(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707470001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: January 12, 2017
• Document Release Date: July 14, 2010
• Sequence Number: 1
• Publication Date: April 5, 1985
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
DI /EEW 85-014
5 April 1985
Copy L Q 7
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Secret
25X
International
Economic & Energy
Weekly
25X1
5 April 1985
iii Synopsis
1 Perspective-The OPEC Challenge in Product Exports0
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2
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3 Summit Issues: Japan Begins To Deliver on Market Opening 0
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7 Summit Issues: Structural Adjustment in the Big Six 0 25
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~~
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11 Summit Issues: Western Europe Copes With the Do11ar0 2
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15 Argentina: Coming Labor Confrontation ~~
25X1
lgeria: The Economy on the Eve of Bendjedid's Visit
25X1
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directed to Directorate ojlntelligence,
Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
Secret
S Aprit 1985
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Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective-The OPEC Challenge in Product Exports
In our view, expanded product exports from OPEC pose little threat to the
energy security of oil-importing countries in the near term.
3 Summit Issues: Japan Begins To Deliver on Market Opening
Prospects for Japanese import liberalization have brightened somewhat as fear
of possible US retaliation spread during March from a few ministries to the
Liberal Democratic Party (LDP) leadership. Nonetheless, the near-term
impact on trade balances probably will be small.
7 Summit Issues: Structural Adjustment in the Big Six
Since last year's London Summit, Big Six governments have implemented a
variety of measures aimed at promoting structural adjustment in their
economies. Prospects for industrial restructuring should improve over the next
few years, but governments will remain essentially conservative in their
approach.
11 Summit Issues: Western Europe Copes With the Dollar
West European concern that the strong dollar is holding back the region's
economic recovery is ill founded. We believe the appreciation of the dollar
during 1980-84 helped the West European economies.
15 Argentina: Coming Labor Confrontation
Falling real wages and rising unemployment threaten to bring labor into
greater conflict with the Argentine Government.
19 Algeria: The Economy on the Eve of Bendjedid's Visit
Algeria-with the strongest economy in North Africa-has maintained a
strong international credit position through prudent financial management
that should provide sufficient leeway to complete the current development
plan.
iii Secret
D! IEEW 85-0/4
S-April /985
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Secret
Perspective
Weekly
International
Economic &_ Energy .
5 April 1985
The OPEC Challenge in Product Exports) 25X1
Several OECD countries-as a result of a shift in refining capacity from major
consuming countries to oil exporters-have expressed concern about the
energy-security implications of growing product exports from OPEC and the
organization's increased ownership of refineries and distribution networks in
developed countries. The weak oil market and growing competition from
OPEC suppliers have forced the closure-of some 8 million b/d in non-
communist refining capacity since 1980. By 1990 we believe an additional 7
million b/d of capacity could be mothballed as a result of continued weak oil
demand and planned expansion in OPEC refining capacity. Meanwhile, OPEC
product exports could double.) 25X1
In our view, expanded product exports from OPEC pose little threat to the en-
ergy security of oil-importing countries in the near term. OPEC's main threat
to energy security remains its ability to control the production of oil. We
expect non-Communist refining capacity outside OPEC to remain sufficiently
flexible to meet demand requirements through 1990:
? _ As long as a country is dependent on imports, it is largely irrelevant whether
the oil is in the form of crude or product. If refinery closures impair a
country's ability to process domestic production and stocks, however, product
imports would increase and heighten vulnerability to a disruption.
? OPEC ownership of refineries and distribution networks in developed
countries poses little threat because these facilities could be commandeered
in a crisis and some oil exporters might have a vested interest in their
continued operation.~~ 25X1
effects on several oil producers that could lead to a disruption in oil supplies
Rising product exports, however, could affect prices. Because prices for
product exports are not controlled by OPEC, members will be tempted to
discount prices in a weak market. Such action would undermine the official
price structure for crude oil and could result in a collapse in oil prices.
Although a price decline would present consuming countries with potential
economic gains, sharply reduced revenues would have potentially destabilizing
The impact of rising OPEC refining capacity and product exports on non-
OPEC refiners will depend in large part on trade policies adopted by importing
countries to protect their refining industries. Pressures for restrictions on oil
product imports are mounting in several developed countries, and some
1 Secret
DI IEEW 85-014
S April /98S
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refiners claim that OPEC's access to low-cost crude supplies will lead to unfair
competition. In our judgment, additional OPEC product exports can be readily
absorbed if distributed among the various consuming areas. Japan, however,
has restrictions on imports that could force more products into other regions,
perhaps encouraging some West European nations to enforce or strengthen
existing restrictions. If Western Europe and Japan opt for protectionist
measures, pressure on the US refining industry will intensify. We believe
policies to restrict OPEC products would ultimately be ineffective because of
-OPEC's ability to control crude oil production and thus limit crude availabil-
ity.
Secret
5 Apri! 1985
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Secret
Summit Issues: Structural
Adjustment in the Big Six
Since last year's London Summit, Big Six govern-
ments have implemented a variety of measures
aimed at promoting structural adjustment in their
economies. Several countries have moved to free up
their capital markets, reduce .government owner-
ship of industry, and contain the power of national
labor unions. Serious labor market rigidities re-
main, however, and continue to retard the restruc-
turing process. Moreover, Big Six governments are
maintaining large subsidy programs for noncom-
petitive, traditional industries. Prospects for indus-
trial restructuring should improve over the next few
years, but governments will remain essentially con-
servative in their approach
Capital markets outside the United States and the
United Kingdom remain inefficient and highly
regulated. Governments have been especially reluc-
tant to expose their financial systems to inter-
25X6 national competition
Japan has moved over the last year to relax t e
rules on foreign and domestic lending. Paris is
easing a wide variety of credit controls to encour-
age more efficient capital allocation. West Ger-
many has promised afar-reaching liberalization of
its capital markets, although details have yet to be
published. In addition, Paris and Bonn have ended
withholding taxes on nonresident lenders to counter
a similar US move.
