INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807700001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: December 22, 2016
• Document Release Date: August 23, 2010
• Sequence Number: 1
• Publication Date: September 20, 1985
• Content Type: REPORT

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Directorate of Seer-et
International
Economic & Energy
Weekly
20 September 1985
Secret
DI IEEW 85-038
20 September 1985
Copy 6 8 5
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Secret
International
Economic & Energy Weekly
20 September 1985
iii Synopsis
1 Perspective-IMF/World Bank Meeting: International Monetary Reform
Latin America: Status of IMF-Supported Adjustment Programs
Prepared by analysts from ALA
9 ,-lunging Commodity Prices Increasing LDC Financial Strains
19 ibya: Foreign Labor RIFs
23 Soviet Economic Assistance to the Communist LDCs
directed to Directorate of Intelligence
Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
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20 September 1985
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-IMF/World Bank Meeting: International Monetary Reform
Renewed debtor dissatisfaction with current international monetary arrange-
ments has bolstered Third World resolve to urge reform during the annual
IMF/World Bank meetings next month in Seoul. Although most industrial
countries intend to listen sympathetically to the Third World proposals, we
expect the LDCs to achieve little in Seoul
3 Latin America: Status of IMF-Supported Adjustment Programs
Despite some recent rumblings among Latin debtors about radical action, we
believe most regional leaders recognize that IMF-supported stabilization
programs are essential to retain the cooperation of creditors. As they balance
economic imperatives against political realities, however, they probably will
take increasingly tougher stands on IMF recommendations.
9 Plunging Commodity Prices Increasing LDC Financial Strains
The dramatic five-year fall in prices of nonoil commodities and resulting
export earnings losses have been particularly stressful for key LDC debtors. 25X1
For 1986, a modest recovery in nonoil prices will be more than offset by
continued declines in oil prices and the LDCs will suffer another, although less
severe, drop in revenues 25X6
Libya: Foreign Labor RIFs
and several other regional states.
Libya's expulsion of thousands of foreign nationals since early August
threatens to destabilize Tunisia and is causing less severe problems for Egypt
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Moscow continues to reap major political and strategic benefits in return for
its hefty economic assistance to Communist LDCs. Although Soviet economic
assistance has remained at roughly the same level over the past four years,
Moscow is pressing these countries to live up to commitments to provide the
USSR with goods and raw materials.
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Secret
International
Economic & Energy Weekly
20 September 1985
Perspective IMF/World Bank Meeting: International Monetary Reform
Renewed debtor dissatisfaction with current international monetary arrange-
ments has bolstered Third World resolve to urge reform during the annual
IMF meeting next month in Seoul. Developing countries argue that sluggish
world growth and their heavy debt burden-aggravated by high real interest
rates, falling export prices, and net capital outflows-threaten established
monetary relations with industrial countries. For the first time, LDCs have
submitted proposed modifications for formal consideration by the IMF Interim
Committee. The industrial countries will be pressured to address these LDC
criticisms of the international monetary system:
? Volatile exchange rates have discouraged world trade and investment in
developing countries needed to service foreign debt. Although developing
countries favor eventually establishing target zones for exchange rates, they
intend in the meantime to press major industrial countries to coordinate
macroeconomic policies by submitting to an explicit consultation process
with the IMF.
? Increased economic interdependence has placed the burden of international
adjustment on developing countries. The Third World believes that the Fund
should tighten surveillance over the monetary and fiscal policies of industrial
countries and promote economic growth as an integral part of LDC
adjustment, partly by easing the adjustment measures attached to interna-
tional lending.
? International liquidity is insufficient. Developing countries favor augment-
ing the loan base of the IMF and the World Bank, and they plan to demand
increased access to cheaper credit from multilateral institutions.
Although the industrial countries share LDC concerns about key features of
the monetary system-especially exchange rate volatility-most have agreed
to block major institutional reform. Instead, they hope to reduce exchange rate
fluctuations by improving the effectiveness of existing, informal coordination
of macroeconomic policies-a strategy they jointly approved this summer.
Consistent and sound macroeconomic policies in industrial countries would
foster greater private lending-argue the United States, West Germany, and
the United Kingdom-easing pressures to increase international liquidity with
official funds.
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Although most industrial countries intend to listen sympathetically to the
Third World proposals, we expect the LDCs to achieve little in Seoul.
Developing countries may try to exploit differences of opinion existing among
individual industrial countries to encourage movement toward monetary
reform. France and Italy, in particular, provide a friendly ear to LDC lobbying
for target zones and formal macroeconomic consultation with the IMF.
Nevertheless, we believe the industrial countries will postpone indepth discus-
sion of monetary reform, probably until the Fund's meeting next spring.
The LDC proposals-if adopted-could complicate policymaking and put
increased financial burden on the United States. Relations with allies could be
strained as US policymakers face greater accountability to other industrial
and developing countries under formal IMF consultations to coordinate
macroeconomic policy. Increasing international liquidity through official
channels would require greater US financial contributions to the IMF and the
IBRD. LDC resistance to conditionality also could further reduce commercial
bank lending to debtors, prompting calls from developing countries to make up
the difference with US official assistance.
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Latin America: Status of
IMF-Supported Adjustment
Programs
Peruvian President Garcia's outright refusal to
negotiate with the Fund and Brazil's resistance to
accept what it views as too rigid IMF conditions
may portend a growing tendency in the region to
challenge Fund prescriptions. The risk of a formal
regionwide break with the Fund is not high. Al-
though some of the region's debtors have made
recent progress in reviving their IMF programs, we
believe some Latin American leaders will continue
to try to persuade the IMF to ease up on perfor-
mance criteria. Failure to reconcile differences
would undermine the IMF's central role in resolv-
ing the debt problems of the region and may oblige
creditors to review their approach to the debt issue.
Staying With IMF Programs
Argentina and the IMF reached agreement on a
new set of targets in June, after three months of
difficult negotiations. The agreement called for a
lowering of inflation to 8 percent per month by the
first quarter of 1986 and for a drastic reduction in
the budget deficit. The Alfonsin government has
moved with unaccustomed swiftness in devaluing
the currency 15.2 percent, raising public service
and energy prices, freezing wages and prices, and
promising to discontinue printing money to finance
budget deficits. Despite the flexibility built into the
new inflation and nominal monetary targets, we
believe the difficulties of increasing budget reve-
nues and decreasing spending may require the
government to seek performance waivers from the
IMF later this year.
In Uruguay, the Sanguinetti government also has
revived its agreement with the Fund. According to
press reports, IMF Managing Director de Larosiere
has given tentative approval to an 18-month,
$120 million standby arrangement in which Monte-
video pledged to bring its fiscal deficit as a share of
GDP down from 10 to 6 percent, to lower inflation
to 60 percent from the current 78 percent, and to
maintain a floating exchange rate. The prospective
IMF package is enabling Uruguay to negotiate
with its foreign commercial banks-which have
agreed to roll over principal repayments until the
end of September-for $130 million in new money
and a debt rescheduling.
Several other Latin American debtors have reached
agreements with the IMF in the last several
months:
? After a six-month stalemate, Chile's debt pack-
age was helped along when the IMF agreed in
principle on 15 July to a new three-year program
providing $850 million in assistance. This agree-
ment, whose first disbursement of $140 million is
likely this month, cleared the way for a 17 July
Paris Club rescheduling of $170 million and
spurred progress on the commercial bank pack-
age-currently over 90 percent complete.
? Panama received an $88 million, 21-month IMF
standby arrangement, and its $877 million com-
mercial bank refinancing package is nearly com-
plete.
Straying From The Fold
Rising foreign payments problems and large budget
overruns have pushed Mexico out of compliance
with IMF targets. Mexico's oil price cuts and
export declines will reduce 1985 petroleum export
earnings by about $1.5 billion from last year's level.
