WEEKLY SUMMARY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A010800140002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 21, 2016
• Document Release Date: April 8, 2009
• Sequence Number: 2
• Publication Date: June 28, 1974
• Content Type: SUMMARY

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Secret
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Gy'T~O STATES OF P~~~`VP
Weekly Summary
State Dept. review Navy review
OSD Review Completed completed completed.
Secret
28 June 1974
No. 0026/74
Copy N2 5 8
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t he WEEKLY SUMMARY, issued every Friday morning by
the Office of Current Intelligence, reports and analyzes signif-
+.ani developments of the week through noon on Thursday. It
f:equently includes material coordinated with or prepared by
the Office of Economic Research, the Office of Strategic
Research, and the Directorate of Science and Technology.
opics requiring more comprehensive treatment and therefore
25X1 shed separately as Special Reports are listed in the
?s tents.
CONTENTS (June 28. 1974) nI
1 The Middle East
4 Egypt-USSR: Reviewing Ties
MIDDLE EAST
AFRICA
5 Rhodesia: Election Scheduled
EUROPE
6 NATO: After the Ministerials
7 Iceland: Voting on Keflavik
9 Portugal: Spinola Tightens Control
10 Spain: Marking Time
11 French Communists and Moscow
11 Italy's Austerity Program
13 USSR: Salyut; Helicopter Carrier
14 CEMA: Sofia Ministerial Ends
15 CSCE: Plodding Through
EAST ASIA
PACIFIC
16 Vietnam: Fighting; Image Polishing
18 China: Posters; Foreign Trade-
WESTERN
HEMISPHERE
20 Argentina; Peron III Again
21 Peru: A Shift to the Left
22 Guatemala: More of the Same
SPECIAL
REPORT (Published separately)
Nationalist China Revisited
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v
THE MIDDLE EAST
DISENGAGEMENT COMPLETED
I Disengagement of Syrian and Israeli forces
on e Golan Heights was completed without
significant problems by June 26, the date spe-
cified in the agreements signed early this month.
In the last stage, Israeli troops turned over to UN
forces the former Syrian administrative capital of
al-Qunaytirah? Rafid village to the south, and
positions on the peak of Mount Hermon to the
north. In accordance with provisions of the disen-
gagement agreement, the UN then returned the
two towns to Syrian civil control, although both
will remain in the UN-patrolled neutral zone. The
Mount Hermon positions will continue under full
UN control
JORDAN REACTS
(p Fin an effort to put pressure on the nego-
tiating parties before the next round of peace
talks, Jordan's King Husayn has publicly threat-
ened not to participate at Geneva unless a Jordan-
Israel disengagement accord is first worked out.
The King told a press interviewer on June 23 that
Israel would have to pull back a "reasonable
depth" from the Jordan River as a prerequisite
for Jordanian participation at Geneva. Husayn
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indicated that Egypt and Syria would also have to
work out a common strategy with him before the
Geneva conference reconvenes. Husayn clearly
? . hopes to force Cairo and Damascus to support his
efforts to get the disengagement negotiations with
Israel rolling
had In o objections to, the Palestine Liberation
Organization attending the Geneva talks. Husayn
offered, as he has previously, to step aside in
favor of the fedayeen-controlled organization if
that was the wish of the other Arab states. Other-
wise, he said, the Palestinian group's mandate
should be limited to handling the still vaguely
defined question of "Palestinian rights," while
Jordan negotiated the return of the West Bank
and East Jerusalem to Arab hands.
FEDAYEEN TERRORISM...
I IFor their part, the fedayeen kept up their
campaign of terrorist raids on Israeli population
centers. On June 25, three commandos raided an
apartment building in Nahariya, a seacoast resort
near the Lebanese border, killing four Israelis
before they themselves died. Fatah, the largest
and most influential of the Palestinian groups,
claimed responsibility for the attack, which the
Israelis say was launched by sea from Lebanon.
(This was the fourth attack by fedayeen terrorists
since mid-April. Altogether they claimed the lives
of 53 Israelis.
?a )Fatah has not been involved in such an at-
tack for some time, but has always approved the
principle of direct strikes at Israel. The group
almost certainly acted at this time both to
counter fedayeen radicals who are criticizing
Arafat for his pro-negotiation policies and to
remind those already involved in direct negotia-
tions that even the relatively moderate fedayeen
groups will resort to terrorist tactics if the Pal-
estinians are not invited to participate in the
peace talks on acceptable terms]
AND ISRAELI REPRISAL
IpPrime Minister Rabin told the Knesset
s~or ly after the Nahariya incident that Lebanon
bears full responsibility for terrorist operations
planned on or launched from its territory. In an
apparent initial reprisal, Israeli artillery shelled
several towns in southern Lebanon on June 25
and 27. The Israelis, who last week carried out
heavy air strikes on fedayeen bases in and around
refugee camps in Lebanon, are likely to continue
reprisals even though they seem to make the
fedayeen more determined to carry on their ter-
rorism-1
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f y 1 Israeli reprisals are, however, increasingly
drawing Arab offers of support for Lebanon and
the fedayeen. Cairo has publicly offered military
l aid to Beirut to counter the Israeli at-
tacks. 25X1
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Israeli soldiers reinforcing border with Lebanon
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SUDAN: TERRORISTS RELEASED
~/~ M v W M I~ t
eight Pak
US `dipl
move that
fists
tior
plan
not-
twit
obsi
the`
new
ists
nt Numayri on June- 24 com-
cated, however, that the Sudanese found it
:ntences imposed that day on the
difficult to be the only Arab country ever to
iian terrorists who murdered two
have brought Palestinian terrorists to trial.
Is and a Belgian in the Saudi
They implied, in effect, that the terrorists
Khartoum in March 1973. The
i
e
would be given executive clemency
were
mm
diately flown out of
and transferred to the "custody"
I I [Minister of State for Foreign Affairs
tine Liberation Organization, a
Ahmad-Foreign Minister Khalid initially
rtually frees theme
made himself unavailable-told the US:ambas-
sador that Sudan did not want to take an
;ed with which the case was sud-
action that might increase tension and "set
ed up and with which the terror-
back" progress in resolving the Arab-Israeli
patched from Sudanese jurisdic-
conflict achieved by recent US diplomatic ef-
s the execution of a scenario }
.forts. Numayri, in weighing the risks involved,
in advance. Numayri was careful
apparently preferred to incur the displeasure
hand. Despite the political sensi-
of the US than to face a political backlash,
case, he had insisted on strict
from the other Arabs and the threat from the
f the judicial process and had left
fedayeen to his own security and that of
~n with US officials and foreign
Sudanese aircraft and di fomatic m
it he favored holding the terror-
sions "
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to account. Cabinet ministers had indi-
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EGYPT-USSR: REVIEWING TIES
Egyptian Foreign Minister Fahmi will go to
Moscow in mid-July for a fundamental review of
Egyptian-Soviet relations. Although the visit
comes in a period of renewed surface friendliness,
strains are likely to re-emerge over such questions
as arms deliveries, a summit that Fahmi will at-
tempt to arrange, and the strategy and timing of
25X1 Arab-Israeli peace talks]
1 ._. [Uppermost in Fahmi's mind will be the arms
shipments that Moscow suspended in April. __:
Fahmi will emphasize, as he an a at have done
in public, that Egypt is not seekin better rela-
tions with the US at Soviet expense. )
Vi, ['Cairo's particular concern for the future of
the Egyptian-Soviet military relationship has both
a political and a practical motivation. Military aid
is the most tangible and only virtually irreplace-
able benefit that Egypt feels it derives from its
ties with the Soviets. In the Egyptian view, the
resumption of amicable relations will largely
depend on a resumption of arms shipments. More
than this, there is undoubtedly pressure from the
military in Egypt for some relief from a situation
that has left Cairo without a flow of spare parts
for over two monthsa
;+.} iThe Soviets, for their part, may be amenable
to requests for a restoration of the arms flow. At
this point in the peace negotiations and in the
US-Egyptian relationship they may see arms as
the only means of guaranteeing some continued
influence in Egypt`
I A favorable Soviet response on the arms
ques ion is probably an Egyptian requirement for
proceeding with arrangements for a summit be-
tween Sadat and the Soviet leadership, which
Fahmi has announced as the purpose of his visit.
