SMALLER LDC DEBTORS: ECONOMIC SITUATION AND US INTERESTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97R00694R000400550001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: October 7, 2010
• Sequence Number: 1
• Publication Date: March 1, 1985
• Content Type: REPORT

Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Smaller LDC Debtors:
Economic Situation
and US Interests
Secret
G! 85-10068
March 1985
?py 2 9 9
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Directorate of
Intelligence
and US Interests
Smaller LDC Debtors:
Economic Situation
Economics Division, OGI,
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
This paper was prepared by
Secret
GI 85-! 0068
March ! 985
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Secret
Smaller LDC Debtors:
Economic Situation
and US Interests
Key Judgments The condition of many low- and middle-income debtors-illustrated by
Information avai/able Colombia, Egypt, Indonesia, Morocco, Pakistan, Peru, and the Philip-
as of 4 February 1985 pines-requires increased attention. The potential for further deterioration
was used in this report.
has put their governments at odds with international creditors, the
International Monetary Fund, and domestic opposition groups. Moreover,
important US interests could be hurt by their economic and political
problems.
These debtors probably will face increasing difficulties over the next few
years because of slowed growth in industrial countries; soft commodity
prices; protectionist pressures in export markets; rescheduled debt, which
will fall due in 1986-87; and rapid population increases. The United States,
therefore, could face a new set of debt-induced commercial issues. LDCs
strapped for foreign exchange probably will increasingly adopt counter-
trade requirements that will hurt US exporters and undermine US trade
policy. Moreover, developing country attempts to rapidly expand exports
could accelerate protectionist pressures in Western countries.
Although most of these debtor LDCs value their ties with Washington,
worsening economic problems probably will move them to try to use these
ties-particularly foreign policy and military/strategic ties-to exact
financial concessions such as increased aid. They could turn to Washing-
ton's ideological adversaries if they feel the United States is not being
responsive-even though they would meet limited success and receive
primarily military assistance.
The United States will confront difficultor potentially difficult-eco-
nomic and political conditions in its bilateral relationships with many
debtor developing countries, not just the seven discussed in this paper. A
steady improvement in the world economy and the adoption of rational
economic policies by these LDCs would greatly help their financial
problems. In our judgment, however, this combination of events is unlikely
in the near term.
iii Secret
GI 85-10068
March 1985
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Secret
Key Judgments
Strategic/Military
11
12
12
C. Economic/Social Indicators
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Secret
Smaller LDC Debtors:
Economic Situation
and US Interests
Table 1
LDC Debtors:
Rank and Magnitude of Debt, 1984
The debt condition of low- and middle-income LDCs
has been largely overshadowed by attention to larger,
higher income countries such as Mexico, Brazil, and
Argentina. In many cases, however, the debt burden
of these countries relative to the size of their econo-
mies is just as great as that of the Big Three. Seven
countries illustrate the economic problems of these
LDC debtors:
? Peru and the Philippines face severe economic and
political crises.
? Egypt and Morocco need to reduce subsidies and
cut budget expenditures.
? Colombia and Peru have the additional problems
that stem from drug trafficking and guerrilla terror-
ism, which are further eroding confidence in their
governments.
? Indonesia and Pakistan, although not in immediate
danger, are not on solid footing.
Despite their differences, the seven countries are
similar in their vulnerability to external economic
conditions such as recession in industrial countries,
fluctuating commodity prices, high interest rates,
uncertain commercial lending, and slowdowns in
Western aid. Moreover, because these countries have
linkages to key US interests, the problems posed by
their economic slide go beyond concern for the stabil-
ity of the international financial system.
The 1981-82 recession in industrial countries, the
contraction of world trade, and other external and
domestic problems have heavily hurt these developing
countries.
Colombia '
With its substantial mineral resources, varied agricul-
ture, and growing industrial base, Colombia is better
equipped than many of its Latin American neighbors
7.
Philippines
26
17.
Colombia
12
8.
Egypt
25
18.
Pakistan
12
9.
India
25
19.
