INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707350001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: December 22, 2016
• Document Release Date: October 7, 2010
• Sequence Number: 1
• Publication Date: January 11, 1985
• Content Type: REPORT

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Directorate of See, et
Intelligence
International
Economic & Energy
Weekly
11 January 1985
DI IEEW 85-002
11 January 1985
?y 683
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Secret
Weekly
International
Economic & Energy
iii Synopsis
Energy
International Finance
Global and Regional Developments
National Developments
13 International Trade in Services: An Emerging Policy Issue
West Germany: Taking a Lead on the Acid Rain Issue
Argentina's Grain Outlook: Challenges for Alfonsin
27 Israel: Facing Revenue Shortfalls
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directed to -]Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
Secret
11 January 1985
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Players and Issues for the Bonn Economic Summit
The next Big Seven Economic Summit, set for 2-4 May in Bonn, will cover the
same basic agenda-economic growth, trade, international monetary relations,
north-south issues, East-West relations, and energy-used since the first
summit a decade ago. Nevertheless, each gathering develops its own theme
and character, often at the last minute.
13 International Trade in Services: An Emerging Policy Issue
Many nations are suspicious of US initiatives to include services in a new
round of multilateral trade negotiations. Nonetheless, a preliminary examina-
tion of services trade patterns indicates that both developing and industrialized
countries have an important stake in this sector.
19 West Germany: Taking a Lead on the Acid Rain Issue
Chancellor Kohl, host this May for the annual Big Seven Economic Summit,
intends to make environmental protection one of his main themes. Domestical-
ly, the West German actions on this issue could affect Bonn's relations with
West and East European neighbors-major sources of pollution-and with the
European Community.
23 Argentina's Grain Outlook: Challenges for Alfonsin
The year-old government of President Alfonsin is counting on a major
expansion in Argentina's grain exports to help service its $46 billion debt. Its
success will depend, to a large extent, on Argentina's relationship with the
Soviet Union, its largest grain buyer and a key bidder on a necessary grain
port expasion project.
27 Israel: Facing Revenue Shortfalls
Since assuming power in September, a continuous decline in revenue has
undercut efforts by Israel's unity government to trim the growing budget
deficit.
31 India: Bhopal's Limited Backlash
The unprecedented chemical plant disaster in Bhopal, India, is not likely to
slow India's industrial modernization or its effort to obtain foreign technology.
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11 January 1985
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Perspective
Weekly
International
Economic & Energy
11 January 1985
Players and Issues for the Bonn Economic Summit I 25X1
The next Big Seven Economic Summit, set for 2-4 May in Bonn, will cover the
same basic agenda-economic growth, trade, international monetary relations,
North-South issues, East-West relations, and energy-as that of the first
summit a decade ago at Rambouillet, France. Prime Minister Brian Mulroney
of Canada and EC Commission President Jacques Delors are the only new
leaders, producing considerable continuity in personalities and issues. Never-
theless, each gathering develops its own theme and character, often at the last
minute.
? Economic Growth. Restructuring problems and high unemployment, particu-
larly in Western Europe, will be key topics, but the West Europeans are
unlikely to accept US suggestions that government spending, particularly on
social welfare, be scaled back to accommodate growth, or that subsidies be
reduced to foster greater flexibility and market response. The most that can
be expected is an agreement for more extensive work in the OECD on
restructuring.
For their part, all the foreign leaders will express varying
degrees of distress at the US budget deficit and its impact on financial
markets, as well as fear of a rapid decline of the dollar.
promises to limit protectionism, but agreement to begin preparations for a
new round of trade negotiations in 1986 appears likely. All countries will
express concern about protectionism, with the United States receiving
perhaps the most heat. In addition, the mixed credit export promotion
practices of France
? International Trade. The French and Italians will be reluctant to go beyond
The French have argued in recent years
that progress in trade liberalization must await a revamping of the interna-
tional monetary system, and they may make this point again.
? International Monetary Relations. Studies in the Group of 10 on improving
the monetary system have been under way since the Williamsburg Summit
in 1983 but will not be ready for review at Bonn. The French Finance
Minister has told US officials that another call for a "new Bretton Woods"
conference to reform the system would be unproductive. The French
nevertheless remain convinced that all countries (read the United States)
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must follow the same international policy rules. At a minimum, Mitterrand
will reiterate France's position and may even hold trade talks hostage to
progress on the monetary front.
? North-South Issues. Bonn tentatively plans to promote a North-South
conference similar to the 1981 Cancun Summit, perhaps to be initiated by
Mexico and Austria, as was Cancun, and endorsed by the Bonn Summit. An
"Action Program for Africa," concentrating on food aid, is also likely to be
discussed, and the leaders will agree to continue efforts to contain the debt
crisis through prudent debtor policies and case-by-case help from creditors.
The tone and results of the IMF's April Development and Interim Commit-
tee meetings-where medium-term solutions to the debt crisis will be
discussed-will figure prominently in summit discussions and statements.
Nontraditional and political subjects will also occupy considerable time:
? Enhanced cooperation against terrorism also is likely to be discussed; the
Bonn Declaration on hijacking, for example, may be extended.
? Bonn, for example, is hoping for a major policy statement on the importance
of ensuring that growth and environmental policies are fully compatible.
Bonn will be looking for support from Canada, particularly on acid rain, but
the Mulroney government's position thus far is that acid rain is primarily a
bilateral issue.
? The United States is likely to register some success in obtaining statements
supporting North Sea energy resource development and Big Six participation
in the manned space station.
The issue carrying most potential for disruption is outside the summit format:
the 40th anniversary of VE Day on 8 May. The West Germans were
embarrassed by the coincidence of the Normandy anniversary ceremonies with
last year's London Summit. As hosts, they were able to move the summit
forward to precede the VE anniversary (and to gain the coalition some political
capital for state elections in mid-May). The effort may backfire, however. The
several thousand journalists present for the summit and the anniversary will
naturally be looking for differences and controversies to report, and the
resulting hoopla could overwhelm the summit.
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Spot Oil-Market
Tre s
exican
Oil Production
Goals
,UK-Norwegian
in K-Norwegian
Gas Deal
Danger
IUU U ressure
on Striking
K Miners
Energy
Spot prices for several key crudes-particularly US West Texas Intermediate
and UK Brent-have dropped over $1.50 per barrel in the last few weeks.
Although Arab Light spot prices were relatively unchanged during this
period-selling at about $27.85 per barrel-the spot price remains about $1
below the official level. Depressed spot prices are indicative of relatively weak
winter demand and OPEC's declining credibility with oil traders. A sudden
burst of cold weather in Europe has strengthened spot prices only marginally
and, despite the current low level of oil inventories, prices probably will remain
weak because buyers are already anticipating the seasonal falloff in oil use.
economic restrictions rather than reduce exports.
Mexico City's recently announced plan to boost oil production substantially
over the next five years is likely to prove overly ambitious. The state-owned oil
company announced last week that it would increase petroleum output 58
percent by drilling 1,000 new wells. According to the announcement, the
decision is in response to the government's projection of a 5-percent annual in-
crease in domestic consumption. By drilling 1,000 new wells, Mexico probably
will be able only to increase output by about 10 percent over the five years. If
increases in domestic consumption begin to squeeze export capacity, the
government probably would choose to raise domestic oil prices or impose other
ment of the Troll field almost surely will be delayed.
