INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807680001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: December 22, 2016
• Document Release Date: September 21, 2010
• Sequence Number: 1
• Publication Date: September 6, 1985
• Content Type: REPORT

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Directorate of Secret
Intelligence
Internatiaual
Economic & Energy
Weekly
6 Samba 1985
DI IEEW 85-036
6 September 1985
copy 686
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International
Economic & Energy Weekly
6 September 1985
Perspective-Western Europe in a Ruh
Libya: Qadhafi's Prospects for Survival
The Smaller Persian Gulf States: Growing Need for Adjustment
OECD Export Credit Negotiations-Limited Progress Expected
fficial Development Assistance: Growing Importance to LDC~
19 /International Financial Situation: Political Update
Energy
International Finance
Global and Regional Developments
National Developments
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directed to Directorate of Intelligence,
Comments and queries regarding this publication are welcome. They may be? 5,,,
Secret
DI IEEW 85-036
6 September 1985
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Synopsis
1 Perspective-Western Europe in a Ru
International
Economic & Energy Weekly
Western Europe is in the fourth year of economic recovery-a recovery,
however, characterized by tight fiscal and monetary policies, slow growth,
industrial stagnation, and continual increases in unemployment. West Europe-
an governments-and electorates-are convinced that traditional macroeco-
nomic policies to boost growth would actually worsen the long-term health of
their economies. 25X1
3 Libya: Qadhafi's Prospects for Survival
in to protect
Domestic opposition to Libyan leader Qadhafi continues to grow. His refusal
to compromise any aspect of his revolution or to make any effort to improve lo-
cal economic conditions in the face of declining oil revenues only enhances the
prospect of his ouster, either by dissidents, the military, or by fellow clan
25X1
.L -
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7 The Smaller Persian Gulf States: Growing Need for Adjustment
The small, conservative Arab states of the Persian Gulf have entered a period
of growing economic, political, and subversive challenge. Although major
political upheaval is unlikely in the near term, Gulf leaders do not seem to be
coming to grips with the long-term implications of the threats caused by their
., - - , . -- I 25X1
11 OECD Export Credit Negotiations-Limited Progress Expected
15
The OECD Export Credit Group will continue to make some progress toward
reducing official export credit subsidies at this month's meeting in Paris, but
we believe that significant changes are not likely to occur.)
25X1
Official Development Assistance: Growing Importance to LDCs
25X1
regular aid disbursements.
Official development assistance (ODA) to developing countries and through
multilateral institutions has become relatively more important to the LDCs in
view of sharp cutbacks in commercial bank lending. We expect recent
moderate increases in ODA flows to continue over the next few years as donors
make special emergency contributions to Africa while also expanding their
iii Secret
DI IEEW 85-036
6 September 1985
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19 International Financial Situation: Political Update
We believe recent difficulties in implementing economic reforms indicate that
a number of debtor countries face a moderate to serious threat of political un-
rest over the next 12 months
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International
Economic & Energy Weekly
6 September 1985
Perspective Western Europe in a Rut
Western Europe is in the fourth year of economic recovery-a recovery,
however, characterized by tight fiscal and monetary policies, slow growth,
industrial stagnation, and continual increases in unemployment. Average real
GDP growth was 0.7 percent in 1982, 1.4 percent in 1983, and 2.4 percent in
1984, but is likely to remain stuck at less than 2.5 percent this year and next.
Unemployment in the region now averages 11 percent, up from 8.2 percent at
the beginning of the "recovery" from the 1980/81 recession. Even looking at
individual countries reveals no dynamic performers: the British economy, the
strongest of the Big Four, almost certainly will grow by no more than 3.5 per-
cent this year. At best, the major economies would do well to keep jobless rates
from climbing still higher.
There are some bright spots. Although growth rates are lagging, domestic
sources of expansion are more important than they were last year when
exports, especially to the United States, accounted for almost one-half of
growth. Private consumption and investment have picked up a little in line
with the rise in real incomes and the drop in inflation. Interest rates in
Western Europe have fallen as US interest rates and the dollar have come
down, thereby promising further increases in domestic demand.
The most remarkable aspect of the region's economic performance is that
West European governments-and electorates-are convinced that traditional
macroeconomic policies to boost growth would actually worsen the long-term
health of their economies. West German Finance Minister Stoltenberg, for
example, last month defended Bonn's tight fiscal and monetary policies as the
best possible under current economic conditions and on several occasions
rejected moving up tax cuts scheduled for 1986 and 1988. Stoltenberg's views
of the proper policy mix-which appear to have been directed toward criticism
from abroad-were generall acce ted in West Germany and elsewhere in
Western Europe as obvious.
The economic imbalances that developed as many West European govern-
ments tried to spend their way out of the oil-induced recessions of the 1970s
played the major role in creating the current consensus. Governments saw
their spending rise from about one-third of GDP to about one-half while
joblessness and inflation continued to grow. The 1982 collapse of French
President Mitterrand's expansionary program helped convince most leftwing
parties as well that fiscal and monetary stimuli would not solve West European
economic problems. Thus, by the early 1980s, West European governments
almost all agreed that high employment and rising living standards could not
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be sustained with high inflation and large budget deficits; a few govern-
ments-including the British, the West German, the Danish, and the Dutch-
even became convinced that the size of government was stifling economic
growth.
Another theme emphasized by West European governments is that slow
growth is caused in part by the wrong mix of industries-something expansion-
ary economic policies cannot fix. West European governments see such
traditional industries as steel and textiles declining as demand drops and
competition from LDCs rises. The ambitious, but still vague, EUREKA
program proposed by Paris exemplifies the interventionist response to deciding
which industries have a future. Another approach being tried in the United
Kingdom, France, and West Germany is lowering barriers to setting up new
companies by promoting a venture capital market and cutting redtape.
Given steady, if unspectacular, growth, almost all West European govern-
ments are likely to continue on their present course in the belief that the
foundations for future growth are being laid. They will continue to reject
suggestions that more expansionary policies-boosting government spending,
raising money supply growth, or cutting marginal tax rates-could be adopted
because they think that such policies would delay the restructuring of their
economies. Electorates are likely to go along with present economic strategies
for the time being. The Big Four governments, however, all face national
elections during 1986-88 and will come under increasing pressure to do more
on the employment front.
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Libya: Qadhafi's Prospects
for Survival
Domestic opposition to Libyan leader Qadhafi con-
tinues to grow. Signs of an erosion in Qadhafi's
political base of support include renewed plotting
by military officers and more widespread grum-
bling about deteriorating economic conditions.
