INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807560001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 22, 2016
• Document Release Date: August 19, 2010
• Sequence Number: 1
• Publication Date: June 7, 1985
• Content Type: REPORT

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International
Economic & Energy
Weekly
Secret
DI IEEW 85-023
7 June 1985
Copy 6 8 2
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Secret
1 / Perspective-Indian Economy on the Eve of Rajiv Gandhi's Visit
iii Synopsis
International
Economic & Energy Weekly]
India: The Continued Success of the Green Revolution
Venezuela: Adjusting to the Depressed Oil Market
13 Tunisia: Economic Strains and Social Tensions
17 Key Debtor LDCs: Exports Decline This Year
Energy
International Finance
Global and Regional Developments
National Developments
directed t Directorate of Intelligence,
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 85-023
7 June 1985
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Secret
International
Economic & Energy Weekly
Synopsis
Perspective-Indian Economy on the Eve of Rajiv Gandhi's Visit 25X1
Prime Minister Rajiv Gandhi will probably highlight India's long-term
economic achievements and recent policy reforms to attract US business
interest in supplying advanced technology. 25X1
3 India: The Continued Success of the Green Revolution
One of India's major economic success stories has been the Green Revolution
in agriculture-the adoption of high-yielding seed varieties (HYVs), chemical
fertilizers, and expanded irrigation.F___1 25X1
9 Venezuela: Adjusting to the Depressed Oil Market
Venezuela's economy is stagnating as the oil boom fades, and Caracas is
responding by retrenching on imports, ambitious development projects, and oil
exploration. With no rebound likely in the oil market in 1985, austerity will
The Tunisian Government has been increasingly unable to meet rising
expectations created by rapid economic development during the 1970s and one
of the highest adult-literacy rates in Africa.0 25X1
17 Key Debtor LDCs: Exports Decline This Year
We believe that exports for 12 key LDC debtors will decline this year
following the sharp rebound in 1984. This could force these governments to
squeeze imports, hurting chances for continuing economic recovery in these 12
countries over the second half of this year.0 25X1
iii Secret
DI IEEW 85-023
7 June 1985
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International
Economic & Energy WeeklyF--] 25X1
Perspective Indian Economy on the Eve of Rajiv Gandhi's Visit
Prime Minister Rajiv Gandhi during his visit to the United States next week
will probably highlight India's long-term economic achievements and recent
policy reforms. Wary of India's coming balance-of-payments strains, Gandhi's
team can be expected to argue for US support for Indian borrowing from
multilateral institutions to bolster his liberalized policies. Gandhi also hopes to
attract US business interest in supplying advanced technology to make Indian
industry more productive. 25X1
Agriculture has been a major success story. Largely because of the Green
Revolution, the danger of widespread famine has been eliminated, and New
Delhi has become an intermittent exporter of foodgrains. Nonetheless, Gandhi
is facing some important challenges. The Green Revolution has not yet
reached vast areas of the country, and one-third of the population remains
undernourished because they cannot afford an adequate diet. Gandhi will have
to grapple both with the economic costs and the political implications of a farm
sector increasingly politicized by dependence on subsidies 25X1
Rajiv Gandhi's policies have accelerated a cautious economic liberalizaton
under way since 1980. India's extensive industrial base has developed during
decades of protection from domestic and international competition. Returns on
this substantial investment, however, have been poor, and capacity utilization
is low. Driven by his interest in technology and productivity, Gandhi has
further eased government restrictions on private production and investment,
especially for the electronics industry. Personal and corporate tax rates have
been lowered and imports of sophisticated technology are encouraged. He has
also pushed the bureaucracy to expedite decisions that affect business,
although he has made it clear that he intends for the government to retain con-
trol of the economy. These moves have fueled optimism among corporate
leaders, who are now actively planning new investments and seeking increased
cooperation with US and other Western business 25X1
Gandhi's policy reforms are supported by a temporarily buoyant economy.
Ample stocks of foodgrains provide a cushion even if this summer's monsoon
rains are poor. Foreign exchange reserves are now adequate, largely because of
past financial support from the International Monetary Fund and a lower oil
import bill, the result of an increase in domestic crude oil production.
Foreign payments strains are likely to increase significantly before the end of 25X1
the decade. Expansion of the economy will require faster growth in imports of
fertilizer, petroleum, and capital goods, while payments to the IMF and
military suppliers are already scheduled to rise sharply. New Delhi is unlikely
to seek relief through a substantial increase in commercial borrowing. Gandhi
1 Secret
DI IEEW 85-023
7 June 1985
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has not abandoned New Delhi's traditional emphasis on self-reliance, which
implies a willingness to sacrifice opportunities for growth in order to reduce In-
dia's vulnerability to changes in the policies of other countries
Gandhi will likely cite India's political stability as a feature that should be at-
tractive to foreign business. New Delhi's management of explosive social
tensions within a democratic framework has been a formidable achievement.
As the country becomes more economically interdependent, however, growing
caste and religious violence threaten to have a greater impact on the national
economy.
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India: The Continued Success of
the Green Revolution '
One of India's major economic success stories has
been the Green Revolution in agriculture-the
adoption of high-yielding seed varieties (HYVs),
chemical fertilizers, and expanded irrigation. India
has been able to achieve foodgrain self-sufficiency,
export wheat, and improve rural incomes because
of the Green Revolution. The high cost of the new
farm technologies have caused agricultural subsi-
dies to soar, however, and led farmers to join
independent farm "unions" to lobby for higher
commodity prices and more input cost supports.
Because 65 percent of India's population is em-
ployed in agriculture, we judge that providing
incentives for increased crop production while keep-
ing growing subsidies in check will be a major
challenge for Prime Minister Rajiv Gandhi's ad-
ministration.
Rising Production
Since the mid-1960s, when the Green Revolution
farm technologies were first introduced, foodgrain
production has risen over 50 percent. The rapid
spread of the new techniques, increased irrigation,
and a dramatic rise in chemical fertilizer consump-
tion have been major factors leading to record
crops over the past two years. Wheat, to which
HYVs were first adapted, has led the way. As a
result, the economic impact favored the wheat-
growing north. The new surge in production in-
creased national stocks and stimulated exports of
nearly 1 million metric tons of wheat to the USSR,
Romania, and the World Food Program
Rice, India's major foodgrain, initially suffered
from the lack of effective high-yield varieties suit-
able to Indian tastes and production conditions.
Now, however, more areas are being cultivated
with high-yielding varieties of rice than of wheat.
In our view, the greatest potential for increased rice
production is in the eastern states. This region,
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however, has been plagued by unreliable irrigation,
highly fragmented landholdings, a poor transporta-
tion network, and limited access to agricultural
credit and technical services. Even so, official
Indian data suggest that the extension of high-
yielding rice varieties since the early 1970s has
been brisk-a rate over twice as fast as that in
south India, the country's other major ricegrowing
region. F__1 25X1
Higher yielding varieties of commercial crops such
as cotton and peanuts have also shown promise; for
example, since the late 1960s hybrids have boosted
average yields, 43 percent for cotton and 12 percent
for peanuts India's major oilseed crop. With the
emphasis on irrigated crops considerably less effort
has been devoted to developing improved varieties 25X1
for India's vast rain-fed areas-nearly 70 percent
of the cultivated land-leading to stagnant yields
for certain coarse grains and protien-rich beans.