Weakening British Government support for the purchase of natural gas from
Norway's Sleipner field may cause the deal to collapse and have repercussions
on future supplies of North Sea gas. The US Embassy reports that, since the
contract was initialed last February, the deal for 10-12 billion cubic meters of
gas per year has been held up by disagreements over the British need for the
gas, pricing terms, construction awards going to UK firms, and the balance-of-
payments impact. Norway's Energy Minister presented the final offer to his
British counterpart late last month in an effort to overcome unresolved
problems. Gas from Sleipner probably will go to continental West European
purchasers, if the United Kingdom refuses the Norwegian offer, but develop-
The Thatcher government is increasing efforts to break the morale of striking
coal miners amid growing signs that this winter's weather will not cause an en-
ergy crisis. Last week, Energy Secretary Walker pledged that there would be
no electric power cuts this year and again appealed to miners to end their
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Ifan Plans
Petroleum Shuttle
Operation
ustrian Power
/Project Blocked
Secret
11 January 1985
militant regions in the United Kingdom.
walkout. The US Embassy says its estimates of energy supplies bear out the
Energy Secretary's optimism; the winter so far has been mild, the United
Kingdom has stepped up imports of coal, power stations are burning oil and
gas, and transport workers continue to move coal supplies. According to the
press, almost 40 percent of the miners are working, with 300 of them returning
to work since Christmas. The Coal Board is emphasizing that tax breaks are
available to those who return to work before April. The Embassy also reports
that, for the first time, criticism of the failure of Union President Scargill to
keep the union together is being expressed in South Wales, one of the most
Iran is developing plans to shuttle oil from Khark Island to two ultralarge
crude carriers permanently anchored near Sirri Island in the southern Gulf,
Iranian crude exports.
unwilling to risk the voyage to Khark. The shuttle service would add flexibility
to Iran's oil export operations but is not likely to lead to increased Iranian ex-
ports or even substitute entirely for Khark exports. Besides the continuing
Iraqi threat to shuttle tankers, pumping and storage limitations aboard the
tankers off Sirri are likely to limit transshipment capability substantially.
Similar efforts earlier in the conflict proved largely ineffective in sustaining
Oil would be transferred to tankers
indifference to 50-percent opposition.
A court injunction has resolved temporarily the stalemate between the
Austrian Government and environmentalists opposing the Hainburg hydro-
electric project. The court ruling, however, will delay for at least one year
construction of the controversial power station, which will produce 5 percent of
current electricity consumption. While unions support the project for the jobs
it will create, environmentalists claim the dam will destroy one of Europe's last
remaining river wetlands and endanger Vienna's drinking water. When the
government began site clearing last December, protestors denied access to
workmen, provoking several clashes with police. Intensive negotiations between
Chancellor Sinowatz and protest leaders failed to resolve the standoff, and
front-page treatment of the controversy helped turn public opinion from
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date with the massive paperwork to implement the currency conversion option that
Mexican Final agreement on Mexico's $48 billion debt rescheduling probably will be
D bt-Rescheduling held up at least another two to three months. The Central Bank is struggling
maturities falling due in 1985-89, expects the rest of Ecuador's creditors to ap-
bankers also agreed to renew a $750 million trade credit and grant $350
million in new medium-term loans. Once the IMF approves a standby loan-
probably in February-the country's external financing requirements should
be covered through the end of the year. Moreover, Ecuador and the US agency
OPIC signed a political risk insurance package-the first involving an Andean
Pact country since 1971-which will improve prospects for foreign investment.
prove the package by April 1985.
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was included at the urging of European financial officials. It allows each
creditor to demand repayment in currencies other than dollars. Last week,
Mexico City made a $250 million "good faith" payment on its 1983 jumbo
loan and promised to pay an additional $950 million as soon as the agreement
with Mexico's 530 foreign bank creditors is completed. This gesture-the first
principal repayment by a major Latin American debtor since 1982-probably
was intended to enhance Mexico's creditworthiness for new money in 1985.
Nicaraguan Debt Talks Talks between Managua and its foreign bank creditors, postponed several
times in late 1984, have been reset for late January
Nicaragua has made no payment on its commercial bank debt
in over a year. It claims that losses caused by the insurgency prevent
compliance with bank demands for a token remittance. One billion dollars of
Nicaragua's $4 billion foreign debt is owed to commercial banks, and interest
arrearages now amount to over $170 million. Managua has little hope of
reversing its critical shortage of hard currency, because levels of foreign
assistance are declining, and the regime already has spent the receipts
expected from the current harvest. The Sandinistas probably will continue
reneging on payments, while requesting yet another rescheduling to avoid legal
action by the banks.
Ecuador's Financial Ecuador's external payments difficulties will probably ease considerably in
Prospects Brighten 1985. The bank advisory committee, which agreed to reschedule $4.3 billion in
Continuing Cuban
Debt Pressures
Havana has approached its commercial and Western government creditors on
refinancing its principal payments due in 1985, only weeks after concluding
the 1984 rescheduling agreement with private banks. A task force of official
creditors is planning to travel to Havana in March or April to assess
compliance with 1984 performance targets and to open the third round of
negotiations on Cuba's debt. Judging from a recent report by the National
Bank of Cuba, which shows a surge in hard currency imports and lackluster
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exports during the first part of 1984, Havana probably missed creditors'
targets for convertible currency trade and balance of payments. Nonetheless,
Havana will probably cite its success in rescheduling its Bloc payments, a
recent agreement allowing Cuba to continue to resell Soviet-supplied petro-
leum products for hard currency, and President Castro's calls for economic
austerity measures as evidence of Cuba's creditworthiness.
Japanese Concessions In early January, Tokyo's Finance Ministry improved the prospects for yen
on uroyen Markets internationalization by agreeing to remove withholding taxes on nonresidents'
Debtor LDC Imports
of
,,Capital Goods
ottoming Out
purchases of. Euroyen bonds and to permit medium- and long-term Euroyen
lending. Neither measure will be implemented before spring but both, we
believe, constitute important concessions. Finance Ministry officials initially
objected to removal of the withholding taxes, which bring in an estimated $40
million annually, because Tokyo is trying to pare its budget deficit. _~
The Ministry held off endorsing long-term Euroyen
lending partly because of Japanese bankers' fears that such activity could
undermine the country's regulated interest rate structure.
Global and Regional Developments
to undertake development projects.
According to trade data for the four largest industrial countries, key debtor
LDC imports of capital goods seem to be bottoming out. Data for the first
three quarters of 1984 show key debtor LDC imports of capital goods up 2 per-
cent, in sharp contrast to the 32-percent drop recorded in 1983. Trade
statistics for the United States, Japan, West Germany, and France indicate
that Brazil and Mexico accounted for the bulk of the increase. Most of the
gain in Brazil's capital goods imports reflected a 23-percent rise in purchases
of electrical machinery, while increased imports of farm machinery accounted
for most of Mexico's gain. While capital goods imports continued to fall in Co-
lombia, Nigeria, and Peru, the pace of decline seemed to have slowed. The
Philippines, however, sharply cut back its capital goods imports in response to
mounting financial difficulties. In the near term, we believe total capital goods
imports by the debtor LDCs should continue to turn upward as some countries
such as Ecuador, Chile, and Colombia selectively ease their import restrictions
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Secret
Growing Thai-Japanese Bangkok is becoming increasingly critical of Tokyo's refusal to take concrete
Trade Frictions steps to deal with the chronic trade imbalance between the two countries.
Thailand's trade deficit with Japan rose to nearly $1 billion in the first half of
Tokyo Approves
Another Tight Budget
restructure trade between the two countries.
1984-almost two-thirds of its total deficit for the period. According to the US
Embassy, Thai officials are especially disappointed that the trade liberaliza-
tions announced by Tokyo in mid-December will not effectively open Japanese
markets to Thai commodity exports: For now, Bangkok is minimizing the
possibility of strained relations with Japan-its largest aid donor-and Prime
Minister Prem has publicly discouraged a student movement to boycott
Japanese goods. Nonetheless, Bangkok is urging Tokyo to accept a plan to
National Developments
Developed Countries
Japan's Cabinethas approved a $210 billion budget for"Japanese fiscal year
1985, which begins 1 April, paving the way for Diet debate in late January.
Total spending will be up by 3.7 percent over the initial 1984 budget, but gen-
eral expenditures-less debt service and revenue sharing with local govern-
ments-will decline for the third year in a row. The Fiscal Loan and
Investment Program, which includes expenditures on roads, water supply, and
sewers will drop by 1.2 percent-the first such cut in 31 years. Defense
spending, however, will be up 6.9 percent, bringing it near the 1-percent-of-
GNP limit, and foreign aid will rise by 10 percent. Japan's deficit will amount
to 22 percent of total spending, down slightly from last year, but debt service
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costs will jump by 11.7 percent, to $45.4 billion, surpassing social security for
the first time as the largest item in the budget. Some taxes will be raised to cut
new bond issues by $4 billion from last year's level.