Privatization, the transfer of government enter-
prises to the private sector, is the announced goal of
several governments. Only the United Kingdom,
however, has followed through. Bonn's privatiza-
tion scheme has been postponed and scaled down,
and Italy's plans to sell some state-owned firms is
off to a slow start. Although Tokyo has privatized
the national telecommunications monopoly, the
move has been denounced by potential foreign
competitors who fear that new government regula-
tions will still deny them access to Japan's telecom-
munications market.
Labor mobility is not a problem in Japan, but West
European labor markets.are highly inflexible be-
cause of union power, high employer taxes, barriers
to firing, and generous unemployment benefits. The
Governments of France, Italy, and the United
Kingdom have compelled their powerful unions to
accept large-scale layoffs over the past year. These
victories, although encouraging, have yet to be
consolidated by new legislation that would allow
firms to more easily adapt their work forces to
changing market conditions. Wage bills in most Big
Six countries are bloated by high social security
taxes, and governments have been reluctant to
encourage new jobs by reducing such charges.
Industrial subsidies, which most Big Six govern-
ments view as their chief tools to promote industrial
restructuring, continue to be concentrated on de-
clining industries. Despite almost a decade of ad-
justment, Western Europe's problem sectors-
steel, shipbuilding, and textiles-remain dependent
on subsidization. Japan has long employed subsi-
dies and special tax breaks to target the develop-
ment of high-value-added industries. West Euro-
pean countries, however, are increasingly looking
toward subsidies to promote high-tech industries.
Italy has been providing low-cost loans for pur-
chases of advanced capital goods. West Germany
introduced last year special tax writeoffs for re-
search and development investment. Joint Euro-
pean projects, such as the EC's information tech-
nology research program-ESPRIT-or the
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D! IEEW 85-014
5 April 1985
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Country Programs
Japan does not stt/fer the economic diflrculties
facing other Big Six governments, and therefore
Tokyo sees no need to alter its restructuring
strategies. Economic growth last year was just
under 6 percent, inflation is under control, and
unemployment is only 2.7 percent. MITI's indus-
trial policy has two goals.? to promote "winners"by
encouraging investment in high-tech growth areas
and to ease the transfer of resources from de-
pressed industries. MITI has employed subsidies
and tax breaks to speed the application and diffu-
sion of technology in the microelectronics, robotics,
high-speed computing, and artificial intelligence
industries. At the same time, MITI has sponsored
capacity-reduction cartels for depressed industries
such as aluminum. Such cartels are controversial
because of their alleged impact in curbing im-
ports-a charge Tokyo flatly denies.
West Germany is offering increasing.financial assis-
tance to promote the startup of new business and to
stimulate private research and development. Tax
revisions in 1984 give relief to small- and medium-
sized .firms and provide tax breaks for R&D
investment. Bonn also is increasing grants for
technical research. Nonetheless, the Kohl govern-
ment subsidizes declining industries at an even
higher level than its predecessor.
France continues to retreat from the interventionist
policies that characterized the first year of the
Mitterrand government. The Socialists have made
progress, at least on paper, toward a more free
market oriented economy. They are reducing cred-
it controls and are trying to create a venture
capital market. Paris has eased bureaucratic re-
quirementsfor starting a business. Foreign. inves-
tors are now generally welcome-notification and
authorization requirements have been liberalized.
In the past year, foreign firms, especially Japanese,
have been allowed to buy out troubled businesses
that in the past would have become wards of the
state. Moreover, the Socialists have largely elimi-
nated delacto wage indexation. Progress has been
less impressive in other areas. Labor and manage-
ment have failed to negotiate more flexible work
rules. Employers still cannot adjust their work
forces easily because labor contracts and govern-
ment laws restrict the use of temporary and part-
Secret
5 April 1985
The United Kingdom is counting on tight fiscal
and monetary policies and free market principles
to generate industrial restructuring and sustain-
able growth. Low ir~ation, deficit reduction, and
investment-stimulating tax cuts are key to Prime
Minister Thatcher's strategy. The new budget in-
troduced tax reforms to lower the cost of hiring
new employees and promised an expansion of
youth training programs in partnership with the
private sector. To reduce the power of British labor
unions, Thatcher last summer pushed through
legislation mandating the regular election of union
o.~cials. Tories are alsolaitltf'ully executing their
extensive. privatization program. Sales of govern-
ment-owned companies have totaled over $8 bil-
lion, and London has opened several public service
sectors such as telecommunications to private
competition.
Italy's record on restructuring is mixed and no
overall industrial policy has been developed. The
government acted last year to curb the wage index-
ation system, although that measure could be .
repealed if aCommunist-sponsored referendum
goes against the government. Rome has given
financial support to extensive .company efforts to
lay off redundant workers. Also, the government
has enacted controversial legislation to limit tax
evasion. Prime Minister Craxi has not acted, how-
ever, to fundamentally reform the country swaste-
ful welfare system, and progress in curbing govern-
ment indebtedness appears to be due more to
.funding shifts than to actual budgetary improve-
Canada lacks a national industrial policy and a
specific restructuring program. Although the new
government has pledged to reduce the impediments
to restructuring, Prime Minister Mulroney has yet
to articulate a specific agenda or to approach the
powerful provincial governments on the process.
Mulroney has abandoned the Trudeau govern-
ment's autarkic investment policies, and is reduc-
ing barriers to foreign capital. The new energy
program is intended to spark private-sector invest-
ment by reducing the government's take of energy
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Secret
Dutch-West German program to develop a 1-
megabit microchip-are becoming more frequent.
The most notable examples of European coopera-
tion-Ariane and Airbus-have become competi-
tive, but at heavy taxpayer cost.
