INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807530001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: August 19, 2010
• Sequence Number: 1
• Publication Date: May 17, 1985
• Content Type: REPORT

Intelligence
Directorate of Seeret
Weekly
International
Economic & Energy
DI IEEW 85-020
17 May 1985
Copy
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 Sanitized Copy Approved for Release 2011/03/07 : CIA-RDP97-00771 R000807530001-9 Secret
International
Economic & Energy Weekly
1 Perspective-Prospects for the US-USSR Joint Commercial Commission
Meeting~_~
~S-Soviet Trade: No Major Increase Likely
7 Economic Policy Under Gorbachev
11 F dor: Free Market Reforms
Energy
International Finance
Global and Regional Developments
National Developments
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i Secret
DI IEEW 85-020
17 May 1985
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Secret
International
Economic & Energy Weekly
The US-USSR Joint Commercial Commission (JCC) meeting scheduled for
20-21 May-the first formal government-to-government trade talks since
1978-will be more important politically than in economic terms. The Soviets
view increased trade with the United States as one step among many now
being undertaken to normalize bilateral relationsF___1 25X1
25X1
The US-USSR Joint Commercial Commission (JCC) meeting next week does
not hold the promise of a large-scale revival of bilateral tradeF___1 25X1
7 Economic Policy Under Gorbachev 25X1
Since taking office two months ago, General Secretary Gorbachev has
expressed dissatisfaction with the performance of the Soviet economy. His
economic proposals, however, are vague and, on balance, we do not believe that
these programs will lead to a significant improvement in Soviet economic
performance. 25X1
11 Ecuador: Free Market Reforms 25X1
Since assuming office last August, President Febres-Cordero has turned to
market forces to stimulate entrepreneurial activity. Although we believe
economic recovery will probably continue along with improvements in the
external accounts, efforts to extend the reform program may be thwarted by
political feuding with the congress, higher international interest rates, and 25X1
Despite sustained economic growth, Pakistan is suffering from two years of
agricultural problems, severe power shortages, and a deteriorating foreign
payments position, which could cause political difficulties for President Zia.
15 Pakistan: Economy Becoming a Political Issue
While tight world supplies and the strong US dollar have helped boost cocoa
earnings recently, world demand is growing slowly and a return of surpluses
and lower prices is expected over the longer term. Ghana and Nigeria are
losing market shares as new competitors, Brazil and Malaysia, and a 25X1
iii Secret
DI JEEW 85-020
17 May 1985
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Secret
International
Economic & Energy Weekly
The US-USSR Joint Commercial Commission (JCC) meeting scheduled for
20-21 May-the first formal government-to-government trade talks since
1978-will be more important politically than in economic terms. The Soviets
view increased trade with the United States as one step among many now
being undertaken to normalize bilateral relations. As such, the Soviets appear
to consider JCC talks as part of an ongoing process to encourage trade, build a
business constituency to represent Soviet interests in both the commercial and
political spheres, and improve Moscow's image in the eyes of the US public to
Moscow probably expects the United States to show some flexibility on trade
matters and particularly hopes to gain access to selected technologies and
equipment. Although generally disappointed with the contributions of Western
technology to their overall economy, the Soviets continue to seek US technol-
ogy and goods. We do not believe the Soviets expect substantial progress on the
key issues they intend to raise at the meeting-notably export control lists and
restrictive trade practices-but they will look for, and probably will publicly
acclaim, any positive movement. They would, in fact, probably proclaim the
JCC a success if progress were made on even some of the relatively minor is-
sues-the ban on Soviet fur skins, for example, or reinstatement of Aeroflot
landing rights.) 25X1
Moscow apparently thinks that any evidence of improved US-Soviet relations
will contribute to the American public's skepticism about US defense pro-
grams and about administration resistance to Soviet initiatives abroad. The
Soviets may also hope that prospects of increased trade could lead US
businessmen to urge US policymakers to adopt more conciliatory positions on
arms control or, similarly, to avoid policy decisions that Moscow views as
If the JCC is successful, we believe Moscow will take additional steps to
promote trade. The USSR will likely buy some food-processing and consumer
goods manufacturing equipment, and possibly several turnkey plants. Orders
may, in fact, have been delayed to coincide with or closely follow the JCC ses-
sion. Nevertheless, economic realities will continue to constrain rapid growth
in bilateral trade over the next several years:
? Moscow has developed alternative suppliers in Eastern and Western Europe
to reduce dependence on US goods; their proximity to the USSR, moreover,
gives them a marked advantage in raw materials trade and the compensation
deals that the Soviets favor.
1 Secret
DI IEEW 85-020
17 May 1985
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? Except for grain, US sales will be hampered because Soviet hard currency
earnings will be down, at least through 199O-largely the result of a
slowdown in oil exports. Even if funds were freely available, Moscow would
continue to be selective because of past problems in absorbing Western
technology.
 US-Soviet Trade: No Ma or
Increase Likely '
The US-USSR Joint Commercial Commission
(JCC) meeting next week-the first since Decem-
ber 1978-does not hold the promise of a large-
scale revival of bilateral trade. Although the USSR
has taken a somewhat more positive attitude to-
ward US-Soviet trade since the meeting of the JCC
working group in January, many contentious issues
remain unresolved. While Moscow realizes that
resolution of major issues is unlikely, the Soviets
would probably proclaim the session a success if
progress were made on even some peripheral issues
such as reinstatement of Aeroflot landing rights.
Moscow could interpret even such limited gains as
a sign of the administration's interest in moving
Following nearly a decade in which US-Soviet
economic relations have steadily deteriorated, So-
viet foreign trade officials and industrial managers
have recently indicated a renewed interest in ex-
panding trade relations. Although US firms so far
have been largely frozen out of the bidding as
primary contractors for major projects during the
12th Five-Year Plan (1986-90), Soviet officials in
December 1984 held out prospects that US firms
might play a greater role than they had in the 11th
Five-Year Plan. They are, moreover, pressing for
rapid resolution of some of the outstanding trade
issues so that Soviet enterprises will have time to
incorporate US imports in their plan calculations.
During talks held in early December 1984, a high-
ranking Soviet official discussed 15 potential areas
of cooperation-including energy projects and con-
sumer goods plants-with visiting US businessmen.
In January the Soviet delegation to the US-USSR
Working Group of Experts meeting in Moscow
The Soviet Union generally insists on the estab-
lishment of joint (or mixed) commercial commis-
sions to regulate its bilateral trade relations with
Western countries. Composed of midlevel and
high-level representatives of the respective govern-
ments, the delegations to these commissions gener-
ally are able to sign long-term trade agreements or
to commit their governments to the promotion of
bilateral trade through legislation, financing, or
other means. For the most part, these commissior25X1
meet on a regular basis-at least once a year ana
often more frequently. 25X1
The US-USSR Joint Commercial Commission
(JCC) has not met for six years-since the invasion
of Afghanistan-and the Soviets have expressed
their unhappiness over this interruption in govern-
ment-to-government contact. Soviet officials-who
think of the JCC as the nonagricultural equivalent
of the US-USSR Grain Consultations-cite the
absence of such a forum as evidence of the US
propensity to link economic and noneconomic is-
sues. Even when the JCC was meeting regularly,
however, the USSR complained that the United
States did not attach sufficient importance to it.
