INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100030009-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: January 25, 2011
• Sequence Number: 9
• Publication Date: January 21, 1983
• Content Type: REPORT

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gr 11,6, i;;;eliigen-c?e
International
Economic & Ener y
Weekly
21 January 1983
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International
Economic & Energy
Weekly
21 January 1983
iii Synopsis
1 Perspective?Mubarak's Vulnerabilities on Economic Issues
3
Briefs Energy
International Trade, Technology, and Finance
National Developments
15 Egypt: The Economy on the Eve of Mubarak's Visit
21
Japan: NTT Boosts Domestic Memory Chip Producersn
23 South Korea: Economic Decisionmaking in Transition
27 Cameroon: Tough Times Ahead
33 Publications of Current Interest
Indicators
Comments and ueries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
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International
Economic & Energy
Weekly
Synopsis
Perspective?Mubarak 's Vulnerabilities on Economic Issues
Egyptian President Hosni Mubarak will use his visit to Washington next week
to seek additional US security and economic help and to press for urgent US
efforts to carry President Reagan's peace initiative to fruition.
Egypt: The Economy on the Eve of Mubarak's Visit
Egypt so far has weathered the soft oil market and the global recession better
than most LDCs, but the country's economic problems could grow sharply in
1983. Faced with growing criticism of the US connection, Mubarak will use
his forthcoming Washington visit to seek changes in the economic aid program
that will more clearly demonstrate the wisdom of close US-Egyptian relations.
Japan: NTT Boosts Domestic Memory Chip Producers
Nippon Telegraph and Telephone (NTT) Corporation, a Japanese Government
entity, is giving a boost to the Japanese integrated circuit industry by
becoming the first purchaser of the next generation random access memory
(RAM) chip?the 256K (K=1024 bits) RAM. US firms already lag Japanese
companies in developing the 256K RAM; NTT's purchase and technical
assistance will give the Japanese companies an additional competitive edge
over their US rivals, bolstering Japanese efforts to perpetuate their lead in the
high-volume memory chip market.
South Korea: Economic Decisionmaking in Transitio
South Korea's highly efficient economic decisionmaking process has come
under increasing strains in recent years as Seoul attempts to devise new
approaches to manage a large and complex economy. Routine decisions and
macroeconomic policy continue to be handled efficiently, but Chun must
define lines of authority more clearly if the country is to achieve its relatively
bright long-term growth prospects
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Cameroon: Tough Times Ahead
Cameroon has been a model of economic progress and political stability since
it gained independence in 1960, thanks to the country's careful use of its
resources and the effective leadership of former President Ahmadou Ahidjo.
Despite this strong past performance, we believe the country will face
significant economic challenges over the next few years as a result of less
favorable international economic conditions and an overly ambitious domestic
development program
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Perspective
International
Economic & Energy
Weekly
21 January 1983
Mubarak's Vulnerabilities on Economic Issues
Egyptian President Hosni Mubarak will use his visit to Washington next week
to seek additional US security and economic help. Since Mubarak believes
that to strengthen his domestic standing he must gain further visible benefits
from the US connection, he can be expected to press for a more flexible aid
program, greater funding for weapons, and urgent US efforts to carry
President Reagan's peace initiative to fruition.
Mubarak's critics cannot point to any major blunders by him, but they contend
his performance has not matched the promise he showed upon taking office 15
months ago. Mubarak has been frank in discussing Egypt's domestic problems,
and the notion is widespread that the government must "do something." The
President has been unsuccessful in defining new policies, however, and there is
little agreement in Cairo over what should be done. By failing to offer a clear
vision of a better future, Mubarak has contributed to a malaise that resembles
the mood in Egypt during Sadat's last year, as well as to growing doubts about
his own leadership ability.
While Egypt so far has weathered the effects of the soft oil market and the
global recession better than most developing countries, it nevertheless faces
enormous economic problems, including rapid population growth and urban
congestion, inefficient public-sector industries, and unchecked government
spending. Lacking consensus on actions to deal with these issues, Mubarak has
focused on improving urban services in Cairo.
Egypt does not have the resources to deal with its economic problems; it faces a
tight foreign exchange situation requiring additional Eurodollar borrowings
and policy adjustments to limit imports. Should oil prices tumble or major
disruptions in international financial markets impede access to new foreign
commercial loans, a foreign exchange shortfall could force the government to
impose much tougher and politically risky austerity measures.
Egypt's economic problems during the coming year, if combined with foreign
policy setbacks and a further deterioration in the quality of life in Cairo, could
touch off domestic unrest. Mubarak's opponents are divided, however, and
discontent so far has not coalesced around any single leader or issue. Political
dissent has been kept within limits considered tolerable by the government,
which retains the emergency powers that it assumed after Sadat's assassina-
tion. The legal opposition parties are annoyances to Mubarak, not serious
threats.
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The largest Islamic fundamentalist group, the Muslim Brotherhood, apparent-
ly has no intention to challenge the regime. Although it is technically illegal,
the government tolerates its activities. The more extreme Islamic groups have
only limited popular support and, since Sadat's assassination, have been kept
in check by the security forces. These groups, nonetheless, still are capable of
isolated terrorist acts.
The military?Mubarak's most crucial source of support?remains loyal
despite penetration attempts by the Islamic extremists and some dissatisfac-
tion within the ranks over the same day-to-day problems of living that beset ci-
vilians. Senior officers generally support the policies of the government, which
in turn has tried to keep them happy by preserving their perquisites.
Progress toward a Middle East peace is Mubarak's most immediate foreign
policy concern. Given the bitterness in Egyptian-Israeli relations stemming
from Israel's occupation of Lebanon, settlement activity in the West Bank, and
a territorial dispute along the Sinai border, Mubarak is relying on the United
States to move the peace process forward. He is trying to encourage a US-PLO
dialogue, which he believes would lend enough momentum to the peace process
to compel the Begin government to show some flexibility.
A solution to the Palestinian problem would facilitate Egypt's reintegration
into Arab ranks. Mubarak does not consider reintegration itself urgent, since
there is considerable Egyptian-Arab cooperation even without formal diplo-
matic relations. Nonetheless, reintegration would be applauded by the many
Egyptians who believe that Egypt is being denied its rightful role as leader of
the Arab world and would briefly divert attention from domestic problems.
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Briefs
Energy
Probable Demise
of Major Canadian
LNG Project
Dome Petroleum's proposed $1.7 billion project to ship 4.2 billion cubic meters
per year of Canadian gas to Japanese utilities appears to have encountered
insurmountable problems. According to Alberta's Deputy Energy Minister, his
government plans to impose a minimum price on any of the province's gas
destined for the project at a level that almost certainly would make the price of
liquefied natural gas charged Japanese customers prohibitive. Because Alberta
was to have supplied 75 percent of the gas needed for the project, this decision
probably will make completion of the project impossible in spite of the fact
that British Columbia, scheduled to supply 25 percent of the project's gas,
gave its approval late last year. Demise of this project will hamper Canada's
efforts to diversify its markets for natural gas exports.
International Trade, Technology, and Finance
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Soviets Refuse To According to Turkish and Western press reports, over 100 Soviet ships have
Pay Higher Bosporus transited the Bosporus Strait since mid-December without paying Turkish
Fees service fees required by the 1936 Montreux Convention. The USSR reportedly
will formally protest the increase in fees that resulted from Turkey's decision
in November 1982 to peg the gold-denominated rates to the market price of
gold instead of the officially set rate that had been used previously. Turkey
maintains that the daily bullion rate for gold reflects its true value as
envisaged by the drafters of the Convention. Ankara's action follows years of
frustration over continuing decreases in real revenues received for services
agreed to in the Convention, which entitles Turkey to just compensation.
Although most other users of the passage to the Black Sea?including the
United Kingdom and Bulgaria, who also are planning formal protests?
reportedly are paying the higher fees, the Soviets contend the increase
contravenes the Convention and requires a revision of it
The USSR generates the majority of the merchant shipping volume going
through the Bosporus. If Turkish projections of $300 million in revenue this
year are accurate, the increased fees could cost the Soviets an additional $225
million in hard currency at a time when they are seeking to reduce such
expenditures. Press reports state that the Soviets owed the Turks almost $4
million in back transit fees by the first week in January.