Qadhafi's response to these developments has been
to align himself more closely with hardliners. He
shows no inclination to rein in the extremists,
curtail costly foreign adventures, or backtrack on
his unpopular economic socialization programs, all
of which could broaden his base of support. His
refusal to compromise any aspect of his revolution
or to make any effort to improve local economic
conditions in the face of declining oil revenues only
enhances the prospect of his ouster by dissidents,
the military, or by fellow clan members in a
preemptive move to protect their own positions.
The Faltering Economy
Libya has weathered the soft oil market by cutting
back sharply on imports, scaling back the Five-
Year Plan (1981-85), slowing payments to suppli-
ers, and resorting to oil barter deals. Despite
producing about 150,000 b/d of crude oil above
Libya's OPEC quota of 990,000 b/d, total export
earnings are projected to remain at about $11
billion this year. Imports probably will fall to $7
billion, leaving a current account deficit of about
$1.2 billion for 1985-a slight improvement from
the $1.5 billion deficit last year.
While oil market conditions have prompted the
government to reassess development goals, work on
several prestige projects continues, although on a
delayed schedule. Heading the list is the $11 billion
Great Manmade River, a grandiose project to bring
water from southern Libya to and coastal regions.
Completion of this project, along with that of other
large-scale development programs-the multi-
billion-dollar steel mill at Misratah, an aluminum
smelter at Zuwara, and the large petrochemical
facility at Ra's al Unuf-is to be delayed for
several years to conserve an estimated $3.5 billion
in foreign exchange 25X1
Defense spending has been the last area to feel the
pinch of declining revenues. Qadhafi came to power
through a military coup, is well aware that the
military poses the greatest threat to his regime, and
will be careful to continue to meet the needs of the
military. We estimate that military imports will
decline to about $1.6 billion this year from their
peak of $2.8 billion in 1982, but most of the drop
reflects the completion of deliveries under existing
contracts.
The regime's efforts to deal with Libya's economic 25X1
decline have placed a growing burden on the
population. An increasing number of Libyans in
Tripoli are complaining about an unprecedented
deterioration in living conditions
Shortages of food, water,25X1
and electricity have become a way of life. Long
lines at state-run stores are increasingly common,
generating sporadic disturbances that have resulted
in several deaths. an emerging 25X1
consensus among Libyans that Qadhafi's social
experiment has failed and that change is needed. 0
25X1 25X1
These grievances probably are aggravated by Qad25X1
hafi's continual exhortations to revolutionary activ-
ity, which further undermine the sense of security
Libyans are seeking in their daily lives. In July, for
example, Qadhafi ordered Western musical instru-
ments in Libya destroyed as part of a new attack on
symbols of Western culture. In addition, dissatis-
fied Libyan university students sent Qadhafi a
memorandum in which they linked expenditures for
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misguided foreign adventures to the current eco-
nomic difficulties. Many Libyans apparently are
holding Qadhafi personally responsible for excesses
committed by his loyalists in enforcing his revolu-
tionary dictums
Dissatisfaction with Qadhafi since the beginning of
the year is finding expression in various ways.
anti-Qadhafi
literature recently surfaced again in several Libyan
cities and that graffiti has even appeared on walls
near Qadhafi's headquarters in Tripoli. Security
crackdowns following the Libyan exile attack on
Qadhafi's headquarters in May 1984 previously
had stifled such activity. These activities are in
addition to disturbances among the Berber minor-
ity in northwest Libya, at least one assassination
attempt against Qadhafi, quashed coup plotting by
military officers, the apparent sabotage of a Libyan
military installation, and instances of open "coun-
terrevolutionary" decisionmaking by local officials
earlier this year.
Regime Countermeasures
Qadhafi almost certainly perceives an increasing
threat of a coup
roundups and interrogations of suspected dissi-
dents have grown. Security forces almost certainly
are closely monitoring the activities of military
officers-as many as 80 may have been executed
last March for their involvement in the first mili-
tary coup plot in two years.
Those
whose continued stay is not approved will be or-
dered home; those refusing presumably will face
death.
Qadhafi in the past has temporarily compromised
some of his radical principles to ease discontent,
but his increasing reliance on youthful extremists in
the revolutionary committees now limits his room
to maneuver. Indeed, his recent speeches and ac-
tions indicate that he remains personally deter-
mined to sustain his revolution and to support
foreign radicals.
If Qadhafi continues to reject compromise, he will
need, at a minimum, a hefty boost in oil revenues to
reduce the current climate of discontent. Any hope
for increased oil demand and higher prices, howev-
er, run counter to oil market trends. Moreover,
unilateral Libyan attempts to boost oil sales would
only put further downward pressure on prices and
threaten the fragile OPEC discipline that remains.
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We doubt that recent attempts by Qadhafi's sup-
porters to blame shortages of consumer goods on
hoarding and mismanagement by local "fat cats"
will satisfy many Libyans. Some Libyans may even
take to the streets in protest if economic conditions
continue to worsen.
For the moment, the exiles alone probably have the
capability to conduct successfully only isolated
sabotage operations. Nevertheless, the dissidents
probably hope to launch another attack on Qadhafi
in the near future to capitalize on his unpopularity
as well as on their increased foreign support. If the
dissidents have well-positioned supporters in the
military willing-to assist, we assess their chances of
toppling Qadhafi are better than even.
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The Smaller Persian Gulf States:
Growing Need for Adjustment
The small, conservative Arab states of the Persian
Gulf have entered a period of growing economic,
political, and subversive challenge. In Bahrain and
Kuwait, popular discontent is on the rise, fed by the
impact of declining oil revenues, unfulfilled politi-
cal and economic expectations, and the greed of the
ruling families. At the same time, continued sub-
versive activity, such as the assassination attempt
on the Amir of Kuwait in May and recently
discovered arms smuggling in Bahrain and Qatar,
test the regimes' ability to protect themselves.
Although major political upheaval is unlikely in the
near term, Gulf leaders do not seem to be coming to
grips with the long-term implications of the threats
caused by their declining economies and the in-
creased potential for subversion.
Feeling the Pinch
Gulf citizens are beginning to criticize the ruling
families for failing to implement policies to deal
with the economic hard times currently hitting the
region. Since their peak in 1980, oil revenues in the
smaller Gulf states-Kuwait, Bahrain, United
Arab Emirates, and Qatar-have fallen by 35 per-
cent. During the last three years, businesses
throughout the region have failed, Kuwait has
suffered a stock and real estate market crash, and
Bahrain has seen several bank closures and the
collapse of its real estate market. According to
various US Embassy reports, many in the Gulf are
criticizing the ruling families for unfair business
practices, corruption, and wasting declining govern-
ment resources.