Moreover, the $2 billion capital flight during the
first half of 1985 was double the amount for all of
last year. At the same time, the overvaluation of
the peso has cut nonoil exports by more than 16
percent and contributed to the surge in imports,
which rose some 39 percent in the first quarter of
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Status of IMF Programs and Compliance:
Mexico, Argentina, and Chile
Most Performance
Recent
Target
Net credits to the
public sector by the
Bank of Mexico b
Cumulative overall
public-sector deficit
Cumulative changes
in net domestic as-
sets of the Bank of
Mexico
Cumulative change
in net international
reserves of the Bank
of Mexico
Argentina
Billion Mexican Pesos
4,902 Mexico is likely to violate target to
finance the budget deficit.
1,785 Mexico will substantially over-
shoot this target despite recent
belt-tightening.
184 Mexico is likely to miss the target
despite changes in banking laws.
500 Falling oil prices, higher imports,
flat nonoil exports, and capital
flight will cause Mexico to sub-
stantially undershoot target.
Billion US $ (except where noted)
Cash deficit of the 6.0 Several politically complicated
nonfinancial public steps need to be taken; expect some
sector (percent of slippage.
GDP)
Net domestic assets 800 Difficult to judge.
of Central Bank
(billion australs) d
Net international re- -9.9 Attainable.
serves,
Limit on outstanding 1.1 Attainable.
external payments
arrearse
Consumer inflation 150 Within reach; some concern about
(percent change) t reactions once price freeze is lifted.
Current account 2.0 Within reach; exports not doing
deficit c well, but interest payments are
lower due to fall in interest rates.
Targets set for fourth quarter 1985.
b Adjusted.
c Targets set for 1985.
d September 1985.
December 1985.
f First quarter 1986 at annual rate.
8 Targets set for calendar year 1985.
Current account
deficit
Gross international
reserves
Public-sector deficit
(percent of GDP)
Inflation (percent
change, Dec/Dec)
Most Performance
Recent
Target
Billion US $ (except where noted)
1.38 Chile likely to miss target as ex-
ports remain depressed.
2.00 Chile has already drawn down
over $700 million through August,
according to US Embassy.
3.5 Chile's deficit could hit 4 percent,
violating target as government in-
creases assistance for earthquake
reconstruction.
25.0 Inflation is likely to run 30 to 35
percent.
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this year compared with the same period in 1984.
Finally, the government's politically motivated pre-
election stimulation of the economy has caused a
larger-than-expected budget deficit, the reduction
maturing debt payments and short-term credits.
With the present favorable trade surplus and ade-
quate foreign exchange reserves, Brazil should be
able to avoid problems in servicing its debt over the
of which was a key IMF target.
President de la Madrid so far has been unwilling to
take the necessary measures to put Mexico back
into compliance with performance targets. Recent
government projections indicate that economic aus-
terity measures announced in late July and early
August will not significantly trim the budget deficit
for the year below some 8 to 9 percent of GDP. The
same study also indicates that inflation for 1985
would be about 60 percent. Both figures are far in
excess of IMF criteria and therefore jeopardize
Mexico's final two drawings from the Fund.
Brazil announced measures in early July to reduce
the projected $18 billion public-sector deficit for
this year, but the cuts were substantially smaller
than those sought by the IMF. Negotiations with
the Fund reached an impasse in August, and
President Sarney
was reluctant to make additional budget cuts be-
cause of intense domestic political pressure to
continue recovery. Instead, Sarney's chief economic
adviser announced publicly on 13 August that
Brazil would seek a "shadow agreement" under
which the IMF would evaluate the results of
Brasilia's program at the end of the year
Recent changes in Brazil's economic team will
make a reconciliation with the IMF and negotia-
tions with creditors even more difficult, in our view.
In late August, Sarney replaced Finance Minister
Dornelles with Dilson Funaro, who has consistently
opposed tough austerity measures and criticized
IMF policies. We believe that Brasilia probably
will not conclude a new agreement until after the
mid-November municipal elections in order to pre-
vent the opposition from exploiting this sensitive
issue. Although the impasse with the IMF is caus-
ing concern among bankers
the immediate financial repercus-
sions will likely be mild. According to the US
Embassy, Brazil secured a 140-day rollover of
Peru's President Garcia, inaugurated on 28 July,
apparently remains committed to his pledge that he
will not submit to a Fund accord and will limit
foreign debt repayments to 10 percent of export
earnings over the next 12 months. Peruvian offi-
cials have also requested a rollover of long-term
debts maturing between July 1985 and 31 January
1986, according to the US Embassy. Garcia's
public statements are impeding the resumption of
debt negotiations, as many US and West European
banks reportedly insist that no debt rescheduling 25X1
talks can occur until Peru accepts an IMF-
supported economic stabilization program.
A Murky Outlook
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Despite some recent rumblings among Latin debt-
ors about radical action, we believe most regional
leaders recognize that IMF-supported stabilization
programs are essential to retain the cooperation of
creditors. As they balance economic imperatives 25X1
against political realities, however, they probably
will take increasingly tougher stands on IMF rec-
ommendations. The Latin debtors probably will use
the October IMF/World Bank meetings to cress
for additional concessions from the Fund
Nonetheless, Garcia's refusal to negotiate with the
Fund because of the potential social consequences
reflects the increasing politicization of the debt
issue. On the one hand, his tougher line with the
IMF could generate domestic acquiescence to addi-
tional belt-tightening measures. This could eventu-
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break the current financial impasse with creditors.
His anti-IMF stance, however-and rhetoric back-
ing unified debtor action-has caused bankers to
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Tougher Action on Debt?
Although we still believe a Latin American debtors
cartel is not in the cards over the near term, the
risk remains that these countries could begin opt-
ingfor radical action. In recent weeks, we have
detected some disturbing indications that a tough-
er political approach may be in the offing:
? Based on US Embassy reports, we believe Peru's
President Garcia will not hesitate to use public
forums such as the UN General Assembly and
Nonaligned Movement to push for better repay-
ment terms, increased aid flows, and a political
dialogue with creditors on the debt issues.
? President Lusinchi of Venezuela is under strong
pressure from the political opposition and labor
groups to scuttle the multiyear agreement negoti-
ated with the bank advisory committee. Domes-
tic critics argue that declining oil revenues neces-
sitate a reopening of negotiations. We believe,
however, Lusinchi is determined to go ahead with
the scheduled September signing of the agree-
ment and worry about any need to renegotiate
later.
cease financial support; this could quickly create
serious economic and political problems for the new
government
Brazil may represent still another subtle test to the
Fund's central role in regional debt adjustment.
After the November elections, Sarney probably will
relent in his opposition to tight austerity measures
to clear the way for a new Fund agreement in 1986.
There is a small possibility, however, that Sarney
may propose a shadow role for the IMF and press
commercial lenders for financial assistance without
a formal program. Brasilia could seek something
resembling Venezuela's arrangement, in which the
Fund blesses a homegrown stabilization program
and monitors progress through semiannual consul-
tations. Such an approach dampens nationalistic
sensitivities toward IMF prescriptions, while offer-
ing bankers some assurance that a reasonable
stabilization program is in effect.
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Secret
If Brazil persuades the banks to cooperate, other
Latin American debtors, particularly Mexico, may
be encouraged to negotiate directly with bankers in
seeking additional debt relief. Bankers accordingly
might have to choose between continued financial
assistance on the basis of each country's self-
imposed stabilization program or cutting credit to
the region. The latter would strain repayment
capabilities and heighten prospects for a revolt by
debtor nations.
