods for domestic consumption.
will continue to do so.
Defense spending has been the last area to feel the
pinch of declining revenues. We estimate that
military imports have declined to about $1.5 billion
this year from their peak of $2.8 billion in 1982,
but most of this decline reflects the completion of
deliveries under existing contracts.' Defense spend-
ing as a percent of the administrative budget,
however, has remained relatively stable over the
past five years. Qadhafi came to power through a
military coup and is well aware that the military
poses the greatest threat to his regime. Qadhafi has
been careful to meet the needs of the military and
Nevertheless, payment arrears on military con-
tracts have strained relations between Tripoli and
Moscow-Libya's primary arms supplier.
Moscow has
accepted about 110,000 barrels per day (b/d) of
crude oil-worth about $1.2 billion annually-
since mid-1982 in payment for arms. Moscow
continues to push for lower prices for the bartered
oil and for hard currency payments on the remain-
ing $4 billion in outstanding contracts for arms
Secret
7 December 1984
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deliveries. Despite the acrimonious nature of Liby-
an-Soviet arms negotiations, Tripoli has no alter-
nate source of sophisticated military hardware.
The government recently resolved much of Libya's
outstanding commercial payments arrears-about
$2 billion, according to the Bank for International
Settlements-through oil-barter arrangements. In
addition to the Soviet deal, Italy, Greece, Turkey,
South Korea, and India will take over $2 billion in
oil over the next several years in payment on
delinquent Libyan accounts and future contracts.
Available evidence suggests this oil will come out of
Libya's current OPEC production quota. The re-
gime has frequently used its large arrears to extract
economic and political concessions from trade part-
ners. For example, Libya delayed granting a large
contract for the development of its offshore oil
reserves to an Italian company until the oil-barter
agreement was signed by Rome.
Prospects for Oil
The petroleum sector has been little touched by the
wave of cutbacks in the domestic economy, and the
1982 withdrawal of US oil personnel has had little
impact on production. Oil production has been
reduced to 990,000 b/d under the new OPEC
quota agreed to in October. This level, however, is
only 55 percent of sustainable capacity of 1.8
million b/d. Maintenance is being carried out
largely by West European personnel, although as
many as 1,000 US workers have returned to Libya.
The maintenance budget for 1985, however, has
been increased to upgrade aging facilities.F_~
Spare parts have not been a major obstacle to oil
production, because of the considerable excess ca-
pacity and production system redundancy
The economy's dependence on petroleum exports
requires the regime to invest heavily in exploration
and development of its petroleum resources. Tripoli
Secret
7 December 1984
is particularly eager to tap its large offshore re-
serves. Development of the Bouri field close to the
Tunisian border-the largest oil project in the
Mediterranean-is under way, with production
scheduled to begin in 1987. Sufficient new oil has
been discovered in this field and onshore to keep
overall proven reserve levels at about 22 billion
barrels.
We believe that Qadhafi has little choice but to
abide by his OPEC quota in the near term because
of market conditions. He can raise production
quickly, however, if market conditions change.
Qadhafi controls 25 percent of available non-Com-
munist excess capacity outside the Persian Gulf
and almost certainly would take advantage of a
closure of the Strait of Hormuz with increased
output.
Political Dynamics of Slow Growth
The economic malaise has intensified the disaffec-
tion already generated by Qadhafi's local political
excesses and radical foreign policies. The revolu-
tionary committees, which have been increasingly
relied on to implement economic policy, continue to
rankle government technocrats. Food shortages and
socialization of the economy have caused popular
disgruntlement to increase
Nevertheless, Qadhafi's ever-present
security forces limit public criticism of the regime.
The financial pinch has not hindered Qadhafi's
efforts to export his revolutionary ideals or support
foreign dissident movements. We estimate that
foreign aid-both military and economic-to gov-
ernments peaked in 1981 at $770 million. As much
as $500 million has been donated this year, almost
all of which has gone to Morocco, Nicaragua, and
Syria. Reduced oil revenues have not been a con-
straint on Qadhafi's support for international ter-
rorism. Cumulative expenditures on these activities
probably total only several hundred million dollars
since 1978.