Bahrain. Further oil price declines will severely
strain Bahrain's economy and raise serious political
problems for the ruling Khalifa family. Bahrain has
already depleted much of its oil reserves and
depends on its richer Gulf neighbors, particularly
Saudi Arabia, to provide a large share of its
revenues. Foreign exchange reserves have fallen by
almost $350 million since 1981 to $1.4 billion and
are now sufficient to cover only five months of
imports. US Embassy sources report that unem-
ployment and underemployment, particularly
among the island's large Shia community-more
than 70 percent of the population-already have
risen to worrisome levels. The number of poor in
Bahrain is growing, and many are complaining
about the loss of jobs to expatriates. The US
Embassy in Manama reports that many Bahrainis
are grumbling about the Khalifa family's lavish
spending habits, malfeasance, and the diversion of
scarce financial resources from needed social pro-
jects to military purchases. 25X1
Thus far, the ruling family has ignored most
suggestions that it curb its extravagance. We be- 25X1
lieve this cavalier attitude is weakening support for
the regime, even among its traditional circle of
Sunni supporters. Calls for a return to representa-
tive government are surfacing-the national assem-
bly was suspended in August 1975-and some
Embassy contacts are urging that the United States
use its leverage with the regime to bring about a
return to some form of po ular participation as a
way to enhance stability. 25X1
Kuwait. Kuwait is in the best position to ride out
the current period of economic stress. With more
than $70 billion in foreign assets and a relatively
small population, officials have room to maneuver,
despite the sharp fall in oil revenues and stagnant
domestic economy. Criticism of the government's
handling of the economy and charges of favoritism
in doling out compensation for the 1982 stock 25X1
market crash, however, are on the rise.
The ruling Sabah family faces a far sterner chal-
lenge on the political front. Since the February
elections, members of the National Assembly have
charged the government and individual ruling fam-
ily members with mishandling the economy and
malfeasance. They are joined by other critics who
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Smaller Persian Gulf States: Growing Challenges
Oil Export Revenues, 1984
Billion US S
0 4 8 12 16
Bahrain
Kuwait
Qatar
UAE
Liquid International Assets, Yearend 1984
Billion US S
0 20 40 60 80
Bahrain
BPS ~k t .a ?Pis Ie ier'R+at`?'..
Kuwait r ~a a , y, .:
Qatar, 1
UAE a`ma gar ,4
I tintaied.
Proven oil reserves, yearend 1984 at 1984 rates of production.
Excludes Neutral lone reserves.
want to make the Cabinet more responsive to the
Assembly. The Assembly may try to force a con-
frontation with the government this fall when it
begins its investigation of Oil Minister Ali Khalifa
and his role in Kuwait Petroleum Company's ill-
fated purchase of the US-based Santa Fe Corpora-
tion.
The Sabah government is unhappy with the As-
sembly's sharp attacks but is unlikely to close down
the National Assembly as it did in 1976. No matter
how obstreperous its behavior, the Assembly is a
useful political safety valve. The Sabahs are more
likely to sacrifice an additional Cabinet member
and may even strip Crown Prince Saad al-Abdallah
of his Prime Minister post. The family apparently
believes Saad's position has been compromised by
Per Capita Gross Domestic Product a, 1984
Billion US $
Bahrain
Kuwait
Qatar
UAE
Years of Oil Productionb
Billion US $
Bahrain
Kuwait,
Qatar
UAE
popular criticism that he was responsible for the
stock market crash and for security failures associ-
ated with terrorist attacks this spring.
The United Arab Emirates. The decline in oil
revenues has not yet seriously affected the UAE,
but we believe that it could become a problem in
the next three to five years. Still, the government
drew down reserves in 1984 to cover revenue
shortfalls, and probably will dip into this $36 billion
cushion again if necessary.
The most immediate issue is political bickering
among the ruling families of the federation. Presi-
dent Zayid, the 70-year-old ruler of Abu Dhabi, is
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still popular. Embassy reporting, however, indicates
that Zayid's fellow rulers are disturbed that he is
disengaging himself from decisionmaking even in
Abu Dhabi and that Crown Prince Khalifa has
taken advantage of his father's frequent foreign
travel to assume control of daily decisionmaking
both in Abu Dhabi and the federal government.
According to Embassy reporting, Khalifa's deter-
mination to prevent corruption in military procure-
ment and his rejection of demands for business
bailouts and expensive infrastructure projects is
making him unpopular in Abu Dhabi and the UAE
as a whole.
Qatar. Qatar has some internal problems but does
not appear to be at serious risk from an economic
downturn. Oil revenues have declined by 35 percent
since 1981, prompting Doha to cut the current
budget by an equivalent proportion. Doha, howev-
er, has relatively large international reserves-$ 10
billion-that could serve as a cushion against fur-
ther oil price declines. It also has the smallest
population and the highest per capita income of the
Gulf states.
Nonetheless, criticism of the Amir is increasing
because he spends large sums of money on highly
visible personal pleasures-the Embassy reports
that spending on palaces is approaching a quarter
of Qatar's annual oil income. If austerity measures
become necessary to counter the decline in oil
revenue, we believe that public disaffection, partic-
ularly among unemployed youth, would grow.
The economic downturn in the Gulf is providing an
atmosphere for dissent-and subversion. Despite
enhanced security measures by the Gulf countries
over the last few years, subversive activity has
increased:
? Since the 1983 bombings of the American and
French Embassies and government installations,
Kuwait has suffered five other major terrorist
attacks. Radical Shias, who allegedly were mem-
bers of the Iranian-backed Dawa Party, were
responsible for the 1983 bombings and may have
conducted the hijacking of a Kuwaiti airliner in
December 1984 and the attempt on the Amir's
life. Security authorities suspect that Damascus
was responsible for the bombings of two crowded
cafes in June 1985.
25X1
the number of Bah-
raini Shia being recruited by Iranian-sponsored
dissident groups is growing and that prominent
Shia families in Bahrain are funding the groups.
One such group, the Islamic Front for the Libera-
tion of Bahrain, was responsible for a coup 25X1
attempt in 1981.
? UAE diplomats abroad have been the target of
terrorist attacks. Iranian-backed 25X1
Shia groups have representatives in the UAE, and
UAE 25X1
authorities had arrested five armed Iranian na-
tionals who were reportedly targeting the US
Embassy and UAE Government officials and
installations.
