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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707500001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: January 12, 2017
• Document Release Date: August 19, 2010
• Sequence Number: 1
• Publication Date: April 26, 1985
• Content Type: REPORT

Directorate of --See. et
Intelligence
International
Economic & Energy
Weekly
26 April 1985
DI IEEW 85-017
26 April 1985
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Copy 680
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Secret
International
Economic & Energy
Weekly
26 April 1985
iii Synopsis
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1 / Perspective-Bonn Economic Summit
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Summit Issues: Big Four Growth Prospects and Options 25X1
25X1
European Community: Growing Agricultural Exports
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Ll____~
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15 India: Rajiv Gandhi's Search for Technology and Productivity 25X1
Energy
International Finance
Global and Regional Developments
National Developments
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Indicators
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
Secret
26 April 1985
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Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective-Bonn Economic Summit
The Bonn Summit on 2-4 May may well be the first at which economic issues
take a backseat to political issues. 25X1
5 Summit Issues: Big Four Growth Prospects and Options~ 25X1
GNP growth for the four major West European economies is generally
expected to average 2.5 percent in 1985, the same as last year's pace. Although
no policy changes are expected soon, our analysis indicates that the Big Four
could boost growth-perhaps enough to reduce joblessness-if they cut either
personal income or business taxes. I 25X1
9 European Community: Growing Agricultural Exports
Although world agricultural trade has slowed in recent years, we expect the
European Community, with the help of substantial export refunds, to agressi-
vely promote its exports for the next several years to alleviate mounting
surpluses. 25X1
15 India: Rajiv Gandhi's Search for Technology and Productivity
Prime Minister Rajiv Gandhi's interests in technology and productivity have
revived economic liberalization efforts. His economic reforms open new
opportunities for ties with Western business but do not ensure faster overall
growth.
19 Spain: Reversing the Economic Slowdown
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Prime Minister Felipe Gonzalez's Socialist government is now carrying out an
ambitious and painful adjustment program to correct the serious economic
problems that have beset Spain since the 1973 oil crisis.F__1 25X1
iii Secret
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26 April 1985
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Secret
International
Economic & Energy
Perspective
Weekly
26 April 1985
The Bonn Summit on 2-4 May may well be the first at which economic issues
take a backseat to political issues. Most of the Summit countries want it that
way-for different reasons-although most will call on Washington to cut its
budget deficit. 25X1
Of the political topics, SDI and the space station are likely to head the list. All
the Summit governments are committed to promoting high technology, and
both programs hold great promise in this area. Even those with misgivings
about deploying SDI are enthusiastic about potential contracts and sharing US
technology. French Defense Minister Hernu commented this week on French
television about the role envisioned for French mirrors in SDI. I 25X1
The West Germans and the Japanese prefer to emphasize political issues to
avoid discussions of possible shifts in their economic policies. Bonn, for
example, expects other governments to encourage it to move up tax cuts now
planned for 1987. The West Germans have publicly ruled out such a move,
comparing it with the ill-fated "locomotive" policy package agreed on at the
1978 Bonn Summit. Bonn will argue that acid rain should receive top billing.
Tokyo views the Summit as its annual exercise in international damage control
and will try to avoid the limelight. Both Bonn and Tokyo-as well as
London-believe that reducing the government deficit is the key to their
countries' long-term economic health. Attempts to refiate the economies of the
industrial world, they argue, would lead to minimal short-term benefits and
could cause a buildup of debt that would undermine their ability to adopt
countercyclical policies in the next recession.F____-] 25X1
The Canadians plan to support Bonn on acid rain, a major political issue at
home. They also want the other Summit countries to support US goals in the
trade area so the US administration can use the communique to fend off
protectionist proposals from Congress. The British, as well as others, link the
US budget deficit with higher interest rates worldwide and would like a pledge
from Washington to reduce it-even if a tax hike is the only way possible. 25X1
Bonn and Paris that could stymie the EC's ability to reach decisions.
The Italians will avoid taking positions on their own in Bonn and also probably
would be content to see economic issues deemphasized. With Italy holding the
presidency of the European Community, Rome is afraid of squabbles between
1 Secret
DI IEEW 85-017
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The French may be the only unhappy participants if economic issues are
played down. Since the first Summit in 1975, the French have maintained that
the Summit should focus on economics. Last year, the French did not want a
statement condemning terrorism and this year refused to participate in pre-
Summit talks on the environment. Their primary goal this year is to firm up
details on an international monetary conference, and they are holding up
agreement on a date for a new trade round until they get their way. They
would also like Bonn and Tokyo to reflate while Washington trims its budget
deficit.
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Secret
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Bonn Summit Positions
United states
West Germany
France
Economic Policy
Sustainable economic growth and job
creation must be based on market-
oriented adjustment, reduced
government spending, and stable
monetary growth. Europe and Canada
must restructure faster; Japan must
accelerate liberalization of imports and
capital markets.
Monetary System
Willing to consider conference to
discuss G-10 recommendations to
improve monetary systems, but
fundamental exchange rate trends are
determined by market supply and
demand. Improvements most likely
through better coordination of
economic policy.
Trade
Freer trade is essential to world
economy. To ensure more open trade
and resist protectionism, must move
rapidly to formal negotiations within
GATT for increased liberalization.
Seeks specific commitment to begin
negotiations in early 1986-with no
monetary preconditions.
North-South Relations
Case-by-case debt strategy, plus
prudent, free market LDC policies to
improve their economic performance
and reduce debt, are still valid. No
need yet for World Bank capital
increase.
Will refer specifically to high US
budget deficit, interest rates,
dollar, and trade deficit. Wants
Summit to express deep concern
about persistence of high
unemployment. Favors more
vigorous action on structural
rigidities.
Not interested in French monetary
reform proposals but believes
monetary conference under IMF
auspices needed to allay French
concerns..
Wants strong free trade statement.
Will endorse new GATT round for
early next year; favors rollback of
trade barriers and progress on
current GATT work program to
maintain credibility of previous
trade commitments. Deeply
concerned about protectionist
pressure in the United States.
Believes steady expansion of trade
and opening developed-country
markets is best for LDCs. Favors
current, case-by-case approach to
LDC debt. Wants increase in
World Bank capital at
"appropriate time."
Environment and Technology Cooperation
Can agree on cooperative research into
ways to improve environment but
wants to avoid action commitments
until more authoritative studies on
causes have been completed.
Space Station
Promote technology cooperation but
recognize security constraints. Secure
strong, unanimous endorsement of
participation in US program by other
Summit partners. Avoid endorsement
of autonomous European program.
Will call for concrete action on
increased international
environmental cooperation,
especially on acid rain. Wants
Summit to stress compatibility of
economic growth with
environmental policies.
Enthusiastic about space
technology cooperation provided
technology sharing satisfactory.
Opposes equal endorsement of
French space proposals.
Trying to restructure and
modernize without sacrificing
"social justice." Concerned that
high US interest rates, volatile
dollar, and US protectionism
could abort recovery. Must rely
on others to lead growth and
could push surplus countries to
expand.
Argues volatile exchange rates
are the biggest barrier to world
trade and the United States is
irresponsible in managing
dollar. Feels that others,
particularly LDCs, bear burden
of US policies. Would like to
see more intervention and more
use of the ECU.