The US-USSR Trade and Economic Council, a
private organization, has maintained commercial
ties between the two countries in the intervening
period, but the Soviets have found it to be an 25X1
unsati.ffactory alternative. The Soviets look at
trade with a much longer perspective-thinking in
terms offve- and 10-year plans-than do US
businessmen, who generally come to the negotiat-
ing table ready to discuss a particular sale or
contract. Moreover, US businessmen cannot nego25X1
tiate most of the policy issues involved in overall
Secret
DI IEEW 85-020
17 May 1985
 seemed willing to compromise on solutions to long-
standing problems. A number of small contracts
were awarded to US firms in late January and
early February, and Soviet foreign trade officials
have resumed participating in joint commercial
seminars held at the US commercial office in
This turnabout in Soviet attitudes roughly coin-
cides with the reversal last fall in Moscow's year-
long refusal to return to nuclear arms control talks
with the United States. Some Soviet statements to
US businessmen strongly suggest that the two
issues are closely linked in the minds of the Soviet
leadership, implying that the change in trade policy
was prompted in part by the hope that US business-
men could be used to influence the US negotiating
position. Party General Secretary Gorbachev re-
cently indicated that progress in bilateral ties
Even if the political atmosphere continues to im-
prove, three major impediments to a sharp increase
Changing Trade Patterns and Attitudes. Partly in
response to US sanctions, Moscow developed new
trade relationships with alternative suppliers that
reduced the Soviet need for US goods. In particu-
lar, trade with Eastern Europe has increased at the
expense of trade with the West. Although East
European equipment is generally less sophisticated
than that available in the West, in many instances
it is still better than comparable Soviet machinery.
The Soviets also have diverted some of the trade
formerly conducted with the United States toward
Western Europe and Japan whom they correctly
perceive as being less strict in applying export
Longstanding Issues. Trade controls and the denial
of most-favored-nation status (MFN) are continu-
ing impediments to bilateral trade. Moscow claims
that the export controls imposed by the Coordinat-
ing Committee for Multilateral Export Control
(COCOM) are unpredictable, do not follow com-
mon criteria, and often change without warning.
Moreover, the United States maintains more exten-
The lack of MFN status has been a constant
irritant to US-Soviet commercial contacts since the
early 1970s and is particularly galling to Moscow
because it has been awarded to other Communist
countries, such as Poland and China. Symbolically,
it is important to Moscow as an acknowledgment
that the United States finally considers the USSR
an equal trading partner. Economically, it would
mean lower tariffs on some items as well as access
to Eximbank credits
Shifts in Basic Economic Factors. Since the mid-
1970s, Soviet disappointment over the contribution
of Western technology to industrial productivity
has cooled Moscow's enthusiasm for increased bi-
lateral trade. The expected benefits did not materi-
alize, partly because of problems in assimilating
foreign equipment. As a result, Moscow has be-
come more selective in its legal acquisition of
Western technologies, seeking equipment that will,
first, increase defense industry capabilities and,
second, break bottlenecks in the energy and agro-
Finally, the USSR's hard currency import capacity
will be limited by declining oil export volume and
lower world oil prices. Unless Moscow revises its
cautious borrowing policy, this could well force the
USSR to reduce the volume of imports from hard
currency countries at least through 1990. Although
grain trade may be protected, this factor will
seriously limit a revival of Soviet nongrain put-
At the JCC meetings the Soviets will probably be
looking for some progress on contentious trade
issues as an affirmation of US willingness to nor-
malize US-Soviet relations. They probably are
 1971-75
(annual average)
1976-80
(annual average)
1981
1982
1983
Soviet imports
972
2,523
2,310
2,859
2,120
Agricultural products
590
1,745
1,614
2,146
1,475
Grain
572
1,476
1,533
1,931
1,177
Raw materials
27
30
26
5
11
Manufactures
355
748
670
708
634
Machinery
239
542
279
234
194
446
NEGL
USSR: Hard Currency
Machinery and Equipment Orders
Total (million US $)
5,866
3,783
2,818
2,674
2,641
6,830
3,774
2,237
1,091
United States (million US 5)
785
311
560
277
232
267
86
27
71
US share (percent)
13
8
20
10
9
4
2
1
7
Energy equipment
1,700
323
825
190
400
4,320
1,325
835
67
United States (million US $)
321
97
368
35
21
54
1
1
1
US share (percent)
19
30
45
18
5
1
NEGL
NEGL
I
Nonenergy equipment
4,166
3,460
1,993
2,484
2,241
2,510
2,449
1,402
1,024
United States (million US $)
464
214
192
242
211
213
85
21
70
US share (percent)
11
6
10
10
9
8
3
1
7
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encouraged by recent actions such as the US
Government's failure to ban imports of selected
Soviet goods that allegedly are manufactured with
forced labor, and the easing of certain COCOM
restrictions-on personal computers, for example.
Moscow may also raise such issues as the US ban
on imports of Soviet furs, the barrier to imports of
Soviet nickel, the 14-day advance notification re-
quirement for Soviet port calls, and US refusal to
Moscow understands that more serious trade
issues-MFN, a major reduction in trade controls,
or US guarantees of contract sanctity-will proba-
bly not be fully resolved soon. But Soviet negotia-
tors will be looking for some evidence of US
willingness to discuss these issues and will be ready
If any progress is made on these issues, there
should be some increase from the current low level
of US-Soviet trade. The Soviets still need large-
scale imports of Western technology and manufac-
tured goods and continue to hope for political
benefits from trade ties with the United States.
It is extremely unlikely, however, that bilateral
nonagricultural trade will return to the levels of the
1970s. The shifts in trade patterns that Moscow
initiated and its determination not to be vulnerable
to US sanctions are major impediments. With the
exception of a few important areas, such as state-
of-the-art offshore drilling equipment, the USSR
can go elsewhere for nearly equivalent machinery
and technology and have these purchases financed
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 Since taking office two months ago, General Secre-
tary Gorbachev has expressed dissatisfaction with
the performance of the Soviet economy. He has
called for a return to rapid growth largely through
"revolutionary" change based on scientific and
technological innovation. His economic proposals,
however, are vague and strikingly similar to the
economic prescriptions of his predecessors, particu-
larly Yuri Andropov. On balance, we do not believe
that these programs will lead to a significant
improvement in Soviet economic performance.
Gorbachev's advent to power has coincided with a
particularly disappointing performance by the Sovi-
et economy thus far in 1985. For example, industri-
al production, which had risen by nearly 4 percent
in both 1983 and 1984, increased by only 1 percent
in January-March compared with the same period
The slowdown in industrial growth probably
reflects:
? Severe winter snarls in transportation that caused
delays in delivering timber, construction materi-
als, and ores.
? Diversion of energy from industry to meet resi-
dential heating requirements.
? Underuse of plant, equipment, and labor because
of supply bottlenecks and low inventories.
? Fewer working days than in the first quarter of
Although acknowledging the role of harsh weather,
Gorbachev attributes the subpar performance
largely to gross waste and inefficiency, which, in
turn, he ties to "complacency" and "irrespons-
ibility" on the part of workers and managers alike.
Consequently, he has made important changes in
top-level positions that may facilitate the imple-
mentation of his economic agenda. He has already
named three allies as voting members of the Polit-
buro, probably giving him a working majority on
most issues. The naming of Nikolay Ryzhkov and
Yegor Ligachev to the Politburo is particularly
significant and should help him overcome the resis-
tance to change on the part of old-guard economic
officials. In addition, he has appointed new minis-
ters for oil, gas, and electric power and eight new
regional party secretaries. 25X1
Gorbachev has made clear-mainly through his
speech to the Central Committee in late April-
that he is aiming for more rapid economic growth,
principally through application of advanced science
and technology. He has also proclaimed such gen-
eral-and noncontroversial-goals as greater effi-
ciency, elimination of extravagance and waste, and25X1
high-quality output. Gorbachev and his team, how-
ever, have been singularly short on specifics. He
has disclosed virtually no quantitative targets, al-
though a planning official indicated to a Western
visitor that the 12th Five-Year Plan (1986-90) will
call for national income and industrial production
to grow at about 4 percent a year.' These are
ambitious targets under the best of circumstances,
if only because the tightness of the labor supply will
continue through the end of the 1980s and the
difficulties in exploiting natural resources will
25X1
25X1
The most concrete element in Gorbachev's plans
for the Soviet economy is a projected reequipping
of Soviet productive facilities with up-to-date ma-
chinery. This suggests that Gorbachev intends to
' Gross national product and industrial production grew at average
annual rates of about 2.5 and 3.0 percent, respectively, in 1981-825X1
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DI IEEW 85-020
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broaden the USSR's investment policy of the past
several years, which has emphasized increasing the
share of machinery in fixed capital investment and
renovating existing facilities instead of building
new ones. To carry out the reequipping program,
the USSR-according to Gorbachev's April speech
to the Central Committee-will raise the growth
rate of machinery production one and a half to two
times above the present rate. The machine-building
sector-which manufactures consumer durables,
industrial machinery, and military equipment-
expanded 5.5 percent last year and has grown at an
Gorbachev also has indicated that he will seek to
improve the economic system by more efficient and
vigorous implementation of programs initiated or
expanded in the past three years. In particular, he
is urging:
? Revival of the discipline campaign, which had
lost steam under Chernenko.