The arrangements for such a meeting could in
themselves cause renewed wrangling. Each side
will press for its own capital as the venue, with
the Egyptians arguing that, in view of Sadat's four
trips to the USSR, it is the Soviets' turn to do the
visiting]
[Although Moscow may accede on this ques-
tion as well, the Egyptians may be disappointed
in their expectation that Brezhnev would make
the call. Brezhnev, who has not been in the Mid-
dle East since becoming party chief, would find it
politically difficult to visit Cairo so closely on the
heels of President Nixon's successful visit. The
more likely candidate for the trip would be either
Kosygin or Podgorny)
~8. ''~F.ahmi's Soviet hosts will undoubtedly also
ra se the subject of the Geneva conference during
his visit, urging its quick reopening in order to
reinsert themselves as active participants in the
negotiations. Sadat, on the other hand, is pro-
ceeding more slowly. He wants to coordinate
divergent Arab positions before moving on to the
next stage and does not anticipate returning to
Geneva before Se tember.
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Sadat and Brezhnev in 1972
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RHODESIA: ELECTION SCHEDULED
Prime Minister Ian Smith dissolved Parlia-
hient last week and announced that a general
election will be held on July 30. Smith apparently
hopes that a fresh mandate from the predomi-
nantly white electorate will strengthen his hand
for a new attempt to reach a constitutional agree-
ment with the leaders of Rhodesia's black ma-
jority-a prerequisite for British recognition of
Smith's government and termination of interna-
tional economic sanctions. Prospects for an early
I agreement have dimmed, however, as a result of
the sudden arrest of a prominent spokesman for
the African National Council, the largest black
group in Rhodesia
U JSmith's Rhodesian Front Party now holds
49 of the 50 white seats in the House of Assem-
bly. Africans hold 16 seats under a restricted
franchise. A general election is not legally re-
quired until April 1975, but Smith told Parlia-
ment he wants to dispel "the present state of
uncertainty" among white Rhodesians, which he
related to the African National Council's rejection
in early June of his latest constitutional proposal.
Smith had offered to increase the black seats to
22, but his formula for gradually broadening the
franchise would prevent Rhodesian blacks who
the African National Council, was being detained
IQwithout trial-the government's standard pro-
cedure for dealing with individuals suspected of
subversion. No reason was given for the action.
Smith has claimed, however, that some members
of the council are linked with the guerrillas who
have been active in the northeast sector of the
country since late 1972
outnumber whites 20 to 1, from gaining a ma-
V-1 [Smith may hope that the detention of
jority in the assembly for at least 40 years. In
Sithole, whom he apparently regards as a key
announcing the election, Smith said he will make
opponent of the proposed constitutional settle-
a new attempt to resolve the constitutional im-
ment, will bring other council leaders around to
passe by convening a "truly representative round-
accepting the terms. Smith claims that Bishop
table conference" after the election
Muzorewa, the president of the council, had
r
LSmith probably sees an election cam
ai
n
in
~ approved the proposal but was overruled by a
ilit
t f
i
p
g
,
a f
art
as an
t
it
t
ll
l
m
an
act
on in the leadership group. Mu-
,
oppor
un
y
o a
ay qua
ms among
zorewa has declared, however, that he will not
Rhodesian whites concerning the coup in Lisbon/
:, resume negotiations with Smith unless Sithole is
and its implications for southern Africa. A black
released]
government in neighboring Mozambique is antici-
pated, and it is widely assumed that such a gov-
I '- Rhodesian whites probably realize that the
ernment will favor the Rhodesian guerrillas who
impasse between Smith and the African National
have been infiltrating through northwestern Mo-
Council precludes an early settlement with Britain
zambique from bases in Zambia and Tanzania.
and relief from economic sanctions. Most whites
Although Smith now ridicules such fears, he no
,
however, will probably vote for Smith's party
doubt foresees that a new regime in Mozambique
next month because they see no acceptable alter-
may at least restrict Rhodesian trade outlets
native. The moderate Rhodesian Party has failed
through Mozambican seaports, unless interna-
to counteract Smith's claims that it encourages
tional sanctions are terminated
black militants. The detention of Sithole may
[Shortly Shortly after calling the election, Smith an-
serve to undercut the right-wing Rhodesian Na-
tional Party as well as extr mists in Smith's own
,<
nounced that Dr. Sithole, publicity chairman for
party
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NATO: AFTER THE MINISTERIALS
fA rare degree of harmony prevailed during
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the NATO ministerial meetings earlier this month.
The European members of the Alliance had many
of their fears assuaged, and all of the allies seem
inclined to avoid airing their differences
J ? V he declaration explicitly mentions British
and French nuclear forces as capable of con-
,; fhe eight defense ministers who compose
" tributing to the deterrence strategy of the Alli-
tl4e Nuclear Planning Group reacted favorably to,
lance as a whole. While the mention of French
Secretary Schlesinger's briefing on US plans for r
nuclear forces in the declaration is clearly made in
strategic retargeting, many of them commenting,.,
the Atlantic context, there have been some signs
that the Alliance's deterrent capability had actu-'`
-'that the Giscard government may be rethinking
ally been enhanced. The result was a further
the ways in which France cooperates with the
softening of the lingering West European concern
other West Europeans in the defense area. Both
that the US-Soviet agreement on the prevention
French Gaullists and the left have denounced this
of nuclear war places limits on what the US
and other provision
of the declaration as exces-
would do to defend Europe.]
sively "Atlanticist."I
The new declaration of Atlantic principles,
M
the
ajor accomplishment of the foreign minis-
The most troublesome paragraph in the
ters' session in Ottawa, was something of an
declaration to agree upon-and as a result one of
anticlimax after months of effort. In proclaiming the weakest-deals with US - West European con-
that the Alliance is the "indispensable basis" of
sultations. US irritation with EC positions, which
its members' security and that an attack on oneT
are nearly immutable because they already repre-
will be considered an attack on all, the declara- ;
., sent compromises among the Nine, has been
tion merely reaffirms the principles on which-,
- matched by the feeling of the EC that its interests
NATO has been based from the very beginning.}
are often ignored by the US. Despite these serious
concerns on both sides, the declaration merely
'' `There are important new elements as well.
contains language which notes that the common
One of these is a pledge by the US to maintain its
aims of the Alliance can only be achieved through
., European forces at a level sufficient to carry out
close consultation. The French objected to any
the strategy of deterrence and to defend the
wording that implied a legal obligation on the
North Atlantic area if deterrence should fail. This
part of either the US or the Europeans to consult,
pledge is designed to reassure the Europeans who
especially on their overall economic and political
fear that the US will eventually make substantial
relations and events outside the NATO context.]
unilateral withdrawals, even while negotiations
for mutt-jai troop reductions are continuing with
the East.
., tSeveral of the participants in the Ottawa
meeting stressed that the recommendation for
LThe declaration also smooths European `` more consultations will have meaning only if the
feathers by highlighting the security and political
? countries involved wish it. The West Europeans
importance of the European Community to an
-' consider the Nixon-Brezhnev summit a test. They
extent unprecedented in such documents.
are concerned that concessions might be made on
Progress toward unity of the EC states, the declar-
the European security conference and the force
ation says, will eventually have a beneficial effect
reduction talks. European interests are deeply
on the common defense of the Alliance.
involved in both. As one observer put it, they will
be looking for the US to show that the logic of
the Western Alliance is at least as valid as the
special relationship between super powers.
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In agreeing upon the new declaration of
principles, the West Europeans have been re-
minded that there is no present defense alterna-
tive to an alliance with the US, and that it is
behind the shield of NATO that Europe can most
safely debate plans for defending itself in the
future. The basic problems between the US and
the West Europeans have not gone away, but the
change in the weather represented by the minis-
terials-if it lasts-may make some of them easier
to tackle.
ICELAND: VOTING ON KEFLAVIK
Iceland's major po1tical parties have made
the future of the Keflavik base the number one
campaign issue in the election this Sunday. There
has been little mention in the campaign of the
economic crisis that brought down the center-left
government of Prime Minister Johannesson in
May. The outcome of the election, therefore, will
be interpreted as a referendum on the question of
whether to retain the base in the defense agree-
ment to be renegotiated later this year between
the US and Iceland.
Although all of the parties have called for a
review of the defense agreement, the opposition
conservative Independence Party has been the
most flexible. Party leaders issued a statement on
June 23 strongly endorsing retention of the base.