J panese Trade
Ministry Proposes
High-Technology
Legislation
Late last month the Ministry of International Trade and Industry (MITI)
submitted legislation that would establish a basic technology research promo-
tion center. The center would coordinate international and domestic basic
research efforts and provide funding for research projects through grants, tax
incentives, and long-term loans. MITI has requested approximately $2 million
from the general account budget and $35 million from the Japan Development
Bank to support loans for research projects. Although recent press reports
indicate the center will be established before the fiscal year ends on 31 March;
major. funding issues have yet to be resolved. Finance Ministry approval of the
use of Japan. Development Bank funds for the center is uncertain. Moreover,
MITI's funding request is ' $10 million less than the estimated cost of the
research projects, and industry leaders are reluctant to make major contribu-
tions.
7
4stralia-New Zealand
conomic Cooperation.
Jeopardized
Wellington's recent rejection of a bid by an Australian company for a New
Zealand packaging and building, products firms sends confusing signals to.
potential Australian investors. After the July 1984 election, New Zealand's
new Labor government lifted the previous government's embargo on Austra-
lian investment, devalued the dollar, and sponsored tours of New Zealand for
potential investors.. Prime Minister Lange, however, has now invoked his
campaign position that he is only interested in ventures promising new jobs and
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Standard Fruit Company claim that the high production costs could lead its fi-
nancially troubled US parent company to close local operations, according to
the US Embassy. According to the Embassy, government and union officials
.underestimate the possibility of a pullout and have ignored numerous attempts
by Standard Fruit to obtain relief. The government continues to oppose
exchange rate reforms and fears special tax. concessions to Standard Fruit
would worsen the fiscal. deficit and bring demands for similar treatment by
others. A decision to abandon the Honduran operation would harm export
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11 January 1985
TRIPromote
Me 'co Releases
it Shipment
to Nicaragua
exports; takeovers,.of existing companies are not welcome. The Lange govern-
. ment was clearly disappointed last summer when Australia failed to recipro-
cate by lowering its barriers to New Zealand investment. In October 1984, the
two countries began negotiations to standardize investment re ulations, but
the rejection of this bid is apt to complicate talks.
Assessment to better evaluate the consequences of new technologies.
The Austrian Government has announced a three-year, $43 million program to
promote investment and R&D in small and medium-sized firms in the
microelectronics industry. Government aid will. focus on computer-assisted
design and manufacturing and other areas of semiconductor applications.
Vienna is concerned that its industry is lagging in a number of high-tech fields
and in innovation generally. The microelectronics program represents a
pioneer government attempt to promote a specific industry. Biotechnology and
advanced materials technology are leading candidates for similar programs.
Also, Vienna plans to set up an office similar to the US Office of Technology
. Less Developed Countries
icaragua late last month persuaded Mexico to
release an oil shipment after delays due.to financial snags. This is the second
consecutive month that Mexico has responded to oil shortages in Nicaragua
with an unscheduled shipment. Unlike the November delivery, however, the
latest shipment did not arrive in. time to prevent a temporary shutdown of the
country's only refinery. Meanwhile, a Soviet shipment en route to Managua
should fulfill February's requirements. Managua. and Mexico City have not
had a bilateral oil agreement since last August, although talks are scheduled
for mid-January, presumably to address debt repayment and oil-supply
arrangements.
despite $600 million in arrears, we
expect continued leniency.by Mexico City under any future agreement.
Honduran Banana The largest banana firm in Honduras may have to divest its unprofitable
Producer Considering operations, generating labor unrest among the company's 13,000 union
Pullout workers threatened with sharp wage reductions or unemployment. Officials of
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 through wage cuts.
earnings-bananas account for 30 percent-and probably would spark addi-
tional union-protests as the new owners probably try restoring profitability
livian Although former Planning Minister Fernandez drafted a tough stabilization
Ministers Differ plan last month, we believe division within President Siles's Cabinet over
on Economic Policy economic-strategy probably will prevent the plan's full implementation. One
More Nigerian
usterity
Soviet Project
in Nigeria f
Founders
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group-primarily technical-experts led by Fernandez-supports tough mea-
sures.to break the hyperinflationary spiral and bolster the external accounts,
including -substantial devaluation, large tax increases, reduction of consumer
subsidies, and :restraints on wage increases. The other faction-dominated by
Siles's political-confidants-is reluctant to take any unpopular measures and
apparently is-holding sway, according to the US Embassy. Central Bank
President Cardozo recently told US officials that the Fernandez plan is not
supported by Siles's closest advisers or key Finance Ministry officials. Given
the continuing political turmoil in Bolivia, opponents will demand concessions
to labor, such .as increases in wages or government spending. Consequently, we
expect Bolivia's 2,000-percent inflation rate to rise further, paralyzing produc-
tion and causing widespread unemployment and product shortages. With price
increases quickly eroding last month's 656-percent minimum wage hike, we
also foresee renewed labor strife and growing political woes for the Siles
. production of 1.3 million barrels per day sold at current prices:
complex. Revenue projections are probably inflated by assumptions of oil
Head of State Buhari has unveiled a more stringent budget for 1985, which
could worsen already broad opposition to his regime. Recurrent spending has
been reduced to $7.1 billion "from $7.9 billion in 1984, a drastic cut in view of
an official inflation rate of 40 percent. In his budget speech, however, Buhari
emphasized increased spending for education and "adequate funding" for the
armed forces, an apparent effort to please two opposition groups. The capital
budget appears to grow from $5.1 billion to $7.5 billion, a real increase of
about 5 percent, but for the first time this includes principal repayments on
loans. Furthermore, funding of this budget is uncertain because Lagos is
depending on $6 billion in internal and external loans, which are not likely to
be available. Allocations are still planned for several prestige projects,
including the new federal capital at Abuja, steel projects, and a petrochemicals
Work on the.iron and steel works at Ajaokuta, a-Soviet-aided showcase
project, has been halted after nearly 20 years of planning and construction.
{ foscow had extended $1.2
billion in credits for the project, which has been plagued by poor Soviet
planning and design and has cost the Nigerians $6.1 billion. More than 4,000
Soviet technicians have worked on the project during the last five years, but
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Tuni 'an
B getary Rigor
Moroe an Budget
}PPCd:
Indonesia
To ost Taxes,
aise Government
Wages
Lagos now says, unrealistically, that-it will be completed in 1988.
luctant to abandon the scheme after investing so much hard currency and
prestige. Nigeria continues to budget scarce resources for the project, and
they have completed only a fraction of the work. Both governments will be re-
government's latest attempt to pick their nearly empty pockets.
Tunisia's legislature has adopted a series of changes in the revenue codes to
consolidate the ineffective tax system and deal with mounting budget and
current account deficits. Taxes have been reduced by 50 percent on select
agricultural crops to stimulate production and offset growing food imports.
New measures will be implemented to reduce tax evasion by doctors and other
wealthy Tunisians. In addition, the tax on alcoholic beverages will rise by 21 to
45 percent. The projected $15 million in additional tax revenues generated by
these reforms, however, greatly understates their significance. The increasing-
ly militant lower and middle classes will be particularly interested in how
strongly the government leans on wealthy Tunisians to shoulder their share of
taxes. More important, however, the increased taxes on alcoholic beverages-
one of the last affordable luxuries-will be viewed by most Tunisians as the
tic.
Morocco's 1985 state budget pledging continued fiscal austerity passed
Parliament after several weeks of stormy review, according to the US Embassy
in Rabat. The approved budget projects no increase in overall spending, with
expected improvements in revenue performance yielding a modest reduction in
the deficit. The budget does allow for a 10-percent hike in minimum wage lev-
els to dampen consumer disgruntlement over additional price hikes on
subsidized goods scheduled for later this year. Morocco's ongoing financial
crunch, however, probably makes even'this budget formulation overly optimis-
improve income tax collection to help offset this expected decline.
In his annual budget message, President Soeharto announced plans to boost
current expenditures to stimulate the recession-hit economy while calling for
higher taxes to make up for declining oil revenues. Current expenditures are to
rise nearly 25 percent in the fiscal year beginning in April, including a 20-per-
cent pay hike for the military and civil servants: Fuel subsidies will be cut
sharply, however, and capital expenditures will rise only 2 percent, considera-
bly below the estimated 10-percent inflation rate for 1984. With the soft oil
market, income from oil and gas, which accounted for 66 percent of
government revenues-in 1983 and 64 percent in 1984, will fall to 60 percent in
1985. Soeharto announced a new sales tax in April and stepped-up efforts to
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secret
viet Trade
osition Remains
Strong
imports of grain from the United States.