25X1
? There have been no reported terrorist attacks in
Qatar. In 1983, however, an arms cache was 25X1
uncovered, and members of the state police force
were implicated in a Libyan-sponsored plot to
assassinate a Gulf leader during the Gulf Cooper-
ation Council summit meeting. 25X1
Prospects
Gulf leaders do not seem to be coming to grips with
the long-term implications of the threats caused by
their declining economies and the increased poten-
tial for subversion. With the exception of Bahrain,
they still can rely on large international reserves to
offset further economic declines.
both the rulers and the popu-
lace view the gloomy economic picture as a tempo-
rary phenomenon and refuse to acknowledge the
need for long-term economic adjustments. None-
theless, we believe that popular expectations-
which have risen during the oil boom years-will
soon clash with the reality of economies whose oil
revenues are unlikely to rebound before the end of
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As declining oil revenues force most people to
reduce their living standards, we believe there will
be growing criticism of the ruling families for
taking an inordinate share of the national wealth.
Charges of royal corruption by themselves will not
lead to the overthrow of the families but could
become a rallying point for dissidents.
Except in Kuwait, the ruling families are ignoring
the growing complaints from the business commu-
nity and the upper and middle classes about the
lack of political participation. Rulers continue to
count on family councils, links to allied wealthy
families and tribal groups, and the security services
to keep the peace. We believe all the ruling families
would resort to heavyhanded repression to prevent
an erosion of their political power.
Traditionally, when the ruling families in the Gulf
have felt threatened by popular discontent, they
have replaced the ruler with another member of the
family or shifted power among the top decision-
makers. If the current recession continues and
popular discontent increases, the families in Ku-
wait, Bahrain, Qatar, and the UAE probably will
shuffle leadership posts now held by the families
and add some commoners to the government. Such
changes, however, would only be cosmetic.
Shifts of power within the ruling families would not
significantly affect the Gulf states' relations with
the United States. These new governments would
remain pro-Western in outlook. In order to stave
off public disaffection, however, the Gulf govern-
ments probably would distance themselves from
Washington in a bid for renewed popular support.
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OECD Export Credit Negotiations-
Limited Progress Expected
The OECD Export Credit Group will continue to
make some progress toward reducing official export
credit subsidies at this month's meeting in Paris,
but we believe that significant changes are not
likely to occur. Rather, the stage will be set for
further negotiations on control over the use of tied
aid credits,' interest rates, and the membership of
advanced developing countries in the Export Credit
Arrangement. At most, greater restraint on the use
of tied aid credits may result if France can be
pressured to succumb to the interests of the other
OECD countries.
The primary agenda item for the 16-20 September
meeting will be tied aid credits with the focus on
the use of blended credits-the combination of
concessional and nonconcessional export financing.
While the EC argues that tied aid credits provide
needed economic assistance to developing coun-
tries, such credits can distort trade by using a small
grant element to undercut minimum interest rate
guidelines. France, in particular, began using tied
aid credits as another way to subsidize exports as
minimum interest rates under the Arrangement
were increased. Most of the tied aid credits are in
profitable sectors such as power, transportation,
and telecommunications equipment. Most of these
credits have also contained a low grant element of
20 to 30 percent, suggesting a goal of promoting
exports as opposed to providing developmental as-
sistance.
Trying to control the use of tied aid credits,
Arrangement members made it more costly for
governments to use them. The minimum grant
element was raised to 20 percent in 1982 and 25
'Tied aid credits-commonly referred to in the United States as
mixed credits-are financing packages which combine aid funds
with nonconcessional export financing from private or official
sources. The term "tied aid credits" also refers to a single
development aid loan with a low level of concessionalityF_~
The Arrangement
Attempting to limit expensive export credit competi-
tion, the OECD member countries agreed in 1978 to
the "Arrangement on Guidelines for Officially Sup-
ported Export Credits. " The Arrangement specifies
guidelines for minimum interest rates and maximum
credit lengths for government-supported export cred-
its based on the relative wealth of borrower countries.
In response to the increasing gap between market and
subsidized rates, minimum interest rates were in-
creased between 1980 and 1982: 25X1
? Minimum interest rates are now composed of a
basket of market long-term bond rates for the
United States, West Germany, the United Kingdom,
France, and Japan. The rates are adjusted semian-
nually if the new composite rate has moved by at
least 0.5 percentage point since the last change.
Also, the commercial interest reference rate (CIRR)
system was introduced in 1983 to set rates for
currencies of countries with low domestic interest
rates, such as the yen, Swiss franc, and deutsche
mark.
? Borrower countries are classified into three catego-
ries: I (relatively rich), II (intermediate), and III
(relatively poor). Credit terms are easiest for poorer
countries, even though their loans are riskier. As a
result of US efforts, a plan has been devised to
automatically reclassify countries. If implemented,
this would bring several countries, including Singa-
pore and Hong Kong, into Category I. Special 25X1
sector agreements cover credit terms for ships,
power plants, and satellite ground stations. An
agreement on large civil aircraft was reached in 25X1
July between the United States and the EC. The
Arrangement excludes agricultural commodities.
25X1
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percent in April 1985. Increases in the minimum
grant element have not deterred the participants
from trying to use tied aid credits. Actual commit-
ments declined sharply in 1983 reflecting the LDC
debt crisis and the worldwide recession but offers of
such credits have risen steadily as competition for
exports intensified.
The EC, led by France, rejects the 1983 US
proposal, supported by several other OECD coun-
tries, to increase the minimum grant element to 50
percent. According to diplomatic reports, the EC
claims this would reduce aid flows to developing
nations. Progress at July's Export Credit Group
meeting included: (1) agreement on a more compre-
hensive definition of tied aid credits and (2) im-
proved transparency-or information-sharing-
procedures requiring a longer prior notification
period. Participants may now call for face to face
consultations on tied aid credit offers if they have a
complaint.
Discussion of interest rate issues will center on
setting rates, known as commercial interest refer-
ence rates (CIRR), for the currencies of countries
with low interest rates, such as Japan. Participants
are dissatisfied with the current CIRR system and
will discuss a study's recommendations to improve
the system. Members will also negotiate on possible
sector agreements on credit terms for small aircraft
and agricultural products. The United States, how-
ever, does not support an agreement on agriculture
without parallel negotiations on agricultural export
price subsidies.
The participants also will examine ways to bring
new members, particularly advanced developing
countries-including South Korea, Indonesia,
Mexico, and Brazil-into the Arrangement. OECD
members are concerned because some of the devel-
oping countries have begun to offer official export
credits at rates lower than the Arrangement's
minimum rates.
a OECD Development Assistance Committee data, tied aid credit
commitments (1981-84 first half).