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Plunging Commodity Prices
Increasing LDC
Financial Strains
The dramatic five-year fall in prices of nonoil
commodities and resulting export earnings losses
have been particularly stressful for key LDC debt-
ors.' Most of these countries are highly dependent
on a few commodities to earn the bulk of foreign
exchange needed to service their debts and import
capital goods for development purposes. We esti-
mate that this year's drop in commodity prices
could cost the major LDC debtors $4.5 billion in
export revenue this year. LDC oil exporters who
also rely on nonoil commodity exports will be the
hardest hit. For 1986 a modest recovery in nonoil
prices will be more than offset by continued de-
clines in oil prices, and the LDCs will suffer
another, although less severe, drop in revenues.
Sizing Up the Decline
Nonoil commodity prices, measured in US dollars,
have fallen by 30 percent since their peak in 1980
while oil prices are down 19 percent from their
1981 high. An index of industrial materials prices
shows a 33-percent drop since 1980, including a
drop of 11 percent through the first eight months of
1985 alone. Food prices have fallen 27 percent
since 1980 and 12 percent so far in 1985. In both
cases, the recovery from the 1981-83 recession has
been unusually weak and unsustained.
Commodity Prices
IIIIIIIIIIIIIIILL
0 1970 72 74 76 78 80 82 84 86
Metals have been hardest hit. Although some
prices currently show a slight improvement over
1984 levels, the potential for future gains appears
modest. Inventory overhangs and the strong dollar
are keeping the dollar prices of metals from rising
significantly. Even though inventories are begin-
ning to decline, production capacity still greatly
exceeds demand-which has not exhibited the
Composite
food
Industrial
metals
growth experienced in previous recoveries. Despite
depressed markets, LDC producers have not re-
duced output because of the need to maintain
revenue and employment. In fact, the strong dollar
permits the LDCs to produce and sell at a profit
even at current low prices, further increasing the
incentive to maintain production. For example,
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Copper. Prices rose 9 percent from yearend 1984
levels, but remain well below peak 1980 levels. A
recent buildup of stocks on the London Metals
Exchange (LME) has kept prices relatively flat. A
glut of producing capacity along with lower eco-
nomic growth rates of major copper importers,
especially the United States, will keep prices from
rising significantly through 1986.
Aluminum. Although cutbacks in production have
continued and inventories have declined, prices
have slid about 7 percent since the beginning of the
year. Prices for the rest of this year will not rise
above current levels, and a modest recovery is
expected in 1986 assuming continued consumption
increases and production cutbacks.
Tin. Prices are currently roughly 8 percent above
yearend 1984 levels, largely because of the decline
of the dollar. Nonetheless, the market remains
oversupplied due to overproduction, large world
stocks, and declining usage, and average prices for
the year will be below the 1984 level. Industry
forecasters estimate decreases in world inventories
of approximately 16 percent and 20 percent for
1985 and 1986, respectively, but global stocks
would still amount to about 5 months of non-
Communist annual consumption. This large over-
hang of inventories along with increased produc-
tion by nonmembers of the International Tin
Council (ITC) will put downward pressure on
prices.
Silver. Prices hit a three-year low in March and
have since rebounded but remain 25 percent below
the 1984 average price. A world surplus of 54
million ounces is expected in 1985 as industrial
demand will not keep pace with the growth in
supply. Nonetheless
]prices could rebound somewhat in 1986.
Chile produces copper at about 40 cents per pound,
well below the current price of 65 cents per pound.
Record harvests, huge stocks, and weak demand
are currently putting downward pressure on LDC
agricultural prices. Competition from developed
countries, particularly the EC, has been strong,
and, in the grain market, for example, some tradi-
tional importers, such as China and India, have
begun to export grain. With Soviet and LDC
demand at low ebb, prospects for a turnaround
remain distant.
Implications for Key LDC Debtors
According to our analysis the drop in key commod-
ity prices could cost the major LDC debtors $4.5
billion in export revenue this year-about 4 percent
of overall export earnings-with several countries
likely to record substantial declines. Oil exporters,
especially those with significant nonoil commodity
exports, probably will be hardest hit:
? Lower oil prices, as well as slumping prices for
palm oil and rubber, are likely to cost Malaysia
nearly $1 billion in export earnings this year, and
Indonesia about $500 million in export revenue.
? Mexico could suffer a loss of over $1 billion, due
to the drop in oil prices and weakness in the
markets for its agricultural and seafood exports.
Losses in 1985 will not be as large for the nonoil
exporters, but several countries could experience a
significant drop in export revenue. Lower corn,
beef, and wheat prices will cost Argentina more
than $300 million in export earnings. Brazil's ex-
port losses could reach $600 million, primarily due
to a sharp drop in soybean prices. Plunging prices
for coconut products likely will slash Philippine
exports by $160 million. Only Chile and Colombia
are likely to post export gains, and these will be
modest at best. In the case of Chile, copper prices
will rise only moderately for the year as a whole,
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Selected Commodity Price Trends, 1970-862
Tin, LME Cash
US cents per pound
Aluminum, LME Cash
US cents per pound
100 1972 75 80 86 40 1979
Sugar, Bulk, World Raw Soybeans, US C.I.F. Rotterdam
US cents per pound US $ per metric ton
Copper, LME Cash
US cents per pound
Silver, LME Cash
US $ per troy ounce
86 40 1972 75 80 86 0
rTIIIIIIIIIIIII
1972 75 80 86
Coffee, Other Mild Arabicas Natural Rubber
Ex-Dock New York US cents per pound
US cents per pound
10 IAW 50
20
IIIIIIIIIIIIIII - 4~111111111111111
0 1972 75 80 86 100 1970 75 80 86 0 1970 75 80 86 10 1970 75 80 86
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Agricultural Market Trends
Grain. Wheat prices in nominal terms are at their
lowest levels since 1978 and in real terms at their
lowest since the early 1930s. Prices have fallen
almost 20 percent in 1985 alone. The dropoff in
corn, rice, and soybean prices has been similarly
steep. While the strong dollar has accounted for
some of this decline, overproduction, in the face of
weak global demand is the dominant factor.
Sugar. World sugar prices have been hovering near
a 15-year low and until global stocks are reduced
world prices should remain depressed. Latin
American and Asian sugar exporters with access to
the premium priced US quota market will also
experience earnings losses as US quota imports
continue to contract.
Coffee. A record global coffee harvest is currently
forecast by USDA for 1985/86, contributing to this
year's 8 percent price dip and adding to already
burdensome stock levels. LDC exporters, short of
domestic storage and critically in need of export
earnings, have been unloading surplus coffee to
nonmembers of the International Coffee Organiza-
tion at one-half the price paid by members. Unless
the growing two-tier price market for coffee is
resolved, LDC coffee earnings could slip in 1986 on
a further weakening of prices.
Cotton. The global cotton market continues to
slump, with trade volumes declining and a high
stock overhang depressing prices to 10-year lows.
Weakness in the cotton market signals slowing
growth in export earnings for key debtors such as
Brazil and Mexico as well as Pakistan and Sudan.
and prices for premium Colombian coffee should
remain relatively stable despite large outstanding
global stocks. In addition, prices for fruits and
vegetables-major commodity exports for both
countries-will, at best, rise slightly
Key Export Commodities:
Importance to LDC Debtors
Copper Chile, Peru, Philippines
Aluminum Venezuela, Brazil
Tin Bolivia, Malaysia, Indonesia,
Brazil
Silver Mexico, Peru
Iron ore Brazil, Peru, Chile
Rubber, natural Malaysia, Indonesia, Thailand
Petroleum Nigeria, Mexico, Malaysia,
Indonesia, Venezuela
Agricultural products
Sugar Brazil, Colombia, Philippines
Coffee Colombia, Brazil, Indonesia,
Mexico
Philippines
Fishmeal Peru, Chile
Palm oil Malaysia
Corn
Declining commodity prices and the resulting loss
of export revenue are restraining potential import
gains this year for oil-exporting key debtors. In
turn, slower import growth will contribute to re-
duced real GNP gains in Indonesia and Malaysia,
while in Mexico lower export revenue is aggravat-
ing debt-servicing problems. Nigeria remains mired
in economic stagnation as falling oil revenues force
further import cutbacks.'