Moscow's hard currency trade position remained strong through the first nine
months of 1984, despite an increase in imports in the third quarter. Hard
currency imports during the period of January-September were 8 percent
below the same period in 1983, and exports were down 4 percent. Meanwhile,
the value of imports from, and exports .to, CEMA countries rose 11 percent
and 1.2.percent, respectively. The drop in hard currency imports. was caused
largely by a sharp reduction in purchases.of machinery and equipment, and of
pipe. The decline,in hard currency exports was primarily the result of a large
reduction in the value of arms exports to developing countries. The rise in hard
currency imports in the third quarter was due mainly to a sizable increase in
Chernenko General. Secretary. Chernenko. in the latest issue of the Party's main iournal
onfrms Soviet : . called.for greater efforts to move the Soviet economy into the technological age,
/Economic Strategy stating that economic problems require "paramount" attention to achieve a
isting system of organization and management.
"radial, breakthrough" in economic efficiency by 1990. The breakthrough must
come from "technological reequipping" of all branches of the economy, an
indication that Chernenko sees capital investment, particularly in advanced
machinery, as the key to economic progress. He indicated, however, that greater
economic efficiency also depends on expansion of the Party's role at all.levels. of
economic life, closer linkage of pay to performance, continued campaigns to
improve labor discipline and end corruption,. and streamlined economic manage-
ment. Chernenko endorsed efforts to increase enterprise autonomy and responsi-
bility; but he cited misuse of enterprise investment funds, possibly an oblique
criticism of the experiment.to increase the role of operating managers in .
investment. decisions.: Although Chernenko's article suggests little complacency
over the improved economic performance of the last two years, his suggestions
for improvement were conservative and did not call for major changes in the ex-
Cuban.Housing Law . To improve what President Castro recently acknowledged as a severe housing
shortage, the Cuban, Government has passed a new housing law that will
become effective this July. Those currently renting.from the State will become
owners of their homes, paying the cost in installments. This measure also
permits. property owners to rent rooms for a limited period, and to sell their
.property at freely established prices. In addition, the Cuban Savings Bank has
been authorized.to make low-rate loans for: new construction and home
improvement. While making no immediate additions to the housing stock,
Havana apparently hopes that the liberal ownership provisions and low-cost
financing will provide sufficient incentives for private construction. Stringent
payment terms, however, which will raise costs for households that have paid
only token amounts for rent, as well as the shortage of construction materials,
may dampen public enthusiasm for the law. Castro's public support and the
unprecedented publicity campaign that accompanied the new law probably
were intended to soothe opposition by hardline officials to the return of
landlords and a free housing market.
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International Trade
in Services:
An Emerging
Policy Issue
The United States has told its trading partners that
it attaches great importance to including interna-
tional trade in services in a new round of multilat-
eral trade negotiations (MTN). The GATT, which
currently is focused almost exclusively on trade in
physical goods, does not include provisions to pro-
tect and foster growth in services trade. Moreover,
many nations are suspicious of US motives, and
attempts to block US initiatives on services are
likely. Nonetheless, a preliminary examination of
services trade data indicates that many other coun-
tries have an important stake in establishing rules
Outlook for Negotiations
Foreign reactions to the US initiative on services
have largely been skeptical or negative:
? The positions of the other industrialized countries
suggest lukewarm support for the US initiative,
combined with wariness that the United States
may be embarking on an ill-conceived "crusade"
that has minimal chance of success.
? Many developing countries oppose what they
perceive as a US scheme to dominate their
emerging service sectors.
Moreover, services trade involves politically sensi-
tive national sovereignty issues, such as the right to
regulate investment, because many service transac-
tions must be carried out through overseas subsid-
iaries or branches.
The issue of negotiations on services has implica-
tions for US economic security and international
competitiveness over the longer term. Transactions
such as banking and financial services play a major
role in the US balance of payments, while other
services such as telecommunications and trans-
border data flows contribute to the US comparative
advantage in technology-intensive industries.
Moreover, service transactions are often closely
linked to exports of manufactured goods, and so
can be important as a competitive factor for other
sectors of the economy.
A major obstacle to negotiations on services trade is
the absence of adequate data on the transactions
involved. Unlike merchandise trade in physical
goods moving across borders, international service
transactions are by nature intangible. They are
sometimes measured differently by different coun-
tries, are often undercounted or recorded as foreign
investment, and are rarely disaggregated to the
level of detail provided for merchandise trade. Lack
of basic data and analysis on international services
trade has provided an excuse for some countries not
to move beyond their initial, negative positions.
Shifting World Services Markets
IMF and US Commerce Department data show
some surprising trends in services trade:
? While the United States does appear to be a
world leader in services trade, its share of the
world market has been significantly eroded in
recent years.
? France and the newly industrialized countries
(NICs)-major sources of opposition to the US
initiative in the GATT-appear to have gained
market share while the US share was declining.
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Service Receipts as a Share of Goods and Services, 1983
? Core services
cJ Other services a
Industrialized Countries
United States
Japan
France
West Germany
Italy
United Kingdom
Developing Countries
Oil-exporting LDCs
NICs
Other LDCs:
Western Hemisphere
Asia
Africa and Middle East
? US exports of services over the past decade have
been fairly buoyant for Asia and Africa, Western
Europe, and Latin America-but remained at
low levels for Japan and Canada.
? Perhaps most striking in terms of what other
countries have at stake from liberalization of
services trade, US imports of services from Asia,
Africa, and especially Latin America in the past
10 years have expanded at a faster pace than US
service exports to those areas.
Only a decade ago, the United States dominated
the international market for services, holding a
larger market share than any other country in core
Secret
11 January 1985
services,' as well as in services as a whole, which
also includes the low-tech but high-volume catego-
ries of shipping, transportation, and travel receipts.
During the 10 years since 1973, the US share of the
global market for core services was slashed nearly
in half. The principal beneficiaries of this shift in
market share appear to have been France and the
NICs-although some of the apparent expansion in
French service exports was due to changes in the
way France reported its figures to the IMF. In
addition to the United States, Britain and Italy also
'Core services include banking, insurance, communications, busi-
ness services, advertising, accounting, legal services, brokerage,
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Global Market Shares in Core Servicesa,
1973 and 1983
NICsb 5.8
I France 9.4
a Core services include fees, royalties, and rental payments for use of intan-
gible assets and for provision of management, professional, and technical
services, and payments for other private services including banking, insur-
ance, communications, business service, advertising, accounting, legal
services, brokerage, management, repair, construction, and engineering.
Receipts for services measured in special drawing rights (SDRs).
b NICs (newly industrializing countries) are Brazil, Mexico, South Korea,
Taiwan, Hong Kong, and Singapore.
lost market share, while gains were registered by
the developing countries other than the NICs.
Much of the dynamism of the core services can be
linked directly to the strong US position in high-
technology and knowledge-intensive industries, par-
ticularly in the communications and information-
services fields, but also in finance, construction,
and engineering. In addition, many overseas serv-
ices transactions in areas such as banking, insur-
ance, accounting, and advertising serve to facilitate
US exports of manufactured goods, and thus can be
Changing Global Market Shares
in Core Services
West Germany .
9.0
9.1
Italy
9.1
4.9
United Kingdom
10.1
8.2
Other EC-10
14.5
8.8
Other industrialized
15.6
11.5
NICs
5.8
14.0
Oil-exporting LDCs
1.3
5.6
Other LDCs
6.7
12.0
a significant competitive factor for US industries.
Increased protectionism in international services
trade, or even perpetuation of the status quo, could
worsen the US balance of payments and have a
negative impact for US exports of high-technology
products.' 0
At the same time as the US economy is becoming
increasingly service oriented (49 percent of GNP
was attributable to the services sector in 1982,
compared with 33 percent in 1952), the US interna-
tional market share in core services is being rapidly
eroded. While US efforts to engage the world
trading community in addressing these issues have
been resisted by many LDCs in the GATT, it is
precisely the fastest growing among the developing
countries (the NICs) that have benefited the most
from the US loss of market share.