Taiwan
10
to deal with its economic problems. In the late 1970s
when prices for coffee, cocaine, and marijuana were
high, Colombia opened the economy and enjoyed an
economic boom. Now commodity prices are down and
Colombia's inefficient industries still are being bat-
tered by imports. Agricultural and industrial produc-
tion has declined, and unemployment is climbing-
now 14 percent. Even earnings from illicit drugs have
declined from a peak of $1 billion annually in the
early 1980s to about $400 million in 1984, according
to press reports. The US Embassy reports that real
GDP growth is projected to be 1 to 2 percent in 1984.
To cope with the economic downturn, President Be-
tancur's government implemented economic reforms
in 1984 that tightened import restraints, accelerated
the pace of the peso's mini-devaluations, and intro-
duced avalue-added tax
Colombia is relying on two new energy projects to
resolve its economic problems. The world's largest
coal strip mine began production for export in early
1985, and, according to the press, by 1986 Colombia
could be self-sufficient in oil. However, Bogota's quest
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
25X1
25X1
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
to ~
~ Table 2 ~
Smaller LDCs: Factors in Economic Plight :??
Price Trends for Key
Commodity Ex-
ports, a 1983-84
Colombia
_
Coffee =
3.5 percent
Egypt
Petroleum e =
-15 percent
Indonesia
Petroleum c =
- 15 percent
Rubber =
-6 percent
Morocco
Phosphate rock =
- 25 percent
Pakistan
Cotton =
- 9 percent
Peru
Petroleum d =
- 15 percent
Philippines
Coconut oil =
3 percent
Sugar =
- 35 percent
Copper =
- 8.4 percent
Weather Worker Remittances Military Government Policies/ Debt, 1979-84 Exports to OECD, 1981-
Expenditures Political Problems 83 e (million US $)
Down 10 percent, About 1 percent of Narcotics trafficking; $6-12.5 billion; inter- 2,673
1984 (projected) budget guerrilla violence. est payments 2,613
doubled; debt-service 2,766
ration from 17 per-
cent to 30 percent.
Up 7 percent, 1984 13 percent of budget Food, energy subsi- $16.5-25.3 billion. 4,760
dies-$3 billion, 4,032
1982-83 (14 percent 3,664
of budget).
Drought 1982 hurt ~ Less than 15 percent Subsidies on food, $16.8-32.0 billion. 21,650
rice crop. of budget fertilizer, fuel; anti- 18,567
Chinese riots, 17,698
Orthodox/Muslim
clashes.
Drought since Down in 1983; exact Spends $1 million Food, education sub- $6.1-12.8 billion. 1,794
1981-hurt grain figures not available per day on Western sidles (9 percent and 1,788
production. Sahara war 27 percent of admin- 1,736
istrative budget); riots
in early 1984.
Poor weather hurt Down 5 percent, 25 percent of budget Demonstrations in $8.7-11.5 billion. 1,090
cotton, wheat crops. 1984 Sind; Afghan 1,079
refugees; narcotics 1,115
trafficking.
El Nino~rought, ~ 25 percent of budget, Subsidies on food, $9-14 billion; debt 2,556
floods; agricultural 1983; Sendero Lu- energy, water; labor service ratio from 32 2,479
production down 10 minoso insurgency strikes; narcoterror- percent to 75 per- 2,480
percent. ism. cent.
Drought 1982-83- Up 74 percent, 1981- Communist insur- Subsidies on food, $13-26 billion; inter- 5,311
hurt rice, sugar, co- 83 gency; pressure for fuels, transportation; est payments 4,333
conut crops. increased spending labor strikes, demon- quadrupled. 4,715
strations, opposition
to Marcos.
a = IMF data, annual prices.
b = OECD Data
Blank boz indicates no significant information or development in this area.
e =OPEC weighted average, crude.
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Table 3
Smaller LDCs: Austerity Programs
Currency Devaluation Foreign-Exchange Budget/Subsidy Cuts, Tax Reform
Controls 1983/84
Multiple exchange rates Recent crackdown on Will slowly reduce New consumption tax on Promises greater role for
with gradual adjustment unofficial FX dealers; subsidies. luxury goods. private investment and
in tourist and new regulations to countertrade agreement
commercial rates. attract tourists/ required.
remittances.