A spokesman for the Turkish Government last week downplayed the press
reports with statements that payments for Soviet ships are not normally
received until four months after their transit. Ankara, nonetheless, is anticipat-
ing formal protests and warns it will take action upon firm evidence of
noncompliance by the USSR or any other country. Neither party is seeking a
confrontation, but the Turks, encouraged by the provisional acceptance of the
new fees by non-Soviet vessels, may try to impound a Soviet merchant ship
that has docked in a Turkish port or slow down the sanitary inspection process
for Soviet vessels that are seeking passage. The Soviets possibly would respond
by imposing limited economic countermeasures to force the Turks to negotiate
a lower fee.
Mexican Agricultural According to the US Department of Agriculture, Mexico will need to import
Import Requirements $2.5 billion worth of agricultural products this year?up from $1.8 billion last
Increasing year?because of bad weather, spending cutbacks, and the lack of hard
currency to purchase crucial agriculture inputs. Mexico's combined grain and
oilseed production last year dropped an estimated 27 percent, in large part
because rainfall was 75 percent below normal. Cuts in the Ministry of
Agriculture's 1982 budget curtailed subsidies for seed, fertilizer, and crop
insurance, and guaranteed support prices paid to farmers did not keep up with
inflation. Production of some other commodities?such as eggs?declined
because controlled farm prices did not cover production costs.
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Canada Extends
Customs Jurisdiction
To meet its import needs, we expect Mexico will seek new trade arrangements
with its agricultural suppliers. Mexico City already has approached Washing-
ton for $600-800 million in agricultural credit guarantees, in addition to the
$1 billion already extended, to cover the remainder of 1983 agricultural
purchases from the United States. Mexican 25X1
agricultural officials expect that the initial credit will be exhausted by July.
Nearly half of those credit guarantees were drawn down by a $450 million
loan from 26 US banks for Mexican imports of grain and oilseeds signed at the
end of December. We believe Mexico also is discussing new deals?including
barter arrangements?with other foreign agricultural suppliers. 25X1
Ottawa recently announced its intention to extend by September its customs
jurisdiction from the current 12-mile limit to a distance of 200 miles or to the
edge of the continental shelf, whichever is greater. This extension will permit
Ottawa to levy duties on offshore installations and on the supplies carried by
their associated vessels. Current plans call for fishing vessels to be exempt
from the new regulations. The government's legislation also continues a
program of federal subsidies to Canadian shipbuilders and includes provisions
requiring coastal trade to be carried in ships built, registered, and operated in
Canada.
Since major oil and gas deposits were discovered off the east coast and in the
Beaufort Sea in the 1970s, Ottawa has been pressured by Canadian manufac-
turers and shipbuilders to adopt protectionist measures to maximize Canada's
gains from offshore development. Ottawa expects its program, by discouraging
imports related to offshore development, to generate $2.4 billion in new
business for Canadian suppliers over the next decade. The retention of federal
subsidies will encourage the use of Canadian-built ships for resource explora-
tion and will also provide domestic shipbuilders with an edge in obtaining
contracts for the construction of patrol frigates and icebreakers used by
Canada's Maritime Command.
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US Countervailing
Duties on Spanish
Steel Exports
We believe that the increased use of protectionist policies will aid the current
retooling and restructuring of the French electronics industry. If successful,
the French policies, coupled with increased government leverage as a result of
recent nationalizations, could significantly reduce US computer sales to
France?nearly 10 percent of US computer exports in 1981, and could further
reduce the US share of the French installed-computer base.
The impact of countervailing duties imposed by the United States earlier this
month against certain Spanish steel exports is likely to be substantial, as steel
products account for about 15 percent of total Spanish exports to the United
States. Export sales have become less profitable recently due to declining steel
prices, and imposition of the duties may force at least one firm, Echevarria, to
cease exporting to the United States. The decision to impose duties follows the
International Trade Commission's ruling in December that US steel producers
had been damaged by highly subsidized Spanish exports. Madrid considered
other alternatives, such as voluntary restraints, but, after consultations with
Spanish steel producers, the Gonzalez administration concluded that counter-
vailing duties would do the least damage to the private sector?an important
point at a time when the Socialists are seeking to reassure a business
community nervous about the government's economic policies.
Japan Debating
New EconOmic Plan
National Developments
Developed Countries
Prime Minister Nakasone last week abandoned efforts to extend through 1987
a revised version of Japan's current economic plan. The government believes
the current plan's average annual target growth rate of 5.1 percent is out of
reach because of two years of poor economic performance.
By scrapping the nearly completed revision of the
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necrer
Israel Averts New
Inflation Record
current plan and requesting instead a longer term?eight- to 10-year?
economic planning document, Nakasone has headed off this confrontation.
Press reports indicate the new plan will not be ready before the June
parliamentary elections.
By delaying revision, Nakasone is only temporarily avoiding the confrontation.
The current seven-year plan's overly optimistic growth targets have led to
inflated revenue forecasts for the past two years. The resulting revenue
shortfalls are hindering government efforts to phase out deficit-financing
bonds. Faced with an even larger deficit in 1983, the Finance Ministry wants
to raise taxes
The 5.5-percent rise in the consumer price index in December brought the
inflation rate for the year to 131.4 percent?only slightly below the 1980
record level of 133 percent. Finance Minister Aridor had pulled out all the
stops in recent months to avoid being tagged with a new inflation record,
including slowing the rate of depreciation of the shekel to lower the price of
imported goods and increasing the prices of government-controlled commod-
ities by a modest 5 percent a month. Aridor, however, faces an uphill fight to
prevent a new record this year. The recent agreements on a new cost-of-living
formula and public-sector wages make real wage gains likely. Real wage
increases have been a major impetus to inflation in recent years.
Italian Budget The Treasury last month exhausted its authorized line of credit with the Bank
Deficit Financing of Italy, and Rome now is proposing legislation providing for an extraordinary
Problems one-year loan of $5.9 billion from the Bank of Italy. The proposal, if passed,
would circumvent 1981 legislation that ended the Bank of Italy's obligation to
act as the residual purchaser of Treasury bills. While adding to the monetary
base would worsen inflationary pressures, the primary alternative, boosting
interest rates on Treasury bills, would risk crowding private borrowers out of
the market and constraining economic growth?a politically less attractive
choice given already poor growth and employment prospects. The govern-
ment's deficit financing problem probably will persist because current labor
unrest will make agreement on bugetary austerity within the four-party
government coalition even more difficult.
Turkey's 1983
Budget Approved
Hoping to bring spending and inflation under control, Ankara recently
approved a budget for 1983 that represents a continuation of the government's
1980 stabilization efforts. Expenditures are slated to rise by 20 percent, about
equal to the expected rate of inflation. Investment?directed largely toward
energy-related projects and housing?will grow substantially, primarily at the
expense of transfer payments and current expenditures. Total projected
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revenue will fall short of planned expenditures by about $800 million, and
Turkish officials expect to make up the difference through domestic borrow-
ing. Although the anticipated deficit is greater than last year's, it still is less
than 2 percent of GNP. The overall thrust of the budget indicates that Finance
Minister Kafaoglu is largely adherin to the austerity policies of former
economic czar Turgut Ozal.
Australian Unemployment in December stood at 9.2 percent, a half percentage point
Unemployment higher than the November level and the worst since the 1930s. The number of
Still Rising unemployed now is 55 percent higher than it was a year ago. The rise in unem-
ployment coincides with a worsening economic situation. Canberra again has
trimmed its economic growth forecast and now is predicting a 2-percent
decline in real GDP for the fiscal year ending June 1983. The Fraser Cabinet
met in mid-January to examine job creation proposals, but concern within
Fraser's own party over the growing budget deficit makes it unlikely that any
major jobs program will be initiated. As a result, we believe unemployment
will continue to rise and probably reach 10 percent in several months.
Mexican Cabinet
Reorganization
Less Developed Countries
We do not believe that President de la Madrid's recent reorganization of
several ministries and the creation of the cabinet post of Comptroller General
will be effective in eliminating inefficiency or reducing corruption. The
greatest change was the shifting of industrial planning and promotion from the
Patrimony Ministry to the Commerce Ministry. Patrimony, renamed Energy,
Mines, and Parastatal Industry, will administer Mexico's state-owned enter-
prises, including the state oil monopoly, Pemex. The new Comptroller General,
Francisco Rojas Gutierrez, de la Madrid's campaign treasurer, will be charged
with monitorin overnment spending procedures and preventing misappropri-
ation of funds.