? Linking workers' earnings to their output,
through such means as greater differentiation of
wages and more use of contract brigades-small
groups of workers whose earnings depend on
fulfillment of contractual obligations to
management.
? Greater operational independence for enterprises.
This would be implemented primarily by expand-
ing the economic experiment begun in January
1984 that gives enterprises somewhat greater
freedom to allocate funds at their disposal and
makes fulfillment of contractual sales obligations
Not surprisingly, Gorbachev has endorsed Brezh-
nev's 1982 food program of which he was a primary
architect. In this connection, he called for increas-
ing the authority of the regional agricultural pro-
duction associations, which are assigned a key role
in coordinating farm activities with those of enter-
prises that provide agricultural inputs or process
farm output. In the same vein, Gorbachev assigned
top priority to modernizing the food-processing
Gorbachev also is stressing the need to curtail the
activities and powers of the ministries, which he has
branded as principal sources of economic obstruc-
tionism. In addition, he has revived proposals for
improving management by introducing training
programs that emphasize problem solving, simula-
Prospects That Gorbachev Can
Revitalize the Economy
Overall, Gorbachev's proposals are in keeping with
the conservative approach of tinkering with the
system-not drastically altering it-characteristic
of previous regimes. The Gorbachev program con-
tains nothing radical-such as sharply reducing the
role of central planning, allowing a greater role for
market forces in determining prices and allocating
resources, permitting bankruptcies and unemploy-
ment, or substantially enlarging legal private-sector
The outlook for the critically important moderniza-
tion program seems highly problematical at best.
Successful implementation would require accompa-
nying measures that would encourage innovation in
machinery manufacturing heretofore lacking. Fur-
thermore, accelerated growth in machinery produc-
tion would require stepped-up investment in ma-
chinery manufacturing capacity. If-as planned-
agriculture and energy retain their already-large
share of investment, other critical sectors might be
further squeezed, creating new bottlenecks in the
economy. Allocating more investment to the ma-
chinery sector also could divert resources from
consumption and defense to a degree the regime
The impact of Gorbachev's recommended changes
in the way the economic system operates is also
uncertain. In the past, some seemingly marginal
steps have had considerable impact, at least for a
while. Andropov's discipline campaign, for exam-
ple, evidently contributed to the acceleration in
25X1
25X1
 growth of GNP in 1983 and in industrial produc-
tion in 1983-84, mainly by increasing the number
of hours actually worked. On the other hand, the
overall record of piecemeal reforms is not encour-
aging because of their failure to attack basic causes
of inefficiency. For instance, numerous modifica-
tions of the system for evaluating performance of
enterprises have turned out unsatisfactorily-pri-
marily because success indicators invite behavior
by enterprise managers that runs contrary to the
We do not believe that Gorbachev's program will
significantly improve Soviet economic perfor-
mance. As Gorbachev acquires more political clout,
he could opt for a more radical approach. In our
judgment, however, this seems unlikely. Gorbachev
is a product of the Soviet system and has been well
rewarded by it. Furthermore, even if he favored a
drastic change in the system, Gorbachev would
encounter pervasive resistance from vested interests
in all strata of Soviet society. The top leadership
sees decentralization as a threat to its power while
lower-level economic managers also look favorably
on the status quo, because they have learned to
manipulate it to their advantage. Workers also may
take a jaundiced view of changes that might, for
example, jeopardize job security.
 Ecuador:
Free Market Reforms
Since assuming office last August, President
Febres-Cordero has turned to market forces to
stimulate entrepreneurial activity and revive the
economy. His administration has made some politi-
cally difficult economic and financial moves that
have already paid handsome dividends. We believe
that, if these policies are successful, they could
serve as a model for other South American debtors.
Although we believe economic recovery will proba-
bly continue along with improvements in the exter-
nal accounts, efforts to extend the reform program
may be thwarted by political feuding with the
congress, higher international interest rates, and
Febres-Cordero has implemented free market re-
forms to revitalize the economy, raise living stan-
dards, and strengthen economic ties with the West.
Domestically, he has raised interest rates toward
market levels to stimulate domestic savings and has
decontrolled some agricultural and fuel prices to
spur increased production. He has also ordered cuts
in subsidies, improved tax collection, limited wage
increases, and reined in Central Bank lending.
Externally, Febres-Cordero has strengthened ex-
port promotion by devaluing the sucre and phasing
out multiple exchange rates in favor of the free
market rate. Further, he has removed some tariffs
and lifted the ban on most manufactured imports,
Since Febres-Cordero took office, Ecuador has
welcomed foreign investors, becoming the first
Andean country since 1971 to sign an insurance
agreement with the US Overseas Private Invest-
ment Corporation. Oil exploration was opened to
foreign bidders, and two contracts have been signed
25X1
Quito is a force for moderation in the
Cartagena Group, favoring individual country talks
with creditors rather than confrontation through a
debtors' cartel. The administration boasts that its
economic strategies parallel IMF-recommended
programs so closely that Ecuador would be in
compliance even in the absence of a new standby
agreement. 25X1
Febres-Cordero's reform policies are boosting busi-
ness confidence, according to press reports. Domes-
tically, price decontrol is easing shortages of con-
sumer goods, higher interest rates are diminishing
speculative financial activity, and restrictive mone-
tary policies have helped contain inflation. Follow-
ing a 6.4-percent rise in the consumer price index in
January reflecting the effects of price deregulation
in late 1984, inflation was only 1.4 percent in
February
Ecuador's foreign payments position for 1985 has
brightened considerably. The trade surplus in-
creased in first quarter 1985 following export de-
regulation, even with the redirection of black-
market imports back into official channels. Quito
also recently reached a new $100 million standby
agreement with the IMF and won the first mul-
tiyear Paris Club rescheduling. As a result of the
IMF accord, commercial bankers agreed to a 12-
year rescheduling of $4.6 billion of debts falling25X1
due during 1985-89. As part of this package,
creditor banks also pledged $200 million in new
medium-term loans and renewed a $750 million
trade credit facility. As a result of the reschedul-
ings, Ecuador's debt service burden will drop from
a projected 60 percent of exports to 33 percent this
year. 0 25X1
25X1
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GDP growth
Agriculture
Petroleum and mining
Manufacturing
Public share sector budget balance
Current account deficit
Estimated.
b Projected.