Prospects for industrial restructuring outside the
United States over the next few years seem some-
what brighter than in the recent past. Technologi-
cal innovation should increase as large Japanese
and West European corporations improve their
profit and liquidity positions and devote more
resources to research and development. We expect
to see more joint ventures among US, European,
and Japanese high-tech firms. The major econo-
mies appear to have arrested the chronic growth of
their welfare systems, but we do not expect that the
attitudes, social arrangements, or legal frameworks
that inhibit innovation in Western Europe will
change easily. Some governments face tough elec-
tions over the next few years, and they will be
cautious on reform. Moreover, governments will be
loath to tamper with social nets and worker rights
while unemployment remains high.
9 Secret
5 April 1985
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Secret
Summit Issues: Western Europe
Copes With the Dollar'
West European concern that the strong dollar is
holding back the region's economic recovery is ill
founded. The 100-percent real appreciation of the
dollar against the European Currency Unit (ECU) z
between 1980 and 1984 has given West European
producers an edge in international markets. Ac-
cording to our econometric model, real GNP in the
four major West European countries was higher
each year than it would have been if the dollar had
held steady. The rising dollar also helped stabilize
the European Monetary System (EMS) by holding
down the West German mark against the other
EMS currencies. On the negative side, the strong
dollar generated pressure on domestic prices, but
all the major West European countries still man-
aged to lower their inflation rates during the
period.
Impact of the Strong Dollar
We believe the appreciation of the dollar during
1980-84 helped the West European economies. The
main positive impact came in the foreign sector
where total real exports of goods and services last
year were higher than in the baseline scenario-
most of the increase in exports was in sales to the
United States. Imports from the world, on the other
hand, were lower. Our results also indicate that the
strong dollar has boosted West European invest-
ment and private consumption. Our model indi-
cates, however, that the price level in the Big Four
was higher than it otherwise would have been.
' This article is excerpted from a forthcoming DI intelligence
assessment.
' The European onetary System (EMS) is a joint float of eight EC
currencies; the United Kingdom and Greece have not joined the
float. At the heart of the EMS is the European Currency Unit
(ECU), an accounting unit made up of a basket of the 10 EC
currencies. Each country in the float is required to intervene to
stabilize the value of its currency against the ECU-in effect,
against the weighted average of the other currencies.
Methodology for Estimating the Impact
ojthe Dollar's Strength
We used our Linked Policy Impact Model (LPIMJ
to isolate the ejject of the strong dollar from other
factors that ir~uence trade patterns, such as the
US economic recovery. To estimate the impact, we
.first ran a baseline simulation jor the 1980-84
period incorporating the exchange rate changes
that actually occurred. We then ran a second
simulation holding real exchange rates constant-
that is, the nominal exchange rates were allowed to
vary just enough to ojjset inflation dijJ`erentials.
More spec4fically, because we wanted to isolate the
dollar's impact on each of the Big Four West
European countries individually, we held the real
dollar exchange rate constant against the Big Four
on a weighted average basis, while allowing real
exchange rates within the Big Four to vary as they
actually did in the real world. The difjerences
between the results generated by .the two simula-
tions measure the impact of the dollar's real
exchange rate appreciation.
These results probably overstate the positive impact
of the dollar because net capital flows from West-
ern Europe to the United States are not explicitly
captured in our model. We believe, however, that
the negative effect of these capital outflows is
relatively small. For example, if capital movements
were the sole cause of the 3-percentage-point rise in
real West European interest rates, the model indi-
cates that less than half of the dollar's positive
Secret
DI /EEW 85-0/4
5 April 1985
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Big Four: Impact of the
1980-84 Real Appreciation
of the US Dollar
West European Reactions
Percent change from baseline
For much of the 1980-83 period, West European
leaders complained that the strong dollar was
putting upward pressure on interest rates, holding
back economic growth, and boosting inflation. Par-
is even attributed the failure of the original Mitter-
rand economic. program to the dollar's rise.
Private consumption
-0.8
-0.5
0.4
1.9
Investment
0.1
1.5
2.1
3.6
Exports
0.6
0.5
0.6
2.6
Imports
-2.1
-3.7
-4.5
-4.0
Price level
(GNP deflator)
0.9
3.7
7.0
11.0
West Germany
GNP
0.4
1.3
2.6
4.8
Private consumption
-0.3
0.2
2.0
5.0
Investment
0.9
2.4
3.9
6.1
Exports
0.3
0
0
1.8
Imports
-1.2
-2.3
-2.4
-0.4
Price level
(GNP deflator)
0:8
3.9
7.4
11.9
Frsnce
GNP
0.3
1.7
2.4
4.4
Private consumption
-0.4
-0.3
0.1
1.0
Investment
0.9
3.2
5.5
4.5
Exports
1.2
1.0
0.8
2.7
Imports
- 3.2
. - 3.0
- 3.4
- 3.8
Price level
(GNP deflator)
0.3
1.3
3.0
4.9
United Kingdom
GNP '
0.7
1:T
2.6
3.4
Private consumption
-1.2
-0.2
0.3
0.5
Investment
0.9
3.2
5.5
4.5
Exports
1.2
1.0
0.8
2.7
Imports
- 3.2
- 3.0
- 3.4
- 3.8
Price level
(GNP deflator)
0.7
2.9
5.3
7.5
Italy
GNP
-0.5
-0.6
-0:3
1.3
Private consumption
-1.8
-3.0
-3.1
-2.2
Investment
-0.7
=2.1
-2.8
-1:1
Exports
0.7
0.9
1.3
3.5
Imports
-2.6
-6.2 '
-7.6
-7.5
Price level
(GNP deflator)
2.2
8.1
15.1
23.5
Between mid-1983 and late 1984, West European
criticism of the dollar abated. The West Europeans
clearly became more aware of the boost -that the
strong dollar was giving to their exports and their
economic growth rates. In its mid-1984 economic
review, for example, the West German Institute for
Economic Research attributed the West German
recovery mainly to an export boom powered by US
economic growth and the strength of the dollar.