Fears new trade round
emphasis on high tech and
services will favor the United
States and Japan and preserve
status quo to French
disadvantage. At same time,
often argues need to protect
own infant industries. Will not
support new trade round
without promise to discuss
monetary reform.
Favors multiyear rescheduling,
more concession] lending and
aid flows, new SDR issue, and
increased World Bank lending.
High interest rates and volatile
dollar seen as hurting LDCs.
Environment not a key issue.
Hopes to become a high-tech
power but fears that the United
States and Japan will work to
maintain their lead. Will resist
commitment not to aid high-
tech industries.
Trying to foster a European
space program under French
leadership. Insisting that
European Space Agency (ESA)
program receive equal billing
with US program in
communique.
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United Kingdom
Tight fiscal and monetary
policies, plus free market
principles, have achieved almost
five years of economic recovery.
Labor market rigidities being
overcome, but likely to take
several years to reduce
unemployment significantly.
Exchange rate intervention
cannot alter underlying market
trends, but may push for
renewed agreement on
coordinated intervention by
central banks under certain
circumstances.
Favors firm commitment to
launch new trade round in
1986. Anxious to discourage
protectionist trends at home
and abroad. Opposes linking
trade round to a monetary
conference.
Prefers case-by-case approach
to debt rescheduling rather
than attempts to make global
reforms. Has become more
selective in aid disbursements.
More research needs to be done
before costly measures are
undertaken, or agreements
made, to further reduce
atmosphere pollutants. Agrees
on need to protect strategic
technology but believes US
approach too broad.
Views space station as
opportunity for British industry.
Already committed $8 million
to consolidate British research
efforts and wants guarantees
that participation will ensure
access to US technology.
Italy
US budget deficit, high interest
rates, and trade deficit are main
threats to world economic stability.
Wants more expansionary policies
in West Germany. Will move
slowly on structural adjustment;
time not ripe to liberalize capital
flows.
Considers flexible exchange rate
regime the only viable system, but
concerned about noneconomic
factors creating excessive exchange
rate fluctuations. Unlikely to
support all French reform
proposals. Would like more use of
ECUs.
New round of trade negotiations
must be preceded by firm
agreements on subject matter,
participation, and timing. Suspects
Japan wants new round to continue
stalling on import promotion. Soft
on including services in new trade
round.
Desires a capital increase for the
World Bank to appease LDCs and
head off calls for a special debt
relief program. Wants debt issues
kept out of such forums as
UNCTAD. Wants World Bank
lending for adjustment purposes,
not for projects.
Little high-level concern on acid
rain issue; more concerned about
seacoast pollution. Believes
international technological
collaboration necessary but
bilateral cooperation more likely to
produce desired results.
Supports US space station
initiative. Sees good commercial
opportunities for Italian firms, but
may begin supporting independent
European industry if perceives
Europe not allowed full and equal
participation with the United
States.
Japan
Concerned it will be pressed to
solve others' structural problems by
stimulating Japanese imports. Will
point to efforts to open domestic
market, while noting that severe
budget deficit prohibits stimulative
policies.
Tokyo does not want
trade round linked to monetary
reform, which it considers
impractical given differences in
economic performance among
industrial nations.
Strongly supports new GATT
round focusing on services, high
technology, and agriculture.
Announced a package of market-
opening measures in April to try to
defuse mounting US and European
criticism of closed markets.
Has stressed case-by-case approach
in handling debt problem and
urged debtor nations to implement
economic readjustment policies.
Has proposed general capital
increase for World Bank.
Environment and technology
cooperation not key issues for
Tokyo. Has shown concern for .
environment by decision not to
dump radioactive waste in Pacific,
but considers acid rain a non-Asian
problem.
Has allocated funds for
participation in US space station,
Secret
Canada
Structural adjustment
necessary, but will move slowly
because of already-high
unemployment. Primary
economic policy problem is US
budget deficit and resulting
high international interest
rates.
Believes in international
coordinated intervention to
reduce exchange rate instability
but argues against radical
changes in world financial
system. Supports increased
SDR allocation.
Freer trade is essential given
heavy Canadian dependence on
exports. Strongly supports a
new trade round, primarily
because new round may reduce
what is seen as increasing
protectionism in US Congress.
Explicit link should be made
between short-term adjustment
of LDC debt and the issues of.
longer term growth and
development.
Will argue strongly for a firm
statement against acid rain and
likely to support any initiatives
from Chancellor Kohl. Will
seek increased technology
cooperation but likely to defer
to US security considerations.
Committed to participating in
US space station program but
leery of any connection with
development of military
technology in outer space.
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Summit Issues: Big Four Growth
Prospects and Options
GNP growth for the four major West European
economies-West Germany, France, the United
Kingdom, and Italy-is generally expected to aver-
age 2.5 percent in 1985, about the same as last
year's pace. Growth almost certainly will be too
small to keep average unemployment rates from
rising above last year's 10.3 percent. A further
moderation in inflation and expected gains in the
share of world trade should help make investment
and exports the two bright spots in an otherwise
lackluster economic situation this year. Although
no policy changes are expected soon, our analysis
indicates that the Big Four could boost growth-
perhaps enough to reduce joblessness-if they cut
either personal income or business taxes.
A Lackluster Recovery
According to 40 forecasters
the West European
recovery will be the weakest in the last 40 years.
Growth in consumption, which makes up two-thirds
of GNP, will lag because of the small expected rise
in employment and real aftertax income. Although
lower wage hikes will improve West European
competitiveness and profits, an expected slowdown
in US and Canadian GNP growth will make
Western Europe more dependent on investment
and increased trade with other areas to keep their
economic expansion going.
Investment should continue to make an important
contribution to Big Four growth in 1985. Capacity
utilization in the European Community already has
reached 82 percent this year and is only 2 percent-
age points below the 1979 peak; this is due in part
to the closings of outmoded factories. Cost cutting,
export expansion, and the declining inflation-5
percent this year versus 6 percent last year-with
its beneficial impact on interest rates and debt
service should help firms improve their cash posi-
tions for needed investment.
Secret
Big Four
-0.2
0.6 1.1
2.4
2.5
West Germany
-0.3
-1.1 1.3
2.6
2.7
France
0.2
2.0 0.7
1.8
2.0
United Kingdom c
-0.7
2.1 3.4
2.5
2.7
Italy
0.2
-0.4 -1.2
2.8
2.6
a OECD Secretariat data.
b Consenus forecasts from the 15 February 1985 issue
the average of projections by 40 US and foreign companies and
economic institutes.
c The OECD uses an average of three UK GNP series that differs
from the series in the Economic and Energy Indicators.
The Big Four countries will probably continue
benefiting from the expansion in world trade. The
West Europeans expect to go on gaining market
shares worldwide because of the strong dollar,
despite its decline in recent weeks. The major
forecasters believe that the foreign trade sector will
give the Big Four economies as much, if not more,
of a boost this year despite the projected slowdown
in US import demand. According to the prelimi-
nary OECD forecast, net exports will account for
almost one-third of the Big Four's growth in 1985.