$300 million standby 16 percent (1983)
(September 1983 to
March 1985)
Extended Fund Facility
(1981-83) canceled
Extended Fund Facility 53 percent (1984)
(June 1982 to June 1984)
canceled. Standby $344
million (April 1984)
$615 million standby 34 percent (since
(December 1984) October 1983)
Cut government spend- Tax reform: lower rates, Canceled/rephased
ing; reduced subsidies on broaden base, simplify major development
food, fuel, fertilizer. laws. projects.
Reduced subsidies for
basic commodities and
education.
Value-added tax. Import restrictions;
barter counterpurchase
requirement for 30 prod-
uct-imports.
a Subsidies for basic
commodities.
Cut budget deficit; elim- Tax increase. Ban on new government
mate food subsidies; investment projects.
raise prices For water,
gasoline, electricity.
Removed controls; Budget cuts; Tax increases; broaden a
multiple FX rates before removed/reduced base; improve collection.
IMF program. subsidies on basic
commodities.
a Blank box indicates no significant information or development in
~ this area.
A
T
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
for financing to support development projects has
been stymied by "guilt by association." Because of
problems with other Latin debtors, banks are reluc-
tant to lend money for energy development projects,
and they have refused to roll over Colombia's $3.4
billion short-term debt. As a result, Colombia is in a
debt trap: it draws down reserves to service its $12.5
billion debt, and banker reluctance to lend increases
as foreign exchange reserves fall.
Egypt
Egypt lives beyond its means and relies on external
sources of income over which it has little control:
? Petroleum exports are subject to declining prices
and soft markets.
? Remittances from 3 million overseas Egyptian
workers are vulnerable to changes in demand for
immigrant labor in the Middle East.
? Suez Canal revenues are subject to slowed shipping
traffic.
? Tourism receipts have not regained ground lost after
President Sadat's assassination in 1981.
According to Egyptian Government officials, income
from these sources slipped in 1984.
Following 8-percent real economic growth annually
during the 1970x, the economy has fallen on hard
times largely because of high consumption and unpro-
ductive investment. The trade and current accounts
recorded large deficits-$5.8 billion and $2.5 billion,
respectively-in 1984. External debt climbed to over
$25 billion in 1984, ranking Egypt eighth among
LDC debtors. Although most of its debt is in official
medium- or long-term obligations, Egypt's 1984 debt
service totaled $3.2 billion-second only to
Indonesia's among these seven countries.
Domestic economic policies have contributed to eco-
nomic dislocation. Agricultural pricing policies have
discouraged farmers from increasing output. Food
subsidies-for bread in particular-have encouraged
consumption, requiring food imports of about $3
billion in 1983. The government also has held petro-
leum and public utility prices to less than 20 percent
of world prices, and consumption increases by about
15 percent annually. [n addition, the country's infra-
structure is decaying, urban overcrowding contributes
to epidemics, and the housing shortage is acute. In the
country's "race against time," President Mubarak has
initiated economic reforms-without an IMF pro-
gram-to reduce subsidies, raise taxes, and encourage
foreign investment. The pace may be slow, however,
because the government has met popular resistance in
the past.
Indonesia
Indonesia is not now on the LDC economic sick list,
but potential difficulties exist. Jakarta has stayed off
the troubled debtor list so far because it undertook
austerity early to prevent further deterioration of its
external and domestic budget accounts when oil prices
dropped in 1982-83 and other commodity markets
softened:
? In 1983 it devalued the rupiah 27.5 percent to stem
capital flight, boost reserves, halt currency specula-
tion, and encourage nontraditional exports.
? The government also reduced subsidies on food,
fertilizer, and fuel products, causing domestic fuel
prices to rise 50 to 76 percent.
? In addition, the government reviewed 125 major
development projects and decided to cancel or re-
phase those with a major import content that would
drain foreign exchange
These measures have reversed the external trends that
had hurt Indonesia but have also severely pressured
the domestic economy. The government is having to
deal with nearly 2 million entrants to the labor market
annually, and layoffs are adding to the problem.