1.4
2.0
-3.9
24.5
10.3
4.6
-5.6
-8.0
2,365
2,491
2,710
1,408
1,580
1,750
693
801
808
155
121
59
60
The main challenge will be to continue the econom-
ic reforms needed to sustain growth and meet IMF
targets in the face of uncertain external economic
conditions. In the 1985 standby agreement, Ecua-
dor has agreed to unify multitiered exchange rates
and post a public-sector surplus, equal to 3.4
percent of GDP by holding down minimum wage
hikes, further cutting subsidies, and sustaining a
tight monetary program. According to the IMF
letter of intent, these adjustments would reduce
inflation to 20 percent at an annual rate and bring
the foreign payments position into balance. Quito
again devalued the lucre in March by shifting the
exchange rate for oil exports and public-sector debt
Lower oil earnings-crude oil accounts for
60 percent of government revenues and 70 percent
of export earnings-are a potential threat to the
economic adjustment program. Ecuador's oil be-
came overpriced in world markets at the end of
1984, and almost half of the state oil company's
contracts were terminated by customers, forcing
Quito to sell on the spot market at lower prices. By
the end of February, however, the Ecuadoreans had
lowered official prices in line with OPEC and again
arranged contracts for most of their crude exports.
Quito will face these same problems in the future
unless it becomes more flexible in adjusting oil
contracts. Nonetheless, such flexibility may not be
25X1
25X1
 Febres-Cordero's free market reform policies will
increasingly focus on boosting the efficiency of the
private sector. Agriculture, which provides 40 per-
cent of overall employment, needs infrastructure
improvements and additional credits. Private con-
struction has not yet picked up, and the low-cost
housing program has hardly begun. Heavy subsi-
dies are still provided for electricity, and domestic
fuel prices are only 50 percent of world market
We believe that modest recovery will continue as
increased agricultural, industrial, and petroleum
production leads to real economic growth rate of
about 2.4 percent. Growth will be uneven, however,
because recent domestic interest rate hikes will
dampen new construction and shortages of credit,
and raw materials will constrain the textile indus-
try. Consequently, we believe employment will fall
short of official goals. Tight monetary and fiscal
policies notwithstanding, devaluations, the removal
of subsidies, price decontrol, and periodic increases
in gasoline prices will probably keep inflation at
Barring external shocks, we believe that the gov-
ernment will come close to its external payments
goals. The $960 million trade surplus projected by
the Central Bank will nearly match the deficit on
services. The modest shortfall in the current ac-
count, in our judgment, will be covered by an
increase in private direct investment and new loans
from foreign bankers. Although total external debt
will rise to about $7.6 billion, its share of GDP will
decrease from 76 percent to 70 percent. Debt
service, eased as a result of the rescheduling, should
be met, and Quito is committed to clear debt
payment arrearages when it receives its new mon-
Ecuador's payments improvements continue to be
vulnerable to changes in the price of oil and
international interest rates. For example, if oil
prices drop below $26 a barrel, Quito's export
earnings will miss the targeted $1.9 billion, causing
the current account deficit to be larger than pro-
jected. Similarly, if the three-month LIBOR rate
rises above 10 percent, interest payments will ex-
ceed the planned level. Should such shocks occur,
Ecuador would probably miss its IMF external
targets and again fall behind on its interest pay-
ments. Moreover, oil export shortfalls would cut tax
We remained concerned that the President's pen-
chant for confronting and feuding with the congress
may delay economic reforms. In March, Febres-
Cordero defied both the congress and the Constitu-
tional Guarantees Tribunal by implementing his
minimum wage law by decree. Although no group
has been able to challenge his actions successfully,
to extend his economic reforms will be hindered-
and perhaps blocked-by embittered legislative
adversaries if he continues his uncompromising
stance{
25X1
25X1
 Pakistan: Economy Becoming
a Political Issue F
Despite sustained economic growth, Pakistan is
suffering from two years of agricultural problems,
severe power shortages, and a decline in remit-
tances from overseas workers, which could cause
political difficulties for President Zia. Although
faced with worsening budgetary and foreign ex-
change constraints, the government is not likely to
undertake any time soon politically sensitive eco-
nomic reforms necessary to improve the situation.
Instead, Islamabad will look for help from Western
aid donors to cope with its domestic economic
difficulties and to shore up its deteriorating foreign
payments situation. If sufficient aid is not forth-
coming, the government will be faced with imple-
menting politically unpalatable austerity measures.
Real economic growth slowed to 3.5 percent in FY
1984 after averaging 6 percent annually from FY
1978 to FY 1983. The relatively poor performance
in 1984 primarily reflected bad weather, some
mismanagement in the agricultural sector, and
shortfalls in public- and private-sector financing.
Lingering problems recently prompted the govern-
ment to lower this year's GDP growth projection
from a record 9.9 percent to 8.5 percent. We
believe that even the new estimate is too high
considering shortfalls in agriculture, insufficient
Pakistan's economy has been badly hurt by hot
weather and a lack of rainfall that are likely to
retard wheat production for the second consecutive
year. The government probably will need to import
at least 2 million tons of wheat over the next year at
a cost of about $400 million. At the same time,
drought has cut hydroelectric power production,
forcing longer and more frequent power cuts than
normal. Industry is particularly hard hit because
agriculture is given priority on the release of water,
and the loss of industrial production has been
estimated at $3 million per day, according to US
Embassy sources. Workers have been laid off and
shortages of some manufactured goods, such as
cement, are likely.) 25X1
Additional water supplies from the spring snowmelt
have temporarily alleviated the energy crisis, but
the government policy of expanding the distribution
of electricity to new customers could make the
situation worse next year. US Embassy sources
estimate that power cuts and additional unmet
demand could reduce output by an average of 25X1
Financial constraints have limited the government's
room to maneuver. Islamabad is already spending
about two-thirds of its current budget on food
subsidies, defense, and debt servicing. Even with
cutbacks for education and routine maintenance of
the country's infrastructure, the budget deficit
continues to grow and now totals 8 percent of GDP.
The government probably will find the deficit even
more difficult to finance over the next year without
expanding the money supply. Recently about half
the deficit has been financed through small savings
deposits in government-sponsored schemes that
paid attractive rates of interest. Declining overseas
worker remittances since 1983 and the move to
interest-free "Islamic" banking probably will re-
duce the pool of savings available to the govern-
Budget pressures are also forcing cuts in develop-
ment programs. Development spending, which has
been declining as a share of the total budget since
Zia took power, fell in real terms last year. More-
over, foreign aid cannot be fully utilized because
much of it is tied to projects that require some local
Secret
DI IEEW 85-020
17 May 1985
 Wheat Production
Million metric tons
Cotton Production
Thousand metric tons
funds, and there is a large backlog in the aid
pipeline. Financing the budget deficits through
private borrowing is soaking up investment funds
that could be used by the private sector. With a
slowdown in capital investment, Pakistan will con-
tinue to lose ground in its effort to provide jobs for
a population growing at about 3 percent annually.
Consumer Price Growth
Percent
Foreign Exchange Reserves
Billion US S
Worker Remittances
Billion US $
Current Account Balances
Billion US S
Data are for fatal year ending 30 June
Proicncd.
Estimated-
Pakistan has recently replaced its five-year devel-
opment plan with a three-year "rolling" plan be-
cause of funding shortfalls. The targets for the new
plan are about 13 percent below the part of the plan
it replaces. Nonetheless, without government re-
form on taxes and subsidies, the US Embassy
believes that Pakistan will not even be able to
finance this less ambitious plan. 0
Pakistan has drawn down its foreign exchange
reserves to the point that it is losing flexibility to
import the goods needed to alleviate domestic
shortages. A growing trade deficit, declining work-
er remittances, and a rising debt service burden
have reduced Pakistan's foreign exchange reserves
to about $850 million, half the level at the end of
the fiscal year last June:
? Exports have been hampered by the lingering
effects of a poor cotton crop last year, stiff
competition from other textile exporters, and low
commodity prices. Import costs are up mostly
because of price increases, and imports of wheat
and electrical generating equipment will put even
greater strains on the trade deficit.
? Worker remittances this year are about 13 per-
cent below the same period in 1984 and probably
will be about $500 million below the peak in
1983.