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West European governments are cutting their bud-
get deficits by shifting more of the tax burden from
businesses to households while holding the line on
transfer payments. The exception has been the
United Kingdom, where 1982 personal income tax
cuts spurred an early start to its recovery. The
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Big Four:
General Government
Budget Deficits as a Share of GNP a
Big Four
4.5
4.7
4.8
4.5
West Germany
3.4
2.7
2.2
1.4
France
2.5
3.3
3.3
3.8
United Kingdom
2.4
3.5
3.3
2.7
12.7
11.8
13.7
13.6
sonal tax cut scenario, Bonn would have to cut
taxes by 15 percent, Paris and London by 10
percent, and Rome by only 5 percent to achieve a
1-percentage-point hike in growth. The British
Government would suffer the sharpest deteriora-
tion in its budget. Reduced unemployment in
France and West Germany, however, would offset
some of the initial decline in revenues. Italy, on the
other hand, would see its government deficit actual-
ly decrease. All four countries would enjoy lower
inflation because gross wages could go up by
smaller amounts and still give workers their desired
take-home pay. The decline in French inflation
would be double that of any other Big Four coun-
try.
OECD estimates that the average Big Four govern-
ment deficit (national plus local) will fall to 4.5
percent of GNP this year, down from last year's 4.8
percent.
Policies To Boost Growth
Although none of the Big Four governments cur-
rently is considering a shift in economic policy,
leaders undoubtedly will be reassessing their strate-
gy as they face elections over the next two years.
Opposition focus on unemployment could create
considerable political pressure on incumbent gov-
ernments to shift gears and stimulate growth.
Using our Linked Policy Impact Model (LPIM), we
looked at several policies to raise GNP growth by.1
percentage point for the Big Four. We found that:
? Cuts in personal income tax rates would be the
most effective way to raise growth and stabilize
or possibly lower unemployment without igniting
inflation.
? Individual tax cuts combined with reduced busi-
ness taxes or with more government spending also
would raise GNP growth but would be somewhat
less effective in reducing. unemployment.
? More rapid money supply growth produced little
growth but quickened the pace of inflation and
exchange rate depreciation.
The benefits and costs of each policy would be
spread unevenly among the Big Four. In the per-
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26 April 1985
The OECD has pointed out that West Germany
and the United Kingdom both have current account
surpluses and small government deficits, giving
them room to reflate their economies. Again, using
our model, we found that, if Bonn implemented in
mid-1985 tax cuts planned for 1987 and London
doubled the 1 April 1985 tax reduction to the level
originally proposed, the economic benefits for the
Big Four would compare favorably to the scenario
where all four countries cut taxes to boost growth.
GNP growth in 1987, would be 0.4 percentage point
higher in West Germany and Italy, 0.3 percentage
point higher in France, and only 0.2 percentage
point higher in the United Kingdom. The unem-
ployment rate, however, would be 0.9 percentage
point lower in West Germany and 0.3 percentage
point lower in the other three countries.
The near term prospects for a change in direction
in Big Four economic policies appear dim but may
change as elections begin to dominate government
thinking. Several times this year, West German
Finance Minister Stoltenberg publicly ruled out
any loosening of West German fiscal policy; he was
probably trying to preempt suggestions at the Bonn
Summit that West Germany reflate. Despite Na-
tional Assembly elections in 1986, the French
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Secret
Big Four: Effects of Alternative Tax
and Spending Scenarios
West German Big Four Individual and Individual Tax Cuts
and UK Individual b Business and Increased
Individual Tax Cuts Tax Cuts Government Spending
Tax Cuts a
Government deficit as a
share of GDP
1985
-0.3
-0.8
0.1
-0.2
1986
-0.4
-0.7
0.3
-0.1
1987
-0.2
-1.3
0.6
0
Billion US $
1986
-6.1
-10.8
-13.6
-13.1
1987
-8.4
-19.8
-24.3
-23.4
a Assumes that West German tax cuts planned for 1987 are
implemented in mid-1985 and that the United Kingdom doubles
the 1 April 1985 tax cuts.
b Assumes that all four major West European governments adopt
policies in mid-1985 that boost their economic growth by 0.5
percentage point in 1985 and 1 percentage point in 1986 and 1987.
Government appears wedded to maintaining aus- Prime Minister Craxi's coalition makes a dramatic
terity. Although the Thatcher government has a shift in Italian policy unlikely regardless of eco-
solid parliamentary majority, Tory backbenchers nomic conditions.
probably will become more difficult to control if the
British economy continues to grow too slowly to
reduce joblessness. The fractious character of
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European Community: Growing
Agricultural Exports
Although world agricultural trade has slowed in
recent years, we expect the European Community,
with the help of substantial export refunds, to
aggressively promote its exports for the next several
years to alleviate mounting surpluses. The EC has
become the world's second-largest agricultural ex-
porter after the United States. Trade tensions
between the EC and rival exporters-the United
States, Australia, Brazil, and others-will increase,
particularly in grain and meat markets.
Community Subsidies and Protection
The EC's generous system of price supports and
import levies has created huge agricultural surplus-
es while protecting Community farmers from out-
side competition. The Common Agricultural Poli-
cy's (CAP) support prices are set not at market
prices but at levels that provide politically accept-
able incomes for farmers. From 1970 to 1984, EC
producer prices rose steadily at an average 8.6
percent annually. In contrast, world food prices
fluctuated widely around a trend rate increase of
only 6 percent annually and, moreover, are current-
ly well below the peak years of 1974 and 1980. To
protect its farmers from these lower world prices,
the CAP also uses import levies to equate import
and domestic farm product prices.
EC farmers' response to guaranteed high prices,
import protection, and no production limits was a
sharp increase in production in the 1970s. Agricul-
tural output rose 20 percent in volume and by the
late 1970s, the EC had largely achieved the overall
goal of the CAP-self-sufficiency in foodstuffs.
Production of most commodities continues to grow.
In 1984 a combination of exceptionally good
weather, broad use of new plant strains, and in-
creased culling of herds helped boost grain produc-
tion 21 percent and beef and veal by nearly 6
percent. The Community already has substantial
Food Prices, 1970-84
EC producer
prices a
world food
prices h
84
Weighted average of EC member countries' prices in national currencies.
b Weighted average of traded food commodities in US dollars.
stored surpluses in dairy products, meat, and wine.
The "butter mountain," for example, now stands at
1 million metric tons, more than the combined
weight of the entire population of Belgium; the
"wine lake" exceeds 9 billion liters; and beef
supplies exceed 600,000 tons.