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Secret
Libya's economy probably will continue to show
slow growth in 1985. With no significant boost in
oil exports, the regime will be forced to restrain
import growth for another year. Efforts to improve
the internal distribution system and a slight in-
crease in food imports programed for next year,
however, may alleviate consumer disgruntlement
over food shortages. Funds probably will be suffi-
cient for the regime to proceed with the truncated
development program. Qadhafi also will have suffi-
cient wherewithal to meet most of his commitments
of foreign ai
The Qadhafi regime could face severe economic
problems next year if oil prices continue to fall. For
example, if oil prices drop to $25 per barrel, Libya
would face a current account deficit of $4 billion in
1985 at present oil production and import levels.
Such a deficit would exhaust available foreign
exchange reserves, forcing Tripoli to cut imports
even more or resort to foreign borrowing-a meas-
ure Qadhafi has resisted.
A sharp economic downturn would be a crushing
blow to Qadhafi's prestige. Although revenues
probably would be sufficient to meet the basic
needs of the population, popular discontent with the
regime would increase. Under these conditions,
Qadhafi would. have to rely even more heavily on
his intelligence and security services to remain in
power. Even under these conditions Qadhafi proba-
bly would be able to spend several hundred million
dollars in support of dissident groups.
Implications for the United States
The measures implemented by Libya to deal with
domestic economic retrenchment have left Qadhafi
financially leaner, but probably more dedicated to
the cause of his revolution. The 8 May attack by
Libyan exile groups against Qadhafi has convinced
him of the need to tighten control over the popula-
tion. Qadhafi's still sizable foreign reserves allow
him considerable flexibility to export his brand of
revolution and to strike at US interests anywhere
he chooses. His weakened'financial position, how-
ever, may prompt Qadhafi to extract a higher price
for his aid in the form of greater alignment of
dissident groups with his radical policies and efforts
to strike at the United States and Israel. Libya's
large and sophisticated arsenal makes Qadhafi a
serious threat to regional stability.
Libya still provides an attractive market for West
European, US, and Asian business interests. The
heavy involvement of some West European coun-
tries in Libya will continue to limit their interest in
coordinated efforts to control Qadhafi. In addition,
the continued use of US firms in the oil industry
and the Great Manmade River project almost
certainly will be used by Tripoli to limit efforts by
Washington to impose even stronger economic
sanctions.
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Debtor LDCs:
Devaluations Slowing
The $26 billion increase in the collective trade Trade Balances
surplus of 12 major LDC debtors' in 1982-83 can _
in large measure be attributed to the real devalua-
tion of their' currencies. Preliminary 1984 data, " '
however, indicate that the pace of real devaluation
is slowing for this group. We believe concern over
the role of devaluations in increasing inflation, and
the resulting political and social fallout, is behind
the slowdown, and will limit the potential for
further real devaluations in the near term.
Sharp Real Devaluations
Many LDC debtors began to devalue their curren-
cies in 1982, as part of comprehensive economic
adjustment programs negotiated with the IMF. By
lowering the foreign price of their exports and
raising the domestic price of their imports, devalua-
tions were intended to improve a country's trade
position and its ability to service foreign debt. On
average, the 12 LDC debtors devalued their cur-
rencies 8 percent in 1982-83. Nine of the countries
we examined had lower real exchange rates in 1983
than in 1981. Argentina, Ecuador, and Mexico.
recorded real devaluations in excess of 20 percent.
Chile and Brazil had real devaluations of 18 and 12
percent, respectively. Only Colombia, Nigeria,.and
Venezuela failed to devalue their currencies in real
terms.
Impact on Trade Balances.
The overall trade balance for the 12 key debtors
improved $26 billion in the past two years, with
nine countries recording- gains. Mexico was the.
standout performer, with a. trade balance improve-
' The 12 countries we examined are Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Indonesia, Mexico, Nigeria, Peru, the
and the Real. Exchange Rate
We calculated the real price adjusted and trade
weighted-exchange rate by taking the ratio of the
wholesale price index (or, when unavailable, the
consumer price index) of each country to the trade-
weighted average of the matching price indexes of
the country's 16 main OECD trading partners, and
multiplying it by the country's trade-weighted ex-
change rate. The base year for our comparisons is
1980. The calculated real exchange rates do not
provide an absolute measure of overvaluation or
undervaluation, but they provide a measure of
recent changes in competitiveness.