' Lower oil prices will, of course, benefit oil-importing countries,
many of whom are also commodity-exporting LDCs. In most cases,
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Major LDC Debtors: Impact on Export
Earnings of Key Commodity Price Changes a
Total
Argentina
1985
Million US $
-4,592
Bolivia - 24
Brazil -626
Chile 72
Colombia 51
Indonesia -491
Malaysia -957
Mexico
Nigeria
Peru
Philippines
Venezuela
a The impacts presented are calculated as the annual percent
change in the price of each of the top commodity exports (including
petroleum exports) for each country, multiplied by the country's
annual exports of these commodities, and summed. Export volume
is assumed to be unchanged.
The outlook for 1986 is more optimistic for the
nonoil exporters-private forecasts indicate a mod-
est recovery in the prices of most nonoil commod-
ities. Oil prices, however, are forecast to decline
further, adversely affecting oil-exporting key debt-
ors. As a result, we believe that the group of key
debtors as a whole will suffer an overall loss of
export revenue due to changing commodity prices,
although the magnitude of the drop will be much
smaller than in 1985:
? Modest increases in tin, silver, and zinc prices
should boost Bolivian export revenue.
1986
Percent Million US $
-737
? Chile will benefit from improved prices for cop-
per, fruits, and vegetables.
? Stable coffee prices and higher fruit and vegeta-
ble prices are likely to boost Colombian exports.
? Prices for Peru's major commodity exports-
silver, fishmeal, zinc, and lead-should rise.
On the other hand, continued weak prices for wheat
and corn will limit export gains in Argentina, and a
further decline in the price of coconut products will
retard Philippine export growth.
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Among oil-exporting key debtors the outlook for
1986 is less optimistic, especially for those coun-
tries with few nonoil commodity exports. An addi-
tional $1 fall in oil prices could cost Nigeria and
Venezuela over $400 million in export earnings
next year. Mexican losses could total over $300
million. Indonesia and Malaysia, however, will
benefit from a modest recovery in the prices for
rubber and timber. As a result, their export losses
will be sharply reduced compared to 1985, despite
lower oil prices and continued weakness in the palm
oil market0
Beyond 1986 the outlook is for continued weakness
in commodity prices based on both secular and
cyclical trends. According to Chase Econometrics,
OECD GDP growth will average slightly below 3
percent through 1990-holding down demand
growth for industrial metals and failing to alleviate
the surplus capacity problem. Similarly, the de-
mand for agricultural products-especially grain-
will be throttled by slow economic growth in the
LDCs and continued overplanting in the United
States, Canada, Australia, the EC, and Argentina.
While the dollar may continue to decline, it proba-
bly will remain strong relative to the early 1970s
when commodity prices soared. These trends will
cause continuation of earnings difficulties for
LDCs who count on commodities for about 40
percent of their export revenues
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Secret
Libya's expulsion of thousands of foreign nationals
since early August threatens to destabilize Tunisia
and is causing less severe problems for Egypt and
several other regional states. A primary reason for
the deportations is the sharp falloff in Libya's oil
revenues that has necessitated cuts in the use of
costly foreign labor. Libyan leader Qadhafi, howev-
er, probably is taking advantage of the expulsions
to cover the infiltration of Libyan-trained dissi-
dents into neighboring states. We believe he will
use the dissidents to try to undermine an orderly
presidential succession in Tunisia and to exploit
any domestic unrest generated by deteriorating
economic conditions in Tunisia and Egypt. Qadha-
fi's actions, however, have heightened regional re-
solve to contain him and will exacerbate Libya's
already serious economic problems
Qadhafi's Motives
Qadhafi's sudden expulsion of some 65,000 Tuni-
sians, Egyptians, Syrians, Nigeriens, Malians, and
other foreign nationals-about 13 percent of
Libya's foreign population-since 5 August under-
scores his growing security concerns and Libya's
mounting economic difficulties. The expulsions
probably are, in part, intended to reduce the inter-
nal security threat in Libya by drawing down the
number of foreign residents from countries Qadhafi
States in June, US Bright Star excercises with
Egypt, as well as Qadhafi's perception of growing
US influence in regional and Arab affairs are the
keys to the timing of the recent bout of deporta-
tions.
A primary reason for the foreign personnel cuts,
however, is to reduce the $2.4 billion Tripoli spends
on foreign labor-almost 30 percent of the work
force at the end of 1984. Tripoli will save as much
as $550 million annually in worker remittances and
support costs from the reductions so far
Libya: Foreign Labor RIFs
Expatriates in Libya a
1985
Total
499,500
375,000
Egypt
170,000
130,000
Tunisia
70,000
39,500
USSR and Eastern Europe
70,000
65,000
Turkey
60,000
40,000
Syria
20,000
5,000
South Korea
18,000
18,500
Sudan
18,000
18,000
Italy
15,000
9,000
Morocco
10,000
14,000
United Kingdom
8,500
6,000
West Germany
4,000
4,000
France
3,000
2,000
Greece
2,000
2,000
United States
1,000
1,000
Other
30,000
21,000
The sharp slide in oil revenues-55 percent since 25X1
1980-and stiff austerity measures to cope with the
loss have taken a heavy toll on the economy and 25X1
living standards. Import reductions have forced
sharp cuts in consumer goods and foreign exchange
President Bourguiba's visit to the United
reserves have dipped to $4 billion forcing the
cancellation or delay of many development pro-
jects. the growing
consensus among Libyans is that Qadhafi's social
experiment has failed and that change is needed.
Secret
DI IEEW 85-038
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Foreign Nationals Expelled From
Libya Since 5 August 1985 a
Total
Tunisia
Libya's dependence on foreign expertise to keep its
small modern economy operating precludes the
deportation of all foreign workers at this time, but
the expulsion of select groups of expatriates proba-
bly will continue for several months. Qadhafi has
maintained since 1982 that Libya cannot afford the
luxury of foreigners performing menial jobs, which
he claims should be done by Libyans. For the
moment Tripoli is exempting highly skilled person-
nel, including doctors and technicians in petroleum
and other key sectors, from deportation. The expul-
sion campaign has targeted unskilled workers, in-
cluding large numbers of bakers, agricultural la-
borers, garbage collectors, and construction
workers. The regime has confiscated the personal
property and funds of those deported, which proba-
bly will be used to redress shortages of consumer
goods and dwindling foreign exchange reserves.
Libya has used the expulsion of workers as a
diplomatic weapon since the early 1970s as well as
a vehicle for positioning Libyan agents and sympa-
thizers. Large numbers of Tunisians were expelled
in 1976 after the Libyan-Tunisian union failed and
again in 1979 following an offshore boundary
dispute. Moreover, in a 1 September speech, Qa-
dhafi reiterated his threat to punish any Arab ruler
who officially visits the United States or has what
Qadhafi views as an unacceptably close relation-
ship with Washington.
The Regional Impact
Tunisia has borne the brunt of the recent round of
deportations and faces its most serious domestic
crisis since the January 1984 bread riots. Over
30,000 workers have been returned so far. Tunis
has retaliated by expelling 30 Libyan diplomats
and 250 other Libyans, closing the Libyan cultural
center, reinstating visa requirements, putting some
military units in the south on alert, and ordering
home all remaining Tunisians in Libya. Moreover,
US Embassy sources claim that Algeria has
pledged military support to President Bourguiba in
the event of Libyan hostilities
The expulsion of all Tunisian workers could cost
Tunis as much as $140 million annually in worker
remittances, lost trade, and added outlays for nec-
essary social services. In addition, we estimate that
unemployment would jump from August's 22 per-
cent level to near 30 percent.