? Foreign debt service is likely to be about
$1.2 billion this year including at least $100
 Current account balance
-991
-1,610
-554
-1,028
-1,600
Trade balance
-2,765
-3,450
-2,989
-3,334
-3,600
Exports (f.o.b.)
2,798
2,319
2,627
2,668
2,700
Imports (f.o.b.)
5,563
5,769
5,616
6,002
6,300
Net services and transfers
1,774
1,840
2,435
2,306
2,000
Worker remittances
2,095
2,224
2,886
2,737
2,400
Long-term capital (net)
581
746
1,276
882
1,000
Gross disbursements
956
1,092
1,301
1,234
1,400
Amortization
-516
-492
-386
-542
-500
Other
146
361
190
100
Other and short-term capital
629
390
-34
-250
. Fiscal year ending 30 June of the stated year.
b Projected.
Surplus for the fiscal year.
million in interest payments on US Foreign Mili-
tary Sales as well as repayment on other military
debt.
The mounting economic problems are becoming a
political issue. An exit poll taken during the assem-
bly elections in February indicated that economic
issues were the second most important concern of
the voters after the implementation of an Islamic
system. Economic problems are likely to be hotly
debated when the new assembly meets later this
month to discuss the budget 0
Despite the need for major economic reforms,
proposals put forth in this year's budget to improve
the government's financial position are likely to be
cautious. The new Minister of Finance and Plan-
ning, Mahbubul Haq, favors an overhaul of the tax
system, a more productive use of savings, agricul-
tural reforms, deregulation of industry, and decon-
trol of cooking oil and fertilizer prices. Any such
proposals, however, are likely to face stiff resis-
tance in the assembly because they threaten the
interests of the strong bloc of conservatives and
landlords. Moreover, the conservative former Fi-
nance Minister, Ghulan Ishaq Khan, retains con-
siderable influence as chairman of the new senate.
President Zia is unlikely to risk public unrest by
supporting measures that will result in higher food
prices. If a deteriorating economy becomes a major
problem, Zia probably will blame the new assembly
for inaction. F__~ 25X1
Pakistan will probably look for outside help in
solving its economic problems. Islamabad has al-
ready asked the United States to help finance
wheat imports and for concessional financing for
future military purchases. In addition, it is likely to
ask foreign aid donors to be more forthcoming with
assistance that can be spent quickly and is not tied
to projects that would draw on domestic financing.
 Coping With a
Changing Market
Government policies in many West African coun-
tries have led to neglect and mismanagement of
their cocoa sectors and loss of market share for the
$2-3 billion in annual world cocoa exports. For
several of these countries, cocoa provides a large
share of export earnings. Ghana and Nigeria have
been hardest hit as new competitors, Brazil and
Malaysia, and a traditional producer, the Ivory
Coast, have aggressively expanded production, im-
proved their marketing, and moved into higher-
value-added cocoa products. Although tight world
supplies and the strong US dollar have helped boost
cocoa earnings recently, world demand is growing
slowly, and a return of surpluses and lower prices is
expected over the longer term. As a result, success-
ful renegotiation of the International Cocoa Agree-
ment could lay a major role in stabilizing the
market.
The Ivory Coast, Brazil, and Malaysia have
emerged as the major forces in the market:
? The Ivory Coast has captured the top spot in the
world's cocoa economy by committing consider-
able resources to its cocoa sector and by providing
farmers with remunerative prices. Production has
doubled over the past 10 years and could reach
600,000 tons by 1990. Currently, Abidjan is
actively cooperating with UK and US manufac-
turer associations on a project to upgrade Ivory
Coast cocoa quality.
? Brazil is now the world's second-largest cocoa
producer. Cocoa experts project that Brazilian
production could exceed 500,000 tons by the end
of the decade. Because of its free market policies
and greater reliability of its cocoa grades, US 25X1
cocoa buyers report that they are relying more on
Brazil as a dependable volume supplier.
? Malaysia also has moved quickly into the ranks of
World cocoa consumption-currently estimated by the world's leading producers with a fourfold
trade sources at 1.7 million metric tons for 1985- increase in output since the late 1970s. Although
will continue to grow at only 2 to 3 percentf through4/ cocoa ranks a distant fourth among the country's
the end of the decade. The United States, West agricultural export crops, the cocoa sector is seen
Germany, the Netherlands, the United Kingdom, as an integral part of the government's drive for
and France account for about 40 percent of global economic development. Prospects are strong for a
consumption. Cocoa supplies have rebounded and 200,000-ton crop by the early 1990s. Malaysia's
are generally keeping pace with demand. For the cocoa industry has been plagued by serious dis-
1984/85 (October/September) season, world cocoa ease and quality problems, and Malaysian beans
bean production will be an estimated record 1.8 are now sold at a substantial discount. Cocoa
million tons, nearly 20 percent above the drought experts believe, however, that the government
damaged 1983/84 harvest. In large part, this sea- will take measures to improve quality.
son's expected record crop reflects favorable grow-
ing conditions as well as the maturing of trees Mismanagement by other West African cocoa-
planted in the late 1970s in Brazil, Malaysia, and producing countries has played a major role in their
the Ivory Coast.' These plantings were spurred by loss of world market shares:
high prices following the contraction of global
' The cocoa plant normally takes four to five years after planting to
mature and bear fruit and from eight to 10 years to achieve
? Ghana, once the leading producer, has been in a
state of general decline since the mid-1970s. Lack
19 Secret
DI IEEW 85-020
17 May 1985
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 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000807530001-9
Secret
Value of Cocoa Bean a Exports, by Selected Exporting Countries,
Average 1980-82
Million Cocoa Bean Share of Country Share of World
US $ Country's Total Cocoa Bean Exports
Exports (percent)
(percent)
World gross exports
Americas
Brazil
249.8
1.2
Dominican Republic
49.5
5.1
45.8
1.9
Cameroon
160.3
13.7
Equatorial Guinea
14.8
42.9
Ghana
492.5
46.3
Ivory Coast
674.7
25.6
Nigeria
181.1
0.9
Sierra Leone
15.4
9.9
Togo
28.3
11.7
Asia/Oceania
Malaysia
79.9
0.6
Papua New Guinea
54.5
6.1
Others
291.6
NA
Does not include exports of serniprocessed cocoa products (for
example, for Brazil, the largest cocoa products exporter earned an
additional average $107 million annually during 1980-82).
6.8
0.6
21.0
28.7
7.7
0.7
1.2
3.4
2.3
12.5
Average
1980/81
1981/82
1982/83
1983/84
1984/85-
1975/76-1979/80
_
_
World total
1,505
1,685
1,725
_
1,542
_
1,529
1,807
Ivory Coast
292
412
456
360 _
405 _
475
Brazil
277
351
315
339
308
375
Ghana
311
258
225
179
159
175
Nigeria
181
155
182
156
125
150
Malaysia
24
49
61
68
90
125
103
120
120
106
109
115
79
85
88
55
55
100
238
255
278
279
278
292
? Estimated.
Secret 20
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 The Third International Cocoa Agreement (ICCA)
is due to expire at the end of September, but
includes provisions for a 12-month extension. The
third conference on a new agreement recently end-
ed inconclusively in Geneva as representativesfrom
70 producing and consuming nations failed to
agree on price stabilization measures and the use
of export restrictions to supplement a buffer stock
Negotiated in 1980, the present agreement has
failed in its basic objective of maintaining a price
range of $1.06 to $1.46 per pound. Because of
inadequate funding, buffer stock purchases ceased
after the 1982/83 season. In addition, the agree-
ment was hampered by the nonparticipation of the
United States and the Ivory Coast-respectively
the world's largest cocoa consumer and producer.