Success will be limited, we believe, by development of new jurisdictional
disputes and the magnitude of the sacrifices required to cut total government
spending some 20 percent. With the administration of the parastatal industries
separated from industrial planning, for example, conflicts between Commerce
and Energy are likely to arise and inhibit efficiency. Even though the new
Comptroller General was credited with stricter control in assigning and
auditing funds than past campaign treasurers, it seems unlikely that he will be
able to hold government spending within budget targets. We expect the
ministries to resist the cuts in federal employment necessary to live within the
1983 budget. De la Madrid will face increasing pressure to raise spending
limits as austerity begins to pinch?especially if inflation exceeds his adminis-
tration's projected 50-percent rate this year
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Venezuela's Financial The failure of two Venezuelan state corporations to meet loan repayments _
Difficulties Intensifying during the past month have heightened banker concern about the country's
financial prospects. As a result, international lenders last week postponed a
$204 million syndication, thereby undermining the government's plans to
refinance maturing short-term public debt. This year Caracas faces the need
to restructure about $7 billion in maturing credits into long-term loans to avoid
further depleting its liquid reserves, now estimated at $4.5 billion. According
to the US Embassy, failure to refinance most of these maturing debts could
cause Caracas to take extreme measures?the imposition of exchange controls
or the declaration of a payments moratorium?to avoid a foreign exchange
crisis.
Costa Rican At a Paris Club meeting last week, Costa Rica secured agreement on the
Rescheduling rescheduling of its repayment obligations through the end of 1983 on nearly
Agreement $1 billion of government-to-government debt; payments will be stretched out
through 1992, following a four-year grace period. San Jose also is nearing final
agreement on the rescheduling of its $1.5 billion foreign commercial debt.
Even with the rescheduling, Costa Rica will need to continue its tight rein on
spending and imports to keep the budget and current account deficits under
control. Despite the sharp drop in the country's standard of living, a privately
run public opinion poll indicates that support for Monge's policies has
increased and may suggest that growing numbers of Costa Ricans are resigned
to a lengthy period of belt tightening. Monge, nevertheless, could encounter
mounting criticism from left-of-center elements within his own party as the
austerity measures take hold.
Chile's Economic
Problems Mount
Chile's economic slide accelerated during second-half 1982. Business failures
are at record levels, the inflation and unemployment rates both exceed 20
percent, and industrial output is more than 17 percent below year-earlier
levels. The government has moved to stimulate the economy through increased
expenditures on public works and jobs programs, but the drop in consumer
purchasing power has negated the impact of these actions.
The worsening economy is sapping public confidence and creating domestic
discontent. Coalitions of farmers, small businessmen, and influential labor
leaders have organized protest actions ranging from boycotts of foreclosure
sales to street demonstrations. The government has taken a hard line toward
open dissidence; it used force to break up a Santiago labor demonstration and
exiled two prominent labor leaders and the president of the national Wheat
Producers Association in early December. Although Pinochet still favors free
market policies, he may heiTQred to make some concessions if the economy
continues to deteriorate.
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Jamaican Bauxite
Output Lagging
India To Buy
More Grain
From United States
The recent sale of $30-35 million worth of bauxite for the US stockpile
probably will allow Jamaica to squeak through its March performance review
to retain IMF funding, but serious problems still plague the bauxite sector. Al-
though Alpart, a consortium led by US aluminum companies, has reconsidered
earlier plans to shut down, the consortium intends to maintain current
production only if it can continue to slash operating costs. Even with the 1-mil-
lion-ton sale for the US stockpile and anticipated new barter agreements,
Kingston predicts that bauxite output in 1983 will fall to 7.7 million tons,
compared with more than 9 million tons last year. The bauxite sector?which
accounts for 75 percent of Jamaica's total export earnings?traditionally is the
country's major source of growth. Real GDP climbed only 1 percent last year,
well below Kingston's original target of 4 percent. Sluggish bauxite perform-
ance is likely to crimp recovery again in 1983.
Grain trader's indicate that India will buy another 1.5 million tons of wheat
from the United States, probably by the end of this month. New Delhi buys al-
most all of its imported wheat from the United States. In the current
marketing year that ends in June 1983, India already has purchased 3.9
million tons, an increase of 1.5 million tons over last year.
New Delhi probably is taking advantage of low international grain prices to
build grain stocks to the target level of 18 million tons by midyear, a target
that now appears within reach, according to USDA estimates. Stocks on 1 July
1982 were only about 15.5 million tons. Although India could purchase grain
from a number of exporters, the offer of blended credits may have influenced
New Delhi's decision to come to the United States.
Communist
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Continuing The USSR's improved hard currency trade picture continued into third-
Improvement quarter 1982. A surplus of $700 million brought the deficit for the January-
in Soviet Hard September period down to $1.5 billion, less than a third of the $5.2 billion gap
Currency Trade registered in the same period in 1981. Exports fell in the third quarter but in
the first three quarters as a whole were still 20 percent above the comparable
period of the previous year. About three-fourths of the increase was due to a
rise in oil exports, which are estimated to have climbed at least 50 percent.
Partial reporting suggests that exports of natural gas also ma have risen
sharply due to increases in both volume and average prices. 25X1
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Soviet Hard Currency Trade with Selected Countries Million US $
Jan-Sept 1981
Jan-Sept 1982
Exports
Imports
Balance
Exports
Imports
Balance
Total
16,369
21,609
-5,240
19,695
21,159
-1,464
Developed West
14,250
16,110
-1,860
16,847
16,869
-22
Of which:
Australia
13
636
-623
17
605
-588
Austria
872
499
373
680
534
146
Canada
56
1,231
-1,175
23
1,304
-1,281
France
2,414
1,778
636
2,296
1,322
974
Italy
2,430
1,044
1,386
3,048
1,207
1,841
Japan
812
2,199
-1,387
767
2,938
-2,171
Netherlands
915
532
383
1,621
390
1,231
Sweden
251
388
-137
399
390
9
Switzerland
252
538
-286
450
429
21
United Kingdom
711
1,083
-372
859
733
126
United States
145
1,460
-1,315
155
2,499
-2,344
West Germany
3,452
2;897
535
4,116
3,037
1,079
LDCs
2,119
5,499
-3,380
2,848
4,290
-1,442
Of which:
Argentina
38
2,855
-2,817
34
1,564
-1,530
Brazil
13
722
-709
168
491
-323
Iraq
873
5
868
1,235
25
1,210
Libya
211
353
-142
204
1,003
-799
The Soviets reduced imports in the nine-month period 2 percent below the
comparable period in 1981 by cutting purchases of Western agricultural
products, chemicals, and nontubular steel. A notable exception was imports of
steel pipe, which rose roughly 75 percent as Japan and West Germany began
deliveries for the Siberia-to-Western Europe pipeline. Sketchy Western trade
data indicate that imports of Western machinery and equipment also may
have risen substantially after falling by one-fourth in 1981.
Polish Price Warsaw officially has announced that retail prices will increase only 15
Increases percent in 1983, with price hikes scheduled thus far on public transportation,
postal services, and private vehicles. Many workers probably are concerned
about rumors of price increases that may not be covered by wage increases.
According to a survey by the regime, about 30 percent of Polish families
cannot afford to buy their meat or flour ration because of the 350-percent
11
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Romanian Efforts
To Spur Savings
Decentralization of
Services in Hungary
China Considering
Purchase of
Nuclear Plant
Secret
21 January 1983
increase in food prices last year. Significant price increases could generate
more resistance this year than last year. With martial law suspended, Polish
workers may be more willing to show their anger and frustration at the
regime's austerity policies. Such outbursts, however, would be localized and
controllable by the authorities.