The loss of income and increase in unemployment
would almost certainly derail the regime's plans to
reduce the trade deficit and burdensome consumer
subsidies-critical items in government efforts to
secure foreign financing and maintain the upper
hand in labor negotiations. A large pool of unem-
ployed workers would be available to support labor
demonstrations against the government plans to
hold the line on wages and raise staple food prices.
Tunisia's powerful labor union has postponed
promised strike activity so far, but has given notice
that new agitation is likely this fall in response to
continued government intransigence, according to
the US Embassy in Tunis.
The US Embassy in Cairo says the government is
bracing for the return of as many as 50,000
Egyptian workers from Libya-mostly unskilled
laborers-by the end of the year. More than 10,000
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Secret
Egyptians have been expelled since 5 August and
another 30,000 workers had returned since the
beginning of the year. The government has taken
special precautions to prevent the infiltraton of
Libyan subversives. Although doctors and other
skilled professionals reportedly are exempt from
Qadhafi's expulsion order, many are leaving of
their own accord.
Cairo's public welcome of returning Egyptian
workers masks official concern that the shaky
economy cannot accommodate such an influx. Real
GDP growth of 5 percent barely covers the annual
increase in the domestic labor force. Government
bonus payments to workers and a massive subsidy
program helps to cushion the effect of the economic
malaise, but puts a heavy burden on national
resources. With half the population under 25 years
old and a recent history of labor unrest, the govern-
ment is sensitive to labor problems and the threat
posed by the possible return of a large number of
expatriates over the next year from Libya and the
Gulf.
Qadhafi's Intentions ...
Qadhafi almost certainly views Egypt and other
states affected by the recent wave of expulsions as
While Tripoli
probably will continue to return small numbers of
Egyptian workers, the remaining 130,000 provide
potential hostages in the event of direct Egyptian
military action and a pressure point for use if
deteriorating economic conditions in Egypt precipi-
tate political unrest. While Qadhafi may try to
infiltrate some Libyan-trained subversives into oth-
er states such a Niger or Mali, workers from these
states are largely illegal aliens and are simply being
returned. The small numbers in most cases will not
... May Backfire
Libya's efforts to destabilize Tunisia have served to
strengthen ties between Tunis and Algiers. The US
Embassy in Algiers says that President Bendjedid
and Bourguiba have agreed to coordinate military
strategy toward Libya. While military cooperation
between the two states probably has not gone much
beyond contingency planning, Algeria does seem to
have made a firm decision to buttress Tunisia with
diplomatic, economic, and military assistance.
Moreover, Libya's actions have heightened Cairo's
longstanding antipathy toward Qadhafi.
Qadhafi's drawdown of foreign workers may also
increase discontent among Libyans over deteriorat-
ing living standards. Many stores-especially bak-
eries-have been forced to close since the expul-
sions began, worsening food shortages in some 25X1
areas of Tripoli. Moreover, previous attempts by
the regime to force Libyans to perform menial
work such as garbage collection have resulted in
serious sanitation problems and the spread of dis-
ease because of popular disdain for such work. A
dramatic and sudden deterioration in local life-
styles will accelerate the creation of a climate
favorable to a move by Libyan exiles or domestic
opponents. 25X1
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the Communist LDCs '
Moscow continues to reap major political and
strategic benefits in return for its hefty economic
assistance to Communist LDCs (CLDCs). Al-
though Soviet economic assistance has remained at
roughly the same level over the past four years,
Moscow is pressing the CLDCs to live up to
commitments to provide the USSR with goods and
raw materials. Cuba absorbs about two-thirds of
the total while Vietnam and Mongolia account for
the bulk of the rest. In return for Moscow's sub-
stantial economic help Cuba and Vietnam provide
the Soviet military with much needed port and air
facilities. Politically, the CLDCs continue to sup-
port Moscow in the UN and other international
organizations.
to 1984, the subsidy on sugar increased from $1.4
billion to over $3.4 billion-more than offsetting
the decline in the oil subsidy
Direct economic aid, in the form of credits to either
finance Soviet development projects or cover trade
imbalances, comprises the rest of Soviet economic
assistance.' Unlike trade subsidies, however-
where Cuba received virtually the entire amount-
Cuba, Vietnam, and Mongolia each received
roughly equal amounts accounting for about 90
percent of the total:
Roughly 50 percent of Soviet economic assistance
to the CLDCs in recent years has been in the form
of subsidized prices for both exports and imports.
Cuba is the major recipient of the largess. Soviet oil
sales are the principal source of trade subsidies, but
the value of this subsidy varies because Moscow
bases oil prices on the world average of the preced-
ing five years. As a result of steeply rising world oil
prices in 1979 and 1980, the value of the Cuban oil
subsidy increased markedly, peaking at $1.7 billion
in 1981. While world oil prices have fallen since
1982, however, the price charged by the Soviets has
increased, and this subsidy nearly disappeared in
1984.
Prices for imports of Cuban sugar and nickel also
are set annually, but are not tied to world prices. In
recent years, Moscow has sharply increased the
price it pays for Cuban sugar, apparently to com-
pensate Cuba for rising oil prices. Thus, from 1981
? Cuba: Of the $1 billion in Soviet direct economic
aid to Cuba during 1984, roughly one-half went
to finance major development projects, including
the Punta Gorda and Cam I nickel plants, the
Santiago textile factory, and the Havana thermal
power station. The remainder went to finance the
trade deficit. Despite increased Cuban oil produc-
tion, Moscow provided Havana with 90 percent of
its oil requirements in 1984.
? Vietnam: The troubled economy of Vietnam also
relied heavily on direct Soviet economic aid dur-
ing 1984-roughly two-thirds of which was trade
credits for the purchase of raw materials, petro-
leum products, and essential industrial commod-
ities. Vietnam's agricultural sector was especially
dependent on Moscow for fertilizers, fuels and
lubricants, and pesticides.
' Grants and technical services are also included under this catego-
ry. There is little direct information on the amount of this support,
but, with the possible exception of Vietnam and Cuba, the amounts
Secret
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USSR: Estimated Economic Assistance to Communist LDCs
Million US $
3,463
4,558
4,666
4,260
4,620
830
1,415
975
1,070
1,000
245
912
481
500
460
540
453
444
520
490
45
50
50
50
50
2,633
3,143
3,691
3,190
3,620
1,165
1,366
2,580
2,740
3,420
1,480
1,657
1,006
345
100
Nickel
-12
120
105
105
100
Vietnam
935
1,120
1,000
1,040
1,040
Economic aid
580
900
950
1,025
1,040
282
633
637
673
687
Development aid b
178
142
188
227
228
Grants c
50
50
50
50
50
Technical services d
70
75
75
75
75
Oil subsidies
355
220
50
15
Mongolia
835
830
885
885
785
Economic aid
770
765
865
880
785
Tradeb
218
247
188
240
202
North Korea
260
145
130
40
55
Trade and development aide
75
65
70
25
45
Oil subsidies
185
80
60
15
10
a Based on (a) estimated balance-of-payments aid necessary to cover
Cuban soft currency trade deficits with the USSR; (b) Cuban
purchases of capital goods from Moscow; and (c) public statements
by Cuban and Soviet officials concerning the amount of develop-
ment aid extended.
b Estimated from reported Soviet trade surpluses.
c Based on proportion of grants in reported commitments.
d Minimum estimated value of Soviet technicians in Vietnam and
training of Vietnamese in the USSR.
e From reported Soviet deliveries of projected-related materials.
Trends in Soviet trade surplus since the mid-1970s indicate that
repayment on earlier credits are being made.
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Secret
USSR: Summary of Economic Billion US $ Composition of Soviet Economic Aid
Assistance to Communist LDCs to Communist LDCs, 1984
1980
1981
1982
1983
1984
5.6
6.8
6.8
6.4
6.7
3.3
3.5
3.8
3.2
3.6
2.3
3.3
3.0
3.2
3.1
? Mongolia Soviet economic aid to Mongolia in
1984 was just under $800 million. Under the
terms of a five-year economic and technical
cooperation agreement for 1981-85, the Soviets
continued to supply aid for several major Mongo-
lian development projects, including nonferrous
metals extraction, agricultural development, and
civil construction projects-primarily housing
and buildings.