The importance that different countries might at-
tach to negotiations on services should be related to
their dependence on services earnings reflected in.
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Growth in Exports and Imports of Core Services, 1974-83
LJ Exports
O Imports
United States
Japan
France
West Germany
Italy
United Kingdom
NICs
Western Hemisphere
LDCs
African and Middle
Eastern LDCs
their ratios of service receipts to total exports of
goods and services. Contrary to what might be
expected, the industrialized countries and the
LDCs appear nearly equal in their relative depen-
dence on core services receipts.
concern-is evidently unfounded. If anything, sev-
eral other countries may have more at stake than
the United States in liberalizing international ser-
vices trade. To what extent these patterns of appar-
ent commercial interest can be translated into
negotiating opportunities remains very much an
open question, however, in light of experience in the
By this measure the United States is less dependent
on its services exports than the NICs, the non-oil-
exporting LDCs, or any other industrialized coun-
tries except West Germany or Japan. Notwith-
standing the imprecision of the data, the prevailing
view of services negotiations-as an exclusively US
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11 January 1985
last round of MTNs.
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Receipts as a Share of Payments for
Core Services, 1983
Percent
Unites States
299
Japan
48
France
139
West Germany
81
Italy
113
United Kingdom
235
NICs
119
South Korea
188
Singapore
259
Brazil
39
Taiwan and
Hong Kong
118
Global Patterns of Competition in Services
The United States appears for the moment to be in
a stronger position in international trade in core
services-measured by its trade surplus in this
area-than any other industrialized country. The
United Kingdom, France, and Italy also have sur-
pluses in this segment of services trade, while West
Germany. and Japan registered deficits.
Among LDCs, the oil-exporting countries register
deficits in international services transactions, as
would be expected, while the non-oil-exporting
LDCs as a group are nearly breaking even in
international services trade. This seems to refute
the common supposition that all LDCs are bound
to be substantially in deficit in this sector and that
only the United States (and possibly a few other
industrialized countries) stands to gain from negoti-
ations to apply GATT rules to trade in services.
United States: Trade in Core
Services, 1973-83
Million US $
Average Annual
Growth
Western Europe
395
1,270
12.4
Canada '
251
644
9.9
Japan
84
246
11.3
Latin America
359
1,172
12.6
Asia and Africa
314
1,767
18.9
Western Europe
396
886
8.4
Canada
247
352
3.6
Japan
40
114
11.0
Latin America
263
1,690
20.4
Asia and Africa
59
420
21.7
The most striking conclusion to emerge from the
data is the apparent competitiveness of the NICs in
international services trade. Recorded surpluses in
services trade, however, might also be due to
protection of domestic service markets rather than
to any inherent strength of service exports.
To assess competitiveness in international services
trade, more detailed data will need to be developed
on such key indicators as import penetration and
relative prices. As a proxy for these measures, the
relative growth of countries' exports and imports of
core services suggest that Japan, France, West
Germany, and some of the LDCs are experiencing
more favorable trends than the United States, with
growth in their service exports exceeding that of
service imports. Moreover, core services receipts of
these countries and the NICs have grown at a
faster pace than their merchandise exports
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In terms of-negotiating dynamics within the
GATT, the wide differences in apparent competi-
tiveness among the NICs raise serious problems.
South Korea and Singapore, both strong perform-
ers in this comparison, have not been active partici-
pants in multilateral discussions within GATT,
preferring to focus on bilateral trade discussions.
Taiwan, Mexico, and Hong Kong are not members
of the GATT. Brazil, which has actively opposed
the US initiative on services negotiations in the .
GATT, appears to be conspicuously noncompetitive
among the NICs in core services. The opposition of
Brazil and other noncompetitive LDC activists
such as India could perpetuate a north-south stale-
mate over the issue of international services negoti-
ations-even though such an outcome would appar-
ently be contrary to the interests of many LDC
members of the GATT.
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West Germany:
Taking a Lead
on the Acid Rain Issue
Chancellor Kohl, host this May for the annual Big
Seven economic summit, intends to make environ-
mental protection one of his main themes. Rapidly
worsening damage to West German forests from
acid rain ' has pushed Bonn into an unusual leader-
ship role in Western Europe on an international
issue. West German actions on this issue could
affect Bonn's relations with West and East Europe-
an neighbors-major sources of pollution-and
with the European Community. Domestically, the
acid rain issue has united the nation on the need for
urgent action, although controversy has flared over
the exact content of legislation. The issue also has
been a key factor boosting the fortunes of the
environmentalist Green Party, putting it into posi-
tion possibly to replace the Free Democrats as the
nation's third-largest party.
One-half of West Germany's forests are damaged,
primarily because of air pollution, according to the
Ministry of Agriculture's 1984 report. By contrast,
the 1983 report found 34 percent damaged and the
1982 report only 8 percent-although part of the
increase probably is due to improved survey tech-
niques. The devastation is most acute in the Black
Forest area in the southwestern state of Baden-
Wuerttemberg, where 66 percent of the forested
land is affected. Bavaria-the southernmost
state-is almost as badly hit. These two states
contain just over half of West Germany's forests.
The damage to trees, soil, fish, and buildings
attributed to acid rain is estimated by West Ger-
man scientists to approach $1.5 billion per year.
' Acid rain forms when sulfur dioxide and nitrogen oxides from
smokestacks and vehicle exhaust combine with atmospheric mois-
The forestry industry, in particular, estimates that
its annual costs, including both smaller harvests
and higher management expenses, total approxi-
mately $350 million. The cost is likely to rise
considerably in the coming years as much higher
percentages of damaged trees, whose wood is unus-
able or of a lower grade, are felled commercially.
The tourism industry expects to be hurt as well.
The increase in this damage is staggering to the
West Germans, who have a strong emotional at-
tachment to their forests. While the official figures
may exaggerate the growth of the problem some-
what, the latest Ministry report has produced pub-
lic outrage and a sense of urgency that cuts across
all political lines. Chancellor Kohl, who calls the
problem one of inestimable importance, faces al-
most no domestic disagreement in laying the lion's
share of the blame on acid rain.
Bonn, under pressure from a growing environmen-
talist movement, is attacking acid rain with strict
antipollution regulations, stepped-up R&D, and an
ongoing effort to promote international environ-
mental cooperation. In 1983, the government man-
dated emission standards for large power plants
and factories that will require installation of
"scrubbers" at an industrywide cost of well over $3
billion; plants and factories unable to meet the
standards will have to shut down. Legislation regu-
lating smaller plants is also being drafted. The goal
is to reduce sulfur dioxide emissions one-third by
1988 and one-half by 1990. Meanwhile, strict
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limits for more than 40 other pollutants are already
in force.
After months of squabbling, the Cabinet.last Sep-
tember ruled that larger. cars must meet emission
standards virtually identical to those in effect in the
United States by 1988; all. new cars must be in
compliance a year later. To achieve the:reduction.
in emissions, catalytic converters and lead-free
gasoline will be needed. Beginning this July, drivers
who voluntarily .change to low-emission vehicles
will be eligible for tax breaks.ranging from $350 to
$1,000. A further financial inducement as of July is
a 2-pfennig-per-liter (less than 1 US cent) reduction
of the tax on lead-free gas and a 2-pfennig-per-liter
increase on leaded gas. The tax change will repre-
sent 1 to 2 percent of the pump. price.
Despite the far-reaching domestic impact and in-
ternational implications of the acid rain legisla-
tion-West Germany is well ahead of other West
European countries on the issue-little serious dis-
sent has emerged. In sharp contrast, the idea of
imposing speed limits. on West Germany's auto-
bahns has set off a powder keg of controversy. The
famous autobahns are a last frontier of unlimited
high-speed driving, and tales are legendary of
Porsches, Mercedes, and BMWs with flashing
headlights bearing down on unwary foreigners in
the passing lanes. Many West Germans regard
driving fast as a right, which they fervently defend.
A government-recommended limit of 120 kilome-
ters (75 miles) per hour has had little impact.
Secondary roads do have speed limits, but past
attempts to introduce them on the autobahns-
chiefly on safety grounds-have fallen flat.