The Romanian Government this month increased interest rates on savings
deposits and instituted a voluntary investment scheme, in which a typical
worker would contribute 8 to 38 percent of his income to his factory in return
for a guaranteed dividend. The moves are the latest in a series of steps by
Bucharest, including price and tax increases and administrative controls, to
sop up domestic purchasing power and support the drive to improve the
country's balance of payments. There has been a decline in the supply of
consumer goods, and the 22-percent rise in consumer prices since 1980 has led
to an unprecedented decrease in real wages. Consumers have reacted largely
by reducing savings rates, and the result has been long lines and severe
shortages, especially of food and energy supplies. The new measures do not ap-
pear to go far enough to bridge the gap between supply and demand
Hungary is moving rapidly to decentralize its service sectors in the hope that
improved and expanded services will lessen the impact on consumers of a
planned decline in real wages, as well as provide employment for workers
displaced by efficiency measures in large industrial establishments. As one
step to meet its goals, the government this month liquidated two of its largest
service establishments?the automobile and electrical maintenance enter-
prises?and replaced them with more than a hundred locally run, independent
businesses. Budapest also is encouraging small service enterprises by granting
them highly advantageous bank financing and by giving workers permission to
use workplace facilities and equipment after normal working hours for their
private businesses. In addition, from January to October 1982, the government
issued almost 8,000 permits to private artisans maintenance and repair
partnerships, and private taxicab operators
China's State Council has approved importing the country's first major
nuclear power facility, but formidable obstacles at home and abroad put its
construction in doubt. The chairman of the Hong Kong?based China Light
and Power Corporation?a joint participant in the project with Guangdong
Province?says his company has not decided whether to proceed. China has
not resolved major differences with the power company over management of
the plant and the cost to be borne by each side. The company can profit only if
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it makes substantial sales of power to Hong Kong after 1990. There has been
no official word on how the project will be financed. Earlier reporting
indicated that the Bank of China would not back the project, which has
construction and startup costs estimated at $4 billion?more than China's
total annual budget for electric power.
Prospective sellers of a nuclear plant presumably are cautious about any costly
project not backed by the Bank of China. The Chinese, nonetheless, have been
negotiating since July with French, British, Japanese, Swedish, and US firms
for nuclear technology and other cooperation. Beijing has been seeking bids to
begin construction this year. Guangdong reportedly has been disappointed
with the prices and financing offered by France, which has been energetically
seeking the contract. The lack of a strong nonproliferation policy currently
prevents the Chinese from contracting for the Westinghouse plant they are
said to prefer.
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Egypt: The Economy on the
Eve of Mubarak's VisitJ
Egypt so far has weathered the soft oil market and
the global recession better than most LDCs, but the
country's economic problems could grow sharply in
1983. At best, Egypt will face a tight foreign
exchange situation necessitating additional Euro-
dollar borrowings. Cairo will continue measures to
limit nonessential imports and may adjust its multi-
ple exchange rate system. Should oil prices tumble
or disruptions in international financial markets
impede access to foreign loans, Egypt would be
forced to impose much tougher and politically risky
austerity measures. Potentially these economic
problems could combine with adverse foreign policy
developments and a further deterioration in the
quality of life in Cairo to cause an upswing in
domestic turmoil.
Faced with growing criticism of the US connection,
Mubarak will use his forthcoming Washington visit
to seek changes in the economic aid program that
will more clearly demonstrate the wisdom of close
US-Egyptian relations. He will seek American help
to begin a major overhaul of sewage and water
facilities in Cairo that will publicly underscore
his?and US?resolve to help urban Egyptians. He
may also appeal for a share of aid as cash transfers.
Such transfers would not only demonstrate move-
ment toward the aid parity with Israel that Mu-
barak and many Egyptians believe was promised to
the late President Sadat, but also would be particu-
larly helpful should oil prices fall in the months
ahead.
1982 Economic Performance
We estimate that Egypt's current account deficit
increased only about $100 million to $2.3 billion
last year. Export earnings declined $300 million,
primarily because of the soft oil market. Larger oil
15
Egypt: Comparison of Egyptian and
Saudi Arabian Oil Pricesa
US $ per Barrel
45
40
35
30
25
20
15
rik
10
Saudi Arab Lightb
Egyptian Suez
Blend'
1111111111H111111111(iiiiiimmt111111111[IIII
5 1979 1980 1981 1982 1983
a For comparison, Egyptian oil prices in 1981 and 1982 have been adjusted
downward to approximate the 30-day credit terms of Saudi Arabian Light.
This adjustment is $0.50 per barrel for 60-day credits and $1.00 per barrel
for 90-day credits. Data are for the end of the month for the first plot and
the first of each month for all others.
b 340 API, 1.7% sulphur.
c34? API, 1.4% sulphur.
588579 1-83
revenue declines were avoided by frequent price
adjustments that enabled Egypt to boost oil produc-
tion to a historic high of 700,000 b/d in the fourth
quarter. Suez Canal revenues barely grew because
of the soft oil market and lower global trade.
Tourist earnings were affected by the war in
Lebanon and the global recession. Remittances
from workers abroad continued to decline because
of Egypt's unrealistic interest and exchange rate
policies.
The decline in foreign earnings was nearly bal-
anced by a fall in imports of goods and services.
Egypt benefited significantly from lower world
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commodity prices, particularly for foodgrains and
sugar that comprise nearly a quarter of total
imports. In addition, the government took steps to
restrict imports:
? The Central Bank of Egypt selectively tightened
domestic credit controls to reduce demand for
"nonessential" imports.
? The public sector's access to foreign exchange
was restricted.
? Private-sector importers were confronted with
increased administrative red tape that impeded
foreign purchases.
Continuing large aid inflows from the United
States and other, donors enabled Egypt to cover its
current account deficit. The Central Bank of Egypt
was able to limit its Eurodollar borrowings in 1982
to a $200 million syndicated loan. In addition,
public-sector banks borrowed another $75 million.
As a result, Egypt was able to avoid turning to the
IMF for loans that would be conditioned on politi-
cally risky policy adjustments.
Economic growth probably slowed to around 6
percent in 1982, largely because of the tight foreign
exchange situation. While good compared to most
countries, growth was down from the 8- to 9-
percent levels of previous years. Fueled by continu-
ing rapid monetary expansion generated by govern-
ment deficits equivalent to 20-percent of GDP,
inflation edged up to 13 percent in 1982. Most low-
and middle-income consumers are effectively shel-
tered by extensive government price controls and
subsidies, but prices of uncontrolled goods have
been rising at a rate of 30 percent or more.
Egypt's reasonably good overall economic situation
is often masked by the difficulties of urban life,
particularly in Cairo. Rapid population growth
since World War II has combined with insufficient
investment and maintenance to create serious ur-
ban problems. Inadequate public transportation,
jammed streets, periodic water shortages, and over-
loaded sewers all try the patience of Cairenes.
Secret
21 January 1983
Minimal Policy Changes
Officials are unwilling to undertake the policy
reforms needed to deal with the country's broad
economic problems. The maintenance of low food
and energy prices?bread at 5 cents a pound and
domestic petroleum prices that average 20 percent
of world market values?are prime examples of
policies that stimulate consumption and enlarge the
budget and current account deficits. Although top
economic officials are aware that pervasive cost/
price distortions skew investment decisions and
encourage waste, the major price adjustments
needed to address these problems are judged politi-
cally unacceptable. Furthermore, Egypt lacks both
the necessary data and the administrative flexibili-
ty to carry through effective reforms and policy
adjustments.
The notion is widespread that the government must
"do something," but there is little agreement as to
what. Mubarak has been unsuccessful in defining
new policies to deal with Egypt's economic prob-
lems. His reliance on staff advice is proving ineffec-
tive since Egyptian politicians, economists, and
bureaucrats cannot agree on policies or even goals.
Moreover, Prime Minister Mohieddin?a key civil-
ian adviser to Mubarak?is extremely wary of
policy reforms that might upset domestic stability.
Lacking a consensus on bold moves, the govern-
ment is pursuing only minor policy changes. The
steps taken so far by Mubarak include:
? Consumer electricity price hikes of 5 to 20
percent.
? A rise in controlled interest rates of 1.5 percent-
age points.
? A public-sector wage increase of $6 per worker
per month, far less than previous raises by Sadat.
? An increase in the number of items subject to the
consumption tax, coupled with tax rate hikes of 5
to 100 percent.