Voter discontent with the outgoing coali-
tion's handling of the base negotiations and the
defense issue generally has been a major factor in
the bright electoral prospects of the Independ-
ence Party. Leaders of the party were active in
promoting the successful pro-base signature
campaign last February. In addition, the party
claims that it alone has a consistent policy for the
defense of Iceland.
As members of the outgoing coalition, the
Progressives, the Liberal Left Organization, and
the Communists will have a more difficult time
convincing voters that their policy toward the
base should be continued. In March, the govern-
ment tabled proposals for the withdrawal of all
forces from Keflavik by 1976. Negotiations began
shortly thereafter but were suspended when the
government fell in May.
Throughout the electoral campaign the three
parties have taken differing positions on the
base-the Communists, of course, vigorously op-
posing its continuation. The Progressives, who
claim that only they have taken a balanced posi-
tion between left and right extremes, have called
for continued membership in NATO but with the
proviso that no foreign troops be stationed in
Iceland during peacetime. The remaining coalition
partner, the Liberal Left Organization, has been
appealing to non-Communists among anti-base
elements. The Social Democrats, who together
with the Independence Party comprise the op-
position, support retention of the base.
The municipal and local elections on May 26
were billed as a preview of the national contest,
but the outcome was inconclusive. The Independ-
ence Party captured more than 50 percent of the
votes, but the Communists also picked up strong
support. Parties of the center suffered significant
losses.
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PORTUGAL: SPINOLA TIGHTENS CONTROL
JPresident Spinola and the provisional govern-
men are stiffening their resistance to the take-
over of local government bodies by the Commu-
nists and are moving to halt abuses of civil lib-
erties by extreme left-wing organizations. The
Portuguese Communist Party is anxious to main-
tain its image of respectability while mobilizing
support for elections next year
~` (The control of local governments is crucial
in the present struggle for political power. The US
embassy in Lisbon estimates that the Commu-
nist-dominated Democratic Electoral Commission
has gained control of a third of Portugal's 304
town councils since the coup last April. The com-
mission took over the councils by organizing
"public discussions" to nominate slates of com-
mission candidates, which were then selected in
similarly orchestrated "elections." 1
).' \The minister of internal administration,
Joaq im Magalhaes Mota, is now refusing to
verify the credentials of some of the officials
selected by this process. Mota is one of the foun-
ders of the recently formed centrist Popular
Democratic Party. The commission has accused
him of misusing his authority for the benefit of
his party and has demanded his resignation
y The government has also moved to clamp
dow on leftists who have gone too far in taking
advantage of the new civil liberties in Portugal.
The open sympathy of the mass media toward the
left prompted the government, on June 14, to
take over the management of a Lisbon television
station, and last week the key administrative posi-
tions in the radio network were assumed by mili-
tary officers. In addition, militant leftists have
been arrested for a wide range of offenses, ranging
from trying to persuade soldiers to desert to
inciting labor unrest
'1 '?' The Communist Party has avoided direct
taftic~sm because of its desire to dissociate itself
from the actions of militant leftists and to project
the image of a responsible member of the provi-
sional government. Although Communist in-
fluence in the government is heavily outweighed
by center and right-wing elements, the party is
content to consolidate its influence in key sectors
of Portuguese society in preparation for elections
next year. The party is, in fact, genuinely con-
cerned that irresponsible behavior by the extreme
left will provide the rightists and centrists in the
Portuguese power apparatus with a pretext for
placing repressive controls on election campaign
procedures.]
Ice appears to be no significant challenge
to tce supremacy of President Spinola and the
junta in the Portuguese power structure at this
time. The military leaders have shown that they
have the power to control the left and are pre-
pared to use it. As long as the Communist Party
stands to gain popular support from its associa-
tion with the provisional government, it will con-
tinue to cooperate. A confrontation between the
party and the government remains a possibility,
however, particularly if Spinola and his colleagues
take a tougher stance in their efforts to prevent
the Communists from extending their influ-
ence.
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Arias
SPAIN: MARKING TIME
Spanish authorities appear to be anxious to
limit the effects of the fall of Salazarism in Portu-
gal on the Spanish political scene. The slow pace
of social and political change promised by Prime
Minister Arias, and the sudden dismissal of Gen-
eral Diez-Alegria are reflections of this caution'
-'1 \fter maintaining a low profile for some
veeks, Prime Minister Arias moved to center stage
this month with a five-day visit to Catalonia, a
principal area of regional discontent. Accom-
panied by seven of his ministers-each of whom
also talked to leaders in their respective fields--
Arias left the impression that his government
would continue toward its declared aim of in-
creasing participation of citizens in public life,
improving conditions in the universities, main-
taining liberalization in the press, increasing its
involvement in social and lagor matters, and im-
proving church-state relations
Vn a nationally broadcast speech, Arias reit-
erate his intention to establish political associa-
tions in order to increase participation in political
life, a key element of his government's program.
He weakened the proposal, however, by stressing
that the associations must function within the
framework of the National Movement, established
by Franco as Spain's sole political organization.
Arias stated that there is room for diversity of
opinion within the Movement, but he did not, as
some had hoped, set a timetable for establishing
association
The Prime Minister's performance thus far
sLgg is that political reforms will come slowly.
Of the several liberalizing measures he announced
last February, only the bill providing for the
direct election of ma ors has been sent to the
parliament for action
Lhe hopes of Spanish liberals were also set
back this month when the relatively liberal chief
of the military staff, General Manuel Diez-Alegria,
was replaced by a conservative general. Some
Spanish officials have tried to portray the ouster
as a normal rotation, but it seems more likely that
he was removed because of his identification with
civilian elements who favor reform of the Spanish
political system. Diez-Alegria's public statements
have indicated that he was surprised by his
dismissal
2~ Although Diez-Alegria has lost his place in
the military hierarchy, he could still play an im-
portant political role. He is considered by some
Spaniards as a potential leader who would take
Spain along the same path followed by General
Spinola in Portugal. These disgruntled Spaniards
may be encouraged by the fact that after General
Spinola was fired, he returned to head a liberal
regime.
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FRENCH COMMUNISTS AND MOSCOW
The French Communist Party's attempt to
broa n its base, to put more distance between
itself and Moscow, and to become "a party like
all the others" may be creating significant strains
in its relationship with the Soviet Communist
Party. These strains appear to have prompted the
visit to Paris on June 19-24 of a Soviet delegation
led by Boris Ponomarev---the Central Committee's
chief q,f relations with free world communist
parties. I
1~ ' 1Ponomarev found the French party less
-malleable than in the past. The communique
issued after the visit made it clear that there was
little meeting of minds on key issues, in par-
ticular, on reconciling the French part 's views of
? its interests with Soviet foreign policy 25X1
If,French Communist leaders have become in-
creasingly committed to participation in a "com-
mon program for governing" with the Socialists
and other left-wing parties that could eventually
lead to a common front government. During the
recent campaign, the Soviet Union sent Ambas-
sador Chervonenko to call on Giscard, thus under-
lining its displeasure with the Communists'
alliance with Francois Mitterrand's Socialists?
-76
French party leaders were furious over the
vie intervention in the campaign. This affront
resulted in the first direct public criticism of the
USSR by the French Communist Party since the
invasion of Czechoslovakia six years ago?
25X1
LAs the campaign went on, Georges Marchais,
geheral secretary of the French party, diverged
significantly from the Soviet line in an attempt to
appeal to a wider spectrum of leftist support.
Since then
=the Communists have no longer endorsed
Moscow's opposition to the French nuclear force.
The Communists are now arguing that, although
land-based missiles should be eliminated-since
they could only be targeted against the Soviet
Union-the nuclear submarine force should be
retained.
Marc ais has been sharply and openly critical of 25X1
the lack of Soviet support for the left's election
campaign against Giscard. The Communist news-
paper, L'Hurnanite, has also begun to temper its
unqualified support for Soviet policies
T IA 1archais is trying to overcome the fact that
the appeal of the Communist Party in France,
especially among the young, is limited by its past
subservience to Moscow. Immensely buoyed by
the closeness of the election results, the French
Communists are anxious to create an appearance
of independence from the Soviets.