The fuse of the stormy political debate was lit when
the Federal Environment Office found that a 100-
kilometer-per-hour (62-mile) speed limit would sub-
stantially reduce nitrogen oxide auto emissions, a
key factor in acid rain. Chancellor Kohl and Eco-
nomics Minister Bangemann both quickly came out
against speed limits, the latter warning that cutting
speeds could mean cutting jobs, since. West Germa-
ny's automobile industry is geared to turn out high-
performance cars. Just as quickly, however, Agri-
culture Minister Kiechle, who is, from Bavaria,
broke ranks and spoke out in favor of speed limits.
Most West German politicians shun the sensitive
topic, and the government's vacillation reflects
popular uncertainty. A poll by a major polling
institute disclosed that 55 percent of West Ger-
mans would accept speed limits if it would help
save the forests, but a later poll by West Germany's
most popular newspaper found a majority against
speed limits.
West Germany's powerful automobile industry-has
mounted a major lobbying effort against speed
limits. Vehicles account for 17 percent of total
West German exports, and Volkswagen and Daim-
ler Benz are, respectively, the nation's second- and
third-largest employers. The industry accepted cat-
alytic converters after the government agreed to
postpone their introduction from the originally
proposed 1986 date, but automobile manufacturers
argue that the best way to control pollution is for
people to buy.new cars that pollute less than older
models. Moreover, industry officials claim that the
reputation of West German cars for speed and
power is exemplified by the fact that Germans
drive as fast as they want. The auto. industry
complains about a fall in new orders due to uncer-
tainty about the effect of the various new measures,
and. company officials point out that the cleaner
cars will cost more, use 5 to 10 percent more
gasoline, and lose as much as .15 percent in power
and performance. Environmentalists counter that
the best foreign customers, like those in the United
States, have not lost their taste for German cars,
despite rigorous speed limits.
Bonn's official line now is that the evidence on the
benefits of speed limits is not conclusive and re-
quires more study. The state of Hesse, however,
where the environmentalist Green Party-has played
an influential role, is proceeding with the introduc-
tion of speed limits on three autobahn stretches on
a test basis.
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The "Greening" of West Germany
The decline of West Germany's forests has been
matched by the equally dramatic rise of the Green
Party-an uncompromising defender of the envi-
ronment. Founded just over four years ago, Green
support has grown to as much as 10 percent of the
electorate. The party won over 5 percent of the
seats in the Bundestag in the last federal election,
and it is also represented in six of 1.1 state parlia-
ments. In some local governments, the Greens are
the second-largest party. With three state elections
this spring, the Greens stand an excellent chance of
expanding their influence even further. If present
trends continue, they could overtake the Free Dem-
ocrats and emerge from the 1987 national election
as West Germany's third-largest party.
Along with the opposition Social Democrats, the
Greens brand Bonn's environmental actions as "too
little, too late." The Greens demand speed limits
now, and both parties fought the. three-year. delay
in the introduction of catalytic converters. The
Social Democrats also are pushing a tax on elec-
tricity; with the proceeds to be used for pollution
Clearing the Air, Internationally
Fifty percent of the 7 million metric tons of acidic
materials falling in West Germany annually comes
from foreign sources, particularly France, Britain,
and East Germany, according to government statis-
tics. International-cooperation on acid rain, there-
fore, is a priority for Bonn, and the Kohl govern-
ment has found itself in the unusual position of
leading Western Europe on an international issue.
Kohl, host this May for the annual Big Seven .
economic summit, intends to make environmental
protection one of his main themes. He has also
repeatedly stressed he wishes to discuss environ-
mental issues with East German leader Honecker
when the two eventually meet.
Bonn views the United States as the leader on
domestic environmental policy, but Kohl may urge
the United States to be more forthcoming at future
international environmental conferences. On the
Secret
11 January 1985
other hand, the Soviets and East Europeans
are
among the world's major polluters and are doing
virtually nothing about it. Foreign Minister
Genscher last month in Prague did win some
cooperation on cross-border air pollution with an
agreement that West German aid would be used to
clean up a Czechoslovak power station.
ment any time soon is highly improbable.
Bonn's action on auto emission standards, well
ahead of its West European neighbors, has been a
source of consternation within the EC. Last month,
however, the EC finally agreed to compulsory
introduction of lead-free gasoline no later than
1989, although the Community's target date for
auto.emission controls remains 1995. West German
Interior Minister Zimmermann, whose responsibil-
ities include the environment, believes that Bonn
has now achieved momentum in Brussels and that
the EC soon will adopt Bonn's 1989 date for
emission controls as well. If the EC fails to do so,
Bonn will go it alone, invoking the article in the
Treaty of Rome that allows for individual regula-
tions in case of danger to' health or environment.
The EC also is considering stricter German-style
emission standards for large factories, but agree-'
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Argentina's Grain
Outlook: Challenges
for Alfonsin '
The year-old government of- President Raul Alfon-
sin is counting on a major expansion in Argentina's
grain exports to help service its $46 billion debt.
Buenos Aires's` new grain program is designed -to
generate an additional $2-3 billion in annual earn-
ings by the-early 1990s. "The success will depend to
a large extent on-Argentina's relationship with the
SovietUnion, its largest grain buyer and a key
bidder on a necessary grain port expansion project.
From a US perspective, Argentine success in nearly
doubling its current grain exports would be a two-
edged sword. Attainment of this goal is necessary
for setting the Argentine economy back on a long-
term growth path, but it would also mean keener
competition for US grain in markets likely to be
glutted for the remainder of the decade. If Buenos
Aires undercuts US-prices-as it has promised- ,.
the United States will lose sales, particularly in
We believe that the goal of the program-produc-
tion of 60 million metric tons by the early 1990s-
is technically feasible. Consistent annual produc-
tion of between 50 and 55 million tons appears
more realistic, however, given domestic infrastruc-
ture constraints and world market demand pros-
pects. Even this outcome would mean a significant
advance from current production and export levels.
To increase grain exports, Buenos Aires will have
to implement policies to expand planted area and
improve yields; and make sizable investments to
modernize and expand grain storage, transporta-
tion, and port facilities: The Alfonsin government is
already pursuing measures to meet these objectives:
? According to Embassy reporting, the new govern-.
ment has reactivated a World Bank loan for $87-
million to finance basic infrastructure improve-
ments, including grain storage facilities.
? Several port improvement projects also have been
under consideration. The focus has been on an-
integrated modernization scheme for the port of
Bahia Blanca-the primary *export terminal for
wheat.
Moscow would very much like to win the multi-
million-dollar Bahia Blanca- contract but has lost
ground recently to Western firms also bidding on
the project. Buenos Aires probably will seriously
consider Moscow's -bid, however, -because Soviet-
grain purchases from Argentina have generated
$1.9 billion annually during 1980-83, about half of
Argentina's total grain exports in that period.
Recent slowdowns-in Soviet grain purchases may
be an attempt by Moscow to exert leverage regard-
ing the Bahia Blanca contract and to pressure the
regime to improve its-balance of trade with the
Soviet Union. The USSR-Argentina Long-Term
Grain Agreement-guaranteeing annual grain
sales-of 4.5 million tons to -the Soviet Union-
comes up for renewal this year,-and we expect
Moscow to be a hard bargainer. Argentina -can ill
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11 January 1985
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Argentina: A Major Force in World Grain Trade
Argentina is a major factor in world grain trade in
spite of its relatively low grain yields and signifi-
cant infrastructure problems. According to the
most recent USDA estimates for the current sea-
son, Argentine wheat, corn, and sorghum exports
accounted for 6 percent, 10 percent, and 35 percent
of global trade in these commodities. Argentina's
presence in the world soybean market has risen
from virtually nothing in the early 1970s to its
current share of about 8 percent of global soybean
exports.
In the 1983/84 marketing year, (July/June) Argen-
tina exported a record 9.6 million tons of.wheat-
up 28 percent from the. previous year. The Soviet
Union, China; and.Iran were the dominant mar-
kets, taking 80 percent of the total; but sales to
smaller markets in Latin America, the Middle
East, North Africa, and Asia also showed consid-
erable growth. Corn.exports for 1983/84; (Oct/ Sep)
totaled 5.9 million tons, with Argentina ranking as
the world's second-largest supplier after the United
States. Major buyers were the USSR, Iran, and
several countries in Western Europe and Latin
America. In sorghum,. Argentina rivals the United
States as the leading supplier to the world market.