We believe little, if any, substantive progress will
be made on tied aid credit discipline during the
September meeting. The EC, pressed by the
French, will probably try to downplay the trade
distorting impact of tied aid credits in order to
avoid further control. In particular, we believe the
EC will respond to the US proposal for a 50-
percent minimum grant element by arguing that
the new transparency procedures for tied aid cred-
its need a longer trial period or have eliminated the
need for additional discipline. France, moreover,
may wish to avoid discussing further changes in
discipline and subsidy reduction under the Ar-
rangement until a decision has been made on the
revisions to its export credit program. At best, the
OECD members may be able to negotiate a moder-
ate increase in the minimum grant element
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Secret
Participants' Positions on Tied Aid Credits
France
Accounting for slightly less than one-half of tied aid
credits supplied by the members of the Arrangement,
France has been the stumblingblock in efforts to
reduce subsidies. Paris typically provides only a
small grant element to its tied aid credits. By target-
ing transportation, power, and telecommunications
equipment, France hopes to spur its economic growth
through exports. Paris, however, is considering a
major overhaul of its export credit program to reduce
the cost of export subsidies to the budget, according
to US Embassy reporting.
Italy
Italy's tied aid credit program is modeled after the
French, but is constrained by limited resources. Italy
accounts for slightly more than 9 percent of total tied
aid credits. According to diplomatic sources, a Minis-
try of Foreign Affairs official has been instructed to
support France's position on tied aid credits in the
EC council meetings, although he pledged to support
the United States
The participants will continue efforts to improve
the CIRR system. Standardizing the methodology
setting CIRRs should begin to reduce complaints
about the operation of the current system. Al-
though progress may be made toward an agreement
on credit terms for small aircraft, it is unlikely that
an understanding will be reached on agriculture,
given the US demand for parallel talks on agricul-
tural price subsidies.
The OECD Secretary General, along with the
developed country participants, is concerned that
the invitations to proposed members should be
worded so that inclusion in the Arrangement can-
not be interpreted as a step toward membership in
the OECD itself. A Secretariat official reportedly
believes that South Korea would accept an invita-
tion to join the Arrangement, given Seoul's demon-
strated interest in it. He was uncertain about
Indonesia and Mexico but felt that Brazil would
probably refuse to join.
The United Kingdom and West Germany
Great Britain and West Germany have traditionally
sided with the United States in support of reducing
subsidies. The two, however, face increasing pressure
from commercial interests at home. London provides
one-fifth of all tied aid credits, but Bonn has not been
a significant player. The United Kingdom recently
stepped up efforts to provide soft credit terms to
promote exports, for example, to China. F_
Japan
Japan publicly sides with the United States in sup-
port of increased discipline and transparency in tied
aid credits, according to US Embassy reporting from
Paris. Tokyo, however, is always looking for loop-
holes in the Arrangement to enable Japan to subsi-
dize its exports. Japan accounts for slightly more
than 8 percent of all tied aid credits. 25X1
Progress on tied aid credits beyond September's
meeting will continue slowly, given the Arrange-
ment's cumbersome negotiating process and Fran-
ce's intransigence. We believe that pressure for
more control of tied aid credits will increase be-
cause of the cost of export subsidies to governments
in a time of budget cutbacks. If the use of tied aid
credits declines as a result of more discipline, we 25X1
believe there will be complaints from the develop-
ing countries which have become used to conces-
sional financing.
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Secret
Official Development Assistance:
Growing Importance to LDCs
Official development assistance (ODA) to develop-
ing countries and through multilateral institutions
has become relatively more important to the LDCs
in view of sharp cutbacks in commercial bank
lending. Last year, ODA accounted for 40 percent
of the total financial flow' to LDCs, and for the
least developed countries-which have almost no
access to commercial credit markets-ODA com-
prised 90 percent of external resources. We expect
recent moderate increases in ODA flows to contin-
ue over the next few years as donors make special
emergency contributions to Africa while also ex-
panding their regular aid disbursements.
According to data recently published by the
OECD, net disbursements of ODA from all sources
totaled $38 billion 2 in 1984, in real terms this
represented a 5.5-percent increase from 1983 and
was only slightly below the 1981 peak. Lower oil
revenues forced OPEC countries to cut their assist-
ance to $4.6 billion, half the level in 1980. This
decline was more than offset, however, by a
7-percent real increase in aid by the OECD Devel-
opment Assistance Committee (DAC) countries,
which provided over $29 billion
Italy posted last year's largest increase in ODA,
boosting its assistance by 39 percent. Italy's aid
program has grown the fastest over the past five
years, up 22 percent at an average annual rate
following Rome's 1980 decision to rapidly expand
its development assistance. Finland, France, and
Japan also have posted consistently large increases.
Sweden, New Zealand, and the United Kingdom,
in contrast, have been trimming their ODA dis-
bursements. UK disbursements, in particular, have
dropped 6 percent annually on average since 1979
Net Financial Flows to LDCs in Selected
Years, 1975-84
Commercial
bank lending
Direct foreign
investment
Official non-
concessional flows
in dollar terms. In sterling terms, however, UK aid
levels have remained stable.
The DAC's official target for individual member
aid disbursements is 0.7 percent of GNP, but only
four of the 17 DAC countries met that level in
1984. The Netherlands reclaimed its top position
under this criterion by donating 1.0 percent of its
GNP last year, followed by Norway, Denmark, and
Sweden. While US aid disbursements ranked last
in 1984 on a GNP-proportional basis, US ODA
flows remain by far the world's largest.
exchange rates.
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ODA Net Disbursements: DAC,
OPEC, and CEMA Donors, 1970-84
Top Ten Donors:
Net Disbursements of ODA, 1984
United States
8,700
0.2
Japan
4,300
0.4
France
3,790
0.5
Saudi Arabia
3,310
3.3
West Germany
2,780
0.4
USSR
2,450 a
0.2 a
Canada
1,600
0.5
United Kingdom
1,430
0.3
Netherlands
1,270
1.0
Italy
1,100
0.3
Importance of ODA
ODA continues to be focused on Asia and Africa,
where most countries have limited access to private
sources of funds and rely heavily on official flows.
Together, Asia and Africa receive more than two-
thirds of Western ODA. Egypt, India, Indonesia,
and Bangladesh remain the key beneficiaries of
DAC assistance, as well as being the top recipients
of Western multilateral ODA. The Soviet Bloc, in
contrast, concentrates its aid on Vietnam and
Cuba. Over 85 percent of OPEC's aid is allocated
to Arab neighbors such as Syria, Jordan, and
Sudan.
About two-thirds of total ODA is directed to
development projects in the recipient countries. For
the least developed countries, these flows are essen-
tial to undertake the investments in public utilities,
agriculture, education, and health needed to in-
crease GNP and exports-projects they are too
poor to pay for alone. Because these projects yield
a OECD data used for comparison. Intelligence Community esti-
mates, based on differing definitions of aid flows, are substantially
higher.
returns only after 10 years or more, these poor
countries must rely on the concessional terms of
ODA to finance such long-term investments.