To measure the impact of changes in the real
exchange rate on imports and exports, we first
estimated import and export equations for each
key debtor. Imports were assumed to be a function
of domestic GNP and the relative price of domestic
versus foreign goods. Exports were assumed to
depend on'OECD GNP and relative prices. In the
short run, oil exports are unaffected by exchange
rate changes, since petroleum is priced in US
dollars. The same is true for other commodities
whose prices are dollar denominated. Therefore, to
ensure proper specification of.export equations,
only nondollar-denominated exports were, included
for Argentina, Bolivia, Chile, Colombia, Ecuador,
Indonesia, .Mexico, Nigeria, Peru, and Venezue-
la-countries whose exports are heavily dependent
on dollar priced commodities: The derived coeffi-
cients on the relative price term were then multi-
plied by the calculated change in the relative pricei
between 1981 and 1983 to obtain an estimate of the
impact of this change on imports and exports.
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DI IEEW 84-048
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Selected Key Debtors: Real Trade-Weighted
Exchange Rates, 1975-84
111111111111 II 11111111111111 I~~~I~~~1~ I II 1111111111111 I~~~ I~~~ 111111111111 II
60 1975 76 77 78 79 80 81 82 83 84 60 1975 76 77 78 79 80 81 82 83 84
140
120
100
80
III 111111111111111111111 lit 11111111II III II II 11111111111111111 II 111111 III II 111111111111 I~~~ 11111111 III 11111111111
40 1975 76 77 78 79 80 81 82 83 84 40 1975 76 77 78 79 80 81 82 83 84 60 1975 76 77 78 79 80 81 82 83 84
ment of $18.6 billion. Argentina, Brazil; and Chile
recorded increases of $3-5 billion. The large oil
exporters in the group were adversely affected by
the weak oil market. Indonesia registered a $6.4
billion drop in its trade balance, largely the result
of reduced oil revenues. Nigeria and Venezuela
also recorded sharp declines in foreign petroleum
sales, but managed slight trade balance improve-
ments by deep import cuts.
Real devaluations were an important factor in the
improvement in the.key debtors' trade accounts.
We estimate that real devaluations were responsi-
ble for one-fifth of the $44.6 billion drop in im-
ports. Devaluation was also a valuable tool in
minimizing export losses. Key-debtor exports, hard
hit by the OECD recession and weak oil markets,
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7 December 1984
declined $19 billion in 1982-83. We estimate that
without real devaluations, the drop would have
been about $24 billion, trimming the overall trade
balance improvement by $5 billion.
Trends Now Reversing
Preliminary 1984 data indicate the pace of real
currency devaluations is slowing. These devalua-
tions averaged less than 1 percent in the first half
of this year, down from 5 percent for the same
period a year earlier. According to US Embassy
reporting, mounting domestic opposition is a major
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Key Debtors: Trade
Balances and the Impact of Real
Exchange Rate Movements, 1982-83
The real exchange rate fell 6 percent in the first
six months of 1984, compared with 14 percent a
year earlier.
Total Due to Due to Impact of Change
Change Shift in Shift in in Real Exchange
in Trade Exports Imports Rate on:
Balance
Total 25.8 -18.8
44.6 5.2 -9.7
Argentina 3.0 -1.3
4.3 0.9 -1.5
Bolivia 0.1 -0.1
0.2 0.1 -0.1
Nigeria 0.7 -6.1
6.8 -0.5 3.3
Peru 0.9 -0.2
1.1 0.2 -0.1
Philippines -0.2 -0.7
0.5 0.2 -0.3
Venezuela 0.1 -5.2
5.3 -0.2 2.0
factor behind the slowdown. By raising the domes-
tic price of imports, devaluation has increased
inflation and sparked dissatisfaction among the
working class and the poor: To ease inflationary
pressures, the pace of real devaluation has been
curbed, and in some cases the real exchange rate
has been allowed to appreciate. Among major LDC
debtors:
? Argentina recorded a 1-percent real appreciation
in the first half of this year. An October devalua-
tion failed to offset the jump in the real exchange
rate, but continued devaluation-linked to a new
IMF program-may erase the increase by the
year's end.