Of the 4.8 million tons. exported by Argentina in
1983/8.4 (Oct/Sep), Japan and the Soviet
Union were the major markets, taking about 80
percent of total exports. Likewise, Argentina's
soybean exports are second only to the United
States, with major sales going to Western Europe,
the USSR, and Asian markets.
According to a former president of the National
Grain Board, Argentina's main market goal in the:
1980s is to recover and increase its share of the
Latin American grain market. Argentina has large-
ly ignored this.area in recent years while trying to
build premium priced sales to the Soviet Union-
in the wake of the US grain embargo. Another goal
is to develop markets for its grains in the Pacific
region, which Argentine officials see as the main
food growth market in the 1990s. Aside from .
established markets in Japan for sorghum, and the
recently expired long-term grain agreement with.
China, the Alfonsin regime has yet to make major
inroads in this market-especially among the new-
ly industrializing countries. In addition to. recap-.
turing Latin American grain trade and developing .
new nontraditional markets, the Alfonsin regime
has often stated its goal of reducing the high.level
of dependence on Soviet grain purchases.
afford to lose steady grain sales to the USSR if it is
to meet its ambitious new grain export goals.
The Payoff-Growth and Earnings .
If Buenos. Aires's grain program is successful, it.
will improve Argentina's prospects for economic
recovery and, payment of its foreign debt obliga-
tions. This-would improve the financial situation of.
US banks with large exposure in Argentina and
provide an opportunity for expansion in US-manu-
factured exports to Argentina. On the other hand,
increased grain exports by Argentina would add
pressure to a world grain market already marked
Secret
11 January 1985
by fierce competition, soft prices, and declining US
sales. US-Argentine. competition would be particu-
larly intense in the 20-million-.ton-per-year Latin
American grain market, a major .US market al-
ready being targeted by other exporters such as
Australia and Canada.
We believe Argentina has no good alternative to
grains for increasing export earnings by as much as
$2-3 billion.. Failure on the grain front might
provide the United States some benefit through
reduced competition in Latin American grain mar-
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Secret
Argentina: Grain and Oilseed Exports
Total Agricultural Grain Oilseed Grain and Oilseed Exports
and Products As a Share of:
Total
Exports
Agricultural
Exports
1980
8.0
6.0
1.6
1.4
38
51
1981
9.1
6.8
2.8
1.3
45
60
1982
7.6
5.4
1.8
1.2
40
56
1983
7.8
6.0
2.8
1.3
52
67
1984 a
8.2
6.3
2.3
1.4
45
58
kets. The resulting economic and political uncer-
tainty, however, would undermine the progress
Alfonsin has made toward establishing a democrat-
ic system.
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Israel:
Facing Revenue
Shortfalls
Since Israel's unity government assumed power. in
September, a continuous decline in revenue has
undercut efforts to trim the growing budget defi-
cit.' Because the Bank of Israel is legally required
to finance budget deficits-by running the printing
press if necessary-the result has been a sharp
increase in the money supply and greater inflation-
ary pressures. Budget cuts announced to date have
not been widely implemented, but reduced spend-
ing will eventually slow economic growth and fur-
ther erode government income. Pressures then will
probably, intensify for the government to address its
deep-seated revenue problems.
Recent Developments
Israel's budget deficit has grown sharply over the
past year. Incomplete data suggest the deficit may
have reached its highest level in several years
during the latter half of 1984.
Excessive government spending remains the core of
the problem. In addition to political concerns to
maintain living standards and low unemployment,
recent governments have found their ability to cut
spending eroded by mounting debt service obliga-
tions, which now account for nearly 40 percent of
the budget. Expenditures, however, are not the sole
cause of the recent growth in the deficit. In real
terms,. government outlays during the first half of
1984 dropped 9 percent below the levels recorded a
year earlier, but government income over the same
period fell by 19 percent.
' The domestic deficit is not clearly defined in Israeli statistics. In
this article, the deficit refers to the difference between revenues
(taxes and other government earnings) and ordinary government
Tax Revenues To Blame
The heart of the recent slump in revenues is a drop
in tax collections. Tax revenues-which account for
about 90 percent of total government income-
were down 15 percent in real terms during the first
three quarters of 1984, compared to the same
period in 1983:
? Some of the reduction resulted from the expira-
tion of the "compulsory loan" tax imposed in
mid-1982 to help finance the invasion of Leba-
non. This nine-month levy was equivalent to
about 4 percent of personal income.
? Direct taxes-which consist of taxes on all types
of income-have been running well below 1982
levels since the last quarter of 1983. These taxes
generate about 55 percent of total tax income.
? Customs revenues from civilian imports also are
down, and they usually amount to about one-fifth
of tax revenues. Tax collection rose briefly during
the third quarter of 1984 as consumers rushed to
import items in anticipation of restrictive mea-
sures likely to be imposed by the new govern-
ment. These revenues are estimated to have tailed
off again in the last quarter, largely because of a
ban of some luxury imports.
? Revenues from indirect levies on property and
consumer purchases, as well as value-added tax
revenues, also have fallen over the past year.
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Israel: Government Expenditures and Revenues a
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Balance
3,985,
-6,412
-2,545
-424
-236
-1,528
-5,883
-6,171
-3,587
-5,439
Expenditures
30,840
34,541
33,213
32,245
39,339
34,685
39,296
36,273 _
33,868
33,740
Revenues
34,825
28,129
30,668
31,821
39,103
33,157
33,413
30,102 .
30,281 .
28,301
a Monthly averages.
These declines stem-in part from the economic
slowdown. GNP growth was a modest 1.5 percent
in 1983 and stagnated last year. Consumers finally
bore some of the burden, with real wages falling 4
percent in 1984, consumption dropping roughly 5
percent, and unemployment climbing to nearly 6
percent. Imports. of consumer goods and services
fell, with noticeable declines for some highly taxed
durables.
Israeli attempts to offset the revenue shortfalls with
various revenue-enhancing measures proved inef-
fective. In March 1984, Prime Minister Shamir's
Likud government doubled the travel tax, imposed
new taxes on some child allowances, .and boosted
the marginal tax rate limit to 66 percent.. In
September 1984, the government removed some
tax exemptions on pensions and allowances, and
levied a one-time fee on cars, boats, machinery, and
buildings. Efforts to implement an 8- to 10-percent
surtax on October incomes and to reintroduce
compulsory loans foundered because of opposition
from the Histadrut, the large labor organization.
aged and admit doing a less-than-adequate job.
Their work has been further complicated by the
"Tax Law Under Conditions of High Inflation"
introduced in 1983 to regulate payments from -
companies and self-employed workers. This legisla-
tion is extremely complex and has been constantly
amended, contributing to declining productivity
-
within the tax bureaucracy. Tax workers are as
strike prone as other government workers, adding
to delays in tax collection.
that is required by law.
The cumbersome and onerous tax system encour-
ages tax evasion. The high marginal rates are a
tremendous disincentive to additional work hours.
Tax accountants have had a field day in searching
for loopholes contained in the "Tax Law Under
Conditions of High Inflation." Not only did this
law allow for numerous justifiable tax reductions,
but its complexity also resulted in delayed pay-
ments. According to one estimate, 40.percent of
recent revenue shortfalls were the consequence of
this one:piece of legislation. Outright cheating also
is acknowledged to be rampant, with taxpayers
arguing that they simply cannot afford to pay all
Cumbersome Tax System
The current tax system is extremely complex, with
rates ranking among the highest in the world.
Taxes as a share of GNP rose from 46 percent in
1981 to 51 percent in 1983. On the administrative
side, tax workers are overburdened and misman-
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~ecrei
Israel: Tax Revenues, 1982-84a
Indirect taxes
on domestic
production
source more difficult to tap in 1984. Bond redemp-
tions increased markedly because a large number
of 10-year-old issues came due. In addition, public
confidence in the economy and the government has
been waning, causing new sales to lag and rollovers
to drop. For several months last spring, bond
redemptions outpaced new issues, fueled by rumors
that after the July national election the government
would tamper with the linkage system that protects
bonds from inflation. Israeli officials have ex-
pressed concern that the pace of redemptions could
pick up again if consumers choose to "buy now" in
anticipation of the end of the price freeze.