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Egypt: Economic Indicators
Note change in scales
Real GDP Growth
Percent
12
10
8
MIII1111111111111111111111
1111111111111111111?11111
1111111111111111111111111111111111
6
4
2
111111111?1111111111111111111
1977 78 79 80 81 82a 83b
Composition of GDP, 1980/81
Percent
Services and distribution 40
Other 6
Industry/mining 13
Petroleum 19
Agriculture 22
Shaded portions indicate range
Current Account Deficit
Billion US S
2.5
2.0
1.5
1.0
0.5
mum
1.I. Imo
mum IN Nom
1977 78
79 80 81 82a 836
Composition of Foreign Earnings in Jan-Jun 1982
Percent
a Estimated.
b projected.
cSep 1982 over Sep 1981.
d Initial estimate.
e Actual estimate.
f1MF estimate.
g End of period. Excluding gold.
Petroleum exports 30
Tourism 8
Suez Canal 11
Other exports 13
Other services 19
Remittances 19
Consumer Price Growth
Percent
25
20
15
10
5
MI moo
11111111111111?11111111111111
1977 78 79 80 81 82 83b
Money Supply Growth
Percent
50
40
30
20
10
1977 78 79 80 81 82,
Government Budget Deficit
Billion Egyptian Pounds
6
5
4
3
2
00
C:1
00
00
00
00
00
en
GO
eN
00
en
oo
00
Foreign Exchange Reservesg
Billion US $
1.2
1.0
0.8
0.6
0.4
0.2
79 80 81 Sep 82
588580 1-83
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With memories of the riots over bread price in-
creases in January 1977 still strong, even these
gradual changes were made with little public fan-
fare, and the public reaction was closely monitored
by Egypt's domestic security services. So far, the
changes have caused grumbling but no unrest.
We believe Egypt is unlikely to take bold reforms
until it faces much more serious foreign payments
problems. Until then, Cairo will make only small
adjustments designed to persuade aid donors, par-
ticularly the United States, that it is attempting to
deal with its longer term problems. In recent
discussions with US officials, for example, Prime
Minister Mohieddin hinted that Egypt may gradu-
ally reduce the bread subsidy, but there is a good
chance that his comments were mainly an attempt
to please the Americans.
Oil Market Threatens 1983 Outlook
We project that Egypt's current account deficit will
show only a slight deterioration to $2.5 billion
during the current year. This projection assumes
that:
? Oil prices will remain at 1 January levels-down
5 percent from the 1982 average-and Egyptian
earnings will remain flat as additional production-
offsets the price decline.
? Egypt continues to limit nonessential imports.
? Wheat and sugar prices fall slightly and overall
OECD export prices in US dollars rise less than 2
percent.
? Worker remittances and earnings from the Suez
Canal and tourism grow slightly.
Egypt can-with difficulty-finance a current ac-
count deficit in the range of $2.5 billion through
foreign assistance, the possible use of some IMF
compensatory financing, and Eurodollar loans. Al-
though most US banks are wary of providing
balance-of-payments loans to Egypt, Arab-owned
banks appear more amenable, according to a recent
survey by the US Embassy in Cairo. Egypt current-
ly is discussing a $200 million syndicated Eurodol-
lar loan with the Trans-Arabian Bank of Bahrain.
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21 January 1983
Egypt: Current Account Balance Billion US $
1980 1981 1982a 1983b
Current account balance -0.5 -2.2 -2.3 -2.5
Trade balance -3.7 -4.8 -4.8 -5.3
Exports 3.9 4.0 3.7 3.7
Oil 2.5 2.8 2.6 2.6
Nonoil 1.3 1.2 1.1 1.1
Imports 7.6 8.8 8.5 9.0
Net services 3.2 2.6 2.4 2.7
Receipts 5.3 5.1 4.8 5.2
Remittances 2.7 2.2 1.6 1.9
Suez Canal 0.7 0.9 1.0 1.0
Tourism 0.8 0.6 0.6 0.7
Other 1.2 1.4 1.6 1.6
Payments 2.2 2.5 2.4 2.5
Unrequited transfers 0.1 0.1 0.1 0.1
a Estimated.
b Projected. Assuming oil prices in 1983 remain at 1 January levels
through yearend.
Economic growth in 1983-barring a fall in oil
prices-is likely to be about 5 percent. Senior
Egyptian officials are increasingly aware that they
cannot repeat the rapid growth of the late 1970s
given global economic conditions. Inflation is un-
likely to slow; the budget deficits will remain large
and government energy price hikes could occur in
the second half of the year.
If oil prices decline sharply in 1983, as some
observers believe they could, Egypt would face
significant difficulties. We estimate that for each
$1 per barrel decline in the price of oil, Egypt
stands to lose close to $200 million in foreign
earnings from oil exports, Suez Canal tolls, and
worker remittances. A sharp decline might even
reduce job opportunities abroad and force some
Egyptians home. With foreign exchange reserves
equivalent to only one month of imports, a steep oil
price decline would leave Egypt scrambling for
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alternative financing. Commercial funding, how-
ever, would be increasingly difficult to obtain.
Egypt might be tempted to seek official aid from
other Arab states, but this would force Cairo to
take the initiative in relations with these states.
Egypt would do this only reluctantly since it would
not want to accept the sort of political conditions
that might be placed on such aid, conditions that
could harm relations with the United States and
reduce the chance of improving relations with
Israel.
The Political Context
Foreign exchange difficulties caused by a sharp
drop in oil prices could be used by the government
to justify tough reforms, but this argument proba-
bly would not be well received. Mubarak's efforts
to educate the public about the hard economic facts
of life so far have met little success. The Egyptian
public and the opposition could well blame the
increased hardships on inept or corrupt leadership.
The appeal of Islamic fundamentalism probably
would grow during a period of austerity.
Egypt faces the possibility in 1983 that the US
peace initiative may not produce significant prog-
ress. This would generate additional domestic ques-
tioning about the value of close ties with the United
States. Further Israeli provocations in the region,
moreover, would make Egypt's relations with Israel
an increasing liability. Such problems would work
together to foster additional criticism and doubt
about Mubarak's leadership.
Implications for the United States
President Mubarak will seek gains from his visit to
Washington that demonstrate the wisdom of con-
tinuing close ties with the United States. On the
economic side, Egypt is hoping to obtain:
? A significant commitment of US aid funds?
approximately $1 billion over the next five years?
to help build new sewage and water facilities in
Cairo.
19
? Further progress in moving toward aid parity
with Israel, through cash transfers.
? Further shifts of unspent aid to new uses.
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The Egyptians continue to believe that the United
States has failed to provide economic aid to Egypt
on terms equal to those given Israel, and they do
not like the conditions sometimes attached to US
aid?for example, the insistence on future domestic
energy price hikes as a condition for financing
energy projects. The Egyptians are clearly aware 25X1
that Washington places no such conditions on its
economic aid to Israel. Furthermore, the Egyptians
believe they have been more supportive than Israel
of US interests in the Middle East. Prime Minister
Mohieddin's recent jocular aside to a visiting US
official that Egypt might receive cash transfer aid
if it invaded Libya reflects Egyptian resentment
over perceived unequal treatment. Improvements in
the US aid program that enable Mubarak to
demonstrate more clearly the benefits of close
relations with the United States would help both
Mubarak and the US image in Egypt.
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Although Egyptian officials want to achieve a sense 25X1
of increased flexibility in the aid relationship, they
may not be clear on specifics while in Washington.
Mubarak's appeal for funding of visible projects is
somewhat at variance with requests for cash trans-
fers. Any cash transfers almost certainly would be
used to finance the balance-of-payments deficit
rather than specific projects. In any case, what is
most important for Egyptian officials is that Mu-
barak's trip be seen by Egyptians as producing
significant gains; the symbolism will prove as im-
portant as the details.
If an oil price decline in the coming months leads to
an Egyptian financial crisis, the US response will
have an important influence on overall relations.\ A
financial crisis would increase Egypt's need for
balance-of-payments support and would spur Egyp-
tian requests for cash transfers. If Egypt is forced
eventually to initiate serious negotiations with the
IMF, it will hope for US help in limiting the Fund's
conditions.