? North Korea The Soviet Union's relationship
with North Korea is more commercially oriented
reflecting the more restrained political ties be-
tween Moscow and P'yongyang. Indeed, North
Korea's merchandise exports to the USSR were
$25 million more than imports in 1984. Even so,
North Korea continued to benefit not only from
subsidized oil prices but also from credits extend-
ed earlier to assist in the construction of industri-
al development projects.
Hard Currency Support
In addition to trade subsidies and direct economic
aid, the Soviet Union has helped the CDLCs,
primarily Cuba, cope with a severe shortage of
hard currency. During 1984, Havana received al-
most $800 million in this type of aid. To this end,
Moscow has:
? Purchased sugar and other commodities for hard
currency outside the trade protocol.
? Allowed Cuba to reexport a portion of the
12 million tons of oil it provided.
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? Development
North Korea
Mongolia
Cuba
Vietnam
Laos and
Cambodia
? Paid Ottawa hard currency for the 1 million tons
of grain Canada has shipped to Cuba annually
since 1980 but has allowed Havana to repay in
soft currency, saving it about $200 million in
hard currency for 1984.
The USSR also provided Vietnam with hard cur-
rency support by acting as an intermediary for
Hanoi's purchases of grain from Australia. Moscow
pays Canberra hard currency for grain shipped to
Vietnam, while charizing the Vietnamese soft cur-
rency.
The Soviet Side of the Ledger
The USSR receives substantial political, strategic,
and economic benefits in return for its economic
assistance. Cuba remains the USSR's most impor-
tant asset in the Western Hemisphere, while both
the Cubans and Vietnamese provide the Soviet
military with much-needed port and air facilities.
Politically, the CLDCs continue to support Moscow
in the UN and other international organizations.
Castro, in particular, has been aggressive in
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promoting the Soviet Union's political position on
various international issues and in defending
Moscow in the Nonaligned Movement.
To a lesser extent, Soviet aid to these countries has
benefitted Moscow economically. By gearing its
assistance to those projects that will result in
increased exports, Moscow obtains foodstuffs, raw
materials, and other needed commodities. In addi-
tion, Moscow's assistance for energy-related pro-
jects in recent years should help reduce future oil
exports to the CLDCs-presently about 6 percent
of total Soviet oil exports-freeing up additional oil
for consumption or hard currency sales. The USSR
is helping to locate and extract coal, oil, and gas in
a number of the CLDCs-notably Vietnam and
Cuba. In addition, the Soviet Union began assisting
Cuba in the construction of a nuclear power station
that Havana claims will reduce oil costs
$120 million annually per reactor.
Looking to the Future
Despite the benefits it receives, Moscow continues
to press the CLDCs to give more in return for its
economic aid. At the CEMA heads of government
meeting last November, Moscow again insisted
that Havana begin meeting targets for exports to
CEMA countries on which it has fallen short in
recent years. The Soviets also persisted in their
calls for Hanoi to increase the production of export
goods, taking into account the needs of the Soviet
economy.
Officials in a number of the CLDCs, however-
notably Cuba and Vietnam-have complained
about Moscow's focus on those projects that will
lead to increased exports of raw materials and
agricultural goods to the USSR. The CLDCs have
indicated a preference for Moscow to gear its
project aid more toward industrial development-
with its long-term benefits-rather than the extrac-
tion of limited natural resources]
Despite the complaints voiced by both sides, how-
ever, we look for no fundamental change in the
pattern of Soviet economic aid. Given the sub-
stantial benefits it receives-and the poor state of
the CLDCs economies-Moscow probably will be
unwilling to trim its economic aid for fear of
exacerbating economic problems in the CLDCs.
Indeed, in the case of Cuba and Vietnam, where
Moscow receives its greatest political and strategic
returns-some increase in economic aid seems like-
ly. The recent signing of the 1986-90 trade and aid
agreement with Vietnam, for example, reportedly
calls for a doubling of aid during this period
compared to 1981-85 and may reflect, at least
partially, payment for the Soviet use of Cam Ranh
Bay. Similarly, Soviet deliveries for a new nuclear
power plant in Cuba could run into several hundred
million dollars over the next few years, possibly
resulting in some increase in total aid during this
period. Finally, Soviet-North Korean political rela-
tions have improved over the past year or so, and it
is possible that this warming trend will result in
increased Soviet economic assistance as North Ko-
rea prepares to launch its new long-term economic
plan next year
From the CLDCs perspective, these countries have
few alternatives but to seek as much Soviet assis-
tance as possible. Substantial aid from Western
sources is unlikely in the near term as is any
appreciable amount of foreign investment because
of the poor condition of their economies.
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Secret
Briefs
Energy
WC Production OPEC crude oil output in August averaged 14.7 million b/d, a small decrease
eclines from July levels. Weak oil demand and continued strong competition from
non-OPEC producers kept production more than 1 million b/d below the
organization's self-imposed ceiling. A coup in Lagos and a spate of Iraqi
attacks on Khark Island did not prevent Nigeria and Iran from offsetting a 0.5
million b/d drop in Saudi output.
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OPEC: Crude Oil Production, 1985
Total
16.00
16.0
14.9
14.7
Algeria
0.66
0.7
0.7
0.7
Ecuador
0.18
0.3
0.3
0.3
Gabon
0.14
0.2
0.2
0.2
Iraq
1.20
1.3
1.4
1.4
Kuwaita
0.90
1.1
0.9
1.0
Less share of Neutral Zone
0.9
0.8
0.8
Libya
0.99
1.1
1.1
1.1
Nigeria
1.30
1.5
1.0
1.3
Qatar
0.28
0.3
0.3
0.3
Saudi Arabiaa
4.35
3.4
2.9
2.4
Less share of Neutral Zone
3.2
2.7
2.3
0.95
1.1
1.1
1.1
a Neutral Zone has no production quota; output is divided between Saudi Arabia and Kuwait and
included in their country quotas.
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Yen zuelan Oil
Ex ort Trends
Venezuela's decision in late July to cut the prices of its heavy grades of crude
oil by about $2-to $21 to $24 per barrel-paid off last month in a sharp in-
crease in exports to 1.6 million b/d, according to the Vice Minister of Energy.
The price cut was prompted by similar moves by other producers-especially
Mexico-which held Venezuelan exports to 978,000 b/d in June and 1.2
million b/d in July, far below the government's 1985 target of 1.4 million b/d.
First half 1985 petroleum sales were $6.1 billion-almost $2 billion below the
same period of 1984-raising questions about Venezuela's ability to finance
economic recovery and meet $5-6 billion in annual debt service requirements.
Although the new numbers may give the government hope, 1985 oil revenues
will fall at least $1.5 billion below budgeted levels. This spells continuing
austerity and depressed investor confidence, further delaying the hoped-for
tl Exploration in
Northern Mexico
recovery.
Despite government austerity measures, PEMEX is continuing exploration in
the Gulf of California to boost declining reserves and provide easier access to
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Last year Mexico announced a
economic and psychological boost.
reduction in proved reserves, and a major oil find would provide a needed
Progress on New Development of Qatar's large North Dome field for the liquefied natural gas
Qatari Gas Project (LNG) export market took another step forward in early September when
Japan's Marubeni trading company obtained an equity interest in the project.