Official unemployment for 1983 was 4 percent, but
the US Embassy estimates that 20 to 25 percent of
the 60 million labor force is effectively unemployed.
These unfavorable trends have led to some labor
restiveness and an increase in wildcat strikes. Increas-
ingly, union leaders have spoken out on behalf of
members emphasizing the need for job protection and
wage increases and decrying subsidy cuts for fuel and
bus fares. The rise in unemployment also has led to an
increase in violence
The government may have to deal with unrest among
those hurt by austerity measures and with dissatisfac-
tion among students and youth who see poor pros-
pects. Anti-Chinese bomb attacks and Orthodox Mus-
lim riots already have erupted.
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Secret
Morocco
Morocco faces acute financial difficulties, many of
which have developed from circumstances beyond its
control:
? Severe droughts since 1981 have caused serious
shortfalls in agricultural production-particularly
of cereals-and required heavy grain imports.
? Collapsed phosphate markets have reduced export
income; Morocco relies on phosphates for 40 percent
of its export earnings.
? European trade barriers have restricted Morocco's
traditional citrus and vegetable exports, and
Europe's economic restructuring has caused the
level of remittances from Moroccan workers-the
country's largest foreign-exchange earner-to level
? Service payments on the country's $12.8 billion debt
escalated because of high interest rates and US
dollar appreciation and necessitated a debt resched-
uling in 1983-84.
War in Western Sahara is an added economic drain
and costs the government an estimated $1 million per
day or 30 percent of the government's administrative
budget, according to the US Embassy.
The government also faces social pressures caused by
economic decline. More than 40 percent of the popu-
lation is at or below the poverty line, and the number
is rising because of falling real incomes. To ameliorate
these conditions, the government provides subsidies
for basic foods, which take 9 percent of the national
budget; free universal education consumes another 27
percent. Despite high financial outlays for education,
only 28 percent of the population is literate.
To qualify for an IMF standby arrangement in
September 1983, Rabat implemented austerity mea-
sures. Efforts by the government to raise food prices
and school fees as part of that program spawned riots
in January 1984. The standby expires in March 1985.
and negotiation of a new IMF program is necessary
for Rabat to reschedule debts and receive additional
aid. We expect negotiations to be completed by
midyear.
Pakistan
Pakistan is not experiencing an economic crisis, but it
is one of the world's poorest countries with formidable
external debt servicing requirements. Real economic
growth slowed to 3.5 percent in 1984, the lowest since
President Zia took power in 1977. This was primarily
because of a disastrous cotton crop and a disappoint-
ing wheat harvest. A 5-percent decline in worker
remittances in 1984-on which the economy relies
heavily-also contributed to increased economic diffi-
culty. Moreover, financial support for over 2 million
Afghan refugees who have fled to Pakistan cost the
Pakistani Government-according to its claim-
$350-400 million in goods and services in 1983 and
continues to drain its resources.
Pakistan's debt-$11.5 billion-ranks it 18th among
LDC debtors in 1984. Although 85 percent of the
debt is owed to official sources at mostly concessional
rates, the 1984 debt servicing burden was still over
$1 billion. Despite several debt reschedulings in the
1970s and early 1980s, the country's debt service ratio
was 22 percent in 1984-about average for many
developing countries, but high given the number of
reschedulings.
The government's proposed 1985 budget does not
introduce dramatic revenue measures that would hurt
the populace. However, the US Embassy reports that 25X1
Islamabad may need to cut social-sector investments
for health, education, and population control. The
need for reductions could be precipitated by an eco-
nomic downturn resulting from a combination of
events-such as bad weather or further drops in
worker remittances.
Peru
The economic and social crisis in Peru is deepening
largely because of three factors: natural disasters, 25X1
world recession, and narcoterrorism. In December
1982 climatic changes caused by El Nino-a warm
current that replaced the cold waters of the Humboldt
Current-brought severe drought in the south and
floods in the north. It left $1 billion in damage and
dropped agricultural production 10 percent. The
1981-82 world recession contributed to plunging
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
prices for Peru's primary exports-copper, silver, and
petroleum. The resulting need to cut imports contrib-
uted to a decrease in industrial production to about
one-third of total capacity. Industrial unemployment
and underemployment now affect two-thirds of the
labor force.