? Brazil registered only a 1-percent real devalua-
tion of the cruzeiro in the first six months of
1984, compared with a 17-percent reduction in
the same period a year earlier.
? Ecuador continues to devalue the sucre in real
terms, but at a much slower pace than in 1983.
? Mexico has allowed the peso to appreciate 12
percent in real terms since the end of 1983,
resulting, in part, in import growth. of 13 percent
in the first half of this year.
? Nigeria has consistently refused to carry out a
major devaluation of the naira, although such a
move is long overdue. The real exchange rate
appreciated 13 percent in the first half of 1984
and stood 66 percent above its 1980 level. Lagos
has managed to hold down imports only through
a complex and burdensome system of controls.
? Venezuela has proved to be the exception, moving
to correct its overvalued currency with a major
devaluation. Since the end of 1983, its real
exchange rate has fallen 29 percent.
The trend toward slower real exchange rate devalu-
ation probably will continue. Leaders of inflation-
weary LDC debtors such as Argentina, Bolivia, and
Peru probably will be reluctant to pursue aggres-
sive devaluation policies for fear of increasing
domestic unrest. Nigerian officials continue to re-
sist IMF calls for a 25-percent devaluation, citing
adverse effects on the public and threats to govern-
ment stability. Finance Minister Junguito recently
stated that to avoid popular discontent Colombia
would not be able to fully accept IMF proposals for
a massive devaluation. In November, Chilean lead-
ers announced they would slow the pace of devalua-
tion to help curb inflation. In our. judgment, slower
exchange rate devaluations will result in a loss of
competitiveness for many LDC debtors that will
reduce the hard-won trade surpluses to service their
foreign debt. Alternatives such as tighter import
controls would hamper economic growth and, per-
haps, trigger the same discontent already feared,
while export promotion measures risk protectionist
reactions by trading partners.
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Japan: Economic Relations
With the USSR Stalled
Despite recent gestures by the Japanese Govern-
ment and business community to improve ties to
the Soviet Union, the short-run outlook for bilater-
al economic relations is not promising. The sharp
drop in bilateral trade that began in 1983 contin-
ues. Cuts in Soviet equipment purchases for stalled
resource development projects in Siberia and de-
clining demand in Japan for these resources have
affected the two major components of the two-way
trade. Moreover, the political climate has improved
little since the invasion of Afghanistan and the
KAL shootdown. Japanese businessmen are not
anxious to undertake new ventures in the USSR
and view increased bilateral exchanges largely as a
means to keep channels open for possible future
business. The government, meanwhile, is unlikely
to encourage improvements in the economic rela-
tionship until it sees movement in US-Soviet
relations.
Trade Plummets
Since 1982, trade between Japan and the Soviet
Union has fallen drastically; two-way trade de-
clined to $4.3 billion last year, a drop of nearly 20
percent from 1982. Trade has fallen 10 percent in
the first 9 months of this year, with exports down
15 percent and imports off 2 percent from compa-
rable periods in 1983.
Strains in the political climate have helped to put a
brake on the bilateral economic exchanges. The
Soviet invasion of Afghanistan, martial law in
Poland, the KAL incident, and the Soviet military
buildup in the Far East have discouraged bilateral
economic relations. The Japanese have become
increasingly vocal in insisting that Moscow return
Although Japanese sanctions following Soviet in-
tervention in Afghanistan have been relaxed, an
official from the Soviet Trade Representative Of-
fice has frequently pointed to these restrictions,
which include limits on official export credits, as a
major reason for the decline in trade. The Soviet
official's remarks probably were meant to convince
Japanese businessmen that the government was not
serving their interests. After the KAL shootdown,
however, many Japanese firms took it upon them-
selves to curtail contacts with the Soviets.1
Slumping Demand on Both Sides
Although Japan has traditionally imported primary
products from the USSR, demand has fallen in
recent years despite the present recovery of the
Japanese economy. One of the main reasons the
Sakhalin offshore oil' and natural gas project is on
hold is the reluctance of Japanese electric power
companies to commit themselves to buying lique-
fied natural gas. Their needs are filled into the
early 1990s, and requirements after that are
uncertain.