The Export Push
As surpluses mounted, the EC has looked increas-
ingly to world markets, using export refunds to
make its products competitive. In 1983, for exam-
ple, the Community spent $1.4 billion on grain
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European Community:
Production of Major
Agricultural Commodities
European Community: Self-s uflIcient:Index=100
Self-Sufficiency Ratios for
Selected Agricultural Products
Cereals (excluding rice) 86 103
Wheat 94 118
Potatoes 100 102
Sugar 82 136
Total vegetables 98 97
Total fresh fruit 80 79
Wine 97 102
100 105
98 105
91 119
Whole milk powder NA 393
Skimmed milk powder NA 126
Eggs 99 102
Beef and veal 90 105
Pork 100 101
Poultry 101 110
Grains
90.3
100.0
118.0
122.0
131.0
124.0
150.0
Wheat
36.7
40.2
55.1
54.4
59.8
59.2
75.8
Beef and veal
6.0
6.7
7.1
6.9
6.6
6.9
7.3
Pork
7.0
7.8
9.3
9.5
9.4
9.7
9.7
Poultry
2.7
3.2
4.0
4.1
4.4
4.3
4.3
Dairy b
86.3
92.5
104.7
104.9
108.2
112.3
105.0
Eggs
3.8
3.9
4.1
4.2
4.2
4.1
4.3
Sugar
8.8
10.4
13.0
16.0
15.9
14.7
14.7
a European Community and USDA estimates.
b Fluid milk equivalent.
export refunds, more than the total it has ear-
marked over the next five years for the develop-
ment of information technology. Although export
refunds have risen fourfold since 1970, the Com-
munity still finds it cheaper to subsidize exports
than go on storing the goods.
The Community's aggressive marketing of its sur-
pluses has been successful in increasing total EC
agricultural exports from less than $5 billion in
1970 to nearly $24 billion in 1983, and in increas-
ing EC world market shares from 8 percent to 11
percent. EC gains have come in many product
categories. EC red meat exports have climbed to
third place by volume from fifth place in 1970.
Before 1978 the Community was a net wheat
importer, but its exports now trail only those of the
United States and Canada. The EC now supplies
nearly 10 percent of USSR agricultural imports-
up from 2.5 percent in 1970-and 31 percent of
OPEC' farm imports-up from 23 percent in 1970.
Increasing EC exports have caused considerable
tension between the Community and other export-
ers. The United States especially, but Australia,
New Zealand, and Brazil, as well, have criticized
the Community's system of export subsidies for
Secret
26 April 1985
distorting competition in world markets. Problems
continue to worsen in at least three agricultural
commodities:
? The EC has more than doubled its share of wheat
exports to the world to 16 percent since 1970,
primarily at the expense of Australia; the US
share remained stable at 38 percent. According to
a USDA study, the United States would have
gained 3.5 percentage points of world market
share-and world wheat prices would have
climbed by nearly 9 percent-had the EC adopt-
ed a free trade policy for wheat in 1980.
? The Community accounts for about one-half of
world butter exports, and sales in 1982-83 to the
Soviet Union were at prices as much as 50
percent below world market prices. Australia,
New Zealand, and the United States have
claimed these sales violate the GATT and the
International Dairy Agreement.
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European Community: Agricultural Exportsa,
1970-83
I I 1 1
80 83
? The EC's beef exports to developing countries
have stymied sales by Australia, Brazil, and
Kenya.
Prospects for EC Agricultural Exports
In our judgment, the EC agricultural sector has the
technology and financial resources to continue
boosting production faster than consumption-par-
ticularly in grains and meats. Given this capability,
and given present CAP policies, we believe most
EC agricultural exports will continue growing at a
relatively rapid pace.
EC grain export supplies by 1987
could rise by nearly 50 percent over 1983 levels.
Because of restrictions on dairy production and EC
sugar trade preferences under the Lome conven-
tion, sugar and dairy export supplies are likely to
European Community: Agricultural Export
Refunds, 1970-84
I i I I I I I I I I I I I I
0 1970 75 80 84
EC enlargement to include Spain and Portugal-
now scheduled for 1 January 1986-also will tend
to boost surpluses. Enlargement will initially re- 25X1
duce EC exports to the rest of the world as the two
new members purchase more food from the EC
Ten. In the longer run, however, once Spain and
Portugal's 3 million farmers come under the full
umbrella of CAP support, high-support prices will
encourage Spanish and Portuguese agricultural
output) 25X1
The expected slowdown in the annual growth of
world food trade-from 4 percent in the 1970s to 2 25X1
percent in this decade, as projected by the
USDA-is not likely to hold back EC exports. EC
export refunds will continue to guarantee Commu- 25X1
nity price competitiveness in world markets. The
Community is now seeking to boost CAP revenues
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by 20 percent in 1986. Under these revenue plans,
we expect the Community to be able to finance
subsidies and export refunds, at least until 1987.
Implications
Competition among US, EC, and other exporters
will intensify, particularly in wheat and beef over
the next several years. Although the EC will have
additional funds that could be used for storing
more goods, we believe it will become more aggres-
sive in exporting. In the case of wheat, we expect
US and other producers' market shares will be
seriously challenged over the next two years. More-
over, EC beef exports will probably continue to cut
into the market shares of Australia, Argentina, and
some developing countries. Bilateral trade frictions
are likely to increase at about the same time the
proposed GATT negotiations are in full swing.
Although the EC agreed to the study of agricultur-
al export subsidies under the GATT, its recent
statement ruling out discussions on the fundamen-
tals of the CAP will probably come under strong
attack.
Secret
26 April 1985
Internally, growing EC financial support for agri-
culture will continue to soak up financial resources
that could be spent to revitalize the region's indus-
trial base. The fourfold increase in support of
agriculture in the past decade yielded no new
jobs-the number of farmers actually declined by
nearly 30 percent in the 1970s. With the prospects
of double-digit unemployment and lackluster eco-
nomic growth for the next few years, the EC's
current heavy emphasis on agriculture-politically
and economically-will limit the Community's re-
search in new technologies and restructuring of
older line industries.
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Secret
India: Rajiv Gandhi's Search for
Technology and Productivity
Prime Minister Rajiv Gandhi's interests in technol-
ogy and productivity have revived economic liberal-
ization efforts. His moves to ease government re-
strictions on private production and investment-
basically moderate in our view-are so impressive
by Indian standards that press reports describe
Indian businessmen as "drunk with euphoria." A
more cautious approach in foreign trade and invest-
ment policy, however, probably reflects concern
about future foreign payments problems as well as
continuing emphasis on self-reliance. Although
Gandhi still plans to retain overall government
control of the economy, he apparently believes that
a dose of bureaucratic efficiency and competition in
the private sector will spur modernization, limit
corruption, and ease strains on the budget.
Gandhi's economic reforms open new opportunities
for ties with Western business but do not ensure
future overall growth.
Shifting Economic Approach
Since independence, Indian policymakers have reg-
ulated the economy through an extensive system of
direct controls as well as a full range of macroeco-
nomic policies. Even though a multitude of minor
policy adjustments since 1980 has loosened bureau-
cratic bottlenecks, Rajiv inherited policies that
protect most Indian businessmen from foreign and
domestic competition and require them to seek
government permission before increasing output
beyond authorized ceilings. After Indira Gandhi
was assassinated last fall, Indian businessmen en-
thusiastically anticipated further reforms from a
Prime Minister with technical interests.
Improvement in productivity, absorption of
modern technology, and fuller utilization of
capacity must acquire the status of a national
campaign.'
Rajiv Gandhi's initial moves have fueled an un-
precedented atmosphere of optimism among corpo-
rate leaders:
? Licenses are no longer needed to establish or
expand capacity outside big cities in 25 industries
including machine tools, automobile parts, scien-
tific instruments, and some electronic
components.