Narcoterrorism is the country's third major problem.
Peru is one of the world's two largest coca leaf
producers, and for the past two years Peruvian pro-
ducers, with help from Colombian distributors, have
moved aggressively into the market. According to the
US Embassy, the growing narcotics trade has corrupt-
ed important Peruvian institutions such as the police
force and court system, and it is a temptation for a
middle class trying to maintain its standard of living.
A new difficulty is that terrorists-especially the
Maoist Sendero Luminoso-are now operating in
major drug producing areas where the level of vio-
lence has increased and threatens the government's
antidrug program.
Adding to Peru's economic drain are:
? Pressures for increased military expenditures be-
cause of the military's dominant political role.
? A thriving underground economy that robs the
government of tax income and undermines the
government's legitimacy.
? Peru's $14 billion external debt in 1984.
The Embassy reports that 40 percent of the 1985
budget is slated for debt service. Lima had stopped
interest payments on its debt in June 1984 but
recently paid $50 million to keep from falling more
than six months behind on servicing, according to
press reports. Even so, Peru is $200 million behind on
commercial bank interest payments, and negotiations
with creditor banks continue to be bogged down while
Peru seeks bridge financing. Because earlier reforms
caused demonstrations and strikes, Belaunde's gov-
ernment appears unwilling to take the austerity steps
necessary to negotiate an IMF agreement before the
spring elections. The US Embassy reports that auster-
ity combined with prolonged economic stagnation will
be socially explosive and probably politically untena-
ble.
Philippines
Despite abundant natural resources, awell-educated
labor force-overall literacy is 87 percent-talented
government technocrats and business entrepreneurs,
and an open, capitalistic economy, the economy is in
its most serious crisis since World War II. It currently
has one of the worst growth performances in Asia;
real GNP fell 5.5 percent in 1984. The inflation rate
exceeds 50 percent, its current account deficit is
nearly $1 billion, and it is the seventh-largest LDC
debtor. Prices for its traditional commodity exports
remain low, and the value of the peso has declined 34
percent since September 1983. The domestic financial
system has also weakened with some banks going
under.
In response to these problems, the Philippines adopted
an IMF-approved economic program as a prerequisite
fora $615 million standby loan; the agreement was
signed in December 1984. Before that, subsidies were
reduced for the second time in 12 months on basic
food items, petroleum products, and electricity. In
addition, the Central_ Eank has lifted foreign
exchange controls, and the government has canceled
or scaled back major industrial projects and is raising
taxes.
The deteriorating economy has affected all sectors of
society. Since 1983, financial credits for business have
dried up, bankruptcies have increased, and factories
have halted or scaled down production. As a result,
unemployment has climbed, and workers' unemploy-
ment benefits are running out. Philippine economists
indicate that unemployment in Manila alone grew by
400,000 in the first 10 months of 1984. Real incomes
have dropped and the income gap between rich and
poor is growing. The press reports that nearly 80
percent of the population lives below the poverty level,
and obtaining sufficient food is increasingly a problem
for more than half of the population. Economic
deterioration also has affected education where costs
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
Secret
have risen, and parents cannot afford to pay even
nominal fees. In 1984, according to press reports,
60 percent of enrolled students were forced to return
to the provinces from universities in Manila
The Philippines' economic straits are compounded by
concurrent political pressures on the government of
President Ferdinand Marcos. Political opposition
spurred by the assassination of Benigno Aquino has
coalesced with demonstrations against economic aus-
terity. Marcos's health also has raised concern about
the successor issue, and these simultaneous political-
economic forces are contributing to a potentially
volatile situation)
To quell popular discontent, most of these LDCs, and
many others like them, will resist needed changes in
economic policy and management. Government subsi-
dies for basic food and other consumer goods drain a
large share of budget resources in Egypt, Morocco,
Indonesia, the Philippines, and Pakistan. Many of
these governments have committed to reducing or
eliminating subsidies, which could cause strikes or
other turmoil that could threaten these regimes. On
the other hand, politically expedient economic poli-
cies-such as food subsidies-designed to mollify
restive populations could lead to equally destabilizing
budget deficits and spiraling inflation.
