INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000400130005-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 40
• Document Creation Date: December 22, 2016
• Document Release Date: June 8, 2011
• Sequence Number: 5
• Publication Date: August 22, 1986
• Content Type: REPORT

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Directorate of Secret
Intelligence
International
Economic & Energy
Weekly
22 August 1986
DI IEEW 86-034
22 August 1986
834
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International
Economic & Energy Weekly
22 August 1986
iii Synopsis
1 Perspective-GATT: Outlook for the Ministerial and a New Trade Round
3 Agriculture in the New GATT Round
7 New Issues in the GATT Round: Intellectual Property and International Invest-
ment
Non-OPEC Oil Producers: Limited Prospects for Reductions in Output
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directed to Directorate of Intelligence,
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Energy
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 86-034
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International
Economic & Energy Weekly
Synopsis
Perspective-GATT: Outlook for the Ministerial and a New Trade Round
Substantial disagreements over agriculture and the treatment of new issues-
services, intellectual property rights (IPR), and investment-portend difficult
negotiations once the new GATT round of multilateral trade negotiations gets
under way.
3 Agriculture in the New GATT Round
Liberalizing agricultural trade will be one of the most contentious issues in the
coming GATT round. Nonetheless, there is some potential for success, particularly
as increased budget costs of the CAP strain EC unity.
The inclusion of intellectual property rights (IPRs) and investment issues in the
GATT, both US initiatives, are two controversial subjects that will be addressed at
the GATT Ministerial beginning in mid-September in Punta del Este. Although
there is support from many GATT members to discuss both problems, hardline
opposition from a number of LDCs-particularly in the investment area-
threatens to hinder progress on negotiations.
Despite commitments from several non-OPEC oil producers, proposed cutbacks
are likely to reduce ouput far less than what OPEC is hoping for. Moreover, we be-
lieve total non-OPEC production will probably rise during the remainder of the
year.
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Relations between President Duarte and the private sector in El Salvador have
been marked by mutual distrust, strong ideological differences, and conflict over
economic policy. The adversarial relationship between Duarte and the business
community shows no signs of abating, and the poor economic prospects suggested
by this standoff will probably force the government to remain heavily dependent
on US economic assistance to generate even small levels of economic growth.
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International
Economic & Energy Weekly
disadvantage.
Substantial disