INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807610001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: July 12, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
12 July 1985
Seeret- 25X1
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12 July 1985
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International
Economic & Energy Weekly
12 July 1985
iii Synopsis
1 Perspective-LDC Industrial Targeting
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Informatics Targeting: Th
e Brazilian Model
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LOA-1
Multifiber Arrangement Renewa
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11 / International Commodity Agreements: Ailing But Not Dead
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ombia: " - ance of Payme
nts
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C
I
)- xI
/
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19 Briefs Energy
International Finance
Global and Regional Developments
National Developments
25 Publications of Interest
Authorized personnel may obtain copies of reports by contacting their local intelligence liaison office
or or the Information Management Center of the Office of Current Production and Analytic Support,
Comments and queries regarding this publication are welcome. They may ho
directed to Directorate of Intelligence
Secret
DI IEEW 85-028
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International
Economic & Energy Weekly F__] 25X1
Synopsis
1 Perspective-LDC Industrial Targeting
LDC industrial targeting in high-tech sectors is an emerging policy concern for
industrial country governm
ents
__
and is creating a climate of uncertainty for
multinational corporations.
F
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3 Informatics Targeting: The Brazilian Model
Brazil's 1984 Informatics Decree has imposed broad and severe limitations on
imports and foreign investment in major high-tech industries. We believe
similar LDC trade and investment restrictions may spread to other sectors,
_
inhibiting the free flow of technology.F
~
Multifiber Arrangement Renewal
A year before the current extension of the Multifiber Arra
ngme
__
nt (MFA)
_
expires, disagreements are already surfacing over renewal.
F
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11 International Commodity Agreements: Ailing But Not Dead
Last year the International Sugar Agreement collapsed after seven years of
ineffectiveness, and the four remaining International Commodity Agreements
(ICAs) face uncertain futures.F__~
15 Colombia: "Narco-Dollars" and the Balance of Payment
In an effort to avoid harsh austerity, the Betancur government is experiment-
ing with measures designed to maximize the inflow of foreign exchange. These
have the side effect of encouraging increased inflows of narcotics profits to
Colombia from foreign safehavens.
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International
Economic & Energy Weekly) 25X1
12 July 1985
Perspective LDC Industrial Targeting
LDC industrial targeting in high-tech sectors is an emerging policy concern for
industrial country governments and is creating a climate of uncertainty for
multinational corporations (MNCs). These highly competitive firms are being
forced by targeting policies to relinquish profitable LDC markets to local high-
technology companies, particularly in Brazil, Argentina, and Mexico. MNCs,
however, which have long-term working relationships with host governments,
have learned to adapt to these policies but hope they do not spread.
Meanwhile, increased management time is spent on administrative redtape
and altering product lines to remain in the market. MNCs are beginning to
have difficulty importing supplies, are losing potential sales and profits, cannot
supply products at the best price and quality, and have problems introducing
new products. LDC targeting seriously affects those MNCs that are new, have
a narrow ran a of investments, and produce profitable items for the mass
market.
These industrial targeting policies are generally carried out through trade and
investment restrictions that often lead to problems for the LDC:
? These restrictions inhibit the flow of technology necessary to sustain
development, particularly in rapidly advancing high-tech industries.
? Though some LDCs have the ability to develop advanced technology over the
long term, lack of financial resources and technical know-how relegates most
LDCs to merely copying developed-country products.
? LDCs need to export to relieve debt burdens, but many of their products cur-
rently are not competitive. In some cases, lack of domestic competition
results in higher priced, lower quality goods that other LDCs cannot afford
and developed countries do not need.
? Trade and investment restrictions discourage new foreign investment that
LDCs need, and we believe such measures may even cause some
disinvestment.
? Many MNCs are not updating the technology of their LDC facilities to
safeguard new techniques from potential competitors.
Despite these problems, LDCs ar ly encouraged by limited successes
in developing domestic industry.
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The emerging trends in LDC industrial targeting place some LDCs on a
collision course with US objectives in the upcoming GATT round. Major US
goals include reducing trade barriers in services and high technology-issues
that have not been directly addressed in past rounds. A number of LDCs want
to avoid these areas for fear of being forced to reduce market protection they
now maintain. Brazil, for example, was reluctant to agree to a US request for
GATT consultations on its new informatics law. Brazil-the leading LDC
opponent to including trade in services under the GATT-has proposed service
negotiations separate from a trade round so that it would have the option of
not participating. In a new trade round, however, high technology probably
would be addressed in the context of other negotiating areas. Many LDCs
believe the inclusion of services and high technology in GATT will perpetuate
the dominance of developed countries in these industries; they view high tech
as a new industrial revolution and do not want to depend on developed
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Informatics Targeting:
The Brazilian Mode
Developing countries are experimenting with vari-
ous policies to spur growth and exports in high-
technology sectors, particularly in informatics-a
broad category including computers, microelec-
tronics, scientific instrumentation, peripherals, and
software. Brazil's 1984 Informatics Decree has
imposed broad and severe limitations on imports
and foreign investment in major high-tech indus-
tries. We are concerned about the negative prece-
dent set by these practices during a time of prelimi-
nary preparation for a new round of GATT
negotiations. In addition, we believe similar LDC
trade and investment restrictions may spread to
other sectors, inhibiting the free flow of technology.
Brazil's Policy
? Brazilianization. Preference is given to national
companies in government procurement, tax
exemption, and long-term low-interest loan fi-
nancing. Interest rates depend on an assessment
of local content and are negotiated project by
project. Joint ventures will only be approved if
new technology is transferred. SEI sets guidelines
for multinational firms to ensure exports exceed
imports by a set amount.__~
Although the Informatics Decree has widespread
support in Brazil, debate continues over the specific
issues, such as the inclusion of software protection
and the priority of regional versus sectoral laws.
According to diplomatic reports, the ministers of
4 CONIN have been unable to reach a consensus on
Brazil's informatics law officially codifies and these issues. SEI has presented a specific informat-
broadens ad hoc policies in effect since 1977. The ics plan to CONIN for submission to the Congress,
law, set to expire in 1992, places the Federal but CONIN has postponed debate on the plan until
Informatics Secretariat (SEI) under the new Minis- S sometime this month. Embassy reporting indicates
try of Science and Technology. SEI is overseen by that some government officials privately admit the
CONIN, a new council composed of federal minis- law was nationalistically motivated, insufficiently
ters and industry representatives. debated, and will actually slow Brazil's technologi-
cal advancement by protecting obsolete technology
The intent of the informatics program is to and inhibiting trade and investment. Problems with
strengthen Brazil's domestic industry and make it the proposed informatics plan identified in the
an internationally competitive export earner. The ~ Brazilian press include more favorable prices and
plan has three main features: financing available in other countries, a shortage of
? Market reserve. Gives Brazilian firms the exclu-
sive right to manufacture and sell products in
certain categories. The coverage is sizable and
focuses on high-growth sectors of the economy.
? Law of similars. Prohibits the import of goods
when a domestically produced substitute can be
found. Companies have sometimes been forced to
accept higher priced and lower quality goods.
human and financial resources for R&D, and an
insufficient local market. Press reports state that
Brazilian hardware is 25 to 30 percent more expen-
sive than comparable foreign products and is of
inferior quality. Despite these high costs, SEI and
most Brazilian and foreign informatics companies
believe that the law has promoted a domestic
informatics industry in Brazil. F-1
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Software. In one area of conflict, the Brazilian
Government faces increasing pressure to add soft-
ware copyright protection to the informatics law.
Diplomatic reporting states that both domestic and
foreign mass-market producers-frequent victims
of pirating-favor long-term protection. Brasilia, in
contrast, views protection as a means for continued
multinational domination of the Brazilian mar-
ket-only 21 percent of the software registered
with SEI was produced domestically. Nonetheless,
the government is willing to offer limited coverage
for software
Other Targeted Sectors
Although President Sarney has stated that infor-
matics is a special case and market reserve will not
spread to other sectors, Brazil's national develop-
ment plan calls for new industrial policies in a
number of industries:
? Pharmaceuticals. Multinationals control 80 per-
()
cent of Brazil's pharmaceutical chemical sales
and invest almost $4 billion per year. A 1984
legislative directive and the 1985 National Phar-
maceutical and Chemical Industry Program ef-
fectively reserve new chemical production for
Brazilian firms. The programs provide fiscal in-
centives and R&D funds and apply the national
"similars" test to imports of pharmaceuticals and
chemicals.
We believe the lack of an effective copyright law
will inhibit both domestic and foreign investment,
and a consequent lack of reciprocity will deny
Brazilian software producers protection abroad.
Nonetheless, Embassy reporting states that intel-
lectual property legislation for software has been
postponed, and we believe it will not likely be
drafted before next year unless unified internation-
al pressure increases or Brazil experiences difficul- -l`
ty in acquiring foreign software.
Regional versus Sectoral Laws. In a second area
? Robotics. SEI has extended market reserve to
robotics. Preference is given to companies using
Brazilian technology or transferring technology.
Currently it affects only the production, not
import, of robots.
internal conflict, the strength of the informatics The national plan also targets the precision instru-
law was challenged in a controversy over whether l 5ments, biotechnology, and communications equip-
SEI's ability to control investment in the informat-
ics sector supersedes the ability of the Manaus Free
Trade Zone (SUFRAMA) to grant benefits. SEI is
concerned the entire industry may be attracted to
the zone, affording firms dual incentives.
SUFRAMA fears that the informatics industry
will remain concentrated in the Sao Paulo region.
During the inaugural session of CONIN in May,
the special fiscal incentives offered by SUFRAMA
were eliminated for the informatics industry. In a
special June session, the Senate restored the incen-
tives and removed CONIN's authority to grant
fiscal or financial incentives to informatics projects.
If ratified, this will weaken CONIN's decisionmak-
ing authority.F-7
ment industries. We believe these sectors, as well as
others with a strong foreign presence and high-
technology content, are vulnerable to market re-
serve policies.
International reaction to Brazil's policy has been
muted, primarily because of uncertainty concern-
ing the program's content and degree of flexibility.
LDCs are assessing it as a development model,
while several developed countries, which privately
oppose the trade/investment restrictions, are fol-
lowing it closely but remaining quiet to protect
their current Brazilian investments
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The informatics law's tariff increases, local content ? Argentina. According to Embassy reporting, Ar-
rules, and other quantitative restrictions have gentina plans to introduce an industrial promo-
drawn criticism from the United States-the big- , .. tion law and a technology transfer promotion law
gest foreign investor and trade partner in Brazil's to spread informatics investment to new regions,
informatics market. Such measures are allowed expand exports, and improve technological capa-
under the GATT because of exceptions granted to bility. Both laws would increase restrictions on
16 LDCs. At first Brazil justified restrictions on na- foreign firms, focusing on computers, telecom-
tional security grounds, then switched to an infant munications, and electronics. Because the govern-
industry rationale. Most recently, in GATT consul- ment is divided over the issue, policy has been
tations requested by the United States, Brazil cited implemented piecemeal. Argentina claims to have
balance-of-payments problems. The United States rejected the export-oriented Brazilian approach; 25X1
was unable to convince any other countries to they intend only to satisfy their small domestic
participate in the discussions, although Sweden industry needs.
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onsi
Other Informatics Programs
Several other countries have recently formulated
informatics policies, with varied degrees of success:
17
? India. Prime Minister Rajiv Gandhi's compre-
hensive development policy gives special attention
to the electronics industry. Although New Delhi
expects to maintain control over the economy, its
policies are somewhat less restrictive than Bra-
silia's. The new policies encourage imports of
advanced technologies and ties with foreign busi-
ness and offer greater toleration of foreign equity
investment to obtain needed technology. New
Delhi is especially interested in promoting soft-
ware exports. We also expect the policies to
provide a more stable tax and import climate.
? Spain. The National Development Plan for Elec-
tronics and Informatics offers generous invest-
ment resources, high tariff barriers, and export
credits and is intended to modernize Spanish
industry. During its first year, the plan has
attracted foreign investment but has failed to
stimulate domestic industry development.
Brazil is actively promoting its informatics industry
model in Argentina, Venezuela, Mexico, and Co-
lombia and is considering lobbying in Southeast
Asia. Potential regional cooperation, however, will
be limited because of organizational and techno-
logical weaknesses.
We believe most LDCs will develop similar but
much less ambitious programs than Brazil's to
regulate foreign participation and strengthen do-
mestic industry. It is unlikely that significant
changes will be made in Brazil's existing targeting
laws; however, Brazilian officials have said they are
flexible, and laws will be applied pragmatically.
They also recommend that multinationals work to
improve their negative image and transfer technol-
ogy to LDCs. We believe that Brazil's debt situa-
tion will force it to attempt to maximize high-tech
exports. The highly competitive world market will
probably inhibit this effort, although Brazil may
find markets in LDCs that contend export controls
reduce US reliability as a supplier of technology. 25X1
We believe Brazil, over the short term, will face
financial and managerial problems in its high-tech
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Multifiber Arrangement Renewal '
A year before the current extension of the Multi-
fiber Arrangement (MFA) expires, disagreements
are already surfacing over renewal. Despite opposi-
tion of the LDC exporters, renewal of the MFA
until at least the end of a new GATT round is likely
because key importers want to retain the quota
system. The LDCs, however, are likely to push for
abolition of the MFA in any new trade round.
The Multifiber Arrangement sets guidelines that
importing and exporting countries use to negotiate
bilateral textile and clothing agreements. The
MFA dates from 1974 and was renegotiated in
1977 and 1981. Except for the US agreement with
Japan, all bilateral agreements under the MFA are
between LDC exporters and industrialized import-
ers. Although negotiated under GATT auspices,
the MFA represents a departure from GATT rules.
It allows importer countries to use quotas to control
imports without having to (1) demonstrate injury to
domestic producers, (2) apply the quotas on a
nondiscriminatory basis, or (3) choose between
compensating the restricted country or facing re-
taliation.
In anticipation of its expiration on 30 June 1986,
the current arrangement, "MFA III," requires the
GATT Textiles Committee to meet no later than
this month to consider whether to extend, modify,
or discontinue the Arrangement. Negotiations on
renewal would begin this fall and could continue
beyond the June 1986 expiration of MFA III. The
Textiles Committee meeting on 23 July may be
limited to an exchange of views because a working
party report due this month may not be ready until
November.
Early LDC Posturing
In recent years, developing countries have become
increasingly critical of the MFA. They believe its
original goals-orderly expansion of trade, indus-
trial country adjustment, and progressive reduction
of trade barriers-have been disregarded by the
industrial countries. They complain that industrial
country producers, unrestrained by quotas, have 25X1
expanded exports at the expense of developing
countries. The United States has borne the brunt of
Third World criticism, despite enormous increases
in US textile and clothing imports from developing
countries (19-percent growth in 1983; 58 percent in
1984). US rules-of-origin changes and countervail-
ing duty actions have been attacked for being
outside the safeguards measures contained in bilat-
eral textiles agreement
Although diplomatic reporting indicates that most
exporting countries doubt that the MFA can be
abolished in the near term, developing country
exporters reaffirmed their desire to end the MFA
at meetings in Karachi in July 1984 and Mexico
City in April 1985. We believe this hardline stance
is attractive to LDC exporters because:
? It papers over differences among them, which the
industrialized countries have used to play off one
group of exporters against another.
? It allows them to start renewal talks from a
position of strength.
As the June 1986 deadline approaches, however, we
believe individual countries will behave as in the
past and abandon the common exporter position to
privately seek the best deal for themselves from
importers.
The LDC exporters' common, hardline position has
enabled them so far to limit progress in the working
party. According to diplomatic reporting, the devel-
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oping countries have tried to turn the working party
into a negotiating forum that would recommend
full application of GATT rules. The industrial
countries want the working party to examine all
options-including liberalization under an MFA
framework-without endorsing any. The industri-
alized countries have also tried to direct working
party attention to developing country barriers to
textile and clothing trade
Exporters Motives
With the MFA in force for over a decade, many
exporting countries have adapted to it and might
actually be hurt by a return to GATT rules.
According to diplomatic reporting, some small- and
medium-sized exporting countries find textile and
clothing quotas helpful because they guarantee
shares of industrial country markets and protect
them against major exporters. MFA quotas also
provide a pretext for extensive government control
of the textile and clothing sector, and many offi-
cials receive personal gain from quota distribution.
Many of these exporters, particularly the Latin
American or ASEAN countries, favor renegotia-
tion of the MFA with higher quotas awarded to
themselves. According to diplomatic reporting,
their opening positions will, however, still call for
ending the MFA and returning to GATT rules.
The large exporters, Hong Kong, South Korea,
Taiwan, and China, are least likely to receive much
growth in quotas from a new MFA and appear to
have the most to gain from ending the MFA
system. We believe, however, they fear that in a
hectic post-MFA period that they would be the
major targets of developed country protectionism.
Consequently, the major exporters will probably
accept some form of MFA renewal as the least
risky alternative, while continuing to work for
gradual phaseout of the MFA.
Industrial Country Importers
The European Community will probably wait until
just before this month's Textile Committee meeting
to agree on a formal position on MFA renewal.
an EC Commission
textile official has indicated a preference for MFA
renewal with no growth in total imports from
LDCs; he would allow increases for new exporters
but cut quotas allocated to Hong Kong, South
Korea, Taiwan, and China. According to diplomat-
ic reporting, the United Kingdom, West Germany,
The Netherlands, and Denmark support liberaliza-
tion or abandonment of the MFA, but France and
Italy are committed to a restrictive MFA. We
believe the EC stance will come out close to that of
France, with the northern tier countries probably
willing to wait until a new GATT round to discuss
liberalizatio
Although a new GATT round will not be directly
linked to MFA renewal talks, developing country
members of GATT are already placing liberaliza-
tion of world textile trade high on their list of
objectives. Knowledge that textiles and clothing
could be a significant part of a new round's final
package may prompt MFA participants to defer to
the broader-based talks and extend the MFA only
until the end of the GATT round. Talks on launch-
ing a new round will probably begin in September,
but the round itself may be barely under way by
the June 1986 MFA deadline.
We believe that it may be unrealistic to expect the
developing countries to begin to dismantle their
own trade barriers if a huge exception to GATT
rules, the MFA, is allowed to continue. Industrial-
ized countries, for their part, are likely to want to
retain a restrictive MFA during a new round so
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that it can be used as a bargaining chip. They may
also offer to reduce some of their textile and
clothing barriers in order to obtain import barrier
liberalizations from developing countries. Develop-
ing countries, however, would probably resist trad-
ing import barrier cuts for MFA phaseout, claim-
ing that they should not have to pay simply to
return textiles and clothing trade to GATT rules.
We believe that there is a better than even chance
that MFA renewal talks will follow past patterns:
little progress until the deadline nears, but eventual
agreement on a renewal that is more advantageous
to small- and medium-sized exporters. A possible
scenario includes a 1986 decision to extend the
MFA until the end of a new GATT round, at which
time new agreements on a post-MFA textiles and
clothing regime would begin to phase in. Clearly,
renewing the MFA in 1986, even on a restrictive
basis, need not be inconsistent with doing away
with it during a GATT round.)
cal improvements.
Whatever the outcome, the industrial countries will
come under intense pressure to allow LDCs-many
of them experiencing debt problems, unemploy-
ment, and slow growth-to earn much more from
textile and clothing exports. Liberalizations in a
new round plus a possible phaseout of the MFA in
the 1990s would increase even further the import
competition faced by developed country textile and
clothing producers, particularly those which have
not substantially reduced costs through technologi-
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International Commodity Agreements:
Ailing But Not Dead
Last year the International Sugar Agreement col-
lapsed after seven years of ineffectiveness, and the
four remaining International Commodity Agree-
ments (ICAs) face uncertain futures. ICAs with
price-support mechanisms represent only 13 per-
cent of the value of world nonoil commodity trade.
With the UNCTAD Integrated Program for Com-
modities (IPC) cotinuing to founder, LDCs are
likely to push harder in other arenas, such as
GATT, for solutions to their commodity trade
problems. We believe, however, that the LDCs lack
the unity necessary for a firm multilateral effort on
any significant commodity issue.