Higher Costs, Higher Subsidies
Although the Green Revolution has been successful
in raising agricultural production, it also has been
expensive. The new farm technologies require in-
creased use of costly inputs such as chemical
fertilizers, hybrid seeds, and pesticides, as well as
diesel fuel and electricity to power irrigation
pumps. Rising production costs, combined with
sluggish commodity prices, have hit hardest at
India's economically vulnerable and increasingly
politically active small and middle-sized land hold-
ers. 25X1
Beginning in the 1960s, New Delhi initiated an
extensive subsidy system to control production
costs, stimulate production, and keep food prices in
Secret
DI IEEW 85-023
7 June 1985
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Percentage of Cultivated Land in High-Yielding Variety (HYV) Foodgrains in India, 1980-81
Ceasr~ Fire lii}.e.f
; Haryana
NEW nct ut [ _
lh
RajasthanPradesh
Maharashtra
'"Chiriase e*j
`cuntlur , lndi,7n
"I' -claim
h.~ Andhra ? C
` Pradesh cp?"d
Goa) Karnataka
LAKSHADWEEP
(India)
Punjab'
KATHMANDU(
4 ' ] A--' ", tX,, Bihar
less than 10
10 to 20
20 to 30
30 to 40
40 and above
Major crop-growing area
Arun aoha
Pradesh
.+. no daa,
J \.i0 J?West
Madhya Pradesh Bengal
Ire d is
,1 ~Dzu r,: and Nagar Havel
China
Nepal
Bhutan ----
/1' .'t
Assam "Nagaland
Meghalaya t }./ 1
Bangladesh J
DHAKA data
M is
DUr
RANGOON*
la
K
era
Tamil 0-
I
Sri Lanka
*COLOMBO
NICOBAR
ISLANDS
(India)
Boundary representation is
not necessarily authoritative.
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Keys to Success
The success of the Green Revolution in increasing
foodgrain production was, in our view, the result of
investment in irrigation, appropriate agricultural
price policies, research, and the maintenance of
privately owned and operated family farms:
? Since the late 1960s, increased public and private
investment has nearly doubled India's gross irri-
gated area, significantly enhancing the potential
for agricultural growth.
? Agricultural policies that emphasized appropri-
ate commodity support prices, production subsi-
dies, and agricultural research-developed with
US assistance-have enabled farmers to reduce
risk and speed up adoption of high yielding
varieties.
? Private initiative on the part of India's numerous
small farmers, who were quick to respond to
incentives, accelerated the spread of the Green
Revolution.
check. Over the past few years, higher farm pro-
duction and food storage costs have become an
increasing burden on Indian finances. The FY
1985/86 budget projects food and fertilizer subsi-
dies alone-state governments subsidize irrigation
rates, power, rural credit and development pro-
grams-at over $2 billion, a sum nearly equal to
the estimated overall budget deficit.
Press reports indicate that Gandhi's new agricul-
ture policy probaly will call for a reduction of some
farm subsidies, but, because New Delhi is reluctant
to antagonize farmers, we judge that a sustained
reduction will be politically difficult. In 1984-an
election year-the federal government contributed
to the subsidy problem by raising average real
foodgrain procurement prices over 7 percent and
allowing fertilizer subsidies to double. There are no
plans to roll back these subsidies in the FY
1985/86 budget.
Richer But Less Stable Villages
Contrary to initial fears of many Indian and West-
ern academics, the Green Revolution appears actu-
ally to have strengthened the economic position of
small farmers and rural laborers. One major reason
is that over 90 percent of those owning irrigated
land-a precondition for the adoption of high-
yielding varieties-are small farmers with less than
10 acres in holdings. Recent academic studies also
suggest that higher real wages and a near doubling
of employment opportunities have raised farm la-
bor income in areas affected by the Green Revolu-
tion.
Nonetheless, we believe that the rapid economic
change has had a somewhat destabilizing effect on
the village "community," which provides the bed-
rock of India's social, political, and economic sys-
tem. Because the new hybrid varieties are much
more costly and productive, farmers have had to
seek credit, markets, and labor beyond the village.
In our view, these changes have loosened tradition-
al social and economic ties and increased competi-
tion for resources. In some cases, these pressures 25X1
have led to localized outbreaks of communal or
caste violence.
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Unbalanced growth between regions has also in-
creased tensions and fueled support for local politi-
cal parties. One of the complaints in predominately
Sikh Punjab is the perception by many Sikhs that
their state's wealth, due in large part to HYV
agriculture, was being "exploited" by the federal
government. As a result, the rural-based Sikh Akali
Dal Party accused New Delhi of not giving Punjat25X1
its fair share of state industrial investment and
adequate prices for its farm produce.
One of the major outgrowths of the Green Revolu-
tion has been the advent of the independent farm
"union" movement-organizations largely com-
posed of small and medium-sized landholders. As
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India: Agricultural Indicators
d Estimated.
h1974/75-1983/84.
s0
305
200
150
But rising Real Input Costs have slowed Real Farm
Income Growth.b
Cost
Income
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cultivation costs rose and farm profits narrowed,
more farmers in states most affected by the Green
Revolution have joined farm "unions" that now
exist in eight of 22 states
In our view, farm unions have been increasingly
successful in wresting concessions from both state
and national governments. Since 1980 press and
US Embassy reporting indicate that union-inspired
protests have resulted in higher procurement prices,
lower electricity and irrigation rates, and the post-
ponement of overdue loans. Farm group pressure
contributed to New Delhi's decision in 1981 to
accept a more generous parity method for comput-
ing agricultural procurement prices. According to
press reports, Rajiv Gandhi has recently conceded
to a major farm union demand to restructure the
Agricultural Prices Commission by allowing farm
representatives to participate, for the first time, in
the setting of national procurement prices.
We judge that continued expansion of farm produc-
tion will be one of the major goals of Gandhi's new
administration. Indian planners estimate that agri-
culture will have to grow at 4 percent per year-
near the average of the past five years-to sustain a
projected GNP growth rate of 5 percent over the
current Five-Year Plan (1985-90). Because crop
yields are still relatively low, we judge that more
efficient use of improved farm technologies, im-
provements in rain-fed farming, and favorable
weather could boost production near anticipated
levels
Although New Delhi is likely to stress reducing
agricultural subsidies, any sharp cutbacks would
jeopardize efforts to increase agricultural growth
and provoke protests from politically active farm-
ers. We judge that farmers will use unions, farm
cooperatives, and political parties to lobby success-
fully at the state and national level for higher prices
and subsidized credit. We also expect these farm
groups to take a more active role in shaping
agricultural policy while pressing for reduced im-
ports and increased farm exports.
The Green Revolution is shifting trade patterns
with the United States. Higher foodgrain produc-
tion has already ended commercial foodgrain im-
ports and, provided there are no major droughts, 25X1
the prospects for future large US grain exports to
India are dim. Progress in oilseed production is
likely to be slow, however, and India will continue
to be a potential market for US producers for
several years. As domestic agriculture develops,
market and investment opportunities for US agro-
industries such as food processing, pesticide, chemi-
cal fertilizers, and farm machinery are also likely
to increase.
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Venezuela: Adjusting to the
Depressed Oil Market
Venezuela's economy is stagnating as the oil boom
fades and Caracas is responding by retrenching on
imports, ambitious development projects, and oil
exploration. Austerity is bringing fiscal and current
account surpluses, but unemployment and idle ca-
pacity are rising. With no rebound likely in the oil
markets in 1985, austerity will continue. Fiscal
policies are likely to remain tight, and Caracas will
again post a current account surplus. Despite some
planned stimulation, we believe economic growth
will be nil in 1985. A sharp fall in oil prices-while
not currently expected-would likely cause an eco-
nomic plunge. More likely, the economy will con-
tinue to limp along and President Lusinchi will be
able to deal with domestic discontent.
Oil dominates Venezuela's economy, generating 93
percent of export receipts in 1984 and almost 25
percent of total economic activity. The government
oil monopoly, Petroleos de Venezuela (PDVSA),
controls the oil sector, providing 65 percent of
public revenue
The government exercises a strong role in the
economy. The oil boom led to a major expansion of
the public sector, which now accounts for more
than 40 percent of economic activity. The govern-
ment is using oil revenues to support economic
diversification by direct investment in steel and
aluminum industries. Moreover, to stem the decline
in living standards, Caracas has directed private
firms to raise employment and provide additional
worker benefits. The current administration has
continued to control imports, prices, wages, interest
rates, and foreign exchange to buffer the domestic
economy from oil price fluctuations
Adjusting to Fading Prosperity
Venezuela, a charter member of OPEC, typically
seeks cooperation and compliance among mem-
bers. In 1984, however, Caracas sharply criticized
OPEC cuts in Venezuela's production quota.
senior ad-
ministration officials criticized production cheat-
ing elsewhere in OPEC and called for
noncompliance or withdrawal from the cartel. Nev-
ertheless, the criticism has quieted recently, and
we expect Venezuela to remain in OPEC and 25X1
emphasize production monitoring to minimize
cheating-and help support prices.
We expect Venezuela to have further disagree-
ments with OPEC in 1985, however. OPEC has
talked about including condensates and gas liquids
in production quotas and setting price guidelines
on refined products. Caracas, with a large percent-
age of its exports in products, is unlikely to accept
OPEC price controls on these. OPEC could also
impose further production cuts in 1985, and seri- 25X1
ous resistance could arise in Venezuela as revenues
and currency reserves decline.
established production quotas.
total oil production-including
condensates and gas liquids-has slipped from 2.5
million b/d in the late 1970s to 1.9 million b/d in
1984, although the average revenue received for
Venezuelan crude has dropped 20 percent to $26.74
per barrel. Oil export revenues declined from a $19
billion peak in 1981 to only $14.8 billion in 1984.
Caracas last year began adjusting domestic spend-
ing and investment to the falloff in revenues. To
protect the nation's ability to repay debt and to
Venezuela faced steady downward pressure on oil
revenues since 1980, as world prices fell and OPEC
Secret
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Venezuela: Oil Statistics Thousand V Venezuela: Balance of Payments Billion US $
except where noted
Production
_ Crude
1,763
1,690
1,555
Condensate
33
109
115
Natural gas liquids
57
57
60
Consumption
346
322
345
Crude
986
1,007
960
514
510
450
Export price (US $ per barrel)
25.31
26.74
26.57
Export revenue (Billion US $)
13.9
14.8
13.7
Trade balance
2.9
8.3
8.7
Exports (f.o.b.)
16.5
14.7
15.9
Imports (f.o.b.)
13.6
6.4
7.2
Services balance
-6.5
-3.7
-4.1
-0.2
-0.2
3.9
-3.4
-2.2
-2.7
-0.8
7.8
-0.7
-1.4
-2.4
-0.3
-0.1
-2.7
0.7
2.1
prevent inflation, President Lusinchi ordered public
spending cut 10 percent, raised domestic oil prod-
uct prices, maintained strict import controls, and
refused labor demands for wage increases
Lusinchi's austerity policies led to a decline in real
GDP of 2 percent in 1984 and a rise in unemploy-
ment to 15 percent, according to the US Embassy.
The external accounts were more favorable. With a
tight cap on imports, Caracas registered a $4.4
billion current account surplus. Official reserves
now total $13.5 billion, and Caracas paid $1.7
billion on debt principal in 1984.
Success in cutting public spending and the lack of
public investment produced a fiscal surplus equal to
5 percent of GDP. This put downward pressure on
Venezuela's economy because the budget surplus-
held in sterile Central Bank accounts-is not avail-
able for new lending.
The sharp cut in oil exploration and development
activities underlies the plunge in domestic invest-
ment.
excess oil production capacity has allowed PDVSA
to reduce oil investment by 35 percent. Most other
industries suffer from low demand caused by de-
clining real incomes, and the US Embassy reports
that private domestic investment has declined for
the sixth year in a row
because of concern over extensive govern-
ment controls, new foreign direct investment is
largely reinvestments forced by Venezuela's profit
repatriation laws.
The declining standard of living-per capita in-
come has fallen 20 percent since 1980-is causing
labor and middle-class discontent. The US Embas-
sy reports that business leaders are clamoring for
wage restraint and relaxation of price controls. The
Lusinchi administration promised last September
to move toward decontrol of prices, but now is
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retreating in the face of labor demands for wage
improvements and protection from inflation. With
strong ties to labor, the Lusinchi administration
began eying a fiscal stimulus package late in the
year to reverse the rising unemployment rate.F_
Although the world oil market remains weak,
Venezuela will be less seriously affected than most
other OPEC producers. We estimate that current
crude production is 1.6 million b/d-half are
heavier types, which the Venezuelans do not con-
sider to be subject to OPEC price guidelines.
Currently, PDVSA is selling its heavier crudes with
little difficulty.
prices for heavier crudes are strengthening as
world refineries adapt to process these cheaper
inputs. As a result, OPEC dropped prices for light
crudes by over $1.00 per barrel in February, Vene-
zuela's average export price only declined by 50
cents. Venezuela also is producing more conden-
sates and gas liquids, which are not included in
OPEC production quotas. One-third of petroleum
exports are refined products, which, while facing
weak markets in 1985, are also not price controlled
by OPEC.
According to US Embassy reports, PDVSA as-
sumes that OPEC quotas will remain in effect
through 1985, reducing export volume to 1.4 mil-
lion b/d compared with 1.5 million b/d in 1984.
PDVSA is optimistic that prices will remain about
the same as last year. Caracas has drawn up a
conservative budget that aims to maintain a fiscal
surplus, but in February the government an-
nounced a $500 million public works package,
equal to 2 percent of GDP, to help reflate the
economy in late 1985.
Looking Ahead
Despite the fiscal stimulus, we foresee continued
recession in 1985 as oil revenues again constrain
the economy. We expect oil revenues of $13.7
billion, a drop of 7 percent compared with last year.
To protect the.payments position, import controls
will remain tight, and Venezuela probably will post
a $2 billion current account surplus. Nonetheless,
Caracas will need to draw down reserves by $2
billion to settle private-sector interest arrears-key
to finalizing the multiyear rescheduling agree-
ment-and to continue interest and principal pay-
ments on public-sector debt.
With another year of economic stagnation, unem-
ployment will rise to around 18 percent. We believe
labor demands for large wage increases will be
successfully resisted, and inflation will remain be-
low 15 percent. Business demands for full removal
of price controls will also be resisted, but at the
expense of reviving investment in 1985. Venezuela
will probably restrain imports and control the
economy with a heavy hand. Caracas will likely
continue to repay both interest and principal on its
debt, but it remains a poor candidate for absorbing
increased US exports or new investment opportuni-
ties.
If oil prices fell to $22 per barrel or OPEC cut
Venezuela's quota again by 200,000 b/d, we be-
lieve oil revenues would fall to $11-12 billion.
Instead of a surplus, we believe the current account
would register a $1 billion deficit and reserves
would probably drop by $3-4 billion. Venezuela's
ability to repay debt and interest could be seriously
hurt, jeopardizing the $21 billion public-sector debt
rescheduling now nearing final agreement. More-
over, we believe real GDP would drop by 4 percent,
causing unemployment to rise to 25 percent. The
Lusinchi administration might then be unable to
resist severe pressure, from both labor and business,
to stimulate the economy
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? VALLETTA
180/a Malta
Pelagie
(Italy)
o DISPUTED
AREA
international Court of Justice
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Tunisia: Economic Strains
and Social Tensions
The Tunisian Government has been increasingly
unable to meet rising expectations created by rapid
economic development during the 1970s and one of
the highest adult-literacy rates in Africa. Social
tensions erupted in nationwide riots in January
1984 following government efforts to reduce bur-
densome food price supports. Particularly ominous
for the government is the growing wealth disparity
between regions and social classes and the alien-
ation of Tunisian youth. President Bourguiba's
upcoming visit to the United States probably will
be used to elicit greater financial aid for Tunisia's
ailing economy and security assurances in the event
of domestic turmoil or foreign aggression.
Tunisia suffers from a growing economic disparity
between the prosperous coastal cities and the im-
poverished interior. Coastal areas have benefited
from the development of tourism, commerce, and
the oil industry, while the south and the west have
suffered from the government's neglect of agricul-
ture. Average income in the south is as much as 40
percent below that of the coastal cities.
the south. About 70 percent of the population is
under 26, and this group is hardest hit by unem-
ployment. Even college graduates often cannot find
employment commensurate with their education.
Few of the young join the ruling Destourian Party,
but a growing number are attracted to conservative
Islamic groups.
The economy began to slow in the late 1970s when
Tunisia's main sources of foreign exchange earn-
ings-petroleum, tourism, phosphates, and worker
remittances-languished as a result of the interna-
tional recession. Real GDP growth has averaged 4
percent annually since 1979-two-thirds of the
level of the previous four years-and has barely
been sufficient to absorb the 3.8-percent annual
increase in the nation's labor force. Reduced de-
mand for Tunisian labor in Western Europe and
wealthy Arab states has helped push unemploy-
ment to 20 percent in urban areas, according to
official Tunisian estimates. We believe, however,
that the actual level of unemployment is closer to
30 percent.
This economic imbalance has prompted a growing
migration to urban areas. About 55 percent of the
population now lives in urban centers compared
with only 45 percent in 1970; if unchecked, 75
percent of the population will live in urban centers
by the turn of the century with one-half in Tunis.
Unskilled, rural migrants often remain unemployed
or restricted to menial labor. Migrants played a
major role in last year's riots, and they remain a
pool of idle, disillusioned poor who could again vent
their frustrations in violence.
Political and generational differences exacerbate
regional economic disparities. President Bourgui-
ba's secular, pro-Western government is dominated
by members of the social elite from the French-
speaking coastal cities and has little popularity in
25X1
Stagnating foreign exchange earnings have serious-
ly weakened Tunisia's international payments posi-
tion. The current account deficit last year of $1
billion was up 65 percent over the 1983 level
because of the soft oil market, a poor harvest, and a
sharp rise in domestic consumption. Tunis has
financed the steadily rising current account deficits
with overseas loans and now has an external debt of
about $4.6 billion-55 percent of GDP. Debt ser-
vice payments consume about one-fourth of re-
ceipts from exports of goods and services. Foreign
exchange reserves of $225 million cover only one
month of imports.
Secret
DI IEEW 85-023
7 June 1985
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Tunisia: Economic Indicators, 1980-85
GDP Growth
Percent
Trade With the United States
Million US $
Projected.
End of period, excluding gold.
Consumer Price Growth
Percent
Financial Exchange Reservesb
Million US S
Prime Minister Mzali pushed through a barebones
budget this year to halt the escalating government
deficit and stem foreign borrowing needs. He has
announced plans to tighten the collection of taxes
and tariffs and reduce government food subsidies.
These measures, however, will greatly complicate
government efforts to keep peace with organized
labor. Labor problems this spring have been sub-
dued because of ongoing wage negotiations with the
government. Union leadership may not be able to
maintain the calm, however, if Tunis holds the line
on wages and goes ahead with food price increases.
Agriculture remains a bottleneck in the economy.
Government neglect and pricing policies favoring
imported grain over domestic production have led
to poor performance in this sector. Agriculture
employs one-third of the population but accounts
for only 15 percent of GDP. Food imports already
meet about 50 percent of demand. Agricultural
output probably will lag population growth during
the next several years, adding to the foreign pay-
ments deficit.
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of popularity complicates his prospects for consoli-
dating power after Bourguiba leaves office.
Petroleum is a mainstay of the economy, account-
ingfor 53 percent of export earnings, about 21
percent of government revenues, and 16 percent of
GDP in 1984. We estimate that production is
currently averaging about 115,000 b/d. Declining
reservoir pressures and limited success with sec-
ondary recovery techniques in the main oilfields-
Al Burmah and Ashtart-will cause production
from these fields to continue to decline. Production
from oil and gas fields still under development-
Tazerka, Miskar, and Isis fields-should allow
production to remain near current levels for sever-
al years, but the US Embassy estimates that the
rapid growth in domestic consumption will cut into
net oil export volume. Tunisia could become a net
oil importer by the end of this decade, according to
industry estimates.
The boundary dispute and political tensions be-
tween Tunisia and Libya have been major obsta-
cles to development of promising offshore fields.
Tunis has yet to accept the International Court of
Justice ruling delimiting the offshore boundary
between these two states. A second hearing on this
dispute is in progress.
Bourguiba's advanced age-82-and chronic
health problems have dulled his political acumen
causing him to spend less time directing public
policy. His continuing grasp on power, however,
frustrates efforts to ameliorate Tunisia's pressing
social and economic problems. The government is
increasingly being viewed by the growing number
of educated youth and unemployed as a tool of the
elite that is dangerously out of touch with the needs
of the population.
Uncertainty over Bourguiba's longevity contributes
to government infighting in anticipation of the
post-Bourguiba period. Mzali's efforts to ensure his
position as Bourguiba's successor have eroded his
popularity and respect for the regime. Mzali's lack
We believe that Tunisia's financial position will
continue to remain weak for the rest of the decade.
Oil revenues will decline as export volumes fall-
more so if energy prices decline. Government ef-
forts to boost exports of Tunisian textiles and
agricultural products will be hampered by West
European quotas. With aid prospects limited, addi-
tional international borrowing will be necessary to
meet the expectations of the burgeoning population
and to finance military modernization and econom-
ic development goals. The gap between consump-
tion and production of foodstuffs will increase
unless politically sensitive food subsidies are
trimmed and price controls are eliminated. This,
however, would again push inflation to double-digit
levels and risk consumer unrest.
Pressure from organized labor to maintain consum-
er subsidies will frustrate government efforts to
keep spending in line with revenue. Radical ele-
ments in Tunisian society increasingly will try to
capitalize on the declining standard of living and
periodic labor unrest to organize and gain conces-
sions from the regime. The government will be
more pressed than in January 1984 to put down
widespread unrest when it recurs and will increas-
ingly have to rely on repression to remain in power.
Bourguiba's death almost certainly will aggravate
the situation as the military's support of Mzali is
less certain, in our opinion.
Implications for the United States
Bourguiba sees his visit to the United States as a
very personal one, highlighting the longstanding
close ties Tunisia has had with Washington. He
will seek Washington's reassurances of protection
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Current account balance
-443
-489
-691
-634
-1,049
-710
Trade balance
-1,078
-1,070
-1,292
-1,182
-1,550
-1,180
Exports (f.o.b.)
1,804
2,110
1,625
1,574
1,450
1,390
Petroleum
1,345
1,308
910
835
770
730
Imports (f.o.b.)
2,882
3,180
2,917
2,756
3,000
2,570
Foodstuffs
390
428
357
425
395
300
Services (net)
620
563
560
531
486
450
Of which:
Receipts from tourism
640
598
575
553
540
490
Worker remittances
320
360
372
345
320
300
Interest on external debt
-184
-210
-204
-191
-205
-210
Private transfers (net)
15
18
41
17
15
20
in the event of domestic turmoil or external aggres-
sion. He may also pursue additional financial assis-
tance-including military debt relief-to help ease
mounting social and security pressures as a mea-
sure of US appreciation for Tunisia's consistent
support for US policies.
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Key Debtor LDCs: Exports
Decline This Year'
We believe that exports for 12 key LDC debtors Key Debtor LDCs: Export Growth, 1976-85
will decline this year following the sharp rebound in
1984.2 Among nonoil exporters, only Chile is likely
to record faster export growth this year; Bolivia and
Brazil face export declines. Colombia and Indone- Percent
sia should do the best among oil exporters in the 25
group. Slowing export growth, combined with high-
er 20
debt service payments, could force these govern-
ments to squeeze imports, hurting chances for 15
continuing economic recovery in these 12 countries
over the second half of this year. Reduced export l0
growth could also put strains on their debt servicing
capacity.
Contributing Factors
The projected slowdown in OECD economic -10
growth likely will trim OECD import demand. On
the basis of OECD projections, real GNP in the -15 1976-80a 81 82 83 84 85b
industrialized countries will rise about 3 percent in Average annual.
1985, only two-thirds as fast as last year. In
addition, continued slack oil sales will hold down
overall export gains for the oil exporters. Increasing
developing country protectionism and loss of LDC
export incentives because of budget cuts also will
limit export prospects of several key debtors, espe- last year's 16-percent increase. Only Chile is ex-
cially Brazil. Real exchange rates for the key pected to show faster gains, and Bolivia and Brazil
debtors are expected to show little change, on face the possibility of an export drop.
average-compared with a 3-percent appreciation
in 1984 that cut into their competitiveness. Among individual countries:
? Argentine grain exports are likely to suffer from
stiff competition and weak prices; beef exports
face competition from subsidized EC sales. Over-
all export growth in 1985 is likely to be only one-
For nonoil exporters as a group, we estimate export fourth of last year's pace.
growth will average about 1 percent compared with
' The group includes Argentina, Bolivia, Brazil, Chile, Colombia,
Indonesia, Malaysia, Mexico, Nigeria, Peru, the Philippines, and
17 Secret
DI IEEW 85-023
7 June 1985
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? Brazil's export performance probably will be far
less robust than last year's. Exports of manufac-
tures, such as footware and steel, are likely to
decline, and sales of commodities could stagnate.
Increased protectionism and reduced export in-
centives, because of budgetary constraints and
GATT commitments, could also dampen exports.
? Chile's copper export earnings should increase
this year as production rises 2 to 6 percent and
prices recover. In addition, exports of iron ore
should also rise.
? The Philippines should benefit from recovery in
the coconut oil and timber markets.
Slower Export Growth for Oil Exporters
Export earnings for the oil-exporting key debtors
are likely to drop 1 percent in 1985, compared with
a 10-percent gain last year. Overproduction and
weak demand continue to depress oil prices.
Growth in nonoil exports is also likely to slow from
last year's pace. Colombia, Indonesia, Malaysia,
and Nigeria should record modest to large export
gains, and Mexico, Peru, and Venezuela probably
will suffer export declines:
? Colombia's export prospects should be bolstered
by higher coal sales, and coffee exports should
recover after a decline last year because of bad
weather.
? Indonesia and Malaysia face slowdowns in ex-
ports of rubber, timber, and palm oil. Oil earn-
ings are expected to show little change.
? The US economy's slowdown and the overvalued
peso likely will lead to a drop in Mexican manu-
factures exports. Oil export earnings are also
likely to decline.
? Because of a desperate need for foreign exchange,
Nigeria is likely to maintain high oil production,
but soft prices will cut the growth in export
earnings.
Key Debtor LDC Exports, 1983-85
1983
1984
1985a
1984
1985a
Total
122.7
137.2
136.3
12
-1
Argentina
7.8
8.7
_
9.0
12
3
Bolivia
0.8
0.7
0.7
-12
-3
Brazil
21.9
26.9
26.5
23
-1
Chile
3.8
3.7
4.0
-3
8
Colombia
3.0
3.0
3.2
-2
8
Indonesia
16.0
17.1
17.8
7
4
Malaysia
13.8
16.3
16.7
18
2
Mexico
21.4
24.1
22.5
13
-7
Nigeria
11.6
12.2
12.4
5
2
Peru
3.0
3.2
3.1
7
-3
Philippines
4.9
5.4
5.6
10
4
Venezuela
14.7
15.9
14.8
8
-11
? Peru's export earnings this year could drop by 3
percent because of weak prices for traditional
exports and lack of export financing.
Implications
Declines in export growth could exacerbate debt
servicing difficulties for most of these countries.
Argentina's debt situation remains bleak: it contin-
ues negotiating with the IMF, and bank creditors
have not yet committed the $4.2 billion that they
agreed in principle to provide. Similarly, Brazil
continues its IMF negotiations, and concern about
its foreign exchange earnings capacity supports
speculation that Brazil will need new money by late
1985. Peru and Bolivia remain in grave debt situa-
tions, and a fall in export growth will make their
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condition worse. Colombia, Mexico, and Venezuela
are doing relatively better with external debt ar-
rangements, and the decline in export growth for
Mexico and Venezuela will not pressure them
greatly. The Philippines recently signed a financial
package with creditors that includes trade credits,
so export growth declines will not have as much
impact. Overall, the expected export slowdown
likely will constrain import growth and dim pros-
pects for continuing economic recovery in the sec-
ond half of this year. Brazil's trade surplus could
decline by as much as $2 billion from last year's
level. Chile and Colombia will have little room for
import gains, because increased exports could be
offset by higher debt service payments. Export
declines imply continued austerity in Bolivia and
Peru. Slowing export growth could imperil Mexi-
co's fledgling economic recovery and dash Nigerian
hopes for renewed real GNP growth. In addition,
reduced export gains probably will slow the growth
of real income in Indonesia and Malaysia.
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Secret
ralian-Japanese
Agreement
/Sales
Energy
Representatives of eight Japanese utilities have initialed a contract with six
Australian suppliers to import 6 million metric tons of liquefied natural gas
(LNG) annually for 19 years beginning in 1989. At current prices, the gas
would be worth about $1.6 billion per year. If government approvals can be ob-
tained and financial terms arranged by the end of July, construction of
liquefaction and loading facilities could begin in Australia by the end of the
year. Japan signed a letter of intent in 1981, but financial difficulties among 25X1
the Australian backers, together with downward revisions in Japanese energy
demand, delayed the initial 1986 start-up date. Australian LNG is expected to
cover about 15 percent of Japanese LNG demand after 1990. Tokyo now has
sufficient supplies tentatively lined up to meet about three-fourths of its
natural gas requirements through 2000 25X1
E,irfopean Coal Imports Coal imports by the European Community in 1984 rose 30 percent over year-
earlier levels to a record 80 million metric tons, partly offsetting the 72-
million-ton drop in EC coal production. The UK coal strike accounted for 67
million tons of the decline in EC output, and led to UK coal imports of nearly
9 million tons, more than twice the amount imported in 1983. Fuel oil was
widely substituted for coal during the UK strike. Other EC coal consumers in25X1
creased coal imports by one-fourth, as a result of the greater use of coal for
power generation. Australian shipments to EC buyers nearly doubled to more
than 15 million tons, while imports from South Africa rose 26 percent to 20
million tons. Imports from Poland rose 50 percent to 15 million tons. Of the
major suppliers, only the United States-whose exports remained flat at 24
million tons-failed to benefit. 25X1
Aramco Encouraging Aramco is trying to cut its payroll by increasing retirement benefits for Saudi
rly Retirement employees who retire early. The company's manpower has stayed about the
same in recent years even though liftings have declined by two-thirds. Unde-
Aramco's Aramco's new retirement formula, the "typical" retirement benefit will be
increased by 7 percent
according to the US consulate in Dhahran
If this does
,
.
not induce a sufficient number of Saudis to retire voluntarily, Aramco intends
to force 500 to 600 older employees to take early retirement. Saudi employees
are currently eligible for full retirement at 60-counted in shorter Saudi lunar
years-and may retire as early as 50 with 60 percent of full benefits.
21 Secret
DI IEEW 85-023
7 June 1985
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IMF Relaxes
Philippine Austerity
West German banks in general have kept their international lending within
conservative limits, according to Bundesbank data-which for the first time
includes activities of foreign subsidiaries. These subsidiaries-about half are in
Luxemburg-accounted for almost one-third of total West German bank
international lending. At the end of 1984, West German banks held $35 billion
or 8.7 percent of total Western bank exposure to the 25 largest debtor nations.
West German banks, however, account for a large share of Western bank
lending to Turkey (33.1 percent), Israel (26.2 percent), Poland (25.6 percent),
and the USSR (19;5 percent).
rate.
Growing concern over the recent appreciation of the Philippine peso led the
IMF last week-at Manila's request-to relax the money supply growth target
set late last year. The peso appreciated 6 percent against the US dollar and
nearly 15 percent on a trade-weighted basis since last November, causing a
$120 million slippage in exports according to our estimate. Manila will now be
permitted to expand reserve money, which determines the total credit available
in the economy, by 15 percent this year rather than the original ceiling of 11
percent. The new limit allows the Central Bank-the only major buyer of
foreign exchange over the past year-to accelerate foreign exchange pur-
chases. In a related move, Manila last week raised the limit on foreign
exchange assets commercial banks may hold. We judge these moves will
weaken the peso, halting the slide in the country's export performance but
threatening to rekindle inflation, currently running at only a 5 percent annual
Global and Regional Developments
O CD Call for The recent OECD Secretariat's Economic Outlook stresses the need for more
conomic Stimulus stimulative economic policies in Western Europe to stem unemployment, now
averaging 10 percent and rising. The report argues that recent declines in the
US dollar and US interest rates enable West European governments to take
immediate action to lower interest rates further and boost growth above the
2.3 percent now projected through 1986. Moreover, the Secretariat also calls
for "appropriately designed" tax cuts to revive domestic damand and invest-
ment. The Secretariat bases its unusually direct warning on its forecast of less
than 3-percent US GNP growth through 1986 that would mean a slowing of
US demand for West European products. US imports have accounted for
almost half of West European GNP growth since the recovery began. If their
economies fail to perk up soon, the West European leaders-particularly those
in France, West Germany, and the United Kingdom facing elections beginning
in 1986-may have to consider tax cuts or other stimulus.
est German Bank
Exposure to Major
Debtor Countries
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Nicaragua's attempt to protest the US trade embargo in GATT has met with
Nicaraguan Embargo little success. During the GATT Council debate last week, representatives of
most of the 34 countries participating criticized the embargo but urged a
bilateral solution. The EC, Japan, Canada, and Australia supported the US
legal position that GATT is not the proper forum for this issue. Some Latin 25X1
American and Asian countries appealed to the United States to end the
embargo, but all African and ASEAN countries were silent. Only Cuba fully
supported Nicaragua's proposal to condemn US actions and initiate GATT's
dispute settlement procedures. Although Nicaragua has succeeded in drawing
attention to, and gaining some support for, its position, the lack of immediate
action by the GATT Council, means that debate in this forum is likely to be
deferred.F____1 25X1
C Development Aid The European Community will give Nicaragua $5.1 million in development
for Nicaragua assistance to improve facilities for storing and exporting food products. EC
Commissioner Cheysson and Nicaraguan Vice President Ramirez signed the
agreement last week in Brussels at the end of Ramirez's four-nation European
tour. Both officials used the occasion to criticize the US embargo-and
Cheysson contended that the sanctions conflicted with the EC's economic 25X1
philosophy. According to Cheysson, Nicaragua has received more than
$25 million in EC financial and technical assistance since 1979. The funds for
the new projects almost certainly were not triggered by the US embargo and
do not represent a new aid commitment. The funds were approved last year as
part of the Community's ongoing aid program for developing countries.
Cheysson's comments reflect his personal views and do not constitute official
EC policy. Many EC members, however, strongly oppose the US trade action
and are likely to make marginal increases in imports of Nicaraguan foodstuffs.
25X1
ropical Timber
Agreement
The International Tropical Timber Agreement (ITTA) entered into force on 1
April 1985 following eight years of negotiations as part of UNCTAD's
Integrated Commodities Program. Unlike agreements on coffee, sugar, tin,
and rubber, the pact contains no provisions for controlling market supplies or
stabilizing prices. Its objective is to provide a framework for cooperation
between producing and consuming countries to promote expansion and
diversification of trade in tropical timber. Only coffee and sugar among the
nonoil commodities generate greater export earnings for LDCs. The ITTA is
also the first pact to link trade with national policies aimed at conservation of25X1
tropical forest resources. All of the major producers have signed the accord, in-
cluding Indonesia, Brazil, and Malaysia, which together account for more than
two-thirds of the estimated $7 billion a year global trade in tropical timber.
Major consumer signatories include Japan, the EC, and the United States,
which together account for about 90 percent of annual global imports of these
products. The first meeting is scheduled for 17-28 June in Geneva.F___-] 25X1
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New Canadian Grain
Export Policy
National Developments
Developed Countries
Africa, and the Pacific Basin.
Ottawa's hardline stance toward the US export bonuses program does not
represent a basic change in its recent grain export policy. The "new" policy,
administered by the Canadian Wheat Board (CWB), consists of aggressive
price cuts, extensive credits, bonus giveaways of hard-to-export winter wheat,
and $250 million in subsidies to be hidden in contracts-all devices that have
been used in the past six months. Recent credit examples include shipments to
Brazil and the new five-year pact with Egypt. Aggressive pricing has been used
in sales of durum wheat to Japan and in a hidden price concession-supplying
a more expensive wheat variety-in a contract with Taiwan. In addition, the
CWB is attempting to include wheat in a countertrade negotiation with
Nigeria. Canada is currently diversifying into less expensive, lower quality
wheat for which demand is growing faster, in order to achieve a 25-percent in-
crease in grain exports by 1990. Target areas include the Middle East, North
W/ t German Plans Bonn apparently has decided on some form of fiscal stimulation in light of the
f ,6r Fiscal Stimulus setback suffered last month by Chancellor Kohl's Christian Democrats in a
key state election. Much of the blame for the defeat has been placed on the
lack of progress on unemployment. The magnitude and form of the measures,
currently under intense debate, will be announced at the end of June. The Free
Democrats and the Christian Social Union junior partners in the coalition-
are calling for compressing the 1986-88 tax cut into a single step in 1986. Oth-
er proposals center on spurs to investment in construction and for environmen-
tal protection. We expect that whatever is enacted will be modest enough to al-
low the government to claim that it is not abandoning its longstanding policy
of budget deficit reduction and primary reliance on private-sector initiatives.
talian Wage The Communists, shaken by losses in recent local elections, are beginning to
Indexing Referendum worry that their referendum on wage indexing will be defeated on 9 June,
seriously eroding their claims to speak for the working man. Last year Prime
Minister Craxi pushed through a cut in the quarterly inflation adjustment,
roughly equal to 4 percent and the referendum seeks to rescind that cut. The
governing parties, management, and moderate labor unions oppose the referen-
dum, because it might trigger a new round of inflation. Even in the
Communist-dominated trade union, most non-Communist members oppose it.