25X1
ITALY'S AUSTERITY PROGRAM
~} he austerity program devised by the Rumor
gbve ment last week should improve Italy's
credit standing and trim at least $1 billion from
the 1974 import bill.]
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Georges Marchais
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10 -he proposed fiscal and monetary measures
represent a compromise between the Christian
Democrats, who favored draconian measures to
curb imports and inflation, and the Socialists,
who wished to maintain employment and increase
welfare spending. The patchwork program aims to
boost tax revenues by $4.7 billion annually, while
reducing the income tax bite on low-income
groups. As a concession to the Socialists, the
Christian Democrats agreed to ease credit slightly.
LFailure to obtain approval of the program in
parliament and in labor union councils would
bring down the government. The coalition parties
probably can exercise enough self-discipline to get
the measures through parliament, but labor union
cooperation is less certain. The unions may go
along for the time being, but if prices continue to
rise rapidly as taxes cut more deeply into income,
their cooperation almost certainly will evaporate':
ecause Italians are past masters at income
t x vasion, the government is relying most
heavily on increases in value-added and other
indirect taxes. While some of the tax measures-
such as a hike of 25 cents per gallon in the
gasoline tax-have the particular aim of cutting
the trade deficit, most re designed to reduce
over-all consumer demand
A key aspect of the Christian Democrats'
agreement to ease credit will be long-term loans
to small- and medium-sized companies and loans
to finance economic development in the South.
These loans are to be covered by a $3-billion sale
of special bonds to commercial banks. Minister of
the Treasury Emilio Colombo reaffirmed Italy's
commitment to IMF credit ceilings
_Y- fhe tax package is expected to trim domes-
tic demand by about 3 percent over 12 months.
GNP growth probably will slow to 3-4 percent in
1974, compared with 5.4 percent in 1973. The
growth rate will be even lower in 1975 w en the
full impact of the austerity program is felt
he anticipated drop in domestic demand
will reduce imports by about 10 percent, after a
lag of a few months. Many import orders already
have been placed, and time is needed for the
direct tax measures to have their full impact.
Together with some small effects from the import
deposit scheme, the austerity program should
hold Italy's trade deficit to about $10.5 billion in
1974, instead of the $12 billion implied by trade
flows so far this year
14. `Even after adjusting the trade account for
the favorable impact of the austerity program, the
current account for 1974 will be about $7.5
billion in deficit. Italy's traditionally large surplus
on net services and transfer payments has been
decreasing in recent years, largely because of
hidden capital flight and increased interest
payments. Heavy net capital outflows could boost
the balance-of-payments deficit to an estimated
$10 billion.]
+S, The balance-of-payments deficit expected in
the second half of 1974 will require additional
foreign borrowing. Rome has a meager $2.2
billion in available foreign exchange, and support
of the lira has been costing $1 billion monthly.
Italy still has large reserves of gold, but it would
sell substantial quantities only as a last resort. The
gold could be used as collateral for loans if the
parties could agree on price and terms. The $4
billion that the Bank of Italy lined up under
short-term swap arrangements with other central
banks cannot be drawn because the banks fear,
justifiably, that they would not be repaid
9.S Un coming weeks, Italy will have to let the
lira's value plummet, impose additional import
controls, or obtain new foreign loans. The govern-
ment will try to avoid the first two options. A
plunge of the lira would be opposed by the
Socialists and trade unions because of its infla-
tionary effects
4{urther import controls would be objection-
able to the EC and GATT and would violate the
terms of Italy's IMF standby credit. By giving
some assurance that Italy is finally starting to put
its house in order, the austerity program should
help Rome find new funds abroad, especially f
gold is offered as collateral.
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14.r' olzurtC 1 v
25X1
25X1
USSR
SPACE STATION IN O BIT
'-0 1
The Soviets placed large Salyut space sta-
tion
in orbit this week. The spacecraft, an-
nounced by TASS as Salyut 3, was launched from
Tyuratam on June 24 using
n the Atlantic to support a manned mission. The
launch could occur within less than a week and, if
so, would coincide with the President's visit to
Moscow.
The only previous Soyuz-Salyut mission oc-
curred in June 1971 when Soyuz 11, carrying
three cosmonauts, docked with Salyut 1. The
cosmonauts remained aboard the space station for
nearly 23 days, performing a wide variety of
experiments in biomedicine, earth observation,
astronomy, and astronavigation. They perished
when a leak developed in their Soyuz spacecraft
while re-entering the earth's atmosphere.
Four Salyut
launched since 1971.
aace stations have been
25X1
I I he Salyut 3 is another
step toward the development of large space sta-
tions in earth orbit that can be manned by succes-
sive crews for long periods of time
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The Soviets will probably orbit a Soyuz I
spacecraft with two cosmonauts aboard to ren-
dezvous and dock with the Salyut. Soviet space
support ships are en route to monitoring stations
in the Pacific, and others are already in position
ow1- stteicu or ,)oyuz spacecraft preparing to dock with first Salyut space station
 Approved For Release 2009/04/08: CIA-RDP79-00927A010800140002-8
Ank SE(:,I-(t
HELICOPTER CARRIER HEADS LITH
The Soviet he c.opte carrier Leningrad, ac-
companied by a destroyer and an oiler, may be on
a "show the flag" cruise that could include visits
to Guinea, the Indian Ocean, or the Caribbean.
The carrier entered the Atlantic on June 22
and has since been moving south along the west-
ern coast of Africa. Its first stop will probably be
Conakry, Guinea, to unload two MI-8 helicopters
that it is carrying on its deck. The helicopters,
which are partially canvas-covered, have had their
rotors removed and are not part of the Lenin-
grad's normal helicopter complement.
If the Leningrad operates in the Indian
Ocean, the Soviets may eventually transfer it to
the Pacific Fleet, although such a transfer is not
likely on this cruise. The Leningrad has been
assigned to the Black Sea Fleet since it became
operational in 1969.
The Leningrad has traveled from the Black
Sea to Northern Fleet waters on two previous
occasions, but this is the first time it has sailed
toward the South Atlantic. The Leningrad has
never visited a non-Soviet port, although the So-
viet navy's other helicopter carrier, the Moskva
has visited Yugoslavia and Egypt.
25X1
CEMA: SOFIA MINJSTERIAL EN.pS
oviet Premier` Rosygin aPfd government
leadets from the USSR's eight full CEMA partners
and from Yugoslavia met in Sofia from June 18
to 21 for the 28th ministerial session of the
Council of Mutual Economic Assistance.
As expected, the participants focused on the
development of energy and raw material re-
sources. The European members of CEMA gave
final approval to the multilateral exploitation of
Soviet natural gas deposits at Orenburg and con-
struction of a pipeline from there to Eastern
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CEMA session in Sofia
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'~ JCLKtI ~
25X1
Europe. They also agreed "in principle" to de-
velop Cuban nickel mines.
Earlier preliminary agreements on the ex-
ploitation of Soviet iron ore resources at Kursk
and the construction of a new power line to
Eastern Europe were mentioned only briefly, sug-
gesting that further details have yet to be worked
out. Hungarian Premier Fock said the session
heard a proposal to build two more major power
lines connecting the USSR and Eastern Europe.
His Czechoslovak counterpart said that the
Soviets had "clarified" the amount of raw ma-
terials and fuel they would deliver, and the terms
of delivery, for the next five-year period.
The participants announced that the "first
stage" in coordinating national economic plans
for 1976-1980 was completed, but gave no indica-
tion of progress on the thorny problems of de-
tailed coordination of plans and revision of intra-
CEMA foreign trade prices. Similarly, there was
no evidence of movement on financial reform
issues. After the session, CEMA Secretary General
Fadeyev rejected any quick movement toward
intra-CEMA convertibility of the transferable
ruble, CEMA's accounting unit.
The conferees may have decided what moves
CEMA will make to establish a dialogue with the
EC. Although the communique ignored the
matter, Fadeyev did say after the session that
"regular contacts" between the two organizations
would be a "great contribution to lasting inter-
national detente."
The Romanians apparently restated their
views on economic integration and, judging by
their rhetoric before the meeting, pushed for
more generous treatment from their developed
CEMA partners. Bucharest's case was no doubt
poorly received. A Hungarian statement during
the session rioted icily that it was time to move
from general principles to specific deeds. The
Romanians signed all but one of the agreements
concluded at the session, abstaining from an
agreement on standardization. According to a
Hungarian report, Bucharest will not fully partici-
pate in the construction of the Orenburg gas
line.