The Integrated Program for Commodities
An UNCTAD resolution in 1976 laid out the IPC
aimed at improving LDC earnings by stabilizing
commodity prices. Facing rapidly rising commodity
prices and fearing a proliferation of OPEC-like
cartels, the developed countries supported the IPC
in principle to ensure future raw material supplies.
The IPC called for price-stabilizing international
agreements covering 18 commodities and ultimate-
ly the creation of a Common Fund with umbrella
financing to replace the individual funds that cur-
rently finance bufferstocks.
The IPC has been a failure. Since 1976 only one
new ICA has been established-the International
Natural Rubber Agreement (INRA). Last year the
ICA for sugar was dissolved, and efforts to form
several new pacts have failed. Consumers have
continued their participation in ICAs largely for
political purposes. The Common Fund is still in
limbo, lacking the necessary signatories to put it
into effect. If and when the Fund enters into force,
few observers expect it to be effective because it is
insufficiently capitalized. The original goal of $6
billion has been pared back sharply, and even the
current 470 million is not likely to be
reached
Nonoil LDCs: Commodity Earnings
and Debt Service, 1975-83
Earnings
Status of the Agreements
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The 1980 International Cocoa Agreement (ICCA)
is operating under a one-year extension set to
expire on 30 September. Prices have averaged less
than the price floor of $1.06 per pound over the life
of the agreement, and cocoa purchases for the
bufferstock were halted in 1982 when funds be-
came depleted. Producers and consumers are mak-
ing halting progress on a new pact and are meeting
this week to discuss another one-year extension.
Producers fear that liquidation of the bufferstock
as a result of expiration would devastate the mar-
ket. Obstacles include resolution of a target price
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range and the type of export control measures
needed to supplement the existing bufferstock. Pro-
ducers are pushing for a $1.05 to $1.35 range,
while consumers are calling for 90 cents to $1.20.
Consumers may block extension until the eleventh
hour in an attempt to force producers to accept a
lower rangeF-7
The International Coffee Agreement, scheduled to
run until October 1989, relies on export quotas to
maintain prices between $1.20 and $1.40 per
pound. Although world coffee prices have hovered
around the upper limit, several disputes between
consuming and producing countries are creating an
unstable situation. Because sales to nonmembers
are not bound by quota regulations, a two-tiered
market has developed, with large exporters, such as
Brazil, providing discounts to nonmembers of up to
50 percent. Consumers have argued for more re-
strictions on sales to nonmembers and a release of
more quota coffee onto the market to bring down
prices to members. F_~
The International Tin Agreement (ITA), which
expires in July 1987, utilizes both export quotas
and a bufferstock. Tin prices have been running
only slightly above the ITA minimum since early
1982 because of declining demand, large producer
and consumer stocks, and rampant smuggling to
circumvent export quotas. Moreover, non-ITA
countries-particularly Brazil-are expanding tin
production. The ITA faces growing difficulty fi-
nancing its bufferstock operations. It has begun
borrowing from commercial sources, using tin as
collateral, and may eventually have to sell some of
its stockpile to service its debt. This would lead to
lower tin prices and perhaps bankruptcy for the
agreement. According to Embassy discussions with
the ITC chairman, the governing council may not
seek a new agreement, depending on the "market
situation and position of the bufferstock" next year.
The current International Natural Rubber Agree-
ment was extended to October 1987 at a recent
INR council session. During this extension, produc-
ers and consumers will attempt to negotiate a new
Price Trends: An Index of Five IPC
Commodities and of all Commodities
IPC
commodities
I I I I I I I I I I j I I I I I I I I I I I I I I II
40 1978 79 80 81 82 83 84 85
pact. The main obstacle is agreement on the mini-
mum price level, which producers consider too low
for the long-term health of the industry. At approx-
imately 40 cents a pound, rubber prices are near
the INRA minimum. US diplomats report a
"surprising" degree of solidarity among consumers
on the price issue, but producers are likely to win
some concessions. Consumers, however, want as-
surances that producers will not restrict rubber
supplies unilaterally
The ICAs have had little effect on LDC export
earnings during the last four years of depressed
commodity prices. The average lifespan of ICAs
has been less than five years, and their ability to
stabilize prices is marginal. The IPC has done little
to change this pattern, and we expect a further
decline in the effectiveness of ICAs.I
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The failure of the IPC, along with waning consum-
er interest, has sparked LDC interest in other
measures. Already there is a move toward adminis-
trative commodity agreements, which concentrate
on facilitating better market information and prod-
uct research but lack price provisions. Such agree-
ments include sugar, wheat, jute, bananas, and
tropical timber.
the Soviet Union is
considering joining the Common Fund to bolster
Moscow's image among LDCs. Even if additional
Bloc countries follow suit, the limited financial
resources of the Common Fund would hamper its
ability to support prices and boost export earnings.
Taking another approach to the commodity price
problem, UNCTAD is considering creating a com-
pensatory financing facility. Such a facility would
be similar to, but much larger than, the existing
IMF facility used to compensate LDCs facing
temporary earnings shortfalls because of low export
prices.
Finally, LDCs may push for a reduction of com-
modity trade barriers during a new GATT round.
LDCs have increasingly divergent self-interests on
commodity issues, however. Although some coun-
tries see protectionism as a threat to their export
earnings, others benefit from special market access
through such arrangements as the Lome Conven-
tion. Indeed, producers capable of expanding out-
put and exports are less apt to join established
exporters in agreements that restrict supply and
control prices. As a result, we believe LDC solidari-
ty on commodity issues will grow even more elusive
in the coming years. F__1
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Colombia: "Narco-Dollars" and the
Balance of Payments
Only two countries in Latin America, Colombia
and Paraguay, survived the negative economic
forces that buffeted LDCs over the past several
years without rescheduling their external debt. In
the case of Colombia, inflows of drug money
apparently helped sustain its international pay-
ments position. More recently, however, traffickers
have brought fewer dollars back to Colombia, and
this combined with a sustained depression in the
coffee export business has substantially reduced
foreign exchange receipts. In an effort to avoid
harsh austerity, the Betancur government is experi-
menting with measures designed to maximize the
inflow of foreign exchange. These have the side
effect of encouraging increased inflows of narcotics
profits to Colombia from foreign safehavens
Dwindling Drug Money Flows
We calculate that drug money first became impor-
tant in Colombia's external account balance about
a decade ago when earnings from the burgeoning
cocaine trade were added to the already substantial
receipts from the marijuana business. Most aca-
demic research indicates that by the mid-1970s
these drug money flows were equivalent to at least
15 percent of all foreign exchange receipts. The
clandestine inflow of US dollars was sufficient to
create a major upheaval in local exchange markets;
from 1975 through 1981 the value of the US dollar
on the Colombian black market was con ist
below that offered by the Central Bank.