? Manufacturers of motor vehicles, paper products,
and some types of machinery and electronic
goods may now vary their product mix within
broad categories but must still seek government
permission before investing in additional
capacity.
? Antimonopoly legislation, which imposes addi-
tional restrictions on production and investment,
will now apply to only about 800 corporations,
compared with more than 3,000 in 1984.
? Small firms may now triple their sales and almost
double their investment without losing tax ex-
emptions or becoming subject to the industrial
licensing system.
? The government department that supervises pri-
vate corporations has been shifted to a ministry
that favors production rather than restraint.
Businessmen will also benefit from a substantial
reduction in corporate and personal tax rates and
lower import duties on some machinery imports.
According to press reports, they are especially
pleased that the government is beginning to plan
tax policies for several years ahead. Fiscal incen-
tives will be partially offset by cuts in business
writeoffs, increased prices for petroleum products
and rail services, higher excise taxes on many
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manufactured goods, and restrictions on govern-
ment loans to poorly managed or nonessential
private corporations.
Another turning point has arrived with ...
microelectronics and computers. In the earlier
(industrial) revolutions, whoever got left behind
found it extremely difficult to catch up ... we
must see that we are not left (behind).'
The electronics industry is a major beneficiary.
Production licenses will be issued far more freely,
even to large companies and for consumer goods
previously viewed as luxuries. Ceilings on output of
micro- and mini-computers have been eliminated
and import duty on computer components has been
greatly reduced while high tariffs on finished com-
puters protect domestic manufacturers. The soft-
ware industry has been made eligible for tax
concessions. Development of mainframe computers
and some high-technology products will continue to
be a government monopoly.
Modest Moves in Foreign Trade and Investment
We want a new dynamism in our economy, but
we cannot do it entirely on our own.... We need
help from foreign business to help us build self-
sufficiency.... It is not feasible to open up
industry completely to free competition from
other countries. It would not be fair to our
industries.'
Import policy changes have been relatively cau-
tious, combining safeguards for domestic manufac-
turers with liberalization to promote modernization
and exports. Licensing regulations, which will be
valid for three years, remove restrictions on some
industrial machinery and offer a new duty-free
import scheme for exporters, but tighten controls
on additional items that compete with Indian prod-
ucts. New Delhi has promised easy access to im-
ported technology, especially for electronics and
export industries, and procedures for employing
foreign technicians have been simplified. The gov-
ernment has even emphasized that foreign equity
investment-previously tolerated but not encour-
aged-will be welcomed in electronics and oil
exploration.
Secret
26 April 1985
Other export promotion initiatives are surprisingly
meager in view of the emphasis Gandhi's economic
advisers have placed on the need to earn more
foreign exchange. Press reports suggest that new
income tax concessions on reinvested export profits
provide little additional incentive since they replace
previous benefits and are no longer available for
trade with the Soviet Union. Gandhi is apparently
relying on easier access to imported technology and
improvement in overall industrial performance to
make Indian exports more competitive in world
markets
Overall Indian economic policy still stresses self-
reliance. Government approval is necessary before
an Indian firm may purchase or lease foreign
technology, even in industries recently exempted
from industrial licensing restrictions. Domestic
manufacturers are still required to reduce gradual-
ly their use of imported parts and now are also
expected to develop their own research skills. New
Delhi remains reluctant to open the Indian market
to foreign investors who cannot contribute technol-
ogy or promote Indian exports.
Gandhi clearly intends the government to retain
control of the direction of the economy. Although
easing detailed regulations, he has retained the
basic structure of import and industrial licensing,
preferences for small producers, and close supervi-
sion of large corporate groups. He has even tight-
ened controls in a few areas-on pollution, for
example, following the Bhopal disaster. Gandhi
apparently has no plans to rely on market forces to
allocate basic consumer goods and will continue the
public distribution system that supplies grain to
urban consumers and supports prices farmers re-
ceive for wheat and rice.
Gandhi hopes to make the bureaucracy more effi-
cient, not less important. He has repeatedly empha-
sized decentralization of decisionmaking so that
public sector corporations can make business deci-
sions without interference from government minis-
tries. Indian industrialists report that bureaucratic
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Secret
approvals for private projects can be obtained more
quickly than in the past-perhaps because Gandhi
has ordered that no file be reviewed more than
twice.
Concern for bureaucratic efficiency-and govern-
ment revenues-has also prompted an anticorrup-
tion drive. Gandhi hopes to encourage increased
reporting of taxable income by lowering tax rates
and relaxing some controls that led businessmen to
conceal part of their production. Rewards for infor-
mation about smuggling have been increased; and
corporate contributions to political parties are once
again legal. According to press reports, some busi-
nessmen were surprised to discover that payoffs
could no longer influence excise tax policy. Many
Indian journalists remain skeptical of Gandhi's
"Mr. Clean" image, however, and question whether
he will forgo payoffs on large contracts that help
fund the Congress Party.
Economic Policy Still Evolving
Gandhi's resolve to create a more competitive
economic environment is yet to be tested. Despite
hints that some hardship is an acceptable price for
efficiency, Gandhi has retained substantial protec-
tion against imports and may slow the pace of
domestic decontrol if unemployment mounts or
business confidence weakens. Policy statements ex-
pected during the next several months will help
define Gandhi's commitment to economic liberal-
ization. Press reports suggest that a revised indus-
trial policy will focus on chronically unprofitable
firms in both the public and private sectors, and
may modify regulations that subsidize investment
in "no industry" districts. Gandhi assured a meet-
ing of international business leaders that he will
ease foreign investment rules further. Details of the
next five-year plan and of agricultural policy,
scheduled for release by July, will clarify govern-
ment investment and welfare plans. Reforms in
education-one of Gandhi's special interests-will
not be proposed until next year.
Gandhi's policy reforms and his probusiness image
do not ensure faster overall growth. His decontrol
moves directly affect only a small share of the
Foreign Payments Constraint
Increasing foreign payments strains could jeopar-
dize India's ability to become more productive and 25X1
efficient. Although international financial reserves
are now adequate-about $6 billion, equivalent to
four to five months' imports at the 1984/85 rate-
expansion of the domestic economy would require
a much faster growth in the volume of imported
petroleum and capital goods. Scheduled payments
to the International Monetary Fund and military
suppliers will mount sharply within the next two
years. Wary of falling into a debt trap, Gandhi and
his economic advisers are reluctant to risk a
substantial increase in commercial borrowing to
finance imports. We see a less than even chance for
discovery of additional petroleum deposits, rapid
export growth, or improved foreign aid prospects,
which would provide a more favorable foreign 25X1
25X1
payments scenario.
Indian economy-primarily exporters and corpora-
tions that produce capital equipment and consumer
durables. Even if liberalization is extended substan-
tially, the potential benefits can be realized only if
shortages of electricity become less severe and
agricultural output increases sufficiently to sustain
domestic demand for manufactured goods. Perhaps
most important, forthcoming foreign payments
strains may block India's ability to import goods
needed to modernize and increase production.