As a result, prices during the life of the agreement
Brazil reportedly is now lobbying for a special
session of the organization's council to discuss
reactivation of buffer stock purchases and an
extension of the current agreement. It is expected
to table its proposal at the 44th General Assembly
now slated for July, the current agreement will be
extended for another year.
of incentives for growers has been the principal
cause but Ghana's deteriorating economy and
weak currency have led to smuggling-15,000 to
40,000 tons annually-into neighboring Ivory
Coast and Togo. Cocoa experts estimate about
20,000 tons annually go unharvested because of
low government procurement prices or deterio-
rate because of transportation problems. The
government has taken steps to raise production to
300,000 tons by 1987. We believe that this target
will be extremely difficult to achieve, although it
does appear that annual production can return to
the 200,000-ton plateau by 1990.
? Nigeria's cocoa sector has been in the doldrums
as Lagos shifted its attention to petroleum as the
primary means of generating foreign exchange.
The government has recently sought to revitalize
the cocoa sector by raising producer prices, subsi-
dizing the purchase of chemical sprays, and
attempting to reduce smuggling. We believe-
because of political uncertainties and lack of
consistent followthrough-that the best that can
be hoped for through the end of the decade is to
stabilize production at about 150,000 tons
annually.
? Cameroon's annual cocoa production has been
relatively stable. Although the government has
strongly supported the cocoa sector, endemic
disease problems limit production potential.
Yields are also relatively low because a large
percentage of the trees are past their peak pro-
duction years. 0 25X1
The prospect exists that world cocoa production
could significantly outpace consumption growth by 25X1
the late 1980s resulting in considerable downward
pressure on prices. The robust cocoa industries in
Brazil, Malaysia, and the Ivory Coast appear more
capable of weathering changing market conditions 25X1
than most of the traditional West African cocoa
producers. For the lagging West African produc-
ers-particularly those that depend heavily on co-
coa export earnings-a price decline would hurt
their debt servicing capabilities and put additional
strains on their already, troubled economies. Pro-
ducers are likely to increasingly look to an Interna-
tional Cocoa Agreement as a vehicle to aid in price
stabilization and thereby avoid significant declines
in cocoa earnings. We believe, however, that for
individual producers the vitality of their earnings
will depend not so much on a new ICCA, but on the
success of efforts to improve production efficiencies
and cocoa quality.( 25X1
 Amal-Sarir
oil-producing
area
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Prospects
W,lakness
Major onshore finds are expected in the Amal-Sarir 25X1
area in eastern Libya, with lesser discoveries likely along the Algerian border.
Offshore prospects include an area north of Tripoli near the large Bouri field
and an area west of Banghazi where AGIP of Italy made a recent discovery.
Drilling operations in the Khalij al Bumbah (Gulf of Bomba) west of Tobruk,
however, have been unproductive. Last year 22 successful wells were drilled i125X1
new fields with yields of 1,000 to 5,300 b/d, Al- 25X1
though Libyan companies are doing most of the drilling, Bulgarian, Roma-
nian, Brazilian, West German, Italian, and American firms are also involved.
This new exploration could add significantly to Libya's proved reserves,
estimated at about 22 billion barrels.0 25X1
Renewed oil market weakness in recent weeks reflects lower oil consumption
and rising production worldwide. Spot prices for most OPEC crudes are now
50 cents to $1.00 below official prices. The USSR and Egypt lowered crude
prices by $1.00 and 75 cents per barrel, respectively. Oil consumption in the
major developed countries in the first quarter declined by 2 percent compared
with year-earlier levels. Partial April data for the United States show a 5-per-
cent drop in total sales. Despite declining consumption, we estimate total nor25X1
Communist production has risen 1 million b/d from winter levels. These
factors are causing an unexpected sharp inventory buildup. US oil inventories
during the last two weeks in April, for example, rose by 1.5 million b/d, far
above the seasonal norm. Unless demand rebounds during the summer months,
oil producers will have to limit production or face increasing downward price
pressure. 25X1
field-Norway's oldest-have sunk as much as 2.5 meters. , 25X1
may be reduced by one-fifth to permit increased reinjection of associated gas 25X1
to halt production platform subsidence. Some production platforms in the
dangerous to use in about three years. Increased reinjection would prove costly
as equipment and new platforms would be required. The reinjection program
may require up to 20 percent of production-which averaged 35 million cubic
meters per day in 1984-to stabilize reservoir pressure, according to Embassy 25X1
sources. Industry press reports that the field operator has warned its European
Secret
DI IEEW 85-020
17 May 1985
 Production
Burma Reorganizes
Energy Planning
Oil Problems
in Zambia
customers it may have to cut gas supplies next winter. We believe the shortfall
could be made up with Statfjord gas scheduled to be available in January
1986. The operator has resubmitted a request to purchase some of Statfjord's
Oman's oil production broke 500,000 b/d this month-80,000 b/d above the
1985 production target-according to US Embassy sources in the Ministry of
Petroleum and Minerals. Muscat has not publicly acknowledged this record
output, fearing cuts in aid from neighboring oil producers. Oman, which is not
a member of OPEC, relies on oil for virtually all of its export earnings and has
compensated for declining prices by boosting production. Muscat reportedly
ordered producers to maximize production, hoping to sell the oil before prices
Rangoon last month established a new Ministry of Energy-in large part to fa-
cilitate the development of natural gas reserves in the Gulf of Martaban. The
new ministry includes the Myanma Oil Corporation-the state petroleum
enterprise-and other energy-related entities formerly under the control of the
Ministry of Heavy Industry. An energy planning unit also will be established,
according to the US Embassy. Despite Rangoon's optimism, the development
of the Martaban gas reserves-which the government estimates at 110 billion
cubic meters-will require more Western capital and technology than it so far
A nine-bank consortium, which had been financing about $200 million per
year in Zambian oil imports, has suspended financing for Zambia's oil needs.
As a result, available supplies-including some 2.2 million gallons of diesel
fuel promised by South Africa-will only last for about four weeks, according
to US Embassy reporting. The consortium has reached a tentative agreement
 Sanitized Copy Approved for Release 2011/03/07 : CIA-RDP97-00771 R000807530001-9 Secret
with Lusaka to reinstate the credits provided that Zambia reduces its
arrearages, totaling some $14 million, by 31 May. If the Zambians are able to
take advantage of this stopgap measure, they may avert a serious fuel crisis, al-
though minor shortages and rationing are expected. Lusaka still faces the
broader problem of implementing a workable austerity program to stem its
dialogue between debtor and creditor nations. President de la Madrid and
senior officials recently called for multilateral concessions from lenders to
resolve the world debt problem; Mexico up to now has negotiated individually
with international banks. Finance Minister Silva-Herzog, who has opposed the
group approach, appears to be losing influence.
increasing its leverage with creditors than with signaling support for a debtors'
cartel. De la Madrid's concern about continued access to international credit
25X1
25X1
25X1
ieden Forgives The Swedish Debt Fund has allocated $11 million for payment of Tanzanian
Tanzanian Debt debt to Swedish commercial firms, according to Embassy reports. The Swedish
Export Credit Board-which has already settled some commercial claims
against Dar es Salaam-will receive about 80 percent of the money with the
remainder paid directly to Swedish firms. Tanzanian firms already have paid
some of their debt in shillings, but the Tanzanian Central Bank has been 25X1
unable to secure the hard currency; Sweden has proposed that the Tanzanian
currency be used for local health and education projects. This will enable
Tanzania to avoid defaulting on Swedish loans. Nordic donors have refused
Tanzanian requests for increased assistance because of Nyerere's recent strong
criticism of developed countries and have warned that further criticism could
adversely affect current assistance programs. Nyerere's comments could also
damage his hopes for increased EC aid. 25X1
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"rd-ri
V
Responses to French West European officials have been responding cautiously to the French
an technological efforts. Their concerns include uncertainty about its organiza-
tional and financial arrangements as well as its relationship to European
participation in US research on SDI. West German Chancellor Kohl and some
Cabinet members have reservations about the ex ense and bureaucracy
involved in creating another European institutio
Italian
officials have praised the French proposal, but Rome continues to support
European participation in the SDI research program
The French are modifying their proposal somewhat in hopes of enlisting firm
European support. They no longer describe EUREKA as a new agency but
merely as a collection of informal measures to increase cooperation in a wide
range of new technologies. Paris claims EUREKA is a civil program and not a
response to SDI, but it probably recognizes that other West European
countries and French industry will be less interested if it does not encompass
some of the technology that may accrue from cooperation with the SDI
UNCTAD Meetings on UNCTAD meetings on the International Natural Rubber Agreement (INRA)
,Natural Rubber ended last week in Geneva with little progress made toward a new agreement.