The annual drug money flow into Colombia appar-
ently peaked in 1980 at about $2 billion. Although
the Central Bank opened a ventanilla siniestra (no
questions asked window) in 1980 to capture addi-
tional drug money, the inflow shrank to less than
$1 billion in 1984, according to US Embassy
estimates. The traffickers' disinclination to return
funds to Colombia-a concern shared by legitimate
businessmen-was in part a result of Colombia's
deteriorating economic situation. It also reflected
Colombia: Official and Black-Market
Dollar Exchange Rates, 1974-85
1 1
0 1974 75
1
80
Black market
Official
the increased financial sophistication of traffickers,
who began to hold more of their profits outside the
country in dollars rather than spending them in
Colombia to enhance their lifestyle and their posi-
tion in society
After 1982, trafficker disenchantment-reflected
in reduced dollar inflows-was reinforced by a
number of actions taken by the newly elected
Betancur administration. In October 1982, only
two months after taking office, President Betancur
closed the notorious ventanilla siniestra. The gov-
ernment campaign against traffickers following the
assassination of Justice Minister Lara in May 1984
Secret
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Colombia:
Current Account, 1980-85
-2,895
-2,838
-2,840
-2,995
-238
-1,544
-2,189
-1,755
-1,650
-1,495
Exports, f.o.b.
4,062
3,219
3,215
3,002
2,950
3,205
Coffee
2,375
1,459
1,577
1,537
1,799
1,850
Imports, f.o.b.
4,300
4,763
5,404
4,757 C
4,600 c
4,700 d
Net service and transfers
79
-351
-706
-1,083
-1,190
-1,500
Estimated.
b Projected.
c Reflects tightening of nonessential imports and accelerated
monthly devaluation pace.
d Reflects easing of import restrictions to comply with, IMF-
monitored, self-imposed economic adjustments.
also altered patterns of drug money movement.
Clandestine dollar flows into Panama from Colom-
bia increased, and
suggests disinvestment by traffickers in Colombia.
Traffickers have rearranged their trafficking routes
and sought cocaine refining sites elsewhere. Some
exodus of traffickers and their money to safehavens
also has occurred.
Recent Policy Changes
Faced with a worsening foreign exchange crisis and
under intense pressure to turn around a deteriorat-
ing economy, Betancur has proposed two measures
designed to reverse capital outflow:
? A tax amnesty on funds from abroad that are
invested in high-priority development projects
during a specified period of time.
? Legalized entry of imports purchased with pri-
vate foreign exchange held abroad.
These measures, if enacted, could have the addi-
tional effect of encouraging inflows of narcotics
Neither measure has been approved, but some
evidence suggests traffickers take Betancur's pro-
posal as signifying a more relaxed attitude and may
already be moving more drug money into Colom-
bia. During the first few months of 1985, $91
million entered the country under the heading of
service income, including tourism, financial trans-
fers, and "other." Tourism alone showed income of
$9.3 million in the last week of February as
compared with less than $1 million during that
period in 1984. Economic experts say that the
depressed tourist industry could not possibly have
generated such sums. We therefore conclude that
the increased "earnings" represent drug money
entering Colombia through the exchange house
system-a mechanism regularly employed to trans-
ferdrurevenues under the cloak of tourist income.
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Production a
Thousand troy ounces
~ I i I
0 1974 75 80 84
a Based on amount reaching smelters.
n End of period.
As a quick fix to reverse the decline in foreign
exchange holdings, in March 1984 the Colombian
Central Bank'-the sole legal purchaser of locally
produced bullion-set a peso price for gold some 30
percent above the world market level. The declared
purpose of this measure was to prevent illegal gold
exports, but the net effect is to enable the Central
Bank to finance the current account deficit, in part
by reselling smuggled gold for foreign exchange.
During 1984, gold purchases by the Central Bank
totaled 700,000 troy ounces, but domestic output
was less than 500,000 ounces.
' In Colombia the President of the Republic exercises control over
the Central Bank through his Finance, Planning, Development, and
Agriculture ministers, who constitute a majority of its Board of
Stockb
Million troy ounces
I I
0 1974 75
80
Costa Rica almost certainly is one source of gold
for drug traffickers. According to the San Jose
press, Costa Rican officials claim that up to 70
percent of the country's gold output is being smug-
gled abroad despite premium prices offered by the
government. They allege that drug traffickers are
the principal purchasers. The Costa Rican press
speculates that the traffickers are outbidding the
government for local bullion, but we consider it
more likely that they obtain a discount by offering
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to deposit dollars in offshore bank accounts held by Drug Money Channels
the sellers.
We have very little information about other sources
of gold entering Colombia. At the very outside,
Costa Rica in 1984 could have supplied only 70,000
of the 200,000 ounces of non-Colombian gold ap-
parently acquired by the Colombian Central Bank.
Trade sources allege Venezuela is a supplier. In
addition, the official gold output of Brazil, Peru,
Bolivia, and Ecuador in 1983 totaled 1.8 million
ounces, and, in our view, substantial unrecorded
output probably enters the underground trade.
Whatever its origin, we judge the gold entered
Colombia from neighboring areas via established
smuggling routes exploited by traffickers
Probably only a small fraction of the money earned
by Colombia's narcotics traffickers actually returns
to Colombia. According to our estimates, they
remove $3-6 billion annually from the United
States-a sum at least as large as the projected
Colombian current account deficit for 1985. In
addition, Colombian traffickers obtain large profits
from Europe, the second-most important market,
and are establishing operations in Australia, the
Persian Gulf, and other affluent areas
The availability of such large revenues may be too
much temptation for any financially strapped gov-
ernment to withstand. How far the Colombian
Government will go to siphon off some of this
enormous dollar pool will depend on a number of
factors. In the short term, bank loans under IMF
monitoring may reduce the lure of drug money, but
persistent austerity and depressed living standards,
over the longer term, may provide an incentive to
turn a blind eye to this source of needed revenues.
Antidrug pressure from the United States and
other consuming countries, as well as the behavior
Before the Colombian traffickers discovered gold,
drug revenues generally entered Colombia as.
? US currency or dollar instruments smuggled by
traffickers. An unknown portion of such cash is
exchanged for pesos on the currency black
market.
? Pesos supplied by exchange houses against dol-
lars received in Colombia or elsewhere. A consid-
erable share of these receipts may be reported
falsely as tourist revenues.
? Smuggled goods.
? Underinvoiced imports with the discounted bal-
ance paid in dollars abroad.
? Receipts for phony or overinvoiced exports
of the traffickers themselves, will also influence
government actions. A relatively low profile by
traffickers could lead to an easing of government
pressure on them and eventual facilitation of their
financial transactions. A new round of trafficker-
promoted violence, on the other hand, would un-
doubtedly cause an outraged gove to slam
all the drug money windows shut.