Mounting criticism that Gandhi is slighting the
poor in favoring India's middle class may emerge as
a significant political issue. Large cuts in taxes on
personal income, wealth, and inheritances directly
affect less than 3 percent of the population while
indirect tax hikes and the large budget deficit
threaten most pocketbooks. Few will be able to
afford products from the new boom sectors-auto-
mobiles and electronic goods. Central government 25X1
spending on welfare and rural development pro-
grams is stagnating. Although Gandhi says that
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Secret
reducing'poverty is his primary objective, his en-
Gandhi's'economic approach will accelerate inter-
est in business ties with the ?United States. At the
same time'; the potential-for bilateral misunder-
standing and friction is high. A new sense of
urgency about modernization- suggests India would
turn increasingly to Japanese or European suppliers
promptly if US export controls remain a significant
trade barrier, :and Gandhi's belief that the United
States is an unreliable'supplier then would be
reinforced. Indian officials already-contend that
economicliberalization, which the.United States
has encouraged;. can continue only if concessional
aid receipts remain high.-If balance-of-payments
strains limit India's-ability to modernize; they will
probably blame the United States for limiting
Indian borrowing from multilateral lending institu-
tions. F -1
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Spain: Reversing the
Economic Slowdown
Prime Minister Felipe Gonzalez's Socialist govern-
ment is now carrying out an ambitious and painful
adjustment program to correct the serious econom-
ic problems that have beset Spain since the 1973 oil
crisis. Although OPEC price hikes and world reces-
sion obviously were major causes, we believe Span-
ish policy errors made a bad situation substantially
worse. Although the Gonzalez program still has a
long way to go, the current account swung into
surplus in 1984, and real GDP growth has picked
up and should average 3 percent over the next few
years. Serious structural weaknesses still exist,
however, and the unemployment rate likely will
remain above 20 percent for the next few years.
Preliminary Efforts To Cure the Problems
Spain's economic growth rate plunged from 7
percent annually during 1960-74 to only 1.6 per-
cent during 1975-83-the sharpest fall recorded in
any OECD country for these time periods. Real
investment declined 2 percent per year on average
and more than 2 million jobs were lost, pushing the
unemployment rate to 18 percent. Spain's external
accounts also deteriorated sharply and severe infla-
tionary pressures built up after 1975.
Madrid was slow to respond to its economic prob-
lems, in part because the leadership was preoccu-
pied by the effort to establish democracy. In 1979
Madrid finally passed a national energy plan and
removed subsidies on oil prices that helped return
oil use per unit of GDP to its 1973 level. The pace
of peseta depreciation accelerated after 1979 re-
versing the decline in Spain's price competitiveness.
In an attempt to contain labor costs, the Suarez
government tried to reform labor regulations, but
the effort was belated and sometimes counterpro-
ductive. The Workers Statute in 1980 made layoffs
slightly less difficult, but also required high separa-
tion payments. In addition, the introduction of
collective bargaining made wage settlements more
rigid. Agreements reached at the national level
between the unions and the employers' association
establish a narrow band within which wage gains
must be negotiated at the company level. This has
particularly hurt firms operating on the margin and
in the less dynamic sectors.
The Socialist Program
After taking office in December 1982, the Gonza-
lez administration- in contrast to the expansion- 25X1
ary tradition of Socialist governments- concen-
trated on restoring economic. stability. It moved
quickly to establish and maintain a more realistic
exchange rate policy-restoring price competitive-
ness to about the 1973 level-introduced a strin-
gent monetary policy, and reined in government
spending.
25X1
Although the Socialists promised 800,000 new jobs,
their efforts to spur job creation have centered on
real wage cuts and legislative changes. Madrid was
able to hold wage increases this year to 5.5 to 7.5
percent under the Socialist UGT trade union's
agreement-inflation in 1985 will be in the 7- to 8-
percent range. Another decline in real wages is
expected in 1986. To stimulate youth employment,
Madrid has eliminated the obligation to pay an
indemnity to new hires if they are later laid off, put
youths under 25 under their parents' social security
benefit plan, and provided tax incentives. Madrid
has not introduced legislation to make layoffs
easier, however, because of the UGT's opposition.
The centerpiece of the government's longer term
economic strategy is the industrial reconversion
program. Under the first part of the plan, the
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Spain: Economic Indicators, 1960-84
- Spain
-Industrial countries
Comparative Real GDP Growth Rates
Percent
Real Unit Labor Costs a
Index: 1964=100
Comparative Inflation Rates
Percent
Real Investment Growth
Percent
Unemployment Rate
Percent
Index of Competitiveness
Index: 1980=100
a The Spanish Government did not collect data for labor costs or
productivity prior to 1964. Real unit labor costs were measured by deflating
the industrial labor cost index by the wholesale price index and dividing by
the industrial productivity index.
b Quarterly data. The index is a ratio of Spanish consumer price inflation to
a trade-weighted average of inflation in competitor countries, adjusted for
Secret
26 April 1985
I., I I I I I I I I I l i i I I I
70 1960 65 70 75 80 84
exchange rate fluctuations. A decrease in the index indicates an
improvement in competitiveness.
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Current account balance
1,109
-5,188
-4,980
-4,217
-2,482
1,995
Trade balance
-5,687
-11,725
-10,115
-9,181
-7,387
-4,018
Exports, f.o.b.
18,352
20,581
20,971
21,332
20,868
24,333
Imports, f.o.b.
24,039
32,306
31,086
30,513
28,255
28,351
Services, net
5,014
4,489
3,443
3,383
3,734
5,182
Tourism
5,558
5,720
5,709
6,122
5,942
6,958
Transfers, net
1,782
2,048
1,692
1,581
1,171
831
Long-term capital, net
3,216
4,252
4,294
1,827
3,088
3,299
Short-term capital,
errors, and omissions
-1,340
-406
-94
-1,096
-907
-734
Gonzalez administration introduced harsh mea-
sures to restructure "sunset" industries during
1984-86. For the first time, inefficient plants and
shipyards are being scrapped. In all, 9.5 percent of
the labor force in these sectors will lose their jobs.
The sharpest cutbacks, 30 to 40 percent, are envis-
aged for steel and shipbuilding. Madrid is also
supporting investments in technological improve-
ments in these traditional industries to increase
efficiency, lower production costs, and enhance
competitiveness on the world market.
The most far-reaching part of the plan aims to
reallocate resources to new industries that can spur
economic growth and lay the foundations for do-
mestic high technology. Madrid hopes to more than
double electronics production, more than quadruple
real exports, and boost private consumption. The
government's success in lining up joint ventures
with foreign multinationals and securing foreign
investment suggests some of these goals will be
within reach by 1987.
job losses. The Gonzalez government has neverthe-
less proceeded with its plans and has sent a strong
signal of its resolve by dismissing striking Commu-
nist shipyard workers. In most regions, Madrid can
count on the support of the UGT to limit strike
activity.
Spain appears to be on the road to a modest 25X1
recovery. Real GDP last year showed an increase of
about 2.5 percent, due mainly to a strong export
performance-which also turned 1983's $2.5 bil-
lion current account deficit into a surplus of $2
billion. Slack domestic demand, lower import
prices, and moderate wage gains helped reduce
inflation 3 percentage points to 9 percent.F I . 25X1
With export growth expected to slacken because of
a loss of price competitiveness and slower US
growth, Madrid is counting on private consumption
and investment to take up the slack this year.