The stagnation of the Soviet economy because of
heavy military expenses, imports of grain and other
foodstuffs, and the burden of aid to satellite and
developing countries has played a major role in
reducing Soviet imports. Japanese exports of ma-
chinery and equipment to the Soviet Union fell
more than 35 percent in 1983 as large-scale Soviet
industrial and resource development projects ran
into funding problems. The Soviet practice of con-
serving hard currency has led the USSR to push
strongly for counterpurchase trade, which the Japa-
the Northern Territories.
Secret
D/ /EEW 84-048
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1982
3,899
4
36
3,729
nese have rejected. The Soviets have also asked for
a major reduction in interest rates charged on
deferred payments for Soviet imports, which the
Japanese have also refused.
Prospects
We believe predictions of improvement in the bilat-
eral relationship are optimistic, despite some re-
sumption of exchanges and trade talks:
? The Fourth Japan-Soviet Roundtable, a private
meeting of politicians, businessmen, scholars, and
journalists, met in Moscow during 9-12 October.
? Soviet Politburo member Kunayev led a delega-
tion from the Supreme Soviet to Japan in late
October, the first such parliamentary exchange
since the invasion of Afghanistan.
? The Japan-USSR Joint Economic Committee is
scheduled to meet this month.
Secret
7 December 1984
1983 1984
(January-September)
The Japanese, while perhaps willing to discuss new
development projects, will be slow to make commit-
ments. Soviet officials have told the Japanese that.
Moscow intends to emphasize the development of
East Siberia in the 1986-90 Five-Year Plan. Ongo-
ing joint resource development ventures, however,
are progressing slowly, if at all. Japanese equip-
ment manufacturers remain interested in sales to
the Soviet Union, which such projects promote, but
several factors discourage a larger Japanese role in
Siberian joint development efforts:
? The Soviets insist that management of the proj-
ects remain strictly in their hands.
? Many resources of potential interest to Japan are
in undeveloped areas that require huge infra-
structure investments before they can be
exploited.
? Capital shortages are frequent in the Soviet
economy, and maintaining a reliable labor force
in Siberia is often difficult.
? Given the extended slump in raw material de-
mand, the Japanese are less concerned than in the
past about lining up stable sources of supplies.
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Secret
Status of Ongoing and Proposed Joint Resource
Development Projects
Sakhalin Offshore Oil and Natural Gas
Agreement has been reached on technical plans to
develop the Chayvo deposit. Terms of sale of
liquefied natural gas are still under discussion-
Japan is reluctant to make a commitment, since its
supply is secure until 1990. Production is not
likely until the early 1990s.
Komatsu-Sedov Timber
The recent housing slump and lumber surplus in
Japan have reduced the attractiveness of the proj-
ect. The Soviets have agreed to limit lumber
shipments but wish to increase exports of proc-
essed wood products-which are unlikely to meet
Japanese quality standards.
South Yakutsk Coal
The Japanese were to receive 100 million tons of
coal over 16 years, but the Soviets missed the first
deadline in 1983. Japan wishes to cut deliveries
because of the slow recovery of the steel industry.
Udokan Copper
Baikal-Amur mainline railway-essential for de-
velopment of the mine-is "completed, " the Soviet
press says, but will not be fully operational until
1988. The world copper market is in a long-term
slump. Japan has resisted Soviet calls for a joint
venture since the mid-1960s, even when world
demand was more lively.
Yakutsk Natural Gas
Although exploration for this project was complet-
ed in 1979, development is at a standstill. The
Japanese have lost interest, and prospects for
resuming talks on the project are remote.
As for the political climate, Japanese diplomats in
Moscow remain skeptical that the Soviets are
heading for a major change in policy toward Japan.