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Energy
Italy Increases Oil The Soviet Union has become Italy's second-largest supplier of crude oil after
Imports From USSR Libya-up from its fifth-place position of only five years ago. Although Italian
)itch Nuclear
lans Proceed
crude oil imports nave dropped 19 percent in the past five years, imports from
the Soviet Union have nearly doubled and now account for 15 percent of the
total. About 6 percent of Italy's petroleum products imports also comes from 25X1
the Soviet Union. Crude oil, petroleum products, and natural gas account for
90 percent of Italian imports from the USSR. A recently released report by
the Ministries of Industry and of Commerce, in conjunction with the military,
does not express concern over this increased dependence on the USSR,
pointing out that alternative energy sources are currently more unstable. With
a $2.4 billion trade deficit with the Soviets in 1984, Rome wants to increase
machinery sales to improve the trade balance. Curtailing oil or gas purchases,
however, apparently has not been considered.F--] 25X1
government following elections.
On 27 June the Dutch Parliament approved the construction of at least two of
the three nuclear power plants proposed by the government in 1980. Despite
the controversy over nuclear issues in the Netherlands, the debate did not
attract much protest. While the original proposal called for three 1,300-
megawatt plants, the actual capacity will be determined by the utility
companies, who will receive no subsidies from the government. Officials hope
the plants will be completed by 1995, enabling the Netherlands to both
increase gas exports and enhance energy security. Potential obstacles include
finding a site for the plants-which the government hopes to do by February-
and solving the waste disposal problem as a condition for final approval. The
government has had difficulty finding a waste storage site and may want to
avoid a final decision as next year's elections approach. Moreover, the Labor
Party, which is opposed to the a nx ansion of nuclear power, may reenter the
lecord Chinese China produced 2.47 million b/d of oil during the first half of 1985, almost 11
Oil Production percent more than the same period last year. About half the increase came
from new finds at the Shengli oilfield in Shandong Province. Beijing plans to
increase Shengli's production 150 percent by 1990 to 1.34 million b/d,
surpassing current production at the Daqing field, where production is
expected to decline. The introduction of resident foreign experts and foreign
technology last year to China's major onshore oilfields has improved Beijing's
exploration and enhanced recovery techniques. Most of the additional output is
being exported to earn foreign exchange. About 85 percent of last year's
increase was exported, and crude oil exports jumped 48 percent in 1984 to
439,000 b/d.
19 Secret
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Zambian Negotiations
With the IMF
ory Coast
Rescheduling
Agreement
Zambian negotiations for a new IMF standby agreement to replace the one
suspended in October 1984 are likely to be protracted and ultimately,
unsuccessful. Declining copper reserves and poor copper price prospects
virtually guarantee Zambia will be unable to cover its $145 million in debts to
the IMF, World Bank, and private creditors that will have accumulated by
October, the projected implementation date of the standby agreement. In
addition, terms of a new IMF agreement are likely to include further currency
devaluations and cuts in government spending-measures Lusaka believes are
politically risky. Devaluations would add to inflation-already running over 25
percent-and to labor-government tensions. Spending cuts are likely to include
reductions in the government work force, adding to an estimated 50-percent
unemployment rateF_~
The Ivory Coast recently negotiated a rescheduling agreement with Paris Club
creditors that covers 100 percent of principal and 50 percent of interest falling
due over the next 12 months. The agreement is identical to last year's
rescheduling and follows a new $66 million IMF standby arrangement
concluded last month. The Ivory Coast's IMF-sponsored adjustment pro-
gram-including tax increases, reduced food and housing subsidies, and a civil
service payroll freeze-has reduced the budget and current account deficits by
over two-thirds since 1982. The economy declined for the third straight year in
1984, however, and the debt service ratio has remained above 40 percent.
Pakistan Seeks
IMF Aid
Pakistan is seeking $330 million in aid from the IMF to help bolster its foreign
exchange reserves. Foreign exchange reserves have fallen by roughly $1 billion
in the past 12 months; we believe they will drop to $700 million by June 1986,
in the absence of additional aid-equivalent to about six weeks of imports.
Even if Pakistan receives all the aid requested-an unlikely event according to
an IMF official-its foreign payments problems will continue because of poor
export performance, declining remittances from Pakistani workers, and unex-
pected increases in imports stemming from poor wheat harvests. An IMF
official involved in the negotiations emphasized the linkage of additional
economic reforms to improve the foreign payments position in the long term to
any substantial amount of aid. Pakistan will request US aid in the hopes that
the United States will impose fewer restrictions than the IMF
lgaria
esumes Borrowing
Secret
12 July 1985
small debt and reputation for financial conservatism.
Bulgaria has taken advantage of favorable borrowing conditions to arrange its
first syndicated credit since 1979. The seven-year loan, carrying an interest
spread of only 0.375 percentage point over LIBOR, was offered originally for
$100 million, but Western banks responded so eagerly that the amount was
raised to $200 million. Sofia enjoys a good standing with bankers because of its
the credit will be used to purchase machinery and spare parts.
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increased grain imports if harvest prospects fail to improve.
Constraints on energy, raw materials, and labor supplies and Soviet pressure to
increase exports of high quality machinery and consumer goods have im-
pressed on Bulgarian leaders the need to modernize industry. Sofia, however,
may use the funds to restructure existing debt, rebuild foreign exchange
reserves that were drawn down during last winter's energy crisis, and brace for
Global and Regional Developments
EC Forecast of Slow, The EC Secretariat currently projects the Community's GNP growth at 2.3
Steady Growth percent annually in 1985, up from last year's 2.1 percent but slightly lower
than earlier forecasts for the same period. All of the acceleration in growth in
1985 is due to the end of the miners' strike in the United Kingdom. The other
nine EC countries should register the same or slightly lower growth rates as
last year because of the expected slowdown in the expansion of US demand for
imports. The secretariat believes that the Ten can maintain the same 2.3-
percent growth rate in 1986 because it expects nominal oil prices to fall
slightly, real income to rise as inflation continues to ease, and job creation to
keep pace with people seeking employment. Expectations that unemployment
will be checked as a result of the slightly higher growth rate are overoptimistic;
we expect EC unemployment will continue rising in 1986 after passing the 11-
percent level later this year. Almost all of the EC governments are concentrat-
ing on inflation, which the secretariat believes will decline 0.9 percentage point
in 1985 from last year's 6.3-percent average. This goal, we believe, is
achievable unless governments shift to more stimulative policies. F_~
Possible EC Move on The EC is planning to expand the use of subsidized credit to promote wheat
Wheat Exports exports in the 1985/86 marketing year beginning 1 August, according to a
generally substantiated source. In particular, France is considering increasing
by one-third the amount of French wheat eligible for government-backed
export credits. Such measures would be the first significant EC reaction to the
US export PIK program. The EC-faced with a wheat stockpile double last
year's and an expected long-term decline in world prices-is anxious to retain
and, if possible, expand its current 17-percent share of the world wheat
market. Subsidized export credits, however, could tend to further depress
prices.