Many political leaders also worry that the referendum may set a dangerous
precedent for economic decision making. Some Communist leaders would
prefer to drop the initiative-launched by former party leader Berlinguer
about a year ago-despite current indications that it would pass. Last week,
however, representatives of government, management, and unions apparently
gave up attempts to negotiate a settlement that would have averted the
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referendum. Reducing wage indexing is widely considered one of the most
significant accomplishments of Craxi's two-year administration, and Craxi has
said that he will resign if the cut is restored.
B fish Industry Seeks British industry and research organizations are reportedly actively negotiating
ole in SDI Research contracts to participate in SDI research, even before London formally replies
participate.
to Washington's invitation. According to press reports, Logica, a leading
computer company, hopes to win a $200,000 software contract probably for
directing laser guns. At the same time, Edinburgh's Heriot-Watt University
expects to receive a grant of $150,000 to work with a US company to produce
prototypes of optical computing devices. Industry observers believe the British
could also make major contributions in the fields of battle management and
conventional missiles. Most firms would prefer to sign direct contracts with the
Pentagon, rather than subcontracting for US companies. It appears likely that
London will eventually decide in favor of the US proposal, primarily to
enhance Britain's technological development. In any case, Prime Minister
Thatcher would probably encourage private firms to use their own resources to
French Arms For the French arms export program, 1984 was an excellent year. Despite
Sales in 1984? some controversy over the total, we believe a figure of about $6.9 billion is ac-
Spanish Labor Reform
curate. The 1984 sales total, however, did not match France's record
achievements in 1980 or 1982 ($8.2 billion and $7.5 billion, respectively). This
impressive performance may fade over the next few years; over half the 1984
total sales came from one deal-an air defense system for Saudi Arabia. This
level of sales in a tight arms market, however, is indicative of France's
aggressiveness and skill as an arms dealer. We expect stiff competition for
future US sales efforts, especially in the aerospace markets.
half years' salary-will continue to discourage hiring
Government, union, and business leaders will meet this month to discuss
modifying Spanish dismissal regulations to conform with EC practices.
Although government officials are convinced that rigid labor laws are a serious
impediment to lowering the 22-percent unemployment rate, Madrid had to
defer action last year to obtain a wage agreement. Business leaders particular-
ly want the elimination of a government commission that must approve
dismissals and that usually grants even higher severance payments than
required by law. This move is opposed by the Socialist UGT trade union,
which is already angered by plans to cut pension benefits and fears that labor
flexibility will translate into job losses. Abolishment of the commission,
however, probably would have little impact because the continuing difficulty
and expense in dismissing workers-severance can be as high as three and a
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v
xican-Nicaraguan
` Less Developed Countries
'Economic Cooperation
JBrazilian Military
Aircraft Sale
Chile's Export
,Diversification
Mexico is not abandoning Managua or bowing to US pressures
Mexico's public pledge last week to strengthen economic ties to Nicaragua
probably does not portend a return to significant levels of assistance and will
not reverse the Sandinistas' dependence on Soviet oil. Mexico City has agreed
to supply Managua with 320,000 barrels of oil-about a 25-day supply-
under terms of the existing Mexican-Venezuelan agreement. Mexico also
expressed willingness to provide an additional 410,000 barrels under conditions
yet to be negotiated. Meanwhile, representatives of the two countries are
meeting to renegotiate Nicaragua's $600 million debt to Mexico-about
$500 million is for oil. Mexican officials have indicated that a joint commis-
sion is preparing an export program that could enable Managua to reduce the
debt. Nicaragua's deepening financial crisis and the limited potential of the
new export program probably will prevent Managua from reducing its debt to
Mexico in the near term. Mexico has little need for most of Nicaragua's major
exports. Mexico City's actions, coming on the eve of President de la Madrid's
visit to five West European countries, may be designed to demonstrate that
Brazil won the competition to sell a new trainer aircraft to Britain's RAF,
beating out its main rival, the Swiss Pilatus PC-9, and other competitors from
the United Kingdom and Australia. Britain ordered 130 Tucanos worth about
$130 million, with an option for 15 more. Brazil won the sale by offering the
lowest price, including a UK-produced engine and, most important, licensing
assembly of the aircraft in economically depressed Belfast. The Swiss are upset
over the sale but could not match the concessionary terms offered by Brazil.
This is the third time the Tucano has beaten the Pilatus in a head-to-head
competition (Egypt and Honduras were the others), and the RAF sale is
expected to open up other sales
Chile is seeking to push forest products-now less than 10 percent of total ex-
ports-ahead of minerals and fishery products as the country's primary export
earner. According to government plans, forest products exports that totaled
$385 million last year will be raised to the $2 billion level by the mid-1990s.
Santiago has begun aggressively marketing softwood logs, lumber, and pulp in
Latin America, the Far East, and Western Europe. These products compete
directly with US forest products. For Chile to succeed, $2 billion in new
investments for infrastructure improvements will be required with much of the
funding from foreign borrowing. Santiago will have to achieve sufficient
political stability to provide a favorable climate for domestic and foreign
investment.
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Ethiopian Coffee
Export Problems
Transportation problems resulting from the diversion of trucks to famine relief
activities probably will hold Ethiopia's coffee exports-which usually account
for over three-fifths of export earnings-below its International Coffee
Organization (ICO) quota this year. Other factors contributing to the shortfall
include a late harvest caused by drought in the southern regions, a shortage of
pickers, and smuggling. Shipments for the first half of the October/ September
coffee year were 50 percent below the same period last year. Although Addis
Ababa has stated it plans to fill the ICO quota, we believe that trucks will con-
tinue to be diverted to food distribution and the government's resettlement
program. As a result, Ethiopia's already serious foreign exchange shortage
would worsen, forcing Addis Ababa to cut non-food-aid imports further
/Troubled Comoran The Comoran economy, beset by a worsening trade position, burgeoning debt,
i Lankan
Insurgency Hurts
Foreign Investment
dependent on foreign largess for the near term
The Tamil insurgency and capricious government economic policies are taking
a toll on Sri Lanka's efforts to woo foreign investors. In 1978 the Jayewardene
regime began a program of economic liberalization that initially attracted
foreign investment and helped diversify its plantation-based export economy.
Over the past two years, however, foreign investment and joint-venture
approvals have declined by 25 and 45 percent, respectively. Recently, a major
US electronics firm decided to pull out of Sri Lanka in breach of contract, re-
portedly in response to the worsening security situation. According to the US
Embassy, the government's control of market access and production quotas
have added to a deteriorating business climate.
and longstanding structural deficiencies is deteriorating. Real growth rates
during 1981-84 declined from 7.4 percent to 3.3 percent as major construction
projects-financed by foreign aid-were completed and growth in the domi-
nant agricultural sector lagged. At the same time, depressed world prices for
copra and spices-which account for 99 percent of export earnings-have
contributed to burdensome current account deficits. The government has
relied on concessional loans and some supplier's credits to close the gap, and
external debt equaled 116 percent of GDP in 1984, compared with 38 percent
in 1980. Unexpectedly low levels of grant aid and the government's unwilling-
ness to cut spending have hit the budget; total government outlays are now five
times domestic revenues and the budget deficit accounts for 18 percent of
GDP. A 3-percent population growth rate, primitive farming techniques, lack
of natural resources, and insufficient infrastructure will keep the Comoros
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'Indonesia's Aid
Donors' Meeting
conomy Slows
runei Closes Door
Jon Chinese Labor
Romanian-Soviet:
nergy Cooperation
Foreign aid donors met in The Hague this week to review Indonesia's
economic performance and to make this year's aid pledges. The World Bank's
latest report praises Jakarta's austerity program for avoiding a foreign debt
crisis and cutting the current account deficit from 8.4 percent of GDP to 2.4
percent in fiscal year 1984/85. Nonetheless, the Bank estimates that Jakarta
will need about $5.2 billion in foreign borrowing annually in the medium term.