They believe Soviet agreement to expand contact is
aimed solely at pressuring the Japanese to make
concessions to the USSR. Indeed, the roundtable in
October was largely a propaganda opportunity for
the Soviets, whose calls for signing a "good neigh-
bor" treaty-which the Japanese Government has
long rejected-dominated the meeting. Recent in-
terest by both Prime Minister Nakasone,and Abe
in stepping up the dialogue with Moscow was
linked to the Liberal Democratic Party presidential
election this fall. Both men tried to improve their
political positions by claiming credit for responding
to public concern over strained Japanese-Soviet
ties. With Nakasone's election to a second term on
31 October and Abe's reappointment as Foreign
Minister, the rivalry probably will continue. As
long as the Soviets show no flexibility, however,
little significant progress is likely. Because the
Japanese probably will follow Washington's lead,
the Foreign Ministry does not foresee significant
(changes until US-Soviet relations improve
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Secret
South Africa: The
Economy and Racial
Reform'
The lackluster performance of South Africa's econ-
South Africa: Economic Indicators, 1979-84
iti
th
f
t
li
ill b
d
i
e
ac
or
m
ng
gment, w
e a
n our ju
omy,
pace of racial reform. Economic austerity measures
imposed during 1984 to reduce a large current
account deficit, as well as persistent high inflation, Note scale change
will hold real economic growth in the 2-to-3- Real GDP Growth
percent range for at least the next several years. As Percent
a result, Pretoria will be unwilling to shoulder ,-, 16
major new spending programs for the nonwhite
population, particularly for the huge black major-
ity. Nonetheless, Pretoria will be under pressure to
sustain some momentum of reform if the new
Constitution granting limited political rights to
Indians and mixed-race Coloreds is to gain legiti-
macy among these nonwhite minorities.
A Gold-Dependent Economy
The level of economic activity in South Africa rises
and falls with the world gold price and the govern-
ment's attempts to keep current account deficits
within manageable bounds. Pretoria has not been
Current Account Balance
Billion US $
adept at balancing the surge in growth and imports -4
Average Prime Lending Rate
Percent
that follows a gold price upturn against the inevita- -6 1979 80 81 82 83 84a 0.
ble current account deficits that follow a price
decline. The price of gold-which accounts for
some 40 percent of South Africa's foreign earn-
ings-has dropped by almost 50 percent since
1980. As a result, South Africa's annual rate of
real economic growth has fallen sharply from the
1980 peak of 7.3 percent to an estimated 1.5
percent for 1984. As in the past, Pretoria reacted to
the current account deficit-as well as continued
inflation and the depreciation of the rand-by
implementing restrictive economic policies.
Consumer Price Growth
Percent
Exchange Rate
US $/Rand
Gold Price
US $/Ounce
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In our view, the South African economy is poised
for a modest upturn next year. Assuming a small
increase in the average gold price to $370 per
ounce, growth of world demand for nongold exports
of about 3 percent, a normal corn harvest, and
some continued -economic restraints, we'project 2=
to 3-percent real growth and a small'current ac-
count surplus for 1985. On the basis of similar
assumptions, some private economic forecasters in
South Africa and the United States expect a slight
reduction of 1 to 2 percentage points in the rate of
inflation.
Most South African economists argue for contin-
ued austerity to keep the current account in check.
In particular, these economists contend that exces-
sive government spending could trigger another
increase in inflation and new foreign payment
problems that would lead Pretoria to either reim-
pose austerity measures or increase foreign borrow-
ing. On the basis of public statements and past
"pay as you go" practices, however, we believe that
Pretoria will attach considerable importance to
avoiding sustained, heavy borrowing. South Afri-
can officials probably are concerned already about
the increase in the country's foreign debt-which
has risen from about $7 billion in 1980 to more
than $15 billion at present, according to the Bank
for International Settlements.
The Impetus of Racial Reform
Against this backdrop of only modest economic
performance that we expect to prevail for at least
the next several years, President Botha's program
of gradual racial reform is unlikely to include
large-scale social-spending programs, particularly
for the black majority. In our judgment, whites
already hard hit by recession inflation, recent tax
hikes, and credit restrictions probably will be un-
willing to foot the bill for costly racial reforms that
would erode their privileged position. Even a specu-
lative surge in gold prices would be unlikely to
induce Pretoria to enact massive new spending'
"
Secret
7 December 1984
programs for nonwhites because of the potential
added burden during subsequent economic down-
turns.
well.