rowing Frictions in
Indonesian-Japanese
Lr Economic Relations
According to recent US Embassy reporting, Jakarta views Japanese import
restrictions on manufactures, particularly plywood and textiles, as obstacles to
its high-priority nonoil export drive. President Soeharto has publicly criticized
high Japanese plywood duties. Indonesia also resents the Japanese penchant
for dealing with the much-resented ethnic Chinese and the gradual shift in 25X1
Japanese investments from import substitution projects to small-scale manu-
facturing. Although the economic relationship almost certainly is strong
enough to weather these disputes, we believe that trade and investment will be-
come a more contentious issue in the near term requiring closer cooperation
between senior officials in Jakarta and TokyoF--] 25X1
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Ce tral American A new round of unilateral trade restrictions by Central American Common
mmon Market Market (CACM) countries-Costa Rica, El Salvador, Guatemala, Honduras,
fade Falters and Nicaragua-is further reducing intraregional trade. By last year, financial
problems and political turmoil cut CACM trade levels 40 percent below the
1980 peak. Recent calls for CACM unity have been ignored, and new country
restrictions are redirecting a growing portion of intraregional trade into private
channels. San Jose is halting credit sales to CACM partners to ease its
growing overdue debt problem. Meanwhile, Honduras-which has a chronic
CACM trade deficit-is restricting importers' access to foreign currency.
Managua's nonpayment of regional bilateral debts-now exceeding $400
million-is forcing the other four countries to limit most trade with Nicaragua
to barter or advance cash payment deals. The sharp depreciation of Guatema-
la's currency during the first half of this year is leading regional competitors,
especially in El Salvador and Honduras, to press their governments for
additional barriers to keep "cheap" Guatemalan goods out of their markets.
National Developments
Developed Countries
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British Trade Back Britain's trade account was in surplus in May for the first time since February
in Surplus
UK Tax Cuts
Threatened
U French
rade Dispute
The GATT Government Procurement Committee has agreed to establish a
working party to examine its members' policies on computer purchases as a re-
sult of an ongoing US-French dispute. Earlier this year, Paris announced its
intention to buy the bulk of 160,000 computers plus computer-related
equipment for its computer literacy program from French manufacturers. The 25X1
United States claims this violates the GATT code on government procure-
ment. EC officials publicly support the French position but privately concede
that Paris manipulated options on contracts awarded for an unrelated program
and used short bid deadlines to evade its GATT obligations. The working party
will study computer procurement as it relates to the code in general rather
than judge this particular case, and Washington still has the option of
requesting a panel to settle the disputeF___1 25X1
1984 largely because of a recovery in the energy trade balance. The $290
million trade surplus and estimated net invisibles earnings of $650 million
helped push the current account surplus to over $1.2 billion for the first five
months of 1985, compared with an $850 million surplus during the same
period last year. The oil trade surplus, which had deteriorated considerably
during the yearlong coal miners' strike, rebounded in May to more than $1 bil-
lion. Meanwhile, imports of capital goods fell with the phasing out of a variety
of capital allowances in March. For all of 1985 the current account surplus
likely will be greater than last year's unusually low $833 million, but still well
below the average $6.8 billion surplus registered in 1982-83. Improved
external performance might enhance investors' confidence in the British
economy and lead to a strengthening in the pound. F_~
The Thatcher government's plans to cut taxes over the next three years could
be jeopardized as a result of falling oil prices. Several prominent financial
analysts forecast that a fall in oil prices could lower oil tax revenues this year
by $3.9 billion, 22 percent below government projections. Higher-than-
forecasted government spending-due in part to large public-sector wage
settlements and increasing inflation-and calls to increase spending further to
reduce unemployment also have cast doubt over the government's ability to cut
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nish Current
Account
Deficit Grows
Z7 Troubles
between oil prices and the pound to avert a fall in sterling's value.
taxes. London is under increasing pressure to deliver on the promised tax cuts
and probably will look for alternate revenue sources. It might, for example,
speed up the privatization program or increase borrowing but either option will
be controversial. By privatizing more companies, Thatcher will be open to
charges that she is selling state assets to finance current expenditures.
Increased borrowing, on the other hand, will be perceived as inflationary.
Should falling oil prices put downward pressure on the pound and raise the
sterling price of oil, it would cushion the fall in tax revenues. The government,
however, is attempting to defend the pound and has played down the link
prior to the important municipal elections scheduled for this fall
Denmark's current account deficit for first-half 1985-$1.5 billion according
to US Embassy estimates-already exceeds earlier forecasts for the entire
year. Unforeseen trade shifts have pushed the trade balance to a deficit of over
$500 million for the first six months instead of an anticipated surplus. Strong
import growth in oil, capital equipment, automobiles, and consumer goods
more than offset only moderate export gains. Although the full-year current
account deficit could top the 1979 record of $3.0 billion, the government
apparently will not restrict consumption. Danish officials expect the current
account to show improvement in coming months. More important, the
conservative-led coalition is reluctant to take money out of consumers' pockets
unlikely to be more than modifications of existing tax laws.
Reeling from three days of criticism from virtually all the major interest
groups represented at a national conference on tax reform last week in
Canberra, Prime Minister Hawke is backing away from his efforts to impose a
12-percent retail sales tax. The tax was to offset reductions in the income tax,
but union leaders complained it would strike low-income earners dispropor-
tionately; they threatened to break the government's wage-setting scheme.
Business leaders told Hawke that investment and growth would suffer, and
25,000 farmers marched on the capital to protest anticipated higher operating
costs. Hawke has never before made such a major retreat on economic policy,
and his action will fuel charges that he has become an ineffective leader.
Although Treasurer Keating maintains that the government will still enact the
most radical tax reform in Australian history, future reform proposals are
Less Developed Countries
outh Korea Eases Seoul is reacting to weak first-half economic performance-mainly because of
Monetary Policy
Secret
12 July 1985
an export decline-by easing its austere monetary policy. The newly an-
nounced measures are likely to help domestic commercial banks that are
saddled with low-yield government-mandated loans but will not spur economic
growth to planned levels. The targeted 9.5-percent annual growth of the money
supply, M2, was maintained through April but hit 12.9 percent by June
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Philippine
Exports Slump
dian Export
ZP7 Efforts
he press reported that $575 million will be issued during 1985 as
ow-interest loans to commercial banks, but no timetable has been announced.
United States
We believe that economic policy makers still adhere to their price stability
objective and will closely monitor the impact of added liquidity on inflation.
Seoul's response to the economic slowdown has been measured, but enthusias-
tic acceptance of the recent Korea Development Bank syndicated loan is
evidence that slow economic growth and a $1 billion current account deficit
has not significantly eroded banker confidence in Korea's creditworthiness.
Persistent economic sluggishness, however, may intensify opposition calls for
protection of domestic markets that could slow the pace of economic liberaliza-
tion and spark negative reactions from major trading partners such as the
depreciation.