Although project financing is important, most low-
and middle-income countries are also experiencing
immediate balance-of-payments and domestic bud-
get problems. In these circumstances, direct assis-
tance not tied to specific projects would help stabi-
lize the economy by financing critical imports to
maintain existing plants and equipment; DAC
members, however, have allocated only about 10
percent of ODA in recent years for general finan-
cial assistance. In contrast, more than half of all
OPEC ODA goes for general support, and less than
20 percent for project financing
We expect total ODA to increase by about 4
percent in nominal terms in 1985, as DAC mem-
bers make special emergency contributions to Sub-
Saharan Africa while continuing to expand their
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Top Ten Recipients:
Net Disbursements of ODA, 1983 a
Million US $
Current Account
million US $
India
1,720
-2,780
Egypt
1,456
-785
Israel
1,345
-2,240
Vietnam
1,287
-926
Bangladesh
1,072
-77
Sudan
964
-220
Syria
956
-815
Cuba
901
b
Indonesia
744
-6,338
Pakistan
742
25
a OECD data.
b Comparable data unavailable.
regular aid activities. The average ODA/GNP
ratio will remain near 0.4 percent. For 1986, we
expect another comparable increase. These esti-
mates depend on several assumptions:
? For countries that have adopted specific GNP-
tied targets-Denmark, France, the Netherlands,
and Sweden-ODA prospects depend directly on
continued economic recovery.
? For countries which have adopted medium-term
aid programs-West Germany, Italy, and Ja-
pan-budgetary constraints would not signifi-
cantly affect planned aid increases.
? The key OPEC donors-Saudi Arabia, Kuwait,
and UAE-probably will avoid further deep cuts
in their cash contributions.
The ODA outlook for Japan, France, and West
Germany is one of continued growth to fulfill the
medium-term programs each has adopted. Al-
though Japan likely will fall short of its plan to
double ODA during 1981-85 compared to 1976-80,
we expect Tokyo to adopt another ambitious five-
year aid plan, and to maintain ODA growth at
about 10 percent annually in coming years. France
decided in 1981 to achieve the 0.7-percent target
ODA/GNP ratio by 1988. France would have to
boost aid by about 12 percent each year to reach
this target, but we believe Paris will make strong
efforts to attain its goal. West Germany also has
adopted the 0.7-percent ODA/GNP goal, but with-
out a specific deadline. We expect Bonn will have
little difficulty meeting the 3.5-percent aid in-
creases in 1985 and 1986 called for in its ODA 25X1
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Secret
International Financial Situation:
Political Update
We believe recent difficulties in implementing eco-
nomic reforms indicate that a number of debtor
countries face a moderate to serious threat of
political unrest over the next 12 months. Leaders in
these countries are likely to attempt to defuse such
problems by retarding or reversing the pace of
support-at least initially-for a new agreement
with the IMF.
Coming to grips
with Nigeria's myriad economic problems will be
difficult even if negotiations with the IMF start
economic reform.
In a few countries, there have been significant
changes in political and economic situations. For
example, President Garcia of Peru-playing to his
domestic supporters-has linked interest payments
on foreign debt with export earnings, a move that
will make an agreement with creditors difficult.
Garcia's initiative will also make it more difficult
for other Latin leaders, such as President Alfonsin
of Argentina, to sell their austerity programs do-
mestically.
Elsewhere, Mexico's President de la Madrid has
instituted budget cuts in an attempt to redress
Mexico's financial troubles. The cuts-which are
temporary and.probably will prove insufficient to
keep Mexico within IMF targets-were made nec-
essary partly by the spate of spending preceding the
recent midterm elections. Mexican officials know,
however, that these spending cuts and other mea-
sures designed to promote efficiency in Mexico's
industrial sector are opposed by labor. In fact,
organized labor officials have already cautioned de
la Madrid that they will have a more difficult time
holding the rank and file in line if the three-year
drop in living standards is not reversed.
In Nigeria, the drop in oil export earnings and the
resulting continued economic difficulties played a
key role in the recent coup. General Babangida,
Buhari's successor, is deeply concerned with Ni-
geria's lack of economic progress and may find
soon.
Prime Minister Junejo of Pakistan announced the
transition to civilian government to coincide with
the lifting of martial law by 1 January. The effects
of a deteriorating foreign exchange situation and
related cutbacks as well as increased Shia militan-
cy are cause for concern and could postpone both
the lifting of martial law and the elections.
In other debtor countries, longstanding govern-
ments are facing formidable opponents. President
Marcos faces increasing opposition in the Philip-
pines, especially from Communist insurgents. Con-
tinued economic decline has prompted a sharp
increase in labor strikes and has probably provided
greater receptivity for the Communist front groups
among low- and middle-income Filipinos. Most
notable among Manila's current economic woes is
the 11-percent drop in export earnings due to weak
international markets and a rigid exchange rate.
Although Marcos has survived the fallout from the
Aquino assassination, continued economic prob-
lems-in addition to the deteriorating political
environment-will bolster the insurgency and in-
creasingly cause problems for him in the scheduled
1986 local and 1987 presidential elections.
Secret
DI IEEW 85-036
6 September 1985
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In Chile, pressure from far-left groups could
prompt President Pinochet to reinstate the recently
lifted state of siege, which would erode much-
needed bilateral and multilateral financial support.
A rash of bombings and protests followed the
recent revelation of police responsibility for killing
Communists in March. The lifting of the state of
siege in early June was instrumental in securing
commitments for World Bank and IMF support,
but a resumption of the crackdown could slow
disbursements.
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Secret
V Industrialized
Countries Reliance on
Persy~n Gulf Oil
South African
Response to
Debt Crunch
Energy
the Persian Gulf.
The recent attacks against Khark Island by Iraq has renewed concern about oil
flows from the Persian Gulf region. Persian Gulf countries are now exporting
about 7.5 million b/d, accounting for about one-fifth of total non-Communist
oil supplies. Of this, some 6 million b/d flow through the Strait of Hormuz
with the remainder shipped via pipelines from Saudi Arabia and Iraq to the
Mediterranean and Red Seas. In first-quarter 1985, Western Europe, Japan,
and the United States relied on the region for about 18 percent, 58 percent,
and 4 percent, respectively, of their total oil imports. Although Western
Europe's reliance on the region has declined in recent years, several countries
remain heavily dependent on Persian Gulf oil. Italy, Greece, Portugal, and
Turkey received from 33 to 80 percent of their oil supplies from the region dur-
ing first-quarter 1985. As a result, we expect these countries would have the
greatest difficulty lining up alternative supplies in the event of a disruption in
Pretoria's four-month suspension of overseas debt repayments and reintroduc-
tion of penalties for the withdrawal of foreign capital probably were intended
to buy time to negotiate debt restructuring, but will add to the cost of future
loans. Some two-thirds of the South African debt of about $20 billion comes
due in the next 12 months, and political uncertainties have led some foreign
banks to press for repayment. Despite a strong current account surplus and a
ratio of debt to GDP lower than that of most major debtor nations, the debt
crunch and Pretoria's extreme measures to solve it probably will prolong South
Africa's economic slump. Pretoria is likely to try to reduce its foreign debt by
maintaining tight credit policies to hold down imports and sustain a current ac-
count surplus. Economic recovery, however, probably requires a significant
increase in the world price of South Africa's mineral exports, particularly gold,
that accounts for half of export earnings.