Western Europe recorded a $5 billion trade surplus
with the United States last year, compared with a
$30 billion deficit in 1980.
Realization that the strong dollar has contributed
to EMS stability probably also has played a major
role in dampening West European criticism. The
EMS has now gone two years without experiencing
one of the bitter realignment struggles that previ-
ously had occurred, on average, every nine months.
Despite West Germany's lower inflation rate and
stronger current account balance, the West Ger-
man mark has not experienced much upward pres-
sure against the French franc or the Italian lira. As
a reserve currency, the mark is often held as a
substitute. for the dollar. When the dollar started
rising, people sold their marks for dollars faster
than they sold French francs or Italian lire, holding
the mark down within the EMS.
Another reason the West Europeans became less
concerned about the strength of the dollar was their
apparent decision to "decouple" their economic
policies from changes in the dollar. Although US
and West European real interest rates are both
Secret
S April 1985
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.Secret
Dollar/ECU Exchange Rates, Real and Nominal, 1970-85
80 1970 75 80 85
Nominal, as of
February 1985
Real, as of
February 1985
higher than they were in the 1970s, changes in
their respective levels are much less closely corre-
lated than they were then.
In the past few months, however, West European
concern over the strong dollar has picked up again.
We believe this stems in part from political sensi-
tivities. In the United Kingdom, for example,
Prime Minister Thatcher has said that the value of
a nation's currency reflects its basic strength and
that the pound should remain above parity with the
dollar. Nonetheless, the major reason for the in-
creased concern probably is the widespread feeling
that the higher the dollar goes, the further it could
fall later-the exchange rate development the West
Europeans fear most.
Impact of Future Dollar Movements
The West Europeans probably would be worse off
if the dollar declines than they would be if the
dollar stabilizes or appreciates further. A drop in
the dollar would worsen West European trade
competitiveness, reduce GNP growth, and aggra-
vate the unemployment problem. In addition, a
depreciating dollar would create pressure for a
realignment of EMS parities, already overdue be-
cause of the inflation differentials within the EMS.
With the dollar falling, more capital probably
would flow into West Germany than into other EC
countries, adding to the pressure. In this situation,
an EMS realignment would be unavoidable; in the
past such realignments invariably have turned into
crises for the EC.
Secret
5 Aprrl 1985
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Secret
Argentina: Coming Labor
Confrontation
Falling real wages and rising unemployment
threaten to bring labor into greater conflict~with
the Argentine Government. Inflation, which has
soared from 340 percent to 800 percent under
President Alfonsin, is stretching labor's patience to
the limit. We foresee major wildcat strikes over
wages in the months ahead. This will complicate
Argentina's negotiations with the IMF that could
lead to a resurgence of cash problems by midyear.
Although Alfonsin is likely to obtain a new Fund
program, once campaigning for the November par-
liamentary elections begins, we see little chance
that he will attain revised IMF targets.
Wage Policy Under Alfonsin
Alfonsin, during the election campaign and early in
his term, promised Argentine workers real wage
increases that he perceived as necessary to main-
tain labor support. Instead, the wage formulas used
by the .government were juggled so often that labor
doubted official claims that wages were staying
ahead of inflation:
? When Alfonsin took office in December 1983, he
publicly vowed to increase real wages-by 6 to 8 .
percent during 1984, a pledge that proved a
major.sturriblingblock in negotiations with the
IMF. By September Buenos Aires began quietly
backing away and announced that wages would
be held to 14-percent nominal increases each
month.
? Wage supplements were paid in October,.Novem-
ber, January; and March in an effort-to prevent a
decline in real wages.
? In March the government recommended that
wage increases be set at 90 percent of the previ-
ous month's inflation.
Argentina:-Wage and ~ Index: September 1984 = 100
Price Levels
January
172
205
February
196
248
March a
246
300
e Estimated.
Although the shifts in wage .policy caused a plague
of strikes last year, most were minor. In September
the General Confederation of Workers (CGT)-
which represents most of the unions and 30 percent
of the labor force-staged a. general strike with
mixed results. The strike lasted only one day, and
worker participation was spotty except in Buenos
Aires. According to the US Embassy, the lethargic
response probably reflected worker satisfaction
over relatively generous wage increases, despite a
doubling of the inflation rate to nearly 700.percent
last December over year-earlier levels. In addition,
Alfonsin's popularity among. union members was .
still strong. Moreover, Alfonsin had co-opted the
union .leadership into the. wage-setting .process
through-a social pact with business and the.govern-
ment.
Secret
DI /EEW 85-014
5 April 1985
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The Growing Wage Gap
Wage policy has had an uneven impact. Alfonsin is
able to dictate the wage increases for civil servants,
but public corporations and private-sector firms
have used the announced changes only as guide-
lines. As a result, estimates show that civil servants'
real- wages were clown about 25 percent in Decem-
ber 1984 compared with December 1983, :while
public-sector industrial workers' wages fell about 6
percent and those in private industry rose 11
percent. Through strikes and union pressure, pri-
vate-sector employees obtained salary adjustments
on top of the wage settlements. Their ability to
extract above-target pay increases waned toward.
the end of the year, however, as the economy .
dipped and layoffs increased.
This year, all workers are being affected by the
slippage in real wages. Since December real wages
have fallen 5 percent accompanied by an increasing
number of strikes, according to the press. Some
25,000 auto workers staged atwo-day strike in
early March, and in mid-March the 300,000-
member metalworkers union called a strike alert
claiming that their real wages had fallen 60 percent
since September. New strikes by teachers and gas
workers have also been called in reaction to late
March price hikes:
Labor Opposition and Inflation
Labor opposition is beginning to coalesce in the
face of the. continuing inflationary spiral-the cur-
rent rate is 800 percent. The CGT rejected the.
government wage recommendation for March, but
apparently still does not feel strong enough to
attempt.another general strike. Saul Ubaldini, the
senior CGT secretary general, recently told the
Argentine press that a national.strike would be
avoided.as.long as the wage negotiations witH
government and business continued." We estimate
workers would need a 40-percent wage increase in
April to restore purchasing power.