Producers Look to
Ethanol Exports
be extended when the International Natural Rubber Organization (INRO)
meets next month in Kuala Lumpur. An extension will mean continued
adherence to the current price range, which producing members argue is too
low-rubber growers claim that profit margins have been squeezed by
increasing raw material costs. Natural rubber prices this year are averaging 15
percent below last year's level and roughly 45 percent less than their 1980
Several Latin American sugarcane producers envision a strong export market
for ethanol produced from sugarcane as developed countries such as the
United States and West Germany phase down their use of leaded fuel.
Ethanol, like lead, can be used to increase octane in motor fuels. Ethanol
25X1
25X1
25X1
25X1
25X1
 .Pdkyo Begins
Summit Planning
exports would provide an attractive alternative at a time when the sugar
market has been experiencing low prices, global surpluses, and increased
competition in developed markets from alternate sweeteners. Producers in
Argentina, El Salvador, and Guatemala are trying to increase distillery
capacity to meet the anticipated growth in demand. Ethanol exports are
especially attractive now for sugar producers in countries participating in the
Caribbean Basin Initiative because they can enter the United States duty free.
During 1984 the United States imported, mainly from Brazil, more than 150
In the wake of French criticism of the Bonn Economic Summit, Japanese
officials-who have already begun preparations for the next summit-are
concerned that President Mitterrand might not attend the Tokyo Summit next
May. Prime Minister Nakasone hopes to mark the end of his foreign affairs
performance with a successful summit and will probably seek assurance of
Mitterrand's attendance when the two meet in Paris in July. Taking into 25X1
account Mitterrand's complaint that recent summits have become a closed
bureaucratic forum, Nakasone announced on 14 May that the Tokyo Summit
should be conducted in a "more casual manner" and that declarations should 25X1
be released in the form of "one or two sheets of paper.'
25X1
Declinjng Prospects
fo cpanese
/Computer Project
Budget cuts and personnel problems are close to hamstringing MITI's highly
touted Fifth-Generation Computer Project. The project's budget allocations
for 1985 are smaller than in 1984, and less than half of that projected in 1981.
Moreover, earlier cuts have reduced overall project funding to only three-
fourths of original projections. The scheduled rotation of researchers back to
industry also is causing major disruptions, and
Ocorporate participants are balking at sending replacements. a un ing
cuts will significantly reduce the chances for progress and may force the Trade
Ministry to scale back research goals. In addition, research under the project's
initial stage (1982-85) is not yet complete and requires portions of this year's
budget. Industry probably will be required to send new researchers, but they
are likely to be young and inexperienced and will need lengthy training. The
wholesale personnel rotation leaves only the project's managers to do the
training, further clouding the prospects that the project will make progress any
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JV'.I CI
West Germany
E/sing Labor
,~Iarket Rigidity
Recent legislation will help to make the West German labor market more
flexible. The new law reduces limitations on job sharing and part-time work
and relaxes the requirement that firms planning layoffs draw up compensation
plans for the personnel to be dismissed-new firms, for example, are exempt.
The legislation, however, was weakened by provisions that tighten restrictions
on layoffs of construction workers and liberalize free visits to health spas. A
companion bill, which is expected to be approved by the Bundestag, will lift
some limitations on the employment of women and teenagers and widen
employer discretion in setting working hours. Despite these positive moves,
further progress will be difficult. A recent Free Democratic Party proposal
that unemployed workers be allowed to work in union jobs for about 80 percent
of the negotiated wage level was lambasted not only by the opposition and la-
bor as an intrusion on collective bargaining, but even by some employers
hatcher
coming under growing criticism for her economic policies. Press reports say the
bulk of the criticism concerns unemployment-now at 13.1 percent and
rising-and is coming from hitherto supportive sections of the Conservative
Party. They are, however, stressing publicly that there is no consensus in the
party's national leadership on an alternative to Thatcher or her policies. The
government reportedly is also losing grassroots support. A nationwide poll
shows a majority of Britons believe the nation is economically more divided
The criticism among senior Tories suggests a growing temptation to disassoci-
ate the party from Thatcher on unemployment. Although this is unlikely to im-
pair Thatcher's ability to govern, her leadership of the party may be
challenged before the next general election, due by 1988. She does not appear
worried about her party's prospects in the next general election, even though
the Tories have suffered losses in the balloting for municipal posts this week.
Brit n Plans Cuts The Thatcher government is expected to release a green paper within the next
in ,Social Welfare few weeks that will outline its recommendations for reducing welfare spend-
ing-measures that will save relatively little in the short run, but promise a
greater impact in later years. According to the US Embassy, there is Cabinet
consensus on eliminating maternity and death benefits, as well as Christmas
bonuses paid to the elderly and raising the eligibility threshold for housing
allowances. The most controversial proposal is to phase out the State Earnings-
Related Pension Scheme (SERPS), a heavily subsidized program created by
the Labor government in 1978 to supplement the flat-rate universal pension.
The government estimates that expenditures for SERPS, although small at
present, would escalate dramatically by the late 1990s as more pensioners
qualified for benefits. London has not yet divulged the details of its alternative
to SERPS, but it almost certainly will call for the expansion of private-sector
25X1
25X1
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A tralian
financial Woes
pension plans. Reductions in welfare expenditures will undoubtedly cost
Thatcher popular support nd will provide the opposition with specific issues to
criticize. I 25X1
During the last three weeks the Australian dollar, which had fallen 27 percent
this year to a low of 63 US cents on 22 April, has rallied to about 69 US cents.