In exchange, the company made a commitment to market 2.8 billion cubic
meters (bcm) annually-one-third of the planned output-after 1992. Other
participants in the project are British Petroleum, Compagnie Francaise des
Petroles, and the Qatari state petroleum company. The remaining 5.6 bcm has
Secret
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secret
not yet been sold, and may face stiff competition from other LNG suppliers to
Japanese and Asian markets. Tokyo already has sufficient supplies tentatively
lined up to meet about three-fourths of its natural gas requirements through
2000. According to US Embassy reporting, Marubeni's signing makes it less
likely that Doha will pursue the idea of building a gas pipeline through Turkey
to serve Western Europe, thus removing one alternative to increased future
Tokyo Prepares
To Import
Petroleum Products
Soviet gas sales to Western Europe
To fulfill promises made at July's International Energy Agency meeting,
MITI is quietly drawing up plans to open Japan's market for refined petroleum
products. According to the US Embassy, MITI officials are considering a
system requiring importers to be licensed to assure a secure supply of
domestically refined and/or imported products, quality control, and sufficient
stockpiles. The Ministry likely will license only current Japanese refiners to
assuage fears that Japan's trading companies will encroach on a fully opened
market. MITI will announce its new program later this fall, with imports
expected to begin next April. The Ministry hopes to avoid public leaks of
specific liberalization moves, however, fearing petroleum industry opposition.
Japanese Politicians Senior officials of the ruling Liberal Democratic Party (LDP) and leading
Call For businessmen last week urged Tokyo to host a conference on international
Currency Summit monetary reform. Details of the proposed currency summit are vague, and the
Japanese Government has not yet officially reacted. We believe the suggestion
is designed to show Japan's desire to ease trade frictions and to help ensure the
success of the May 1986 economic summit, which Tokyo will host. Nonethe-
less, it is doubtful that a special meeting-if held-would yield any concrete
scheme to remedy currency misalignments. Instead, as happened at the
"Group of Ten" meeting of deputy finance ministers in spring 1983, the
participants are likely to reject any proposals to set target zones for exchange
Italy Reschedules
Iraqi Debts
ratesJ
Italy's agreement last week to reschedule nearly $500 million in Iraqi debt
payments due in 1985 is another success in Baghdad's continuing efforts to de-
lay foreign debt payments until oil earnings increase. Moreover, the US
Embassy in Baghdad reports that three Italian companies agreed to accept
repayment-about $100 million-in crude oil at official prices, apparently to
protect Italian access to the Iraqi market. Baghdad previously had been unable
to persuade Western creditors to accept oil for debt payments.
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i
I *F Delays
/Liberia Decision
orth Korea
Searching for Funds
until all outstanding debts to the Fund are repaid.
The IMF's Executive Board has postponed until 25 November a decision to
rule Liberia ineligible to use Fund resources. Monrovia made no firm
commitments regarding payments to the Fund during a review in late August.
A revised budget, which Liberian officials probably hope will buy them time
until after the election scheduled for 15 October, does not provide adequate re-
sources to meet the growing overdue obligations to the Fund. The Board is
frustrated with Liberia's inaction on paying arrears and is likely to declare
Liberia ineligible in November, blocking Liberia's access to IMF facilities
P'yongyang is continuing its efforts to obtain Western credits, probably to
finance plant and equipment imports for the next seven-year economic plan
(1986-92). Some of the money may be intended to meet payments on North
Korea's roughly $1.3 billion hard currency debt.
Pyongyang's bad payments record may
dissuade potential lenders, and Western government guarantees for these or
any other credits are unlikely. Recent pledges to some Western countries to re-
sume payments on arrears undoubtedly have the ring of P'yongyang's many
Pacific Regional Senior trade officials from Australia, Brunei, Indonesia, Japan, Malaysia,
Trade Meeting New Zealand, the Philippines, Singapore, South Korea, and Thailand strongly
Global and Regional Developments
failed promises of the past.
reaffirmed support for a new GATT trade round during a regional trade
meeting last week. They expressed concern about growing protectionism,
acknowledged the need for effective enforcement procedures in GATT, and
cautiously supported including trade in services on the agenda. The 10
countries agreed on the need for a reduction in trade barriers for tropical
products, textiles and clothing, and agricultural goods; they expressed particu-
lar concern about protectionist sentiment in the US Congress. This strong
support for a new GATT round will help to offset opposition by Brazil and
India. Indonesia, the principal opponent of US participation in the group,
appeared to soften its stance, but future support for US participation is far
from assured.
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Likely To Resolve The EC has reacted to the US imposed deadline for resolution of the canned
\ US Canned Fruit fruit dispute with restraint, and may even accept a GATT panel recommenda-
Dispute tion to restore competition in the EC canned fruit market. The 1983 GATT re-
port found that EC production aids to fruit canners had nullified tariff
advantages granted US canned fruit exporters, but the EC has blocked 25X1
adoption of the report, leading to the US deadline. The EC Commission
considers this dispute relatively insignificant in view of the upcoming steel
negotiations with the United States and the decrease in production aids to fruit
canners over the past two years. EC acceptance of the GATT recommendation
is likely because it would meet US demands while allowing the EC to continue
decreasing production aids without completely eliminating them. The EC may, 25X1
however, try to tie a resolution to other issues, such as the US complaint
against EC preferences on Mediterranean citrus.
Increased Cooperation Costa Rican president Luis Monge, according to US Embassy reporting, is
Among Central calling for increased economic consultations and cooperation among the
American Core Four Central American Core Four-Costa Rica, El Salvador, Honduras, and
Guatemala. Monge's plan focuses on reduced regional trade barriers, joint
negotiations with the IMF and other multilateral organizations to increase
international funding and modify stabilization conditions, and full implemen-
tation of the Jackson Plan for generous financial support to the. area. 25X1
According to Monge, his program would help revive sagging private sectors
and also help isolate Nicaragua and focus attention on the Sandinistas'
economic failures. Closer economic ties among the Core Four could help to
boost regional trade and financial flows but not enough to boost significantly
the area's sluggish economy.
Squabbles in the Community (CARICOM) trade accord is prompting sharp criticism from
Caribbean Community neighboring countries and threatens the organization's viability. The? accord
rowing Trade Trinidad and Tobago's failure to implement the 14-month-old Caribbean
would lower trade barriers among members and raise tariffs on imports from
non-CARICOM countries. Four of CARICOM's 13 members have yet to
implement the agreement-despite three deadline postponements-but Trini-
dad has drawn the most criticism because it is the largest market. To conserve
its declining foreign reserves, Trinidad has slashed imports from CARICOM
countries about 30 percent this year, after a decline of 18 percent in 1984. Gre-
nada and Barbados have expressed the sharpest disapproval of Trinidad's trade
policies. Barbadian Prime Minister St. John recently even suggested that
Caribbean governments restrict purchases of Trinidadian products until Port-
of-Spain relaxes its import restraints. Given its worsening economic problems,
however, Trinidad is likely to make only token efforts to soften its import
policies.
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National Developments
J Canadian Commission The recent report of the Macdonald Royal Commission on the Canadian
Supports Free Trade Economic Union supports a free trade agreement with the United States, but
With the United States only if Canadian industry and sovereignty can be protected. Proposed safe-
guards include a 10-year phasein to help Canadian firms adjust to increased
competition; funds to retrain workers who lose their jobs because of free trade;
and the exemption of certain industries, such as automobiles. Proposed
measures to reduce the unemployment rate-essentially by a devaluation of
the Canadian dollar-would complicate any free trade agreement. The report
emphasizes that an accord with safeguards would substantially boost Canadi-
an industrial production, and that all provinces would benefit. Prime Minister
Mulroney probably regards the study as a vindication of his attempts to
promote freer trade with the United States, and may attempt to incorporate
some of its recommendations into a proposal Ottawa will present to Washing-
ton this fall.