We judge that labor may still be willing to go along
with restraint through April
Unless the govern-
Secret
5 Aprif 1985
The Union-Peronist~Connection
The lack of serious labor threat to the AUonsin
government thus jar probably reflects the fractur-
ing of the Peronist party-the party most closely
aligned with labor-and the schisms within the
union movement. Although the CGT has the poten-
tial to exert considerable power, it remains an
amalgam ojcompeting groups., These factions were
nominally reunified last March when AUonsin
tried to ram new union election laws through
Congress, but the alliance has been_frayed by the
widening split in the Peronist party. Old-line union
bosses recently took steps to e./~ect a, reconciliation,
and the two Peronist wings have opened. a dialogue.
The prospects for reestablishing cohesion are not
good, but, if Alfonsin.continues to hold wage
increases below. inflation, this could galvanize the
unions and Peronists into concerted action.
ment shows signs of controlling inflation, labor will
become more combative.
_ ~ promi-
nent Peronist politician predicts that, by June, .
Argentina- will be suffering from a wave of wildcat
strikes because of government failure to halt the .
inflationary spiral.
Implications
We see little chance that Alfonsin. will be.able to
attain new IMF:budget and inflation targets cur-
rently under negotiation-especially as the_Novem-
ber parliamentary elections approach. Alfonsin
probably will be unable to resist labor demands for
higher wages, although he again may try to spread
any catchup increases over several- months..In
addition, several government ministries and the
military are seeking public spending increases in
the coming months to offset accelerating inflation,
according to the US .Embassy: A-loosening of .wage
restraint-along.with~higher government spend-
ing-would bring Argentina out of compliance
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Secret
with its Fund program again, renewing the halt in
both IMF and commercial bank medium-term
lending. Interest arrearages could again grow, and
Argentina probably would resort to tighter import
controls. Meanwhile, the economy will continue its
current slide, because of lagging investment and
depressed private consumption, and Alfonsin's po-
litical standing will suffer greatly.
17 Secret
S Aprrl 1985
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Secret
Algeria: The Economy on the Eve
of Bendjedid's Visit
Algeria-with the strongest economy in North
Africa-has maintained an excellent international
credit position through prudent financial manage-
ment that should provide sufficient leeway to com-
plete the current development plan. The vicissi-
tudes of the oil and gas market and the limited
prospects for gas sales to Western Europe will be
the main factors affecting the government's ability
to meet development spending goals. Moreover,
continued austerity to cope with the soft oil market
will, despite Algeria's pervasive security forces,
sharply increase the likelihood of unrest.
Oil and gas account for nearly all export receipts,
30 percent of GDP, and 40 percent of government
revenues. In contrast, despite heavy spending in
industrial development, nonoil heavy industry pro-
vides only 15 percent of GDP. A limited oil reserve
base is causing Algeria-with the fifth-largest gas
reserve in the world-to rely increasingly on gas
exports for foreign exchange.- Crude oil production
capacity peaked in 1978 at more than 1 million b/d
and is declining about 10 percent annually.
New Development Plan
Algeria has embarked on a $110 billion 1985-89
Development Plan that emphasizes agriculture-a
major break from past policy. More important, the
plan reveals President Bendjedid's growing ability
to direct the economy-over the objection of re-
maining socialist hardliners. Tlie evolution toward
a market-oriented economy, however, will continue
to exclude the priority areas of petroleum and.
heavy industry.
As part of the new development plan, the govern-
ment has offered free state land to small farmers
Algeria: Hydrocarbon Production
and Exports
NGL and crude
oil production
Crude oil
production
' Exports
p
Consum lion
I
0 1978 79 80 81 82 83 84?
" Estimated.
around Algiers probably to help raise agricultural
production through conversion of collective farms
to private ownership. Private-sector farms already
produce 60 percent of Algeria's cereal output and
90 percent of meat on less than one-third of
available farm land. The US Embassy in. Algiers
reports that response has.been mixed as the govern-
ment will retain control over crop choice and
marketing. This program~ne of the first positive
steps under the plan-is fraught with risks for the
regime, however, because of the bitter struggle to
nationalize farmland after independence.
Secret
D/ IEEW 85-014
5 Apri! /985
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Secret
Algeria: Balance of Payments
a Estimated.
b Projected.
Unlike many other Third World oil producers,
Algeria has moved quickly to head off financial
problems caused by the soft oil market. The US
Embassy reports that sharply lower petroleum reve-
nue projections already have been incorporated in
the national budget and the development plan.
Algeria's excellent credit rating, despite one of the
largest debt burdens of any OPEC country, should
allow the government to meet foreign borrowing
needs through 1989. We estimate that service costs
on the $16. billion foreign debt peaked in 1982 and
will decline slightly to a' manageable 33 percent of
export receipts this year. Foreign reserves have
been maintained at about $1.6 billion-two months
of imports-since 1983.
Algeria's economy will continue to be determined
by the international oil market through the rest of
the 1980s. Total oil exports this year are not
expected to exceed the 800,000 b/d level achieved
in 1984-a level that includes about 300,000 b/d of
Secret
S April /985
condensate and natural gas liquids. Overall export
receipts of $12.4 billion will show little growth this
year. Even assuming no increase in import costs, we
project a $2.6 billion current account deficit for
1985. Real GDP growth has averaged 4 percent
annually since 1979 and is not likely to exceed 5
percent in 1985, according to the US Embassy.
Slow growth will frustrate government efforts to
improve living standards for most of the popula-
tion-50 percent is under 18-which is growing 3
percent annually. Food prices have recently been
increased by as much as 17 percent to trim the
growing subsidy burden on the budget. Imports of
consumer goods are down 50 percent from the 1982
level and social spending has been sharply cur-
tailed. The US Embassy reports that unemploy-
ment probably exceeds 20 percent in urban areas.