Madrid's restructuring program has met strident
opposition in regions where the Communist trade
union has been able to exploit worker resentment of
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Because of the gains made in 1984, the Gonzalez
administration apparently believes that it can ease
monetary policy over the near term to stimulate
investment and employment. It has also introduced
tax cuts in hopes of boosting private consumption.
Madrid has balanced revenue losses with reduc-
tions in military spending and transfers to public-
sector companies in order to avoid sacrificing the
gains.made so far in reducing the budget deficit.
We expect that GDP will expand no more than 3
percent annually in 1985 and 1986. Real wage
losses, and a lagged response to lower interest rates
and labor law reforms probably will limit private
consumption and investment growth. Firms may
respond to real wage cuts and greater labor market
flexibility by hiring more workers, but the slow
pace of economic growth and demographic trends
suggest that the jobless rate will be above 20
percent as the Socialists enter the 1986 elections.
Secret
26 April 1985
Political Implications
Even though Gonzalez will have made little or no
progress on unemployment-the issue that con-
cerns voters most-and his austerity program has
hurt his constituents, he should win next year's
election because he faces no strong opposition. We
believe workers have no incentive to undermine the
Socialists as long as the only alternative is the
rightwing Popular Alliance. Moreover, all of
Spain's political parties, with the exception of the
far left, agree on the need for an industrial restruc-
turing program-a topic that probably will stay on
the political front burner because it directly affects
workers' interests.
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Energy
Moscow Plans More The US Embassy says the Oil Ministry is planning to produce slightly less
I vestment, crude oil this year than originally targeted in 1984. This is the first time that
L_I Less Oil the Ministry has planned to produce less than was targeted in a previous year.
Output during the first quarter was 6 million tons, about 4 percent, below that
posted in the same period last year. Investment in the industry, however, is
planned to increase substantially-by about 15 percent. Meanwhile, several
West Siberian oil officials reportedly have been fired in recent weeks. This
second wave of dismissals is in keeping with General Secretary Gorbachev's
demand that appointments be based on ability rather than political connec-
tions. For the first time some of those dismissed reportedly face criminal
charges, probably for mismanagement.
Record Soviet Oil
Exports to the West
in 1984
OECD data indicate that in 1984 the USSR sold to OECD nations over 1.6
million barrels per day (b/d) of oil and oil products. This level surpasses the
previous record in 1983 by about 50,000 b/d. The increase evidently came in
reexports of OPEC oil. Recent Soviet trade data indicate that the reexports 25X1
were steped up by roughly 50,000 b/d in 1984, primarily from Iraq and Saudi
Arabia. Total Soviet oil exports to the West and to LDCs that pay hard
currency probably earned the Soviets almost $16 billion last year-an increase
of some $300 million over 1983 earnings, despite the slight fall in world oil
prices. 25X1
Soviets Concentrate The Soviets are likely to sign contracts soon totaling nearly $3.5 billion for
on Gas Production three sour-gas processing facilities that will substantially expand Soviet
production capacity by 1989. A gas extraction and processing complex near
Karachaganak will process nearly 20 billion cubic meters per year and will
produce almost 225,000 b/d of condensate along with other products. Another
plant at Astrakhan will expand current facilities by an additional 6 billion
cubic meters per year, and a new desulfurization plant will handle associated
gas from the Tenghiz oilfield. In addition, the Soviets have recently reached
agreement to expand a gas pipeline to Finland and build a new one from
Bulgaria to Turkey, and plan a gasline to Greece. The projects highlight Soviet
emphasis on gas processing and distribution for domestic use and hard
currency exports that could preempt Western efforts to develop alternative gas
sources for Western Europe.
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Mauri nian-Algerian Algiers has agreed to provide partial financing to rehabilitate Mauritania's
Refs ery Venture sole oil refinery. The $13 million package is less than half the IMF estimated
cost to bring the idle facility on line. The US Embassy in Nouakchott believes
that the competitive position of the 22,000 b/d refinery will remain weak
because of limited domestic demand, high production costs, and low world oil
prices. The IBRD recently recommended that the state-owned facility remain
closed or be turned over to private operators for use as a storage facility. The
decision to proceed is contrary to the Taya regime's protests against the
previous government's financial imprudence but may be an attehiptto gain
some benefit from' the $150 million white elephant. Nevertheless, the loan is
another sign of Algeria's willingness to support the new regime.
l Algerian
wing
Algeria is seeking $1 billion in new foreign financing for its development
program. This loan follows closely on the heels of a $600 million loan floated in
January and brings to $5 billion the total amount of foreign borrowing since
1982. Algiers continues to enjoy an excellent credit rating despite lower oil
revenues and the largest debt burden of any Arab OPEC state-$16 billion.
Terms of the new loan-one-half of 1 percentage point above LIBOR-are
slightly above the January rate but still low compared with other Third World
countries. Recent borrowing only partially offsets the $4 billion in debt service
costs this year-33 percent of export receipts. The government probably'will
increasingly rely on trade credits to bridge the financing gap during the
1985-89 Development Plan.
Global and Regional Developments
Malaysia's
participation
in International
Rubber Agreement
Malaysia-which produces almost half of the world's natural rubber-is
reassessing its participation in the International Natural Rubber Agreement
(INRA). Kuala Lumpur has been disappointed with INRA's reference price
structure that has not kept pace with rising production costs. Earlier this
month Malaysia and other members of the Association of Natural Rubber
Producers agreed to make higher reference prices a key issue at this week's
INRA renegotiation meetings. Kuala Lumpur last week also announced a
pricing move that effectively eliminates Malaysia's rubber export'duty, 1?'.
probably as a bargaining maneuver. We believe producer countries will be
successful in negotiating a higher reference price structure, in which case
Kuala Lumpur is likely to sign the new agreement. If not, Malaysian
participation will be in doubt.
SSR May Ratify
Common Fund
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26 April 1985
A Hungarian diplomat told a US official that there is a 60-percent chance the
USSR will ratify the Common Fund Agreement on Commodities. The Fund
has 85 of the 90 ratifications and $237 million of the $313 million in capital
contributions needed to go into effect. Moscow
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In 'a Blocks
5Vute Agreement
as the first step toward the "New International Economic Order."
may try to gain the maximum political benefit by becoming the 90th country
to ratify. The United States has signed but not ratified the agreement. Moscow
prefers to keep its economic relations with developing countries on a bilateral
basis but realizes it would significantly enhance its image in the LDCs by
joining the Fund. The agreement has great symbolic value to the Third World
increased criticism at the next IJO session in November 1985.