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Even Less Likely the export sector, probably will strengthen Bonn's resolve not to reflate the 25X1
economy. The 5-percent jump in the volume of new domestic manufacturing
orders followed a solid 2-percent gain in the second quarter. Other indicators,
such as retail sales and business surveys, also point to a pickup in the domestic
economy. While the government will hold firm to its budget consolidation
course, some easing of monetary policy is possible. Earlier this month, Finance
Minister Stoltenberg and Bundesbank President Poehl said that they see scope
for a further drop in interest rates, following the August reduction in the
discount rate from 4.5 to 4.0 percent. 25X1
talian Budget
Deficit To Con
Treasury Minister Goria's latest proposals-increasing indirect taxes, capping
public-sector wage increases at 6 percent, and cutting welfare spending by
transferring some government services to the private sector-have met with
strong opposition from ministers who want neither higher taxes nor cuts in 25X1
their departments. Infighting over the budget and other contentious issues
implies that the five-party coalition lacks the political will and cohesiveness to
push through unpopular austerity measures. In order to reach agreement
among coalition members, the Cabinet will almost certainly water down
Goria's proposals, and the logrolling necessary to get the bill through
parliament by the end of the year will probably weaken the measures to the
point where they will have little impact on the deficit. 25X1
I Tian Trade Relatively strong domestic demand and declining export competitiveness
elicit Worsens pushed Italy's trade deficit to $8.5 billion for the first six months of 1985-a
68-percent increase over the same period last year. Although July's 7.8-percent
devaluation of the lira is likely to help the trade balance toward the end of the
year, the sharp increase in the deficit has stepped up industry demands for
measures to improve Italy's competitiveness. In particular, business leaders are
pressuring the government to slow inflation by limiting wage gains and
controlling public spending. Rome's efforts probably will be ineffective,
however. Moreover, the increasing capital intensity of Italian industry is.
boosting imports of intermediate and investment goods, and offsetting gains on
j the export side.
V
Disagreement within the Cabinet on the 1986 budget will probably stall efforts
tinue to reduce the public-sector deficit, which is now over 15 percent of GDP.
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Spanish Unemployment Registered unemployment in Spain fell in July for the fourth straight month,
Declines lowering the unemployment rate to 19.3 percent-down from a peak of 20.2
percent in March and the lowest rate in 10 months. The Ministry of Labor
views this as proof of the success of government employment programs, but we
are more wary. Part of the recent decline is seasonal-activity in the services
and agricultural sectors usually picks up during the summer months. Never-
theless, the labor market is much stronger than it was last year. The number of
unemployed has declined by 27,000 for the first seven months of the year, in
contrast to an increase of 62,000 during January-July 1984. Additionally, the
pickup in investment activity in the second quarter was largely responsible for
an increase of 10,000 workers in the construction industry during July. With
the seasonal gains in employment now largely past, however, we do not expect
a further decline in the unemployment rate during 1985.
Less Developed Countries
o Rebuild Trade
Pakistan recently signed a trade agreement with Iran that would restore
bilateral trade which fell to less than $100 million last year to roughly $400
million annually. The agreement, to take effect 1 October, provides for a
doubling of Pakistani imports of Iranian crude oil-to 20,000 b/d-in
exchange for increased Iranian purchases of Pakistani textiles. The US
Embassy in Islamabad says that Tehran had threatened to stop purchasing
Pakistani goods unless Pakistan reduced its trade surplus with Iran. The
surplus, combined with Iranian displeasure over poor quality Pakistani textiles
and past violations of trade contracts, were the likely causes of the sharp drop
in trade last year, from the previous year's $442 million level. The two
countries probably hope to ease political tensions by improving trade relations.
25X1
oreign Investment in South Korea approved $207 million in direct foreign investment through mid-
South Korea Falling September-half the total for the same period last year and far off the pace
needed to hit the overly ambitious $450 million target for 1985. Foreign
investment last year was a record $419 million but was dominated by two
projects-a $100 million investment by a US auto manufacturer and a $93
million addition to a Seoul hotel. Even so, yearend results should compare
favorably to 1983 approvals of $268 million. Spurred by continued foreign
investment liberalization, the 1988 Seoul Olympics, and burgeoning high
technology and automobile industries, direct foreign investment should be
robust over the next three years, with several projects in the $50-100 million
range possible. If, however, businessmen perceive that Seoul is mismanaging
the economy, President Chun is losing his grip on power, or a succession crisis
is developing, they may balk at additional capital commitments
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rt'rma's Export
Prospects Worsen
country's long-term development prospects.
Burma's exports for the fiscal year which began 1 April are likely to decline
sharply from last year's level of $375 million, according to the US Embassy.
Earnings from rice exports-which traditionally account for 40 percent of the
country's foreign exchange revenues-plummeted 68 percent in the first five
months of the fiscal year compared with the same period last year. Depressed
commodity markets-along with Rangoon's poor pricing and marketing
policies-will put a damper on most of Burma's other exports, as well. As a re-
sult, Rangoon probably will further curtail imports despite the impact on the
'Less Czechoslovak Czechoslovakia's trade with nonsocialist countries-primarily the developed
Trade With West-continued its steep slide during the first six months of 1985, down 12
Nonsocialist Countries percent from the same period a year ago. Its share of total Czechoslovak trade
is now below 20 percent compared with 30 percent in 1980. First-half exports
were down 12.4 percent from a year earlier. Because of the downturn in
exports and continued priority on debt reduction, Prague cut imports by more
than 11 percent despite plans for a 14-percent increase. This generated a
robust trade surplus of $427 million, but deprived Czechoslovakia's aging
industry of badly needed modern plant and equipment. Prague could ease up a
bit; Czechoslovakia's debt is low, and it has considerable untapped borrowing
capacity. Nonetheless, the regime apparently feels it must reduce hard
currency debt to limit its vulnerability to Western political leverage.
`eather Clouds Grain Recent heavy rains and flooding are causing serious damage to an estimated
xport Prospects 20 percent of the cropland in China's northeastern provinces, where much of
the nation's corn-China's major export grain-is grown. A much larger area
is threatened with less severe damage. Wet weather has also reportedly caused
moisture and pest damage to stockpiles from last year's bumper crop. A
weather-induced decline in the quantity of marketable corn could mean China
will have trouble fully implementing its ambitious plans for expanding grain
exports to earn foreign currency. Importers of Chinese grain are already
complaining of delayed deliveries and defaults on contracts. The higher prices
and lower quality likely to result from China's weather problems could cause
buyers to seek other sources for corn.
Beijing Appoints
New Ministers
a leading role in promoting economic liberalization.
Beijing has appointed new heads of the ministries of Labor and Personnel,
Metallurgical Industry, Geology and Mineral Resources, Public Security, and
State Security in the second round of high-level changes this year. The 25X1
changes are another step by Deng Xiaoping toward institutionalizing current
economic reform policies by appointing younger-their average age is 15 years
less than their predecessors-better-educated officials. All the new appointees
have college-level educations and most appear to have solid connections to
prominent reformers in the party. The replacement of reform economist, Ma
Hong, with a 67-year-old historian, Hu Sheng, however, suggests that a more
orthodox tone will prevail at the Academy of Social Sciences, which has taken
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Vietnamese Vietnam announced severe currency measures on Saturday and canceled all
Currency Re-form international flights to prevent an exodus of unofficial gold holdings or other
forms of wealth. Hanoi allowed individuals five days to register currency
holdings and set stringent limits on the amount that could be converted into
new bank notes at a rate of one new note for 10 old ones. The announcement
did not say how official market prices would be affected or what the new rate
of exchange with the dollar would be. Hanoi had devalued last April from 10
dong to 100 dong per dollar to fight inflation and to curb black-market
currency speculation. Even with strong followup measures, this latest move to
shore up the sagging economy will have only a limited impact because of
fundamental shortcomings in industrial and agricultural production and the
drain of military operations in Cambodia. The move will disrupt foreign
exchange transactions, including overseas remittances-the country's largest
source of foreign exchange earnings. The measures also will disrupt some
black-market activity and deprive unofficial currency holders of some financial
gains
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