Portuguese Financial The Ministry of Finance and the Bank of Portugal have agreed on a financial
Reform Package
reform package aimed at increasing private investment and reducing the
burden of the budget deficit on the domestic banking industry. With inflation
expected to fall this year, nominal interest rates have been lowered to reverse
the steady decline in real private investment since 1980. We do not expect an
economic recovery until 1986, however, when increased domestic demand and
improved EC market access stimulate manufacturing activity. Bank profits
will likely improve as the government begins issuing treasury bills to help
finance the budget deficit. The nationalized banks, which have been forced to
21 Secret
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 lend to the government at below market rates, will now be able to increase
lending to the private sector at better rates of return. Lisbon expects to finance
about 40 percent of the budget deficit with treasury bills this year and to
progressively increase this share until most of the deficit is financed with this
instrument.
MF and World Bank A senior Bangladesh Government official told US diplomats that $280 million
Loans to in loans from the IMF and World Bank are being delayed because Dhaka has
Bangladesh Delayed not followed through on several promised economic reforms. The government
recently reversed its agreement to implement new taxes and salary cuts for
government employees, costing Dhaka an estimated $45 million in anticipated
revenues. It also has allowed private credit to expand faster than the IMF
target. Negotiations on loan terms will continue, but Dhaka will be reluctant
to undertake austerity measures at a time when it is trying to set the stage for
national elections. Without the loans, foreign exchange reserves-estimated at
$360 million, equal to about six weeks' imports-will fall even more
Islamabad Moves To Pakistan's Finance Ministry has arranged a $150 million, five-year loan from
Resolve Financing a group of five international banks. The interest rate-seven-eights of a point
Problems over LIBOR for the first two years and one point over for the final three
More Bulgarian
V Borrowing
Secret
6 September 1985
years-is higher than the rate on a similar $125 million loan obtained last
year. Although two US banks are participating, several other US banks
declined because of concerns over Pakistan's creditworthiness. a
US bank recently lowered Pakistan to its lowest credit rating
category, primarily because of the recent decline in Pakistan's foreign
exchange reserves. In a separate move to help finance the government's budget
deficit, Islamabad is allowing banks to loan 100 percent of the purchase price
of special national fund bonds at 4 to 5 percentage points below the market
rate. Previously, the banks were limited to a maximum of 75 percent at the
market rate. US Embassy sources indicated that bond sales probably would
exceed-by perhaps $100 million-the target of $300 million by 31 August.
The financing changes have allowed the government to disguise its bank
borrowing, but may add to inflationary pressures.
Bulgaria is arranging its second loan syndication in three months, according to
the US Embassy. The Japanese-led loan is for $100 million on favorable
terms-eight-year repayment and an interest spread of three-eighths percent-
age point over LIBOR. Western observers believe that lenders' enthusiasm will
increase the final total for the loan to more than $200 million. The two credits
are the first loans to Bulgaria by Western banks since 1979. Declining hard
currency trade earnings, agricultural shortages, and the threat of a second
energy crisis this winter probably contributed to Sofia's decision to seek new
credits, despite its concerns about increased borrowing.
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UK Rail Strike Vote The vote last week by British railway workers to reject a nationwide strike fur-
Weakens Unions ther weakens the union movement. Newspapers are describing the vote-
which most political observers had believed would be affirmative-as a
devastating blow to railway union leaders. Unlike the miners, the railway
leaders had decided to hold a prestrike ballot to abide by trade union laws
passed in 1984. Union leaders were opposing plans to eliminate some jobs. The
railway workers' decision added to tensions at this week's annual meeting of
the Trades Union Congress, already troubled by splits in the miners' union.
Prime Minister Thatcher's government will view the ballot as vindicating its
union legislation, which is designed to reduce the number of walkouts.
Thatcher is likely to cite the vote as evidence that the British people approve of
her efforts to break down barriers to economic efficiency.
Greek Economy
Worsening
Seoul Moves To
Boost Economy
Secret
6 September 1985
will be growing.
Prime Minister Papandreou presented a bleak picture of the Greek economy in
a major speech at Greece's largest annual trade fair last weekend. He said that
Greece's 17-percent inflation rate and its approximately $15 billion foreign
debt must be reduced, hinting that austerity measures are in order and that
some key labor gains-including wage indexing-may have to be adjusted.
Papandreou is likely to try to moderate his inflationary election-year wage
policy, but he probably will face strong resistance from labor, especially the
large Communist unions. The worsening economy also is likely to put pressure
on Papandreou to improve relations with the United States and other Western
allies. Greece depends heavily on them for bank loans, and its need to borrow
Less Developed Countries
Seoul is cautiously loosening its austere monetary and fiscal policy to reverse a
broadly based economic slowdown-real GNP growth was a meager 2.7
percent in the second quarter and 3.2 percent for the first half, the lowest gain
in four years. The cornerstone of pump-priming measures is a $281 million
supplementary budget, passed late last week, which will boost government
spending on construction by $242 million. The balance will go to welfare
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Secret
programs. In addition, Seoul has earmarked $531 million to bolster investment
in manufacturing sectors, such as autos and electronics. These high-growth
areas are dominated by large conglomerates that, until an easing of credit
controls last month, were unable to finance many of their expansion plans.
Seoul has also increased export financing, reduced redtape, and is aggressively
devaluing the won to help spur exports. With the abandonment of monetary
targets, M2 grew at a 15-percent annual rate in June.
Economic policy makers, however, have avoided "quick fix" options that would
risk a return to high inflation and a deteriorating foreign payments position.
Nonetheless, forces largely outside Seoul's control will shape second-half
economic growth and, in our judgment, the measures announced so far will
have little immediate effect if demand for Korea's exports remains flat. While
economic technocrats have been the target of criticism from the press, the
opposition party, and conservatives in the bureaucracy, international bankers'
confidence in their ability to manage the economy remains firm. Calls to
abandon austerity will likely intensify, but we believe major policy changes are
unlikely. Seoul may slow market-opening measures to quiet domestic criticism,
but such moves may prompt retaliation by major trading partners.