Although some military expenditures have been pared,
the reasons for substantial military allocations are not
likely to recede. Insurgent groups in Peru and the
Philippines are gaining strength while Colombia is
trying to counter terrorist groups. There is no indica-
tion that Morocco's war against the Polisario in
Western Sahara will end soon. Pakistan will continue
to feel the need to allocate a large share of its budget
to the military partly because it fears Indian
intentions.
Sociopolitical conditions in most of these countries
will worsen without resumption of vigorous economic
growth. Lack of jobs, unemployment, and underem-
ployment probably will continue to be serious prob-
lems in the wake of a continued need for austerity.
Moreover, real incomes will continue to decline, and
gaps between rich and poor will widen.
High population growth in all the countries-at
2.1 percent Colombia's is lowest-will exacerbate the
unemployment nightmare as well as strain social
services and resources. In Indonesia nearly 4 million 25X1
are born annually and 2 million will enter the labor
market every year. Pakistan is the world's ninth most
populous country, and its population will double ap-
proximately every 23 years. Morocco's population is
expected to double by the year 2010. We estimate
that Peru and the Philippines, respectively, will need
to create 150,000 and 700,000 new jobs annuall 'ust
to keep pace with population growth 25X1
While irrational government policies and demograph-
ic forces augur continued problems for low- and
middle-income debtors, improvements in the interna-
tional economy could brighten their prospects:
? Economic growth in the OECD countries should
expand an average 3 percent in 1985, although
growth in the United States and Japan will slow
from last year's rates; continued OECD growth will
support some LDC recovery, but not enough to put
the LDCs back on a path of sustained growth.
? The resulting expansion in world trade also should
contribute to LDC economic recovery. GATT re-
ports that world trade volume grew 9 percent in
1984, and a rate of just over 6 percent in growth is
possible this year.
? Continued declines in interest rates also will ease
LDC economic burdens. For the major LDC debt-
ors, a 1-percentage-point decline in interest rates
saves $2 billion annually in debt service.
? Lowered oil prices have helped nonoil LDCs curb
spending for energy, and this trend probably will
continue in 1985. It does, however, hurt prospects
for the oil exporters in the group, like Peru and
Indonesia
Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
 Sanitized Copy Approved for Release 2010/10/07 :CIA-RDP97R00694R000400550001-6
In the long run, adherence to economic adjustment
programs adopted by some debtor LDC governments
will be a primary factor in determining the extent of
their recoveries. Some-Colombia, Egypt, and
Peru-may undertake formal IMF programs this
year. Should these governments maintain the political
will to carry out needed reforms-despite probable
downturns in the first year of austerity-the long-
term prospects for their economies will be significant-
ly improved.
The possible consequences of these LDCs' economic
problems-and of countries like them could threat-
en significant US interests that go beyond the stabil-
ity of the international financial system. These inter-
ests include economic, strategic military, and foreign
policy concerns that could be hurt if LDC economic
problems lead to increasingly unstable domestic situa-
tions.
Commerce
US trade and investment could sutler increasingly.
The US trade deficit will widen in 1985, and these
LDCs' economic adjustment programs will contribute
to the increase. In 1984, US exports to these seven
countries dropped below 1983 levels for all but Paki-
stan and Morocco. Exports to Indonesia fell by $250
million or 17 percent; and by $148 million to Peru or
16 percent. These countries-especially Colombia,
Peru, and the Philippines-will again severely curtail
imports and promote exports in line with IMF stabili-
zation programs and self-imposed austerity measures
this year. These efforts will further dampen demand
for US goods.
In addition, these countries could resort to greater
trade distorting policies, such as export subsidies, to
stimulate exports and earn more foreign exchange.
These subsidies will present increasing problems to
US policymakers as the demand from US industries
for offsetting protectionist policies will grow
Another concern to the United States is increased
countertrade, that is, trade contingent on an exchange
of goods and services. Countries strapped for foreign
exchange are requiring countertrade arrangements.
US Exports, Imports, and Investment
Position, 1983
~~n~