CSCE: PLODDING THROUGH
': [_he European Security Conference has
plodded through another indecisive week, ending
whatever faltering hopes the Soviets and others
had that the concluding phase could be held in
July. The Soviets now seem reconciled to holding
the final stage later this yea 1`7
The conference is still stalemated over the
issues of "freer movement" and military-related
"confidence-building" measures. Two weeks ago
the Soviets made three concessions in these areas
to demonstrate that they are still negotiating in
good faith. They accepted a reference to "sub-
scriptions" in the text on access to printed infor-
mation, and they also agreed to increase from 50
to 100 km the depth of the frontier zone re-
quiring notification of military movements, and
the time of advance notification from seven to
ten days
~, The Soviets have shown little inclination to
compromise on other aspects of the "freer move-
ment" issue. They continue to call for specific
references to respect for national laws and cus-
toms-the formula they have used to oppose
Western efforts to increase non-governmental
human contacts
" 71 The net result is that the two sides are still
far apart. The West European participants will be
reluctant to let the conference conclude at all
without significant Soviet concessions on the
freer movement issue. Some Western delegates are
already considering adjourning the conference for
an indefinite period
The Soviets may now be hoping that some
sort of breakthrough on CSCE will occur during
President Nixon's visit. The key question is what
Moscow will do if the summit fails to give new
impetus to CSCEr.
The Soviet desire for a top-level meeting in
the near future is still strong and was endorsed by
most of the leaders in a series of Supreme Soviet
election speeches earlier this month. Moscow is
aware, however, that the West has sought nego-
tiating leverage from the Soviet interest in an
early and successful CSCE, and it will gi
grudgingly on the unresolved issues.
25X1
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V~#Th7AM
a..
DEMILITARIZED ZONE
5
rpDanang
THAILANt
1,
K11TU1
~V0 alryh
SOUTH
w.~
VIETNAM
CAMEO
IA
~
4
4
oua.<
-- MI. 2
n
p-r 4 ..... tn~e
l?.9 4
0
100
Miles
556095 6-74
VIETNAM
?.tively low.I The Military Region 2 commander
recently suspended the stalled government cam-
paign against the major communist supply area at
Vo Dinh north of Kontum City. He also shifted
many of his combat units in the highland prov-
inces. The new division commander in Kontum is
now applying new tactics against the effectively
dispersed North Vietnamese artillery sites and
defenses and hopes to regain the initiative..
{ The government operation to recapture two
psyc ologically important outposts north of Sai-
gon gon in Binh Duong Province has been temporarily
halted in order to rotate forces and rebuild
ammunition stocks. East of Saigon, government
-troops have been unsuccessful in easing pressure
#on national Route 1. Although this key artery
between the coastal provinces and Saigon is again
open, traffic is increasingly harassed
The number of incidents in the delta prov-
inces returned to a fairly low level this week-in
keeping with the monthly cyclical pattern of
communist activity there. The major battlefront
i n the delta-along the Cambodian border-
,jemained relatively quiet
IMAGE POLISHING
tq 1Hanoi has been trying to polish the image of
theiet Cong's Provisional Revolutionary
Government as a legitimate government ever since
the cease-fire. More than 40 countries-principally
the communist states and some left-leaning Afri-
can nations-now recognize the Provisional Rev-
olutionary Government, but Hanoi has failed to
crack the ranks of either the industrialized non-
bors in Southeast Asia. The Vietnamese commu-
THE FIGHTING GOES ON communist states or Vietnam's immediate neigh-
fg=` Military activity this week reached a high nists have had to settle for token gestures of
point for the year in the northern provinces, recognition to salvage any gains at all
particularly in Thua Thien and Quang Tin. The
': I communists also increased their sapper attacks
against fuel and ammunition depots and the shell- ,-. tThe Vietnamese communists hoped that the
ing of government positions on a countrywide , recent French decision to upgrade the Provisional
basis` ,*?Revolutionary Government's information office
in Paris to mission level would serve as a catalyst
':Combat in the central provinces picked up to entice other Western nations to follow suit.
slightly during the week but still remains rela-
25X1
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 25X1
25X1
Specific demarches to Canada,
Belgium, and the Netherlands appear to have
failed, and even Sweden, long sympathetic to the
cause of the Vietnamese communists, has turned
down, at least for the immediate future, personal
appeals by Hanoi's Premier Pham Van Dong to
recognize the Provisional Revolutionary Gov-
ernment
[The Vietnamese communists have not fared
any better in extended negotiations with Japan
over the exchange of ambassadors between Hanoi
and Tokyo. The talks have been hung up on two
1 issues: Japanese economic aid for North Vietnam
and recognition of the Provisional Revolutionary
Government. As Hanoi's need for foreign aid has
increased, its determination to advance the Pro-
visional Revolutionary Government's diplomatic
interests appears to have waned.
L__ __1
?1, Hanoi's efforts on behalf of the Provisional
ev lutionary Government, however, may get a
more sympathetic hearing elsewhere in Asia. The
new deputy prime minister of Australia, Jim
Cairns, is a long-time sympathizer who argues that
the provisional government, under the Paris agree-
ment, is entitled to equal status with the Saigon
government. So far, Australia's Labor government
continues to deny formal recognition, but some
gesture-probably support for seating at interna-
tional conferences-may eventually be made
25X1
[Hanoi has been turning the screws hardest-
and most effectively-closer to home in Laos.
Initially, Prime Minister Sovanna succeeded in
tabling a communist demand for reco nition at a
cabinet meeting on June 12
With con-
inue communist pressure on this issue certain,
at least some bow in this direction appears likely.
25X1
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South Vietnamese inspect destroyed Russian-built T-54 tank, north of Saigon
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'~ , JCV1'ZC I -,
25X6
25X6
CHINA
POSTER POLITICS
[The walls in one section of Peking were
freshly papered this week with new political
posters. Unlike their predecessors, the new tracts
consist largely of personal grudges and graphic
accounts of alleged physical abuse suffered by the
authors. The focus is definitely local. In keeping
with a Central Committee directive issued last
month, representatives from several provinces
have come to Peking to air their grievances in
posters7
')/ (Two Politburo members attacked in the
tial round of posters earlier this month-one by
name and the other by thinly veiled innuendo-
;?made public appearances this week. The posters
have apparently had little or no effect on their
political standing. Moreover, an article in the cur-
rent issue of Red Flag, the party theoretical jour-
nal, strongly suggests that at least some of the
officials criticized in posters are wrongfully at-
tacked. The article warns against mistaking
"friends" for "enemies" and "hurting our com-
rades.."
[The same article encourages the expression
o correct criticism," and there seems little
a'doubt that the party Central Committee-not the
$ poster critics-will ultimately decide the fate of
provincial officials currently under attack-F____1 25X1
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25X1
1973 TRADE BOOM TO, CONTINUE
Pushed by soaring world prices, currency
revaltiations, and a rising volume of imports and
exports, the dollar value of China's foreign trade
in 1973 increased by 60 percent to approximately
$9.4 billion. This year, trade will probably in-
crease another 30-40 percent, approaching $13
billion.
China's trade deficit last year with the non-
communist world was $425 million, and it is
expected to reach $1 billion in 1974. To help
cover these deficits, Peking has relaxed its con-
servative financial policy and greatly expanded
the use of short- and medium-term credit. At the
same time, China has stepped up efforts to boost
hard currency earnings from commodity exports
and services. Petroleum exports, only $35 million
in 1973, will probably exceed $300 million this
year and could earn $1 billion annually within the
next few years.
China's recent surge in imports is aimed at
overcoming agricultural shortfalls and boosting
industrial development. Imports of grain, sugar,
cotton, and vegetable oils will probably increase
from a record $1.3 billion in 1973 to about $2
billion this year. Roughly half of China's agricul-
tural imports; will come from the United States.
Machinery and equipment orders from the
West in 1973 totaled almost $2.5 billion, in-
cluding $1.2 billion-worth of complete industrial
plants from Japan, Western Europe, and the
United States. New orders for machinery and
equipment are strong, despite a growing debate in
China over -the dangers of reliance on foreign
equipment and technology.