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Japan: NTT Bo DomesticMemory
Chip Producers
Nippon Telegraph and Telephone (NTT) Corpora-
tion, a Japanese Government entity, is giving a
boost to the Japanese integrated circuit industry by
becoming the first purchaser of the next generation
random access memory (RAM) chip?the 256K
(K=1024 bits) RAM. NTT will purchase sample
quantities in the fiscal year beginning 1 April 1983
and is scheduled to begin regular procurement one
year later. US firms already lag Japanese compa-
nies in developing the 256K RAM; NTT's purchase
and technical assistance will give the Japanese
companies an additional competitive edge over
their US rivals, bolstering Japanese efforts to per-
petuate their lead in the high volume memory chip
market. Japanese companies already have more
than half of worldwide sales of the latest-genera-
tion commercial memory device, the 64K RAM.
Continued Japanese dominance of the advanced
memory sector will directly affect the US merchant
semiconductor market.
NTT Moves In
NTT has announced it will incorporate 256K
RAMs to be produced by Nippon Electric Compa-
ny (NEC), Hitachi, and Fujitsu, into its computers
and telephone exchanges beginning in 1983. Ac-
cording to the trade press, NTT concluded that the
three Japanese firms are the most capable of
meeting its requirements after an extensive survey
of the world's semiconductor producers. This is not
surprising; NTT involvement with the companies in
the development of the 256K RAM began at least
as early as 1980?as confirmed by NTT's co-
authorship of technical papers on the device with
NEC/Toshiba and with Hitachi. The trade press
also indicated NTT will continue to provide free
design and manufacturing assistance from its rF:-
search laboratory.
21
NTT has had a long history of involvement with
the major Japanese semiconductor companies in
the development of advanced RAMs. Since the
mid-1970s NTT has had two very large-scale inte-
grated circuit (VLSI) research and development
projects with industry, which, according to the
Japanese press, had among their accomplishments
the development of 64K and 256K RAM devices.
NTT is now into its third VLSI project that has as
one of its goals the development of a one megabit
(1,000K) RAM. NEC, Fujitsu, and Hitachi were
the commercial members of the first two NTT
VLSI projects. Toshiba has recently been added to
the third VLSI project.
kkccording to the US trade press, NTT
also developed a 64K RAM device with Oki Elec-
tric in 1978 for NTT's in-house use.
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Impact of NTT's Help
Technical assistance from NTT will augment the
companies' efforts to develop a first-generation
256K RAM for the commercial market even if the
design of RAMs for NTT differs from the ulti-
mately accepted standard for widespread applica-
tion. Know-how from the NTT Electrical Commu-
nications Laboratories, perhaps the leading
semiconductor research facility in Japan, has
helped the companies refine their 256K RAM
designs and production processes for mass manu-
facturing.
Secret
21 January 1983
US companies wishing to sell 256K RAMs to NTT
will be at a severe disadvantage. First, they will
lack the established working relationship with NTT
that the Japanese firms have acquired as the result
of joint development efforts in the past. Second,
under the provisions of the NTT Procurement
Agreement that took effect 1 January 1981, US
firms must submit proposals (which NTT can
reject) and then must become qualified by NTT as
suppliers for the 256K RAM. The three Japanese
firms are already qualified since they were working
on development of 256K RAMs designed to NTT's
specifications before the NTT Procurement Agree-
ment
Furthermore, the impact of NTT's involvement
with the Japanese companies on the 256K RAM
will extend beyond the semiconductor industry.
NTT will require its prospective suppliers of com-
puter and switching equipment to incorporate into
their products 256K RAMs meeting NTT specifi-
cations. Thus, US suppliers of computers and
switching equipment will be locked out of the NTT
market?at least in the short term?unless they use
256K RAMs produced by Hitachi, Fujitsu, and
NEC, who also make competitive end products.
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South Korea: Economic Decisionmaking
in Transition
South Korea's highly efficient economic decision-
making process has come under increasing strains
in recent years as Seoul attempts to devise new
approaches to manage a large and complex econo-
my. President Chun Doo Hwan's corps of compe-
tent economic planners is divided between those
who believe decisionmaking must evolve beyond the
authoritarian economic command and control sys-
tem established by President Park Chung Hee in
the early 1960s and those who favor the traditional
management style. This struggle, combined with
less decisive top leadership, has resulted in in-
creased disarray, especially in implementing new
policies. Routine decisions and macroeconomic pol-
icy continue to be handled efficiently, but Chun
must define lines of authority more clearly if the
country is to achieve its relatively bright long-term
growth prospects.
Decisionmaking Under Park
Efficient economic decisionmaking has been a key
to South Korea's spectacular economic success over
the past two decades. International bankers and
businessmen have consistently ranked South Ko-
rea's planning process and its ability to implement
policy among the most effective in the world.
Several factors contributed to this efficiency. Park
had a strong personal commitment to economic
development. He initiated a highly structured, well-
defined decisionmaking process in the early 1960s
and ensured that economic policy was controlled by
highly competent professional technocrats, most of
whom had advanced degrees from US universities.
While his authoritarian system was criticized for
its restrictions on political rights, it had economic
23
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advantages; the government could mobilize re-
sources for key projects and plan for the long term
without being overly affected by day-to-day pres-
sures for consumer and special interest benefits.
The Economic Planning Board (EPB), established
in 1961, was the dominant force in economic
policymaking. It prepared formal development
plans, drafted the annual budgets, coordinated
positions on policy issues within the ministries, and
implemented policy. Policy implementation benefit-
ed from a close business-government relationship.
A well-defined, mutually satisfactory relationship
developed between the Park government and the
business leaders who built South Korea's major
corporations. Speed, flexibility, and pragmatism
generally characterized South Korean economic
decisionmaking throughout the 18 years of Park's 25X1
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Decisionmaking Under Chun
In many respects the positive traits that character-
ized economic planning under Park are still pres-
ent. Chun has maintained a strong government
commitment to and emphasis on economic develop-
ment, and he relies on a cadre of talented, largely
US-trained economists. For the most part, sound
economic principles, not political expediency, are
the bases for economic decisions.
Chun's economic planners have implemented pru-
dent macroeconomic policies. Kim Jae Ik, an inter-
nationally respected economist with a doctorate
from Stanford, has been the chief architect of
South Korean economic policy since Chun came to
power in 1980. Kim, from his position as senior
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secretary for economic affairs in the Blue House,
convinced Chun that government overstimulation
of the economy in the late 1970s was largely
responsible for the problems of 1979-80 and that
fiscal austerity was the best prescription. Chun
gave Kim wide latitude in formulating policy, and
Seoul enacted the politically unpopular measures
needed to cool the overheated economy. As a result
South Korea's economic fortunes improved greatly.
The inflation rate (wholesale prices) has been re-
duced from 40 percent to 5 percent over the past
two years, the current account deficit has been
more than halved, and real GNP growth?at about
6 percent in 1982?is once again among the highest
in the world. The austerity measures have enabled
South Korea to avoid the balance-of-payments
difficulties faced by so many other LDCs and to
retain the confidence of international bankers.
Developing Problems
South Korea's very success in managing economic
development and the resulting expansion of the
economy have put increasing strains on the deci-
sionmaking machinery in recent years. Extensive,
day-to-day government management has become
increasingly difficult. The investment decisions re-
quired by the $67 billion economy of today are far
more numerous and complex than those that arose
when the GNP was only $2 billion in the early
1960s.
Policy mistakes have convinced many observers
that South Korea needs to reduce government
intervention in the economy and to rely more on
market forces in allocating resources. Most Korean
observers believe, for example, that the Park gov-
ernment pushed investment in heavy industry too
fast in the late 1970s. The issue of a new role for
the government in managing the economy has led
to increased debate among South Korean economic
decisionmakers
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21 January 1983
Liberalizers Versus Traditionalists
Economic policymaking has been disrupted by the
struggle between government liberalizers?those
who espouse greater reliance on market mecha-
nisms?and the traditionalists?those who favor a
continuation of state-led economic development.
Several top government officials, including Secre-
tary Kim, have pressed for reducing import restric-
tions, easing foreign investment regulations, turn-
ing control of the banking system over to the
private sector, easing regulations on foreign ex-
change flows, and reducing subsidies. These efforts
have run into strong resistance, especially in the
Ministry of Commerce and Industry (MCI) and at
the middle levels of the economic bureaucracy. The
traditionalists point to the success of government-
led economic development in the past and cite the
Japanese model to bolster their argument.