South Korea Promotes Seoul has targeted the creation of an aerospace industry as one of its strategic
Aircraft Industry goals and already has given a mandate to an engineering effort to design the
Saudi Arabia Cuts
Health Spending
country's first domestically produced aircraft-a small piston engine plane.
Currently, South Korean firms only assemble aircraft engines and fabricate
fuselages. The government has established a high-level committee to prepare a
long-term development plan for the industry, including financial and tax 25X1
benefits for firms manufacturing aircraft parts. As a further stimulus, Seoul
will require foreign manufacturers to buy Korean aircraft parts as a condition
for aircraft sales to Korea. Seoul also will seek technical assistance through
joint ventures particularly with US firms. 25X1
South Korea's advance into the aviation industry is part of a broad effort to
foster technology-intensive industries, including semiconductors, computers,
telecommunications, autos, and machine building. Private firms, spurred by
government incentives, are sharply boosting R&D expenditures. Weaknesses in
domestic technological capabilities and shortages of skilled labor, however,
pose obstacles to achieving government targets.
Riyadh plans to drastically cut Ministry of Health expenditures under its
austerity budget for FY 1985/86. Health care spending-traditionally spared
the budget ax-will decline to $2.5 billion, down 26 percent from its FY
1984/85 level. The Ministry of Health reportedly has announced that free care
will be available only to Saudis and North Yemenis-2.7 million expatriates of
other nationalities will be charged for these services. It has called for a
60-percent reduction in pharmaceutical purchases. The Ministry also has
begun to replace Western physicians and staff with relatively cheaper
Secret
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Pakistanis, Thais, and Filipinos. Operations and construction will absorb 41
percent of the Ministry's cuts and plans to build 36 new hospitals this fiscal
year probably will have to be stretched out or canceled. These cuts will have a
serious effect on the quality of medical services provided.
Iran's Import Slide Sagging oil sales and low foreign exchange reserves have forced drastic
merchant class.
reductions in Iranian imports since the beginning of the year and led to a bitter
debate within the government. Imports in the first quarter of 1985 from
OECD countries-about two-thirds of total imports-were down 46 percent
from the same period in 1984. According to Iranian trade data, total imports
in June were 43 percent lower than a year earlier. Growing shortages of spare
parts and raw materials have caused already depressed industrial output to fall
even further, according to press reports. Members of the Consultative
Assembly-Iran's parliament-recently charged Prime Minister Musavi's
government with financial mismanagement and passed a bill imposing severe
restrictions on expenditures of foreign exchange. More political conflict is
likely as stricter limitations on transfers of foreign currency and confiscation
of profits from sales abroad heighten dissatisfaction within the powerful
Another Record Indian Another record foodgrain crop is likely in the 1985/86 (July/June) crop year,
Foodgrain Crop Likely bringing problems as well as advantages. The US Embassy reports that
rainfall during the southwest monsoon has been normal or above normal in
over 90 percent of India's major foodgrain growing regions. Besides the
probability of an adequate monsoon, crop production will be enhanced by
increased irrigation, rising fertilizer use, and the rapid spread of high-yielding
seed varieties. Another record crop, however, will aggravate acute storage
problems and depress already sagging farm prices as well as push up food
subsidies that reached over $900 million in FY 1984/85. A bumper crop will
also add increased urgency to New Delhi's efforts to promote agricultural
exports, particularly wheat to the USSR and Middle East.
Grenada's V As Grenada approaches the second anniversary of the US-led intervention, the
Investment Problems country's inability to attract significant foreign investment is compounding the
island's severe economic problems. The country desperately needs new invest-
ment to ease the government's serious liquidity problems and to reduce the
island's 35-percent unemployment rate. The government has tried to promote
new investment by selectively offering tax breaks and other incentives.
Grenada's investment climate, however, is hurt by weak infrastructure, an
inadequately trained labor force, and vivid memories of the country's political
instability, according to US Embassy reporting. As a result, the government is
considering additional measures to lure foreign business. If the poor economic
situation persists, public support for the Blaize government could be seriously
undermined.
Secret 26
6 September 1985
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Secret
Continued Stagnation The Hungarian economy remained in the doldrums during the first half of
ctf the Hungarian 1985. Industrial production grew only 0.4 percent over the level of January-
Economy June 1984-well short of this year's target of 3 percent. Only the energy,
improvement in Hungary's financial position
chemical, and machine-building sectors posted small gains. Harsh winter
weather and continued cutbacks in investment caused major declines in
construction, 13 percent, and building materials, 7 percent. Falling prices for
agricultural exports cut hard currency earnings slightly from the level of the
first six months of last year, while increased purchases of energy boosted
imports by 16 percent. As a result, the hard currency trade balance showed a
deficit of $100 million compared with a $300 million surplus for the same
period last year. Although Budapest has raised-large loans from Western
banks this year, continued poor economic results could reverse the recent
I
25X1
China Encouraging Beijing plans to begin exporting domestically produced summer grain-largely
Wheat Exports
China Codifying
S&T Reforms
wheat-according to a senior Ministry of Commerce official. The Chinese
have made some small wheat sales this year, although these were actually
reexports of US and Australian wheat. China is encouraging provinces to
export grain in order to earn foreign exchange and reduce stockpiles. Most
sales have been of corn, but with Beijing's encouragement northeastern 25X1
provinces may begin to compete with US sales to Japan, South Korea, and the
eastern Soviet territories. The quantities sold will be limited, however, by
China's transportation problems and port congestion.
China announced last week that it was drafting new legislation governing
science and technology management. At a national conference, S&T Minister
Song Jian said the laws will cover such topics as the rights of scientists and
technology transfer. The legislation-to be drafted by a committee under the
State Science and Technology Commission-will standardize and institution-
alize S&T reforms announced by the Central Party Committee in March.
China has been implementing changes in S&T management on an experimen-
tal basis for several years, but bureaucratic resistance and confusion have
slowed the pace of reform. Giving the measures the force of law reemphasizes
Beijing's commitment to the changes
27 Secret
6 September 1985
25X1
25X1
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Secret
eijing Divesting Ownership of nearly 55,000 small businesses-nearly 70 percent of the total-
Secret
6 September 1985
has been transferred from the state to individuals and collectives since the
State Council launched small business reform last year. According to the
Ministry of Commerce (MOC), these changes in management have generally
resulted in improved efficiency and larger incomes for employees. Despite
encouraging results, some conservative leaders oppose small business reforms
as a step back from socialism. A MOC official recently complained that some
businesses have not reinvested sufficient funds and have distributed all profits
to their workers, while others have switched lines of business without
permission. To counter these trends, the MOC plans to issue new regulations
on finance, taxes, and labor management for private enterprises.
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Secret
Secret
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