Trade with the non-communist world will
continue to account for 80 percent or more of
China's total trade. Japan will remain the leading
partner with two-way trade reaching about $3
billion. The US, now China's number two trading
partner, will run up a surplus that is likely to
exceed $1 billion on a total trade of $1.2 billion.
Trade surpluses with Hong Kong and the less
developed countries will help offset China's lar e
deficit with the develo ed West.
SECRET
China:
Balance of Trade
Billion US Dollars
f
All
n
Deficit
AllilM I
tom,
TOTAL
'
,
t=
Surplus
2
NON-COMMUNIST
us -~.
COMMUNIST
0
1969
556094 6-74
70 71 72 73 74
Preliminary
estimate
25X1
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 ARGENTINA: PERON ILL AGAIN
President Juan Peron's incapacitation with
anot er bout of "flu" suggests that his health is
continuing to deteriorate.
Although official sources have described the
illness as "mild" and stated that the President
would handle affairs of state from his residence,
his condition apparently is more serious than gov-
ernment spokesmen are willing to admit. Sources
close to Peron's inner circle have told the US
embassy that while Peron's condition is not criti-
cal, there have been respiratory complications and
Peron will have to maintain a reduced schedule
for an indefinite period.
The seriousness of Peron's condition was
pointed up by the sudden return to Argentina of
Peron's private secretary, Jose Lopez Rega, who
had been accompanying Vice President Peron on
her trip to Europe. Mrs. Peron also reportedly
intends to cut short her trip after stops in Italy,
Switzerland, and Spain. US embassy sources be-
lieve this is a precautionary move and that the
government is trying to avoid alarming the public
'This is the fourth time since Peron's return
to Argentina last June that he has suffered what
government sources describe as the flu.F-
25X6
ITo some extent, Peron's most recent sick-
ness can probably be attributed to the strains
imposed on him by his heavy schedule during the
past few weeks. In addition to coping with Argen-
tina's deteriorating economic situation, Peron
addressed a massive outdoor Peronist rally, made
several speeches to key economic groups, and met
with visiting foreign ministers of the La Plata
basin countries. He had already complained of
not feeling well after his trip to Paraguay earlier
this month.!
\All of these demands on Peron's energies
have undoubtedly taken their toll. The 78-year-
old President had hoped to travel to Spain for
medical attention and rest during the worst of
Buenos Aires' winter, but political pressures and
problems at home have made him reluctant to
leave.
Teron's latest illness will probably fuel re-
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President Peron and wife appearing earlier this month
r because of their strong reluctance to assume
the responsibility of governing, the majority of
the armed forces favors a strict constitutional
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SECRET
25X1
succession, with the military backing Vice Presi-
dent Maria Estela Martinez de Peron or Senate
President Jose Allende. Although officers are con-
cerned with the course of the Argentine economy
and Peron's lack of progress against the terrorists,
they would be reluctant to take the reins again
unless widespread violence broke out after
25X1 Peron's death.
PERU: A SHIFT TO THE LEFT c
1? ? rihe rising tensions caused by the forced
retirement of Navy Minister Vargas last month
appear to have subsided, but the six-year-old mili-
tary regime now is likely to shift further leftward
} LThe initial round of resignations by navy
officers who shared Vargas' moderate views
25X1 a ears over
President Velasco has demonstrated his
considerable military support, but tensions below
the surface will continue to have an unsettling
effect on the regime)
'L/ (It is the more radical government leaders
who are likely to profit most from the recent
military split., even though Velasco probably did
not specifically intend this. The new navy minis-
>''f f ter has taken a line in strong support of the
President and is unlikely to oppose the radicals as
did Vargas. The radicals also are likely to be
encouraged by two recent government actions:
the closing of a leading non-leftist magazine and
the outlawing of a major non-leftist political
1 party. Further moves against the non-leftist news
media appear certain. In addition, Velasco seems
more determined than ever to implement the
social property system, which will significantly
increase government control of industry. Radicals
have hotly defended this program
$L# ,The succession problem is likely to be af-
fe'cte'd by the outcome of the military split. In
January, Army Chief of Staff Morales Bermudez
is scheduled to become prime minister, a likely
post from which to succeed Velasco, who may
leave the presidency next year for health reasons.
Morales Bermudez, however, is a moderate)
it f7 I&orales Bermudez appears to be in no
danger of being ousted as was Vargas, since his
~c-base of support is more widespread. Radicals in
the cabinet and in the army, however, are likely
to persist in their efforts to reduce his influence.
I [n the past, Velasco has felt that Morales Be
mudez is the best qualified to provide stability
and durability to the revolution. Recent events,
however, suggest that the President places more
importance on instituting further revolutionary
change than on maintaining military unity and
Velasco
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KjeIl Laugerud
GUATEMALA: MORE OF THE SAME
tOn July 1, the rightist, two-party coalition
that as governed since 1970 Will rPrPiva nnnthnr
four-year lease on power when Kjell Laugerud, a
44-year-old retired general, fierce anti-communist,
and friend of the US is inaugurated as president.
Despite campaign promises to bring about modest
social and economic change and to deal with
political dissent legally, his government's policies,
direction, and methods are not likely to be much
different from those of his predecessor
"l fhe new cabinet, announced on Monday, is
basically conservative. Laugerud chose close
friends to head the key defense and government
ministries and technically competent, respected
men for most of the other positions.1
i Laugerud achieved his victory in the election
last /larch through blatant vote rigging-excessive
even by Guatemalan standards. Protests of the
fraud by the defeated Christian Democratic Party
r have been to no avail, and it seems resigned to
Laugerud's accession. The defeated candidate,
now military attache to Spain, is all but for-
gotten. The army was initially dissatisfied with
the government's conduct, but now appears fully
united behind the president-elect. The govern-
ment itself has eased its harassment of opposition
leaders, although political assassinations have con-
tinued in the interior. 1
I `s Nevertheless, Laugerud will start from a
weak position. The Christian Democrats are still
angered at having victory stolen from them, and
their disgruntlement is likely to smolder for some
1.'.time. The party believes that the violence directed
against it in the countryside is part of a govern-
ment effort to cripple if not eliminate it as a
viable opposition group.
Moderation is a scarce commodity in 25X1
E _~
Guatemalan politics, however, and the conser-
J vative Laugerud is likely to react with strong
countermeasures when confronted with dissent.
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.augerud will have to grapple with serious
economic and social problems inherited from the
outgoing administration of President Carlos
Arana. Although the middle class is expanding,
wealth and power still belong to only a small
segment of society. Many in the lower class live
on the borderline of poverty and starvation. In-
creasing inflation is worsening the economic
picture. Tax law revisions-periodically proposed,
but invariably defeated or watered down by busi-
ness interests--are essential t raise badly needed
revenues for the government.
_` the new president's relationship with Arana,
who will be the only ex-president in recent times
to remain in the country after his term in office,
could be delicate. Some observers believe Arana
will try to maintain a position of power by pre-
serving the loyalty of senior army commanders. If
Arana is successful in this, Laugerud will be deal-
ing witmore than just a consultant on policy
matters !.
' )Laugerud's main concern in external affairs
au
erud will
l
h
t
d
t
will be the perplexing problem of Belize, the
g
a
so
ave
o
evo
e consid-
neighboring British self-governing colony that
erabl time and energy to blunting the influence
Guatemala claims as its own territory. Belize
of his vice-president, Mario Sandoval. Sandoval,g3wants independence, coupled with a defense guar-
an extreme rightist, an advocate of political re-
antee from the British, but London wants to
pression and violence, and an ambitious leader of
withdraw completely. Its dilemma is how to pre-
one half of the governing coalition, will attempt
vent a Guatemalan take-over of an independent
to have a hand in most policy decisions. In deal-
Belize while avoiding the albatross of a defense
ing with him, Laugerud will be hampered by the
guarantee. Laugerud professes a hard line on
knowledge that he owes his election to Sandoval's
Belize and would probably intervene, by force if
skill in engineering the vote rigging. To Lau-
necessary, should the UK give Belize inde-
gerud's advantage is his support from the army,
pendence without reaching an accommodation
which is almost unanimous in wanting to mini-
with Guatemala. His preferred course, however, is
mize Sandoval's influence. Laugerud has already
probably to emulate his predecessors-procras-
won an important bout with Sandoval over the
tinate for four years and pass the problem un-
choice for president of Congress, but this struggle
resolved to the next president~
is likely to be only one of many, as both men try
to assert their will.)