Algeria's pervasive security forces and the limited
expectations of most Algerians have helped control
discontent so far. Continued austerity, however,
will increase the likelihood of unrest.
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Secret
Algerian Gas An Alternative to Soviet
Supplies in Western Europe?
Algeria's potential to be a significant supplier of
natural gas to Western Europe is hampered by its
hardline stance on pricing and unreliability as a
supplier. As a result, purchasers probably will be
less willing to sign new contracts jor Algerian gas,
opening new opportunities for the Soviet Union to
capture any growth in import demand in the West
European market.
Algiers' ability to sell liquefied natural gas (LNGJ
is limited by its pricing demands that make Algeri-
an LNG 30 percent more costly than Soviet gas.
Only gas sold to Italy via the Trans-Mediterra-
nean Pipeline is competitive in the current surplus
market. Algeria has been negotiating gas export
contracts directly with consumer governments.
These deals are at times part oja larger trade
package and require subsidies to state-owned
utilities that purchase the gash
We believe Algiers' inflexible pricing policy has
been in large part determined by production prob-
lemsthat limit the amount ojgas available to meet
supply commitments during the rest ojthis decade.
Unanticipated problems in existing.fields, delays.in
developing new ga.F1ields, and continuing poor per-
formance ojLNG plants are limiting output. The
government has considered several alternatives-
such as decreasing gas injection and accelerating
development of southern gasfields-but most are
too costly or politically undesirable. Such meas-
ures would allow Algiers to export between 20-25
billion cubic meters annually through the early
1990s. By the mid-1990s, cater new gasfields come
on line and the production capabilities ojexisting
,fields are restored, Algiers should be able to meet
its existing commitments and perhaps have an
additional 40-45 billion cubic meters per year
available jor export.
Algerian-US Trade
Manufactured goods
" All fuel.
b Estimated.
Algerian exports~~
Implications for the United States
Algeria's economy is the strongest in the region
despite financial constraints. Algiers has provided a
half-billion-dollar market for US agricultural
goods, heavy machinery, and transport equipment
since 1979. The government has expressed interest
in US technology and expertise to help meet agri-?
culture and water resource development goals-a
$16 billion market over the next five years. In
Secret
5 Apri! 1985
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1978 1979 1980 1981 1982 1983 1984 19858
addition, Algiers is looking for Western sources. of
resupply for its Soviet-equipped armed forces and
has expressed interest in select US military equip-
ment and training, according to the US Embassy.
US companies will have to overcome stiff competi-
tion from Algeria's West European trade part-
ners-particularly the French-to gain a share of
the market. Financing will be a key element in
major contract negotiations. Petroleum barter deals
may be offered as payment. In addition, Algiers
may look for concessions in gas negotiations with
Washington as a sign of US interest in broader
bilateral relations.
Secret
S April 1985
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Secret
Energy
w Polish Parliament recently approved a 15-year energy program that includes large
Energy Program investments in new mines and nuclear power plants. There was little emphasis
v
hPl'h'd h t t
t
t
h
e mos energy in ensi
e in
ry is
oug o is in us
on conservation, even t
Eastern Europe. The plan calls for increasing hard coal production 8 percent;
soft coal, 53 percent; and electricity output, 69 percent by the year 2000.
Purchases of Soviet gas are expected to more than double by the year 2000
contingent upon larger Polish coke deliveries and work on the Yamburg
pipeline. Crude oil imports from the Soviet Union will remain at 13 million
tons at least until 1990. The government also wants to import 3 million tons
annually from the. West but will be hindered by its chronic hard currency
shortage. Spending. on energy projects will rise by over 100 percent during
1986-90, as compared with the previous five years-a marked shift in , . ,
investment policy. Even if these investments succeed, energy supplies will be
inadequate to meet growth and export targets. ~ ~ : .
f.
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China Invites Onshore Beijing announced on 30 March it will open up 1.83 million square kilometers
O' Exploration
F.ikploration
Vietnamese Oil
New Developments in
in 10 southern provinces to oil exploration by foreign firms. No specific terms
were announced. The disappointing results that foreign firms have had in
China's offshore waters almost certainly led to this decision. The areas Beijing 25X1
is opening have few existing fields and are largely unexplored. Although
China's oil production grew by 8 percent last year, to 2.28 million barrels per
day, the largest fields are reaching maturity,?and new sources of oil are needed
to fuel China's ambitious modernization plans.~~ 25X1
A Vietnamese-Soviet joint venture drilling in the South China Sea apparently
hit oil for the second time early this year. The new well is near the find an= ~~;
nounced last May-about 100 kilometers from Vung Tau.
the joint venture plans commercial production by 1986, and
is also reportedly small.
discussion. These plans are premature, however, pending delineation of the
field over the next two to three years. The first discovery well flowed at about
only 2,000 b/d, and the flow rate of the second
an oil refinery=to be built by the Soviets at Vung Tau-is also under
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Electric Power
Shortages Growing
in Pakistan
Pakistan's Water and Power Development Authority (WAPDA) is projecting
drastic electricity rationing for the next three months because lack of rainfall
and late snowmelt have severely reduced hydroelectric production. Commer-
cial and residential power cuts have already been longer and more frequent
23 Secret
S Apri! 1985
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than normal for this time of year. An emergency plan instituted by WAPDA
to provide power for tubewells in drought-stricken wheat-growing areas will
exacerbate shortages elsewhere. Resulting industrial losses threaten lower
exports and further deterioration in the foreign payments position. Foreign
exchange reserves are about $900 million, half last April's level. As shortages
intensify, management and distribution of power probably will become a major
political issue. The media is claiming that US opposition to Pakistani nuclear
programs is making it more difficult to develop nuclear power to help close the
energy gap.
hilippine Financial According to US Embassy reporting and preliminary data, Manila likely will
Rescue Package - again exceed the money supply target under its $615 million IMF standby'...
in Jeopardy ~ ~ loan, thereby delaying $160 million in loan disbursements. Meanwhile, signing
of a commercial bank package, which includes $925 million in new loans, is
postponed indefinitely as the steering committee and a key Saudi bank remain
deadlocked over conditions for the level of the bank's contribution to the new
loan package. The steering committee believes the Saudi bank is just
continuing its pattern of not joining debt rescheduling programs-a policy that
.the committee fears will threaten all multibank rescheduling efforts. The
stalled commercial bank package may require the Fund to renegotiate the
Philippine economic adjustment program because the original targets assumed
significant loan disbursements in early 1985. Protracted negotiations with the
IMF, however, will further delay the economic recovery.