The International Jute Organization (IJO), a producer/ consumer group, met
in Bangladesh last month against a background of flood-ravaged crops and
gloomy predictions for future markets. India, a major exporter, effectively
vetoed two agricultural projects designed to reduce production costs and
increase yields making jute competitive with synthetics. The Indians apparent-
ly were reluctant to share commercial data with competitors, although the US
Embassy in Dhaka doubts that India's growers have any secrets worth
protecting. Bangladesh, where sales of jute and jute products are the second-
most important source of foreign exchange, bitterly criticized India. The
Embassy notes that US unwillingness to pay its IJO assessment will draw
Developed Countries
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26 April 1985
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Opp sition Strategy Several senior. Labor and Tory politicians have established an Employment
on ,IUK Unemployment Institute to devise strategies for dealing with unemployment. The aim,
record.
according to press reports, is to study the causes of joblessness, attack the
government's record on the issue, and promote alternatives. The institute,
which will begin work after the local elections in May, will reportedly seek a
common ground between the opposition and the left wing of the Conservative
Party on measures to reduce unemployment. The Tory government is most
vulnerable on unemployment-now 13 percent and rising-but, given other
economic priorities, has done very little about it. Despite broad concern over
joblessness, the creation of the institute does not presage a political realign-
ment. Its proposals, however, may embarrass Thatcher, keep unemployment
high on Parliament's agenda and in the public eye, and force her to defend her
Less Developed Countries
Peru's Probable Center-left candidate Alan Garcia-the likely winner of the May runoff-
New/Economic Path favors highly nationalistic economic policies. Domestic economic policy will be
aimed at restoring growth and reducing foreign dependency. He will stress
agricultural development to eliminate food imports and import-substitution
and tariff barriers to reactivate industry. To fund development, the candidate
wants to heavily tax wealthy individuals and corporations and implement
tighter planning to balance the budget. On debt, Garcia has also called for by-
passing the IMF, limiting Peru's annual debt servicing to 20 percent of
exports, and promoting joint action among Latin nations to secure easier
repayment terms. Tighter control over foreign investment is likely, but foreign
firms probably would not be nationalized. The candidate also is on record as
favoring multiple exchange rates and exchange controls to bolster exports and
reduce imports.
Flooding in Brazil's Extensive flooding in impoverished northeastern Brazil will present a serious
exican Sale of
Secret
26 April 1985
soybean harvests, raising prospects of additional economic problems.
standing water in more productive southern areas has slowed the cotton and
economic challenge to recently installed President Sarney. Floods have left
over half a million people homeless in a region that suffered six consecutive
years of severe drought, which ended only last year. Polio and diphtheria and
higher reported incidences of influenza and hepatitis are adding to the,
northeast's woes. The government is sending relief shipments of food and
temporary shelter, but high waters will slow`deliveries to many areas. Plans are
being made for massive reconstruction but the costs-probably hundreds of
millions of dollars-will be a heavy burden for debt-ridden Brazil. Meanwhile,
Mexico City's highly touted plan to sell many of its state-owned enterprises to
help cut the public-sector budget deficit in 1985 is unlikely to result in
significant savings. Last week's announcement that the government is seeking
bids for shares of 35 of the 127 state firms promised for sale has evoked little
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oroccan Harvest
Prospects Dim
enthusiasm from domestic or foreign investors.
serious crunch in the last half of 1985.
Morocco's important winter grain crop is seriously threatened because of
drought over the past two months. The US Embassy estimates that production
will fall to 3.4 million tons this year, down 8 percent from 1984 and far below
the 6.3 million tons required to meet domestic demand. Four of the past five
cereal harvests also were sharply reduced by drought. The grain shortfall this
year will exacerbate the already serious shortage caused by the cutoff of US
CCC grain credits for 1985. Larger-than-anticipated cereal imports will
burden Morocco's strained financial position-$49 million in foreign exchange
reserves remain. Sufficient grain supplies probably have been secured to see
Morocco through June, but additional supplies will have to be found to avert a
Nigerian Truck Lack of trucks to move goods from Nigeria's major ports is becoming the
ortages and biggest obstacle to transshipping food aid for famine-stricken Chad and Niger,
Relief Efforts according to the US Embassy in Lagos. Congestion at Nigeria's ports is
Zambia To Establish Lusaka's IMF standby agreement will be reinstated upon final agreement on a
Foreign Currency limited auction system designed to improve the efficiency of Zambia's foreign
Auction currency allocations, according to US Embassy reporting. The Fund suspend-
greater than at any time in the past three years. The truck shortage results
from lack of spare parts and replacement vehicles and the already heavy use of
Nigerian trucks to move food aid in neighboring states. Fear of delays in
delivery of essential domestic goods, such as fertilizer, may reinforce the 25X1
government's reluctance to allow donors to use the port at Lagos. Port
congestion also provides the government a justification for denying transship-
ment of food aid to Chad despite growing international pressures to do so.
ed the standby agreement when Zambia fell behind on repayment of its 25X1
foreign debt, which had been rescheduled last July. The auction system that
was pioneered in Uganda allows for a limited amount of foreign currency to be
sold on the open market each week in addition to that allocated under official
foreign exchange controls. Lusaka also must pay some $3 million in arrears
owed to the IMF since February before the Fund will resume disbursements.
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,Status of Soviet The "Long-Term Consumer Goods and Services Program" has not gotten very
/Consumer Program far, as indicated by a recent joint resolution by the Central Committee and the
Council of Ministers that addresses only housing repairs and improvements.
The resolution follows similar actions this year on telephone services and
footwear. The program has been in the works since 1983. Completion of the
program-a major component of the next five-year plan-was originally
scheduled for mid-1984. Last January a commission staff member said it was
delayed because a sufficiently "impressive" program could not be devised in
part due to the shortage of internal investment and drawn-out negotiations
over appropriate consumer goods deliveries from Eastern Europe. The recent
piecemeal approach indicates the Politburo has not yet decided on any major
redirection of resources to consumers.
7 Soviet Activity in
the International
Titanium Market
In a major departure from recent Soviet marketing policy, Techsnab, the
organization newly appointed to take responsibility for Soviet titanium exports,
lowered its price of ingot-grade titanium sponge to compete with Japanese
producers. As a result, a large quantity of the titanium sponge was recently
sold to a West German steel company. In a related move, the Soviets reentered
the European titanium scrap market after several years' absence to take
advantage of recent price increases. Soviet titanium exports declined in the
early 1980s largely because of increased military and civilian demand and low
world prices. The moves to expand exports may reflect a desire to increase
hard currency earnings now that sufficient titanium is stockpiled or otherwise
available for internal consumption.
ban-Soviet
ugar Problems
a poor harvest has forced Havana to purchase
several hundred thousand metric tons of sugar on the world market since
October to satisfy its export commitments.
Havana
sells sugar to Moscow at over 10 times the world market price. Cuban sugar
output this year will do well even to equal last year's harvest of 8.2 million
tons. Havana's export efforts probably are motivated by President Castro's
pledge last December to honor commitments to CEMA.
De luation
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26 April 1985
Hanoi in early April devalued its currency by nearly 90 percent against the US
dollar in an attempt to reverse last year's sharp drop in hard currency export
earnings and to divert black-market revenues into the government's nearly
empty foreign exchange coffers. The new rate (100 dong per dollar) is still less
than half the black-market rate. Long recommended by the IMF, the
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Secret
devaluation represents a victory for the pragmatic faction in the Politburo and
may presage further economic reform. The pragmatists are considering
measures to improve trade relations with the West. Restrictions on foreign
trading companies in Ho Chi Minh City have been loosened and a liberalized
foreign investment code is under consideration. Opposition from hardliners,
however, could reverse the trend if substantial economic improvement is not
soon evident.
29 Secret
26 April 1985
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