The rally is due in part to decisive steps taken by Prime Minister Hawke on 22
April: he pledged to cut next year's budget deficit by US $700 million and En-
ergy Minister Evans refused to subsidize domestic oil prices. In addition,
currency traders apparently were encouraged by two consecutive months of
marginal improvement in the balance of trade and by the lack of response in
Queensland to calls for statewide strikes. Nevertheless, with a debt service to
exports ratio of 42 percent for fiscal 1984, a widening current account deficit, 25X1
and a budget deficit almost 4 percent of GDP, we believe Australia will
continue to worry investors, currency traders, and bankers. Australia's total
foreign debt-most of it private-will probably reach a record of US $50
billion for the year ending in June-28 percent of GDP. At the same time, the
current account deficit is likely to hit US $7 billion-also a record. Moreover,
monetary growth-now running close to 14 percent-and higher import costs
resulting from devaluation will spur inflation, now about 7 percent at an
annual rate. As a result, wages, which are indexed to inflation, would rise
further, undermining Australian competitiveness. 25X1
Brazil's Emerging Finance Minister Dornelles and his anti-inflation prescriptions are gaining
Fjscal Strategy support from President Sarney at the expense of rival Planning Minister 25X1
week the administration intends to reduce substantially a $17 billion public
deficit it inherited this year. The administration recently approved a $2.5
billion social program proposed by Sayad but expects to more than offset its
economic impact with deep cuts in subsidies and other spending. The boost in25X1
Dornelles' influence probably reflects recent success in reducing inflation and
improves prospects, at least temporarily, for stabilization policies. A major
task Dornelles now faces will be to marshal support for fiscal austerity from an
increasingly assertive Congress, probably using increased social spending to25X1
Vazil increases Brazil recently announced a 267-percent increase in the minimum purchase
Wheat Support Price price for the 1985 wheat crop. Set at about $225 per ton and pegged to the val-
ue of the cruzeiro, the new purchase price should boost wheat-planted area b;25X1
 Brazil To Cut
Sugar Production
Chile's Worsening
Trade Accounts
Nicaragua Offered
erchant Ships
as the consumer price subsidy is phased out, wheat imports this year could be
pared by 500,000 tons to about 4.4 million tons. Reducing its wheat import
bill-$755 million in 1984 and second only to oil-is a priority goal of the new
Brazil, the world's largest sugarcane producer, plans to cut cane sugar
production in 1985/86 (June/May) to 7.9 million, down 1 million tons from
this season's total. According to Brazil's Sugar and Alcohol Institute (IAA),
the planned reduction reflects depressed world sugar prices. About 2.5 million
tons of the coming crop is expected to be exported, earning about $500 million,
compared with earnings of over $1 billion from sugar in 1981 and 1982. IAA
officials also stated that more sugarcane will be converted to ethanol during
A declining trade surplus could bloat Chile's current account deficit to $1.8
billion-some 30 percent above its 1985 IMF target-forcing corrective action
to prevent serious cash strains later this year. Chile's first-quarter trade
surplus was $170 million-down from $227 million in the same period last
year. Exports fell 5.3 percent to $921 million, because of a drop in copper and
industrial product exports. Meanwhile, imports rose less than 1 percent to
$750 million, because, the US Embassy reports, Chilean businessmen, fearing
a devaluation and tariff increases, rushed to stock He intermediate and capital
goods imports. the declining trade
surplus sparked increased capital Hight. To score up the external accounts, we
believe the new economic team will devalue the peso before the end of June,
and impose a differentiated tariff system-applying higher tariffs on goods not
used in producing exports. Additionally, Santiago may resort to import
agreed to sell two 5,000-ton general cargo ships to a joint venture formed by a
Spanish national and a US company; the buyers have offered to resell the ships
to Nicaragua for $4 million. The buyers expect to register the ships in Panama
early this month and will offer to operate the ships for Nicaragua, probably to
carry cargo between Eastern Europe and Nicaragua. The Spanish bank may
not be aware of the final purchaser of these ships. Registering the ships under
the Panamanian flag avoids open Nicaraguan ownership, but the US embargo
nevertheless may complicate the joint venture's negotiations. Nicaragua's fleet
currently is composed of coastal freighters and only one oceangoing freighter;
 j /
/Sudanese-Libyan
Economic
Rapprochement
So Yemen's
conomic Decline
Recent efforts to restore diplomatic ties between Khartoum and the Qadhafi
regime may bring some economic relief to financially strapped Sudan. The US
Embassy in Khartoum says that, under recently signed agreements, Libya has
promised a three-month supply of crude oil, 100,000 metric tons of wheat and
transport trucks, crop-dusting aircraft and expertise, as well as medical
supplies. Tripoli also claims to have stopped aid to Sudanese opposition groups.
Sudan has stopped anti-Qadhafi radiobroadcasts and terminated all support
for Libyan opposition activities as their part of the deal. Libyan calls for a 25X1
union similar to the Morocco-Libya union, however, appear to have fallen on
deaf ears in Khartoum. On the surface, the new Sudanese regime has kept
Libya at bay and may have gained some badly needed aid, but the new
agreement also enhances Qadhafi's ability to exploit weaknesses in the new
regime from within. Qadhafi's aid offer is a typical ploy to establish relations,
however, his record weighs against large-scale disbursements0 25X1
South Yemen is facing serious economic problems that will force it to abandon
some development projects, slow down others, and make draconian cuts in
imports. The continuing drought has seriously damaged agricultural produc-
tion-necessitating an increase in food imports. Meanwhile, debt repayments
and reduced foreign aid are squeezing limited foreign exchange reserves. Gulf
Arab states and Libya have not provided expected aid, and Soviet Bloc nations25X1
have failed to take up the slack den has or-
dered a 50-percent cut in imports from last year's level, including elimination
of all luxury imports. Opponents of pragmatic President Ali Nasir Muham- 25X1
mad probably will raise the economy as an issue in October's party congress.
irrigation, high-yielding varieties, and a dramatic rise in fertilizer use are
likely to boost total foodgrain output for 1984/85 (July/June) to about 150
million metric tons. Two bumper crops of wheat and rice have created major
storage problems which, according to press and Embassy reports, have forced
the government to consider increases in food-based welfare programs and to
seek export markets for about 4 million tons of wheat. India already has 25X1
commitments for nearly 1 million tons of wheat from the USSR, Romania,
and the World Food Program. Additional sales will be difficult-the world
wheat market is glutted, Indian wheat quality is uncertain, its port facilities
are inadequate, and its domestic prices are relatively high. New Delhi will
likely combat these disadvantages by offering a combination of low-transport
,,Record Stocks Spur Despite poor weather, we expect India's 1985 spring wheat crop to approach
/ Indian Wheat Exports last year's record production, which will add to the government's severe
storage problems and spur renewed efforts to find export markets. Increased
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Secret
President Soeharto last month dismissed the director general of the notoriously
corrupt Customs Service and appointed Finance Minister Prawiro and Armed
Forces Commander Murdani to oversee a thorough cleanup of Indonesia's
customs and port procedures, a move that would achieve significant savings
because more than 80 percent of imports are capital and intermediate goods.
According to the US Embassy, many observers expect additional reforms in
the land transport and telecommunications sectors. Prospects for achieving a
major boost in competitiveness are still doubtful, however, because some
officials, such as the new head of the government body responsible for
overseeing foreign investment, favor continuing protection for high-cost firms.
Brunei Royalty Since Brunei gained independence last year, the royal family-to increase its
Impedes Foreign personal wealth-has created obstacles to the operation of foreign firms0
petroleum concession-which covers 40 percent of Brunei's continental Shell-
by delaying exploration efforts. Unsuccessful thus far, the firm must find oil in
the next two years to maintain its contract. Last month, officials of a US con-
struction corporation were detained by police for questioning and their local
partner jailed at the instigation of another royal family member. In addition,
the chief executive officer of Brunei Shell Petroleum-a 50-50 joint venture
between Royal Dutch Shell and the Brunei Government-recently had two
raucous confrontations with a high-level family member. We believe that
pressures on foreign firms are likely to increase as factions within the royal
Taiwan's Economic V' Taipei has established a committee to recommend policy changes to boost
eform Committee Taiwan's sagging economy. Formed on the recommendation of Premier Yu
Kuo-hua, the committee consists of government, academic, and business
leaders, including proponents of economic liberalization who have long
opposed Yu's conservative policies. The committee will have six months to
formulate its recommendations. Yu may have suggested the committee to
bolster investor confidence weakened by a stagnant domestic economy,
declining trade levels, and recent financial scandals. The government has
loosened some restrictions on trade and investment-largely in response to US
pressure-but retains measures that protect domestic industry. Yu probably
will continue to resist liberalization, however, and may be gambling that the
 C!, ifia's Shrinking
,rain Imports
one-year agreement to export 1.5-2.0 million tons of corn to Japan. This
situation is unlikely to continue, however, because Beijing is both reducing
Beijing has purchased only 2 million metric tons of grain this year, and grain
traders are predicting that China may import as little as 5 million tons in
1985-1984 imports totaled 9.7 million tons. All major suppliers are affected,
particularly the United States, which generally accounts for half of China's
grain imports. China has not purchased any US grain this year and is likely to
import 2.5 million tons of US grain, at most, by yearend. In fact, China may
be a net grain exporter for the first time this year-Beijing recently signed a 25X1