Only about half the amount will be supplied by commercial sources, requiring
aid contributions totaling about $2.5 billion annually in each of the next three
years. The donors have indicated a willingness to adhere closely to the Bank's
recommendations but will continue to watch Jakarta's progress on followup
reforms to improve the economy's efficiency.
Real GNP growth slowed to 4 percent in the first quarter compared with first
quarter 1984-following 7.5-percent growth for full year 1984-due largely to
a decline in exports. The 8-percent fall in foreign sales in January-March was
broad based, reflecting weaker global demand and increased protectionism
abroad. Several private forecasters are now projecting 5.0- to 5.5-percent
growth for the year, compared with the government's 7.5-percent target.
Seoul, which has maintained a tight monetary and fiscal stance to drive
inflation below 3 percent, may ease its austere policies to stimulate domestic
demand. The Chun government will proceed cautiously, however, because of
foreign payments concerns: the current account deficit in the first quarter
exceeded the government's $500 million target for all of 1985.
the country's vital oil and natural gas industries.
The Brunei Government announced last week that, beginning next year, it will
no longer renew work permits and employment licenses for expatriate Hong
Kong and Taiwanese residents. This is the latest in a series of moves against
the large Chinese minority, which dominates the country's private sector.
Following independence last year, the government imposed strict citizenship
requirements that effectively exclude nearly 90 percent of the country's 60,000
Chinese. Without citizenship their access to education is limited and they are
denied government employment-which constitutes nearly half of total em-
ployment in Brunei. These discriminatory policies have resulted in a steady
emigration of Chinese managerial and technical personnel to Singapore and
Canada over the last year that, if it continues, will impair the functioning of
Soviet trade officials in Bucharest told US Embassy officers that in 1986-90
the Romanians are to provide equipment and about 2,000 workers for a
gasfield project in Turkmeniya, contribute some financing and equipment for
the Yamburg gas pipeline, and construct the 183-kilometer portion in
Romania of a Soviet gas pipeline to Greece and Turkey. Romania also is to
provide equipment and labor to help the Soviets explore for oil and gas in the
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Secret
Caspian Sea and Siberia; the Soviets are already laying a pipeline to
Romanian offshore deposits in the Black Sea. The Soviets will pay for the
expanded Romanian cooperation by providing oil, gas, and other raw materi-
als. The Soviet officials, however, expressed skepticism that Romania can meet
its commitments.
/Reform Conference
ino Soviet
Long-Term
Trade Agreement
Zl\
about half the oil the Soviets had agreed to provide.
President Ceausescu has been pushing Moscow for more cooperation on energy
and increased bilateral trade. The Soviets have given a small concession by
shifting the oil trade from a barter to a clearing account basis, thus nominally
increasing the planned trade level. Much of Romania's best equipment, which
was to have been bartered for oil, however, is now included under the clearing
account. In addition, Bucharest has been reluctant to provide labor to the
USSR; both countries have shortages of skilled labor. Although overall trade is
likely to increase, growth will probably fall short of plans, given Romania's
economic difficulties and ambitious targets for exports to the West. Bucharest
was only able to provide the Soviets with enough hard goods last year to obtain
power, and managers are hesitant to take on increased responsibility.
A party meeting last week endorsed major changes in the economic reform
program that would increase the role of the central government. The decision
is a retreat from the 1982 reforms that allowed firms more responsibility in ar-
eas ranging from wages to production. At the conference Deputy Premier
Messner said that the government would not return to strict centralized
management, but would maintain and even broaden the state's role in planning
and implementing economic strategy. Premier Jaruzelski paid lipservice to
reform-most likely to impress Western creditors and the IMF-but endorsed
Messner's statements and compared Polish reform to policy changes in other
socialist countries, especially the USSR. Other speakers confirmed rumors
that reform opponents had gained strength in the past year, because of poor
performance by some sectors experimenting with reform and the growing
belief that economic recovery demands discipline, not decentralization. Pros-
pects for reform-even before the conference-were dim largely because of
the regime's reluctance to take politically difficult steps such as linking wage
increases to productivity gains. Moreover, officials are concerned about losing
9
A large Soviet trade delegation reportedly arrived in Beijing in mid-May to be-
gin final negotiations on a trade agreement for 1986-90~
the formal signing is to take place during
Vice Premier Yao Yilin's visit to Moscow in July. The agreement reportedly
will call for total bilateral trade of some $20 billion over the period, reaching
$6 billion in 1990. After languishing during most of the 1960s and 1970s, 25X1
trade increased from $250 million in 1981 to more than $1 billion last year.
The Soviet official stated, however, that these figures are probably optimistic, 25X1
because each side will try to minimize bartering commodities that could be
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l
Sino-Japanese Friction
Over Trade and
-,Technology Transfer
i/
ina and Japan
Initial
Nuclear Agreement
J
hina's Acrylic
Fiber Plans
sold for hard currency. He considers total trade turnover of $16 billion a more
realistic figure. An unwillingness to barter commodities that could be sold for
hard currency is not the only factor that will limit trade growth. A large
portion of the total depends on delivery by the Soviets of large amounts of ma-
chinery and equipment called for in 18 major Chinese development projects.
China's complaints about its growing trade imbalance with Japan-$1.4
billion in first quarter 1985 compared with $2.2 billion for all of 1984-may
be designed to press Tokyo to increase imports of Chinese goods and transfer
production technology. Beijing has stepped up its charges that Japanese firms
are unwilling to invest in and to transfer production technology to China and
has linked future imports to technology transfer. Earlier this year, the
leadership ordered a slowdown in imports from Japan and the United States in
favor of goods from Western Europe-particularly France and West Germa-
ny. A more long-term bilateral concern is technology transfer. China's State
Council last week issued new regulations aimed at stepping up technology
imports, and Beijing has exempted purchases of advanced technology from
recent measures to curtail imports by provincial authorities. Moreover, Beijing
seems willing to overlook West Germany's nearly $300 million trade surplus
with China because of Bonn's willingness to transfer technology.
China's textile
industry for the next five years will focus on expanding acrylic fiber capacity.
Domestic capacity, now estimated at about 60,000 metric tons, will be almost
tripled by 1990. A 50,000-ton plant is already under construction in Daqing.
Import substitution-particularly with the prospect of rising prices-is proba-
bly the motive for this planned expansion. China is a major importer of acrylic
fiber-80,000 tons in 1983, 120,000 tons in 1984, and perhaps 200,000 tons
this year. Beijing expects imports of all synthetic fibers to increase by 20 to 25
percent this year.
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hina Buys $150
Million Worth of Coal
Equipment From Italy
China signed a contract last week with Italy for $150 million worth of coal ex-
traction equipment. The deal will be financed under a $500 million low
interest export credit Rome recently provided for the development of south-
western China's coal mines, railways, and port facilities. Italy is also providing
technical assistance. The contract is among China's largest for coal equipment
and comes on the heels of a $126 million loan from the World Bank to build
coal facilities. Beijing hopes to utilize foreign equipment and technology to
expand coal output by the year 2000 to 1,200 million metric tons, a 55-percent
increase over current production.
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