Yugoslavia's Yugoslavia and Western governments agreed last week to reschedule about
Debt Rescheduling $800 million in debts falling due between 1 January 1985 and April 1986. The
agreement reschedules 90 percent of principal over nine years with afour-year
grace period and contains a goodwill clause promising support by creditors in
future years. Talks with commercial bank creditors are slated for 11 April.
Belgrade had sought a rescheduling of debts maturing in 1985 through 1988.
The failure to obtain a multiyear commitment may reinforce domestic
criticism of the government's handling of foreign debt and increase pressure to
obtain more favorable terms from commercial banks. To save face, officials
probably will characterize the goodwill clause as a form of multiyear
rescheduling. The banks are likely to reschedule at least two years of principal,
which the government likely will portray as the better deal demanded by
Secret 24
5 April 1985
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Secret
Panama's Financial Panama's new budget has reopened IMF loan talks and encouraged commer-
Outlook Bleak cial bankers to extend their debt repayment moratorium through 30 June, but
prospects for a quick solution remain bleak. To gain National Assembly 25X1
~ approval, President Barletta scaled back his tax proposals and ofTered vague
Panama City can meet its IMF targets. It is asking Barletta to identify specific
reductions and to implement new labor, agricultural, and commercial policies.
Over the longer term, Barletta must find a way to satisfy international
financial requirements without undermining his fragile domestic support.
spending cuts instead. the Fund is skeptical that 25X1
OECD Economic
Growth Forecast
.,
Global and Regional Developments
fiscal policies and a falling dollar will dampen US import demand.
The OECD Secretariat has raised its forecast of industrialized countries GNP
growth in 1985 to 3.4 percent, mostly because of a substantially higher
forecast for US GNP. Partly because US import demand is not expected to
rise as rapidly as last year, the Secretariat foresees no pickup in the West Eu-
ropean growth rate in 1985. Unemployment is expected to climb to 11 percent
in Western Europe but to fall in the United States, Canada, and Japan.
Inflation in the OECD is expected to ease to 4.3 percent because of weak com-
modity prices and moderate wage settlements. According to the Secretariat,
the factor most likely to change the forecast is the possibility that tighter US
OECD: Secretariat's Forecasts
of GNP Growth in 1985
25 Secret
5 April 1985
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National Developments
~f
Israeli Economic
Package Revisions
Developed Countries
The Israeli Government, the Histadrut labor confederation, and the Manufac-
turer's Association agreed last Friday to revise the current wage-price accord
to include new price hikes followed- by atwo-month price freeze. Most prices
then will be raised again, and another two-month freeze will take effect. By
proposing further price freezes, Labor and Likud are trying to hold the wage-
price agreement together until the Histadrut elections in mid-May. The ' ;
current $23 billion budget merely cuts out last year's overspending but makes
no other significant cuts-a reflection of the government's inability to reach
consensus on stronger economic programs. Persistent inflationary pressures
will force the government to consider additional austerity measures after the
labor election.
N French Trade To improve French export performance, the Ministry of Industry and Com-
stitute merce has established a new, graduate-level school to train industrial manag-
ers and government officials in the skills needed to promote French products
abroad. The Ecole Nationale d'Exportation, will enroll about 200 students in
courses ranging from sales techniques to foreign languages. It will also
reportedly offer short courses and seminars for top executives and bureaucrats.
Exports have been one of the major bright spots of President Mitterrand's
economic program, and the new school is clearly intended to bolster that
success. Its program will probably be oriented toward problem areas, such as
the USSR and Japan, but it will almost certainly focus on expanding France's
already sizable exports to the United States as well.
Less Developed Countries
Brazilian
/Austerity Moves
Economic policy makers in the new government have ordered a 10-percent cut
in spending, halted new federal lending for two months, and have frozen
government hiring. The government also has reinstituted price controls, revised
the indexation formula both for government bonds and for the exchange rate,
and liquidated a failing financial institution. Meanwhile, press reports indicate
that officials are meeting with bankers and the IMF this week to discuss
Brazil's economic situation. Although the spending and lending reductions are
encouraging, the new indexation formula will slow devaluation and undermine
the competitiveness of Brazilian goods at a time, when export growth is
declining. Even tougher fiscal steps are needed, but the uncertainty surround-
ing the health of President-elect Neves will complicate efforts to impose
tougher controls.
pposition to
Mexican Trade
Liberalization
Trade liberalization measures outlined in Mexico's 1985 IMF program will
probably not be fully implemented because of strong domestic opposition and a
sluggish economy. In response to Fund pressure, Mexico City plans to increase
reliance on tariffs and reduce use of import licenses. The most controversial
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S April 1985
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Venezuelan Caps
nterest Rates
abor Troubles,
in Suriname~i~
deterioration in the balance of payments would force a cutback.
Many trade regulators also object to lossof their bureaucratic power,, .
Moreover, we believe liberalization would push imports to such level
feature, scheduled to start next month,.would allow companies unrestricted use
of 40 percent of their export receipts for imports of industrial inputs. Mexico's
long-protected private sector strongly opposes the plan, claiming it would force
many. small and medium-sized firms to close, according to the US Embassy.
we expect less saving and added motivation for. capital flight.