The liberalizers initially swayed Chun, and his
public and private comments echoed the need to
open the economy. Over the past year, however, the
traditionalists appear to have gained ground by
stressing to Chun that domestic businessmen would
be subjected to increased foreign competition. As a
result, the pace of liberalization has been slow.
Chun, in fact, may not be aware of the extent to
which the struggle between the two camps has
caused disarray and confusion in South Korean
decisionmaking. The President, in any event, has
been less decisive than Park in dealing with such
conflicts.
The economic impact of liberal reforms is difficult
to predict. In such industrial areas as steel, ships,
and autos, heavy government involvement is proba-
bly beneficial because the domestic market is small
and the industries lack maturity. In other areas,
textiles and footwear for example, more reliance on
market forces may strengthen the country's com-
petitiveness. Liberalization of the South Korean
import and foreign investment regime would also
be beneficial to the country
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Business-Government Relationship
Although we believe movement toward greater
reliance on market forces will benefit the economy
in the long term, this transition has inevitably
resulted in a less-than-smooth response by business
to government policy in the near term and has
contributed to a weakening in business confidence.
Prices are gradually replacing government direc-
tives as signals for business investment. The busi-
ness community, however, is not fully in favor of
the liberalization trend. Although businessmen
want more say in making investment decisions and
greater freedom from government regulation, they
do not want to lose their traditional advantages,
particularly subsidized credit and protection from
foreign competition.
Other factors have made businesses less responsive
to government policy direction. Businessmen were
burned by following Seoul's advice and overinvest-
ing in heavy industry in the late 1970s, and as a
result they have lost some confidence in govern-
ment planners. The turnover of senior personnel in
the economic ministries has also shaken business
confidence and slowed decisionmaking. Chun, hop-
ing to raise confidence, replaced his economic
ministers last January in an effort to inject more
business experience into the Cabinet. He shuffled
economic ministers again in May and in June, this
time in response to a major financial scandal.
Rumors indicate another major Cabinet shuffle
will take place within the next two or three months.
A reorganization of the economic ministries in
November 1981, which sought to reduce national-
level economic decisionmaking, appears actually to
have further hampered the overall effectiveness of
the decisionmaking process. Besides cutting person-
nel throughout the government, Chun shifted all
international financial responsibilities from the
EPB to the Ministry of Finance. The EPB has thus
been stripped of much of its authority over other
ministries and now functions more as a budget
bureau than as an economic policy coordinator.
25
The business community is concerned about Chun's
basic attitude toward private enterprise. The Presi-
dent got off to a bad start with business because of
a hastily designed industrial restructuring program
that mandated mergers in six industries; this was
followed by orders to divest real estate holdings and
sell subsidiaries. Although Chun has been courting
business over the past year, he has yet to reestablish
the close working ties to the business community
that existed previously.
Foreign Investment Policy
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The various strains and problems that have devel-
oped in decisionmaking are perhaps most apparent
in Seoul's foreign investment policies. South Ko- 25X1
rea's foreign investment image has been tarnished
by problems foreign investors have had in dealing
with Seoul. Several US firms, including IBM and
Signetics, considered investments in South Korea
but went elsewhere because of difficulties in deal-
ing with the government. 25X1
Foreign investment policymaking has suffered as a
result of both the struggle between government
liberalizers and traditionalists and the November
1981 reorganization. Struggles among the minis-
tries for authority over foreign investment slows
decisionmaking. Moreover, attitudes toward for-
eign investm . 'ii I ? various ministries differ
significantly
Without one
ministry clearly in charge, these conflicts are time
consuming and convey mixed signals to foreign
investors. Dow Chemical's withdrawal and General
Motors' decision to give up management control of
its joint venture were caused, in part, by delays in
South Korean decisionmaking.
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21 January 1983
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Prospects
We believe the overall efficiency of South Korea's
economic decisionmaking structure and the policies
in place will enable the country to achieve a fairly
good growth rate in the coming year. The country's
growth potential over the longer term, however, will
not be realized unless the problems in the decision-
making process are resolved. Perhaps most impor-
tant, we believe Chun will need to lessen the
disruptions caused by the struggle between the
liberalizers and traditionalists and more clearly
define authority lines. We believe Seoul would do
best by retaining many of its traditional manage-
ment techniques and strong involvement in the
economy while at the same time selectively and
gradually implementing some liberalization re-
forms, especially in opening the economy to greater
foreign investment. South Korea needs the technol-
ogy embodied in foreign investment to broaden its
industrial base. We believe the country's top eco-
nomic planners?and Chun himself?are commit-
ted to creating a more favorable foreign investment
environment. A committee headed by Kim Chang-
jin in the Prime Minister's office has been set up to
handle foreign investment disputes, and Kim ap-
pears to bepushing hard to improve the investment
climate.
Most observers agree that economic decisionmak-
ing was more efficient when the EPB was the
dominant ministry, and recent reporting indicates
many Korean officials are attempting to restore the
EPB to its former position. The director of the EPB
recently obtained President Chun's concurrence to
return the powers the EPB lost in the 1981 reorga-
nization on a gradual, step-by-step basis. Other
elements of the government however, are trying to
block these efforts.
Chun will have to avoid bowing to political pres-
sures, such as those from the National Assembly
and business to provide more government stimulus
and larger wage increases. Such short-term politi-
cal expediency would be costly to the country's
long-term economic performance. A stimulus pack-
age announced last summer went further than
Secret
21 January 1983
many economists thought prudent and was dictated
in part by political considerations and pressure
from business.
Failure to come to grips with these issues would
increase the possibility of both economic and politi-
cal instability. The public has high expectations for
a return to rapid growth and improvement in living
standards. The economy's growth potential, howev-
er, has been reduced because it has reached a more
mature stage of development and faces a less
favorable international economic environment.
Implications for the United States
The outcome of the struggle between the liberaliz-
ers and traditionalists will have an important im-
pact on US economic interests and US-Korean
economic relations. The longer South Korea takes
to open up its markets to imports and foreign
investment the more likely are troublesome dis-
putes with the United States. In the near term, US
firms seeking to invest in South Korea will continue
to have difficulty in dealing with the Korean
Government because traditionalists at the working
level will seek to protect domestic interests. The
liberalizers in the government, however, are likely
to succeed in opening the Korean import market
gradually, and US exporters should find fewer
restrictions by the mid-1980s. In broader terms, a
well-managed, high-growth economy will buy more
imports from the United States and will be able to
spend more on defense.
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Cameroon: Tough Times Ahead
Cameroon has been a model of economic progress
and political stability since it gained independence
in 1960, thanks to the country's careful use of its
resources and the effective leadership of former
President Ahmadou Ahidjo. Despite this strong
past performance, we believe the country will face
significant economic challenges over the next few
years as a result of less favorable international
economic conditions and an overly ambitious do-
mestic development program. The newly installed
President, Paul Biya, will be required to make and
impose tough economic decisions to keep the coun-
try on a strong development track.
Oil Underpins the Economy
Cameroon began pumping oil in late 1977; by the
end of 1978 it was a net oil exporter. The US
Embassy reports that while many other LDC econ-
omies began to sputter in the late 1970s in the face
of a global commodities slump, Cameroon easily
weathered the decline as it began tn benefit frim
oil revenues.
we believe the prospect of a coming oil boom made
Cameroon attractive to foreign bankers just when
international financial markets were overflowing
with recycled OPEC money.
We believe Cameroon has been more successful
than West Africa's two other major oil producers?
Nigeria and Gabon?in managing its oil windfall.
US Embassy reporting indicates the government
has used oil money to build up the industrial and
27
agricultural sectors. By the end of 1981 economic
growth had topped 6 percent for the third year in a
row, oil production was up more than 25 percent
from the 1980 level to 88,000 b/d, and agriculture
was benefiting from favorable pricing policies and
good weather conditions. Food processing activities
led to strong industrial performance.