25X1
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Page 23 WEEKLY SUMMARY Jun 28, 74
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//.EEL L IG~N~
E- m
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-c
Gy'r~0 STATES Of pM~~`GP
Weekly Summary
Special Report
Nationalist China Revisited
Secret
N! 5 8
June 28, 1974
No. 0026/74A
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7',7ationallst
CUM
Revisited
Chiang Ching-kuo
STAT
The Nationalist regime on Taiwan has profited from the island's spectacular
economic development, stable political institutions, and close relationship with the
US to solidify its control. International political and economic developments,
however, such as the rapprochement between the US and Peking and the interna-
tional oil crisis, have led some on Taiwan to question the island's prospects.
Increasing political isolation, the prospect of further normalization of relations
between the US and Peking, and continued buffeting of the island's economy by
world economic developments will confront the Nationalist leadership with in-
creasingly difficult problems that must be handled with limited political and eco-
nomic resources.
One of the Nationalist government's best assets is the firm leadership supplied
by Premier Chiang Ching-kuo. The Premier has been de facto head of the regime
since his father's illness two years ago. Broadly experienced, with an extensive
network of supporters throughout the party, government, and army, Chiang Ching-
kuo so far has succeeded in coping with Taiwan's international isolation. Increasing
concern over his economic, and some of his international policies, however, has
contributed in the past few months to the first serious, albeit muted, criticism of his
leadiership.
Special Report
SECRET
June 28, 1974
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Chiang Kai-shek
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The Nationalist regime in Taiwan is counting
on continued economic prosperity, stable polit-
ical institutions and continued close relations
with the United States to help prolong its 25-year
hold on the island. These assets are offset, how-
ever, by potential weaknesses in the economy,
long-range morale problems, and a widespread
belief that the all-important relationship with
Washington will be further eroded.
An encouraging sign of the Nationalists'
prospects for political survival has been the
regime's ability to weather successfully a change
in leadership. Since retreating to Taiwan in 1949,
the Nationalist regime had been dominated by
President Chiang Kai-shek. In the summer of
1972, serious illness and the vicissitudes of age--
he was 85---forced President Chiang out of active
political life. He made no public appearances and
received no high-level visitors between July 1972
and late March 1974, when he bade farewell to
the departing US ambassador. Although he is no
longer ill, he appears to be only casually in-
terested in public affairs.
Chiang Ching-kuo
Since mid-1972, Taiwan has been under the
leadership of the president's son, Premier Chiang
Ching-kuo, who had been groomed by his father
in a series of increasingly responsible positions.
He maintains a busy schedule
and appears fully in command of
political power. The Premier, for example, made
all the major decisions in Taiwan's confrontation
with Japan last April over Tokyo's civil air agree-
ment with Peking.
There's more to Chiang Ching-kuo's political
authority than the inheritance of his father's
mantle and his constitutional powers as Premier.
Chiang Kai-shek still provides a psychological
buttress, but Ching-kuo's authority rests on the
network of supporters built up over decades of
work at the heart of Nationalist politics. This
network is a major asset in a society where per-
sonal loyalties remain important.
position. As Premier, he selected, subject to his
father's approval, the membership of the Execu-
tive Yuan--the national cabinet-and brought
young technicians into the middle reaches of the
government. They owe their status to him and
have a vested interest in his continued political
success. Older associates of the president are
slowly being shunted aside.
To improve his government's image, Premier
Chiang has pushed hard to combat corruption,
not sparing those having high-level connections
with his father's regime. He has tried to make the
administrative apparatus more efficient and to
weed out the incompetent, the no longer useful,
or, in exceptional cases, the potentially hostile.
To strengthen his position in the army, the
Premier has instituted a system of rotation among
unit commanders and political officers, and per-
sonally approves all appointees from command
down to the regimental level. The new minister of
national defense, General Kao K'uei-yuan,
reputedly is a Chiang Ching-kuo man.
The Premier also has his supporters planted
in important Kuomingtang offices. Although the
party is more a tool of power than a source,
control of it gives Chiang Ching-kuo dominance
over the island's only major political organization.
Almost without exception, the standing commit-
tee endorses the decisions of the Premier, as they
did those of his father. Chiang Ching-kuo holds a
seat on the Central Standing Committee, and his
close associate, Li Huan, heads the party organiza-
tion department-the main lever of power in the
party. The reorganization of the party central
headquarters in the spring of 1972 inevitably
entailed some redistribution of power within the
party hierarchy-generally to Ching-kuo's advan-
tage. The Premier also played a major behind-the-
scenes role in selecting the candidates for election
to the Central Standing Committee in March
1972. Chiang Ching-kuo is now second only to his
generally inactive father in the official party hier-
archy.
I n consolidating his own position, the
Since becoming Premier, Chiang Ching-kuo Premier has sought the support of the Taiwanese,
has attempted to consolidate further his political in part by bringing more of them into political
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June 28, 1974
SECRET
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life. Since the Kuomingtang retreated to the
island in 1949, mainlanders have held most of the
high-ranking posts in the party, the civil bureauc-
racy, and the military service. A Taiwanese did
not reach the rank of ambassador in the foreign
service until 1972. The new cabinet that accom-
panied Chiang Ching-kuo into office in May 1972
contained an unprecedented number of six
Taiwanese, double the number in the previous
cabinet. For the first time, a Taiwanese became a
vice premier, while another was made governor of
the province.
Some Taiwanese intellectuals and politically
conscious young businessmen dismiss these moves
as meaningless sop. Mainlanders still hold the
most important positions in the government,
security apparatus, party, and army. Those
Taiwanese who have achieved high office not only
occupy the less vital offices, but also have been
involved with the Kuomingtang for almost all of
their political lives and are carefully watched by
mainlander subordinates. Some are "half-
mountainmen" who were born in Taiwan but
spent a great part of their lives in the mainland.
Mainlander-Taiwanese Tensions
Nevertheless, mainlander-Taiwanese animos-
ities have become less intense. Differences be-
tween the two groups have become blurred
through intermarriage and common cultural ex-
periences. As Taipei's diplomatic isolation deep-
ened, increasing concern about Taiwan's future
provided impetus for greater cooperation. Neither
group wants to come under the domination of
Peking. The mainlanders are interested in main-
taining their privileged political status on an
independent Taiwan. The Taiwanese business
community, which controls the private sector of
the island's economy, is equally determined to
maintain the capitalistic economic system that
has made it prosperous. Even though Taiwanese
appointments to national ministries are largely
cosmetic, the Taiwanese do have a stake in the
island's political life and are prominent in local-
level politics.
The Kuomingtang's iron grip on Taiwan's
political process, reinforced by a usually efficient
Special Report
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SECRET
25X1
security organization and backed up by martial
law legislation, makes organized political opposi-
tion hazardous. Most politically ambitious
Taiwanese have made their peace with the party
because there is no other choice. Many young
Taiwanese politicians believe that time is on their
side, not only because they outnumber the main-
landers, but because of Chiang Ching-kuo's need
to placate the Taiwanese in order to secure polit-
ical support and stability in the uncertain days
ahead.
Once hopeful of making Taiwan a republic
with no ties to the mainland, the Taiwan Inde-
pendence Movement has become badly frag-
mented and is poorly led. Improved relations be-
tween the US and China and Japan's recognition
of China ended the movement's hope of support
from Washington and Tokyo. Visits to Peking by
the movement's members reportedly have
resulted only in communist admonitions that the
future of Taiwan is within a united China. China
is interested in the Taiwanese independence
movement mainly for its potential nuisance value
against the Nationalist regime.
The Economic Picture
The importance of the Taiwanese within the
island's economy involves them in one of the
most sensitive areas of Nationalist policy. Busi-
ness support and confidence in the regime's
future are important elements in maintaining
stable control of the island. So far there has been
no indication that Taipei's diplomatic reverses
and anxiety about relations with the US have led
to a lack of business confidence, even though
many in Taiwan, both in and out of government,
now regard US-Chinese diplomatic relations as
only a matter of time. But if prosperity has
helped induce political apathy useful to the
regime, an economic downturn could spell
trouble. Certainly, the economy is still providing
a standard of living for the average citizen far
surpassing that on the mainland. Some of the
bloom, however, has come off the rose. Like
other developing countries, Taipei has been hard
hit by the sharp increases in prices of oil, basic
commodities, and manufactured goods that
Taiwan must import to continue its industrial
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Imports to Taiwan in 1973
Total=$3,792.5 (million U.S. dollars)
Japan
38%
U.S.