We believe that the government must sustain some
momentum in the reform process if the new Consti-
tution is to gain legitimacy among the Colored and
Indian populations. Less than one-fifth of eligible
Coloreds and Indians voted in elections last August
for the nonwhite chambers in Parliament. More-
over, the nonwhite members of Parliament will be
particularly eager to belie the charge of having sold
out South Africa's black majority, and will demand
reforms that would benefit South African blacks as
In fact, according to press reports, Pretoria is
considering several relatively inexpensive measures:
? New incentives to encourage the promotion of
blacks into managerial positions in the.private
sector.
? Admission of more blacks to white colleges,
universities, and technical schools.
? Relaxation of regulations on business activities of
blacks in central city areas, as well.as' other
restrictions on nonwhite businessmen.
? Elimination of bans on interracial sex and mar-
riages-a step of.great symbolic importance,
especially for Coloreds.
Even with these reforms, however, the lives of most
blacks are unlikely to improve enough in the near.
term to avoid periodic flareups-of black unrest.
We do not expect that South Africa's economic
troubles will give Washington much leverage over
Pretoria's domestic or foreign policies. South Afri-
ca most likely will continue to plead for patience for
its gradualist approach to racial reform, citing
among other factors the economic constraints.on
the reform process. Recent US legislation, however,
requires that US support for an IMF loan to South
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Secret
Reforms Aimed at the Black Majority
Although South Africa is in no manner prepared to
abandon white control of the government or the
economy, recent reforms signal an important shift
in Pretoria's domestic economic and social policies
toward blacks residing in urban areas. Until re-
cently, racial "separate development" has been
built on the premise that all blacks could be
assigned to tribal areas and would only have rights
in those "homelands. " Implicitly, the government
now has recognized that South Africa has a large
and settled urban black population in white areas.
The acceptance of a permanent black population in
white areas is reflected by several recent reforms,
including the introduction in the late 1970s of a
leasehold system that allows urban blacks to lease
land in white areas. Pretoria also has opened new
job opportunities, increased spending on education,
and legalized labor unions. Private-sector incen-
tives have been introduced for additional black
training. According to press reports, Pretoria even
has considered imposing school fees on the families
of white students to help fund increased education-
al expenditures for the other racial groups.
Despite the new realism implicit in recent reforms,
President Botha's reform program in the near term
probably will only marginally improve the lives of
blacks living in white areas and will have even less
impact on those in impoverished tribal homelands.
Today, almost every aspect of daily life of blacks
living outside of the homelands is regulated by a
Africa be contingent upon expected benefits for
South Africa's blacks. Washington may gain some
leverage if South Africa should approach the IMF
for another standby loan-which it almost certain-
ly would in the event of a serious economic decline.
complex structure of discriminatory laws designed
to maintain white privilege and control:
? Political Rights. Apartheid envisions that blacks
will exercise political rights only in the tribal
homelands. When a homeland becomes "inde-
pendent, " South African blacks belonging to that
tribal group lose their South African citizenship
whether or not they were born in, or reside in, the
homeland. Outside of the homelands, black po-
litical representation is limited to local councils
that most blacks resent for cooperating with the
white government.
? Residence. Blacks living outside of the home-
lands are allowed to live only in designated black
townships, which have poor or inadequate hous-
ing and services, and which are located far from
jobs in white cities.
? Travel. Movement of blacks outside of the tribal
homelands is severely restricted, often entailing
separation offamily members. Blacks must carry
an identification `pass book" and legally can
only stay in white areas for 72 hours unless they
have a job or have gained residing rights.
? Education. Separate and unequal educational
facilities are maintained for the various racial
groups, and black teachers often lack a high
school diploma themselves. The government
spends an average of seven times as much to
educate a white child as a black child.
Secret
7 December 1984
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Sanitized Copy Approved for Release 2011/06/13: CIA-RDP97-00771 R000707310001-4
 Sanitized Copy Approved for Release 2011/06/13: CIA-RDP97-00771 R000707310001-4
Sanitized Copy Approved for Release 2011/06/13: CIA-RDP97-00771 R000707310001-4
 Sanitized Copy Approved for Release 2011/06/13: CIA-RDP97-00771 R000707310001-4
Secret
Secret
Sanitized Copy Approved for Release 2011/06/13: CIA-RDP97-00771 R000707310001-4