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In addition, Cameroon's foreign payments position
continued to improve, as more than $1 billion in
1981 oil revenues again made up for depressed
cocoa and coffee receipts. Yaounde's fiscal policies
held nominal import growth to little more than 10 25X1
percent. As a result, we estimate that Yaounde held
its current account deficit under $200 million, the
lowest since 1977 and an amount easily financed by
foreign donors and bankers. Although the external
debt climbed to $2.4 billion by the end of 1981, the
15-percent debt service ratio was still fairly low.
Typical of many LDCs in the throes of an oil boom,
however, Cameroon began to experience increased
demand-generated inflationary pressure as public
expectations rose sharply. 2
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We believe that economic growth continued in the25X1
6- to 7-percent range during 1982, but at some cost
to the international accounts. The slack world oil
market and increased domestic consumption re-
duced oil export earnings to about $850 million.
This downturn, along with still depressed sales of
cocoa and coffee, cut total export earnings to about 25X1
$1.5 billion, down nearly $400 million from 1981
and the lowest since 1979. With foreign exchange
outlays on the rise as Yaounde accelerated its FY
1981-85 development program, we believe the cur-
rent account deficit expanded to $650 million, the
largest since independence. 25X1
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Cameroon: Selected Financial Indicators
1977 1978
1979 1980
1981a 1982
Trade balance
Million US
40.5
31.2
-12.1
69.6
145.0
-300.0
Exports (f.o.b.)
828.1
1,078.5
1,302.6
1,620.0
1,880.0
1,500.0
Of which:
Cocoa
330.2
326.2
331.2
277.9
215.0
210.0
Coffee
400.4
320.1
356.1
299.4
235.0
220.0
Oil
25.0
265.0
720.0
1,100.0
850.0
Imports (f.o.b.)
787.6
1,047.3
1,314.7
1,550.4
1,735.0
1,800.0
Services and transfers
-149.9
-218.2
-268.5
-287.1
-325.0
-350.0
Current account balance
-109.4
-187.0
-280.6
-217.5
-180.0
-650.0
Foreign exchange reserves
42.4
52.3
125.7
173.5
70.9
NA
External public debt
861.0
1,182.8
1,663.7
2,000.0
2,400.0
2,800.0
Real GDP growth
Percent
4.0
5.0
6.1
6.2
6.5
6.0-7.0
Inflation rate
14.0
12.5
10.0
12.0
15.0
16.0
Debt service ratio
6.0
8.0
8.0
13.0
15.0
20.0
a Estimated.
b Projected.
we
estimate that Cameroon has borrowed about $400
million from various international lenders. The
remaining $250 million will come from an estimat-
ed $900 million in overseas investments that the
government has been accumulating as a financial
cushion since the startup of oil production
Looking Ahead
The Financial Picture. Cameroon, unlike most of
its West African neighbors, has an opportunity to
regain and maintain a strong financial position over
the next several years. We believe, however, that
Secret
21 January 1983
this will require the Cameroonian Government to
make extensive and politically risky adjustments in
the development program. Such changes could
probably be carried out fairly easily if Ahidjo were
still at the helm. President Biya does not have
Ahidjo's prestige, however, and in our view will be
less able to resist pressure from the country's
various interest groups to maintain those parts of
the plan of benefit to them
The current $8 billion development plan (FY 1981-
85)-the most sophisticated to date in preparation
and the most democratic in terms of participa-
tion-is targeted at consolidating the gains of
previous plans, meeting more of the economic and
social demands of the Cameroonian people, and
further diversifying the economy. To reach these
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Cameroon: Projected Current Account Balance and Debt Position Million US $
1982
1983
1984
1985
1986
Trade balance
?300
?333
?541
?535
?638
Exports (f.o.b.)
1,500
1,693
1,740
2,033
2,253
Cocoa
210
210
210
210
210
Coffee
220
220
220
220
220
Oil
850
1,043
1,090
1,383
1,603
Other
220
220
220
220
220
Imports (f.o.b.)
1,800
2,026
2,281
2,568
2,891
Services and transfers
?350
?394
?444
?500
?563
Current account balance
?650
?727
?985
?1,035
?1,201
External public debt
2,800
2,882
3,867
4,902
6,103
Investments abroad
650
goals, the government seeks to exploit more fully
Cameroon's abundant natural resources?particu-
larly oil and natural gas. In addition to developing
its petroleum industry, Yaounde wants to move
ahead on several other major programs in order to:
? Accelerate regional economic development.
? Maintain self-sufficiency in food.
? Expand the production of traditional export
crops.
? Increase utilization o tic raw materials in
industrial production
Should Cameroon manage to implement the fifth
development plan as it now stands, we estimate that
the country will face a cumulative current account
deficit of $4-5 billion over the period 1982-86 and
will have a total debt by the end of 1986 in excess
of $6 billion. In addition, we believe Yaounde will
be forced to draw down its remaining $650 million
of overseas investments?perhaps as early as this
year?just to make ends meet. Cameroon could, as
a result, be forced to turn to the IMF for balance-
of-payments assistance or perhaps to the London
Club or Paris Club for debt rescheduling by the end
of the decade.
29
In carrying out its proposed development program,
the Cameroonian Government is counting heavily
on loans. There is little inclination to finance
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development through increased taxation. Accord-
ing to the plan, Cameroon expects to garner $3.2
billion in project-related financing from interna-
tional banks and private Cameroonian interests.
Because Cameroon's domestic banking sector is
still underdeveloped, most of this must come from
foreign banks. Even though Cameroon currently
has a solid credit rating, we believe the government
will be un an where near this
amount.
Implementation of the plan will also be affected by
manpower and transport deficiencies. With less
than 5 percent of the population possessing any
technical skills, the country has a severe shortage of
qualified labor and must depend on foreign expatri-
ates, mainly French, to fill most of the technical
and managerial positions. The transport network is
grossly inadequate, with most roads impassable
during much of the year.
The Political Scene
Prospects now clearly depend on newly installed
President Biya's ability to consolidate his power
and handle the economy. Cameroonian officials
and international development experts agree that
major investments in agriculture are needed to
maintain Cameroon's ability, rare among African
states, to feed itself. This, however, would be
possible only at the expense of more popular proj-
ects in industry?such as the Kribi LNG project?
and social programs involving education, health,
and housing. The Cameroonian populace has come
to expect high-visibility projects such as the pro-
posed LNG venture as well as increases in the
standard of living
Secret
21 January 1983
We are concerned how Biya will implement any
needed program cuts to minimize popular disaffec-
tion. Particularly worrisome, in our opinion, will be
the reaction of residents in English-speaking west-
ern Cameroon, who have long resented what they
believe is second-class treatment by a French-
dominated bureaucracy in Yaounde. Biya is from
French-speaking southern Cameroon, and we as-
sume that he is well aware of the potential for local
unrest if he does not appear sympathetic to the
concerns of his western constituents. His task will
be more difficult because all of the country's
current oil production is off the western coast, and
we believe that regional politicians are carefully
noting the extent to which oil money is being used
to improve local living standards.
Biya's track record since he assumed office in
November is encouraging. US Embassy sources
indicate that he has been accepted calmly by
Cameroonians. In addition, Biya has used his ad-
ministrative talents to make some politically adroit
moves and to consolidate his position. In our view,
his selection of cabinet ministers from the country's
principal tribes and his choice of a Muslim north-
erner as Prime Minister?his constitutional succes-
sor?reflect his awareness of the political need to
balance his heritage as a non-Muslim, southern
minority tribesman.
We view Cameroon's military and internal security
forces as generally apolitical and able at least for
now to keep any antigovernment movements from
taking root. According to US Defense attache
reporting, these forces are disciplined and well
trained. Should domestic unrest develop, Biya, like
his predecessor, will probably rely on the national
police and gendarmerie?which receive better pay
and allowances than the Army?to maintain inter-
nal order. Biya almost certainly will emulate
Ahidjo's threats of force and promises of shares in
the political spoils?such as cabinet posts and
development projects?to keep Cameroon's many
disparate tribes working together.
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Still, we cannot rule out domestic unrest based?at
least in part?on economic grievances. We believe,
in particular, that the military could become more
troublesome if cuts in government spending prompt
a sharp decline in economic activity and members
of the lower ranks are forced to support an increas-
ing number of family members. The military no
doubt will be watching to ensure that it is not
required to bear an excessive share of the cost of
any economic slowdown.
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