The government is attempting to beef up revenues
by tightening up tax collection. A two-week "tax
raid" in October, for example, resulted in addition-
al assessments of $4.5 million on 981 audited
returns.
The Israeli Government has little recourse to other
sources of income. Incomes from government prop-
erty and services annually average less than 10
percent of total earnings, and these, too, have fallen
as a result of austerity. For the first half of 1984,
monthly earnings from this source were down
nearly 30 percent in real terms from the same
period in 1983.
The Israelis have sought to finance the domestic
deficit through bond sales. In recent years, such
sales have covered roughly two-thirds of the gap.
Yet the government found this traditional revenue
By law and practice, the Bank of Israel is required
to cover the remaining gap. In November alone, the
Bank of Israel reportedly pumped 130 billion shek-
els (about $225 million) into the economy-primar-
ily to help cover rising subsidies resulting from the
price freeze-compared to a 30-billion-shekel in-
jection the previous month. The injection of money
slowed to just over 100 billion shekels in Decem-
ber-in part because of government efforts to delay
some payments and credits-but is expected to pick
up again in January.
The Israeli Government has yet to offer an econom-
ic program to replace the current wage-price
freeze, which is slated to expire on 5 February.
Finance Minister Modai came under attack by
some other ministries at a late December Cabinet
meeting for failing to come up with a new package.
Modai argued that little new could be expected if
old programs, particularly budget cuts already
approved, could not be enforced.
There are some signs that the government is consid-
ering remedies for the revenue side of the deficit
problem. Modai has stated publicly that in the next
package the government will collect the taxes re-
quired to balance the budget. Moreover, a special
committee appointed by former Finance Minister
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Cohen-Orgad to study the tax law is scheduled to
issue its report by the end of February. Some of the
preliminary recommendations of the committee
include abolishing the "Tax Law Under Conditions
of High Inflation," linking tax payments to a stable
benchmark rather than the depreciating shekel,
and broadening the tax base to reduce the burden
on individuals. Political realities will make such
changes hard to implement, however, and major
changes are unlikely in the near term.
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secret
India: Bhopal's
Limited Backlash
The unprecedented chemical plant disaster in Bho-
pal, India, which claimed over 2,500 lives and
injured well over 70,000, is not likely to slow
India's industrial modernization or its efforts to
obtain foreign technology. Although the state and
federal governments controlled by Rajiv Gandhi's
Congress (I) Party share the blame for the catastro-
phe, it had no effect on the election. Soviet at-
tempts to blame US policies are not likely to be
well received in New Delhi, which is trying to
attract US technology.
Black Eye for India
Although flaws in plant design cannot be ruled out,
press and US Embassy reports suggest that poor
supervision and training by Indian management as
well as lax-even nonexistent-inspection by local
officials were largely responsible. The US Consul-
ate in Bombay reports that both the Indian busi-
ness community and expatriate supervisors believe
that Bhopal was the result of an endemic aversion
to maintenance and safety procedures by Indian
management. The Consulate notes, however, that
multinational corporations often take only a curso-
ry interest in the management of their Indian
subsidiaries and often oppose added expenditure on
safety equipment or needed inspections.
Foreign perceptions of India's improving business
climate have probably suffered' a temporary set-
back in the wake of Bhopal. In our view, the
extensive international press coverage, the fear of
an extended legal battle, and the bizarre arrest and
release of the Union Carbide corporate chairman
are likely to revive stereotypes of Indian bureau-
cratic bungling and antimultinational attitudes.
Impact on Foreign Commercial Ties
According to US Embassy reports, New Delhi
continues to indicate a strong interest in US tech-
nology and selected multinational participation in
the economy. The absence of government public
comment, other than Rajiv Gandhi's promise to
tighten safety regulations and support for suitable
compensation, suggests an effort to minimize con- 25X1
troversy and reassure current or potential foreign
collaborators.
In our view, New Delhi will impose tighter safety
and environmental controls on both Indian and
foreign companies as a result of Bhopal. If rigor-
ously enforced, these controls would raise produc-
tion costs and make some industrial operations less
profitable. Given the lack of a deep-rooted safety
consciousness in India, however, we doubt that new
rules alone will be effective. We expect foreign
firms involved with highly toxic substances will be
reluctant to make new investments or transfers of
technology unless they are guaranteed limited li-
ability and more control of safety or production
processes.
Because most US technology desired by India is in
the "clean" fields of computers and electronics, we
do not expect US technology transfer in India to
suffer. Unlike Union Carbide, which has a majority
interest in the agrochemical plant, most new US
tieups are joint ventures with Indian firms, requir-
ing only the transfer of technology and little or no
equity investment. A Union Carbide decision to
leave India probably would be viewed by the
international business community as an isolated
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policies.
In our view,-India's recent agricultural success,
which, in part, is due to the increased use of
pesticides, is not in jeopardy. With over 40 major
agrochemical firms in India, Union Carbide ac-
counted for only. 14 percent of the large and
growing pesticide market. Moreover, press ac-
counts claim that the Union Carbide plant was
losing money and was in production for only part of
the year. Supplies currently are plentiful, and the
permanent closure of the plant will have little effect
on agricultural production..
Despite opposition efforts to blame the ruling party
for negligence, indifference, and cowardice,
Gandhi's candidates swept to a landslide. Even in
Madhya Pradesh state-where Bhopal is the capi-.
tal-the Congress (I) Party won nearly all parlia-
mentary seats despite reports that the state's Chief
Minister and a Nehru family friend fled in panic at
the height,of the disaster.
We expect India will attempt to resolve the legal
tangle quickly and quietly to avoid further damage
to its image:and speed up compensation to the
victims. The US Embassy reports that, when.the
Union Carbide president and Foreign Secretary
Rasgotra met in December, alternate compensation
packages, administered by state and federal agen-
cies, were discussed. Press reports indicate that one
of the first moves of the new Gandhi administration
will be to organize a.legal committee to help
represent the victims and pave the way for a
possible out-of-court settlement.
According to. US officials in India, anti-US. protests
have been small, orderly, and confined mainly to
requests for adequate compensation. Indian media
criticism has focused on the activities of US law-
yers and on state government officials whose over-
sight and cozy relationship with the US multina-
tional, the media claims, helped lead to the tragedy.
In our view, public debate is likely to continue on
Secret
11 January 1985
the relationship between the government, multina-
tionals, and domestic industry. even after the furor
over Bhopal dies down.
Seeing Bhopal as a propaganda windfall, Moscow
was quick to blame Washington and US multina-
tionals for elevating profits over people. The USSR
has also claimed that Western powers have exploit-
ed the disaster as a chemical warfare study at the
expense of needed medical care. We believe the
heavyhanded Soviet attempts have not been well
received in New Delhi, which shares the blame and
hopes to attract new US and foreign technology.
Implications for Multinationals and Developing
Countries
Bhopal will instill a keener awareness of the envi-
ronmental dangers of rapid industrialization, which
were often neglected by India and other countries
in the name of development. We expect developing
countries will institute increased safety and envi-
ronmental controls. Although these changes will
probably lead. to higher, short-run costs .for chemical
industries, we do not foresee a major reduction in
the transfer of needed technology or expertise,
because both the multinationals and developing
countries require these processes to sustain their
economic growth. To minimize risk, however, some
firms are, likely to process hazardous chemicals in
the United States or. other Western countries and'
then export less dangerous products.to subsidiaries
in the developing countries.
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Troubled LDC Debtors: Consumer Price World Metal Prices: Still a Damper
and Money Supply Growths on LDC Earnings, 1972-84
100 -V 20 10
i I I_,_uJ ~--LL I I J I ulw ui in ni udui hn6______ ______ udm uiLn uiLiJm
I i I i Imlwwinuinimluilmlmlwlwlm luiluimlwwuilninilnilwluilwlui
Tin
US $ per pound
Aluminuma
US cents per pound
Zinc
US cents per pound
Metals
Index: 1975=100
111 111 1111111 1111111 uil____6____ ____ ___
0 1979 80 50 1972 75 80
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