Venezuela last week imposed across-the-board deposit rate ceilings-several
percentage points below market rates-probably signaling more interventionist
policies to revive.the economy. The US Embassy reports Caracas hopes to
boost mortgage funds to .spur a revival of construction. The government hopes
that the ceilings will eliminate the liquidity squeeze on mortgage lenders who
now pay higher rates for deposits. Deposit shifts from banks to mortgage
lenders are unlikely because public confidence in these institutions has been
shaken by recent failures. Moreover, with inflation exceeding interest limits,
Army Commander Bouterse's hardening stance against recalcitrant labor
leaders is likely to weaken the fragile unity within Suriname's coalition
government and undermine the regime's efforts to create an appearance of
democracy.
Labor leaders apparently have not decided on their next step, but
they are likely to press hard to prevent any erosion in living standards.
Shift in Egyptian President Mubarak may use the resignation of Minister of Economics al-Sa`id
Economic Personnel to revise foreign exchange policies that have damaged Egypt's private sector.
Meanwhile, Mubarak has announced the formation of an independent,
nonpolitical economic advisory council and has directed the Central Bank to
report directly to the Prime Minister rather than to the Economics Minister. 25X1
Mubarak was fed up with several of al-Sa`id's policies, especially foreign
exchange rules established in January that greatly diminished the flow of hard
currency through the banking system and sharply reduced private-sector
imports. A new probusiness Economics Minister, Sultan Abu Ali, together
.with greater independence for the Central Bank, suggests a more favorable
atmosphere for the private sector. ~~ 25X1
27 Secret
5 April 1985
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Civil Service
Unrest in Tanzania.
To Increase
employment.
President. Nyerere has recently announced plans to fire 27,000 government
employees, roughly 10 percent of the civil service, in acost-cutting measure.
The.announcement has prompted slowdowns and sitdown strikes that have
effectively stopped government paper flows
0 The civilians complain that Nyerere is cutting the civil sector while
continuing to increase military personnel and spending. Although Nyerere
probably is reacting to IMF suggestions on government spending, an IMF
agreement remains indefinite. We do not believe Nyerere will fire all the
workers, and the government has assured that it will help find alternative
now amounts to about $100 million annually.
Bangkok last week announced a contract to export 500,000 metric tons of
tapioca pellets this year to the Soviet Union. for use as animal feed. Soviet ofli-
cials have indicated, moreover, that an additional purchase of 2 million tons is
.possible, although~lhey did not specify a time frame. Moscow traditionally has
bought Thai sugar, corn, rice, and tapioca flour, but this is the first major pur-
chase since 1981 of tapioca pellets, Thailand's second-largest export. Soviet
Deputy Foreign Minister Kapitsa last week in Bangkok suggested that
Moscow will seek additional opportunities to expand Thai-Soviet trade, which
/Papua New. Guinea. The Papua New Guinea Cabinet last week authorized reopening of the giant
Mine Hanging On
Late Spring /~
Threatens Soviet
~ Grain Prospects.
Secret
5 Apri( 1985
sabotage.
Ok Tedi gold and copper mine under afour-month license although discussions
on modifying the contract's original provisions continue. The government
closed the mine at the end of February over disagreements with the mining
consortium on the viability and pace of copper development. Copper produc-
tion will start in 1988-when the mine's gold reserves are depleted-but
construction of a single copper-processing line will begin immediately. Expan-
sion of the copper facilities to the level originally envisaged and construction of
an associated hydroelectric dam .will be .decided. at the end of 1986. The
government decision apparently reflects significant company concessions and
efforts to calm foreign investors' fears of nationalization. Moreover, some of
the approximately 2,000 workers dependent on the mine have threatened
Unusually heavy snowfall last winter in the European USSR, coupled with
below-normal temperatures through mid-March, has delayed the start of the
spring sowing campaign and created the potential for serious flood damage to
winter grains. It is too early in the crop season to assess the full impact of these
developments on overall Soviet grain production prospects for 1985. Neverthe-
less, the delay in sowing means that. the spring grains in the Ukraine and
North Caucasus will be more vulnerable than normal to damage from hot
temperatures this summer. If planting slips even further behind-a likely
occurrence-an early frost this fall could interfere with crop maturation,
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Secret
thereby cutting potential yields. Damage to the winter grains-about one-third
of total Soviet grain output-would be greatest with a rapid snowmelt that
almost certainly would result in widespread flooding. Even if the snow
disappears at a slow rate, however, some plants will drown in waterlogged soils.
ew So et-Hungarian The USSR and Hungary signed an agreement this week for economic,
cooperation Agreement scientific, and technical cooperation until the year 2000, according to press
reports. The program calls for cooperation in microelectronics, computers,
robotics, nuclear energy, biotechnology, and new industrial materials. The
countries will pool efforts to improve technology and increase bilateral trade in
metallurgical products, chemicals, food, and consumer goods. Similar agree-
ments have been signed or are being negotiated with other CEMA countries as
part of Moscow's effort to limit CEMA's dependence on the West and to exert
tighter control over its allies. The agreements, however, seem too general to en-
sure that Soviet goals for CEMA integration will be met fully, and the USSR
will push for specific commitments in subsequent negotiations.
Growing Vietnamese Aweather-induced crop shortfall may force Hanoi to import 400,000 to
Ricelmports 500,000'metric tons of rice this year-up from about 295,000 tons in 1984, ac-
cording to the US Embassy in Bangkok. Vietnam, which claims self-
sufficiency in grain, so far has not publicly requested humanitarian aid and
presumably intends to acquire the rice on commercial terms. A foreign
exchange shortage forced Hanoi to sell gold to pay for imports in 1984,
however, and we are uncertain how it will finance this year's purchases.
Japanese trading companies have already provided about 100,000 tons,
partially paid for by Vietnamese commodities. A Soviet trading company also
purchased 50,000 tons of rice in Thailand for Vietnam early this year,
according to the Bangk{pk Embassy
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