25?l0
Other
23%
West Germany
5%
Australia Hong Kong
3% Indonesia 3%
3%
556083 6-74
development. Nationalist policy makers were
already concerned about inflation last year, even
before the oil crisis, when inflation averaged 10
percent. By last fall, the prices of some items,
including daily necessities, were 30 to 50 percent
over those prevailing at the beginning of the year.
As 1974 began, inflation showed no sign of
abating; indeed, the round of crude oil price hikes
that had just occurred promised to aggravate in-
flationary pressures.
In January 1974, the government announced
sweeping economic stabilization measures, in-
cluding large price increases for such basic needs
as petroleum, electricity, and transportation, as
well as a tight money policy. To offset the in-
creased cost of living, a 10-percent pay raise was
granted to civilian and military government per-
sonnel with a 40-percent rise to follow in July. By
late May, there were some indications that infla-
tion may have begun to ease as wholesale and
consumer price indexes in April dipped from
March levels. The implementation of the eco-
nomic stabilization program, however, did not
eliminate concern within official and business
circles about Premier Chiang's ability to handle
economic problems. The tight money policy
threatens bankruptcy for many small and medium
firms, and the Premier may be unable to resist
Special Report
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June 28, 1974
SECRET
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Exports from Taiwan in 1973
Total=$4,483.4 (million U.S. dollars)
pressures to loosen the reins. In fact, Taipei has
decided to extend credits to small- and me-
dium-sized firms to finance imports of vital raw
materials.
The International Problem
Continued economic prosperity and political
stability are closely bound up with problems of
foreign policy. Taiwan still depends heavily on
export growth, imported raw materials and in-
dustrial machinery, and continued foreign-
particularly US-investment for sustained eco-
nomic growth. But the series of political reverses
suffered in the last four years-expulsion from the
UN and its affiliated organizations, and the
massive shift by other countries to recognize
China--call into question the long-term interna-
tional position of the island and the regime.
Diplomatic representation has been reduced to 35
countries, mostly in Africa and Latin America, as
the number of governments recognizing China
increased from 45 in 1969 to 90 by mid-1974.
The erosion is continuing. Taipei is probably cor-
rect in fearing that Malaysia's recognition of
China in May will be followed by the Philippines
and Thailand. In Latin America, Brazil and
Venezuela are actively interested in expanding
contacts with Peking.
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V 0CUf1C 1 ,
Taipei has been able to minimize the effects
of growing political isolation by adopting a more
flexible approach, including a de facto two-China
policy. More iimportantly, essential economic ties
have been preserved with major trading partners
that have switched their diplomatic recognition to
Peking.
The US Connection
Relations with the US, however, are at the
heart of Taipei's concern. Premier Chiang Ching-
kuo recognizes that continued close political, eco-
nomic, and military ties with Washington are a
major element in maintaining popular morale and
continued confidence in the future of the Na-
tionalist regime. Between the announcement in
July 1971 of plans for President Nixon to visit
Peking, and the arrival in May 1974 of Ambas-
sador Unger in Taipei, the Nationalist leadership
underwent a period of increasing anxiety about
relations with the US. Washington's detente with
Peking moved faster and was more substantial
than the Nationalists expected. The recent arrival
of a new US ambassador and the current ferment
Nations Having Diplomatic Relations With China
556089 6-74
Special Report
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SECRET
25X1
on the mainland have probably reduced fears of
new and precipitous moves in US policy toward
Peking, but many in the Nationalist leadership
and in the Taiwanese business community believe
that relations with Peking occupy a more prom-
inent place in US foreign policy than does a
competing concern to preserve a special relation-
ship with Taiwan.
Taipei's immediate reaction has been to cling
to ties with Washington as tightly and as long as
possible, while attempting to build up a greater
measure of economic and military self-suffi-
ciency. Preservation of the US defense commit-
ment to Taiwan, embodied in the 1954 Mutual
Security Treaty, is particularly important to the
Nationalists. Concurrently, the regime, while de-
emphasizing the "impossible dream" of a trium-
phant return to the mainland, steadfastly trum-
pets its refusal to talk with Peking. Premier
Chiang has ruled out the notion of turning to the
USSR to attain more room for political ma-
neuver-although he does allow the use of in-
cidents, such as occasional Soviet naval units
transiting the Taiwan Strait, to twit Peking. At
. jq~fY
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Republic of China (Taiwan)
Peoples Republic of China
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some time in the future, however, events beyond
their control may force the Nationalist leaders to
reconsider their absolute prohibition on talks
with the mainland. Unless they feel forced to do
so and they clearly have not, even when the
diplomatic tide has been running strongly against
them -they cannot be expected to change their
mind. The Taipei government will not easily give
up its claim to be the legal ruler of all China. To
do so would gravely undermine the juridical basis
of mainlander rule and render more acute the
question of Taiwanese access to real power.
The Japanese Factor
Taipei's all-out effort to maintain good rela-
tions with its major economic and political
partner the US--is in marked contrast to rela-
tions with its second-ranking economic associate,
Japan. Tokyo's switch of diplomatic recognition
from Taipei to Peking in September 1972 was a
severe psychological blow to the Nationalists.
Economic imperatives, however, forced Taipei to
maintain close business ties. Unofficial channels
of political communication were arranged and,
after a short period of uncertainty, economic ties
regained a high level. Nevertheless, a degree of
emotionalism has recently appeared in Taipei's
handling of its relations with Japan that is absent,
or at least suppressed, in its policy deliberations
concerning the US. In part, this may be due to
the supreme importance of maintaining special
ties with Washington. Moreover, Chiang Ching-
kuo's handling of the political confrontation with
Japan over the issue of civil airline arrangements
with Tokyo suggests that he miscalculated the
relative power of political factions in Japan's
ruling Liberal Democratic Party. Chiang's reaction
to the conclusion of the Sino-Japanese air agree-
ment in April 1974 was to terminate services by
China airlines and Japan airlines to Taiwan and to
close the island's airspace to all Japanese aircraft
rather than accept Tokyo's conditions for con-
tinued civil air service. The Premier probably had
little choice in making this move-he had publicly
threatened to do just this in an attempt to build
opposition to the proposed agreement in Tokyo.
Nevertheless, Chiang was careful to keep Taiwan's
economic relations with Japan separate from the
civil air issue and probably hopes to resume air
service after enough time has passed to save face.
The Premier's handling of the civil air issue is
atypical of his efforts to adopt a more flexible
Special Report
-6-
SECRET
June 28, 1974
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Premier Ching-kuo reviewing honor guard
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SECRET
foreign policy. Taipei warned Manila that recogni-
tion of China would damage the entire spectrum
of Filipino relations with Taipei, but nevertheless
is formulating plans to maintain economic, civil-
ian, and cultural ties with the Philippines even if
Manila does not heed the warning. The same
policy is being applied to Malaysia.
The Honeymoon Ends
After nearly two years as de facto head of
the Nationalist regime, Chiang Ching-kuo's polit-
ical honeymoon may be ending. His handling of
the Japanese civil air issue and his tight money
policy have led to the first real, if muted, crit-
icism of his government. So far, the Premier has
earned support from foes in the Nationalist old
guard, as well as from his long-time supporters
and the population at large, for his successful
economic policies and his handling of relations
with Taiwan's one indispensable friend-the US.
As Washington proceeds with further normaliza-
Special Report
25X1
tion of relations with Peking, and as economic
problems, such as inflation and world oil prices,
buffet Taipei, Chiang Ching-Kuo will face harder
problems than ever before. Missteps in dealing
with these problems could shake public confi-
dence in his leadership.
His regime is not in any immediate danger.
Moreover, the Premier benefits from a widespread
popular belief that there is no one capable of
taking his place and from the fatalistic feeling
that tiny Taiwan is merely a pawn in the game of
international politics. The island will probably
face a succession crisis when Chiang Ching-kuo
dies. There is no successor in sight, nor is the
Premier grooming one. Chiang will probably be
succeeded by a collective leadership, which will
have to deal with the enduring problem of main-
taining an independent Taiwan in a still less
friendly international environment.
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