Manila reportedly told the IMF last week that export earnings may drop by 15
percent this year-a sharp contrast to the 10-percent growth rate targeted by
the Fund. The poor export performance is due largely to declining world prices
for coconut oil, the world-wide slump in electronics, and the continued
overvaluation of the peso. Declining export earnings are a major setback for
Manila's economic recovery program and have led the US Embassy to revise
down its GDP forecast to as much as a 4-percent decline this year. According
to the US Embassy, the IMF is pressing Manila to lower the value of the peso,
and we believe that a rebound in exports requires at least a 20-percent
New Delhi has announced modest new measures to stimulate nonpetroleum
exports, which grew only 3.8 percent in dollar terms-but 20 percent in
rupees-last year. According to the Commerce Minister, the government is
launching a drive-probably in the form of trade missions-to push sales to
the United States, and establishing export promotion organizations for
electronics, computer software, and some agricultural products. Tax rebate
benefits for more than 800 items have been revised slightly-increased, for
example, for some clothing and steel products, but lowered on tea bags and
leather goods. Price or credit subsidies have been raised for a few industrial in-
puts used in the production of export goods. New Delhi hopes that liberalized
industrial controls and increased access to Western technology will help make
Indian products more competitive. Current negotiations for an export promo-
tion loan from the World Bank may lead to further policy changes, but, in our
judgment, prospects remain poor for achieving the very rapid growth in export
volume needed to ease forthcoming foreign-payments strains.F_~
Indian Industrial / Further liberalization of government restrictions on private production indi-
Decontrol Extended Extended cates that Prime Minister Gandhi's efforts to make Indian industry more
t productive, while still cautious, are gaining momentum. A policy change
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Sudan Cuts
Diesel Price
announced shortly after Gandhi's US visit last month authorizes manufactur-
ers to vary their product mix within subcategories of 14 industrial sectors,
including steel, agricultural machinery, metal products, and automobile parts,
without government permission. The new rules benefit a much larger share of
Indian industry than similar measures announced earlier this year for a few
high-technology sectors of special interest to Gandhi. The latest measures do
not apply to very large or foreign corporations, or to products reserved for
small-scale industry. Nevertheless, decontrol will help adjust output to market
ai Exports Stagnate Thailand's exports for the first five months of this year amounted to $3 billion,
demand and permit fuller use of existing capacity.
The Sudanese Government reduced the price of diesel fuel by 20 percent
earlier this week and is revising transportation fees to reflect the lower price.
The price rollback follows increasing union pressures on the ruling military
council to provide relief to consumers and could trigger other concessions. The
US Embassy reports that the latest measure reverses a decision made a week
earlier to hold the line on prices. Other price reductions, however, would send a
strong signal to the IMF on the ability of the new rulers to comply with a Fund
stabilization program. Sudan is attempting to clear up over $115 million in ar-
rears with the Fund to qualify for a new standby arrangement. F__1
Thailand's Corn
Surplus Grows
an increase of less than 1 percent in dollar terms over the same period in 1984.
Although the value of manufactures exports is up sharply, earnings from
commodities-which account for 60 percent of foreign exchange revenues-
remain depressed because of slack global demand. Bangkok will likely
intensify its export drive to avoid continued cuts in capital goods imports,
which have been largely responsible for the country's improving current
account balances. Despite the adverse impact on US exports of its recent tariff
hikes, Bangkok can be expected to press Washington to keep US markets open
to Thai products.F__1
Higher production will push Thailand's exportable surplus of corn to at least
3.4 million metric tons for the 1985/86 season, an increase of at least 8 percent
over the previous year's export level, according to the USDA. Bangkok may
find it difficult to sell the surplus. World demand is expected to decrease, and
the United States and Argentina-Thailand's traditional competitors-are
harvesting large corn crops. In addition, China is emerging as a new threat to
Thailand's corn exports, last year taking 15 percent of its Asian markets by of-
fering lower prices and better quality. Although Bangkok is trying to diversify
its markets-particularly in the Soviet Bloc-weak demand and continued
L Islamic Banking in
Pakistan Completed
quality problems will likely limit sales
Pakistan's banking system completed the final stage of its conversion to
Islamic principles on 1 July. The new regulations eliminate all interest
payments on deposits and loans. In return for loans, firms will share any profits
or losses with the lending bank; the bank, in turn, will share its profits or losses
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Secret
with depositors. Although the framework for the Islamic system is now in
place, some major pieces are still missing, such as a recognized accounting
standard and banking tribunals to settle disputes arising from the new system.
The new regulations have caused no major disruptions to the economy or the
financial system, but have proved expensive in terms of both administrative
costs and customer confidence.F___1
Irrigation in Africa
P spects for Soviet In a recent speech, Yegor Ligachev, Gorbachev's senior lieutenant, stressed
ic Reform that the new leadership's economic program will not include any move toward
a market economy or private enterprise. His comments echoed a recent
warning by Pravda that efforts to introduce market forces into socialist
economies "inevitably lead to severe economic, social, and political problems."
The speech and article undoubtedly had Gorbachev's blessing, and may be
designed to set the acceptable limits of debate on the economy. Although a
forceful advocate of change, Gorbachev has clearly called market reform and
private enterprise unacceptable options-at least for the present time.
oviet Journal Cites A recent article in a Soviet labor journal suggests that use of guest workers by
Increased Use of member countries of the Council for Mutual Economic Assistance (CEMA) is
Guest Workers on the upswing. According to the article, 200,000 guest workers are employed
in production activities alone in CEMA countries. The vast majority are
evidently from the CEMA bloc. Czechoslovakia, the only individual country 25X1
for which numbers are given, has 45,000 guest workers-of which 27,000 are
from Vietnam. Other data indicate 18,000 Vietnamese worker-trainees in the
USSR. It is not clear, however, what proportion of all Vietnamese labor on So-
viet soil the 18,000 represents. We estimate that Vietnamese workers in the
USSR in 1982 numbered about 15,000. While the article emphasizes the
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force, currently about 0.1 percent of total employment
advantages of greater labor mobility within CEMA, it concedes problems with
organization, pay, and control of guest workers. In any event, guest workers
will likely remain a tiny fraction of the overall Soviet-East European labor
Ren al of the
tra-German
Swing Credit
intra-German relations.
The two Germanys last week signed an agreement on renewing through 1990
the swing facility-the interest-free overdraft credit line used by East
Germany for financing bilateral trade. The swing limit will rise from its
current DM 600 million level to the DM 850 million ceiling that prevailed in
1976-82. Although Berlin has not used the swing substantially in the last
several years-partly to avoid appearing overly dependent on West Germa-
ny-it still considers the facility a useful source of inexpensive financing that
frees up cash for other imports. The East Germans relied heavily on the swing
during the financial pinch of 1982-83 and may do so again to boost Western
imports during the 1986-90 Five-Year Plan. The West Germans may hope
that the renewal at higher levels will help sustain the appearance of progress in
25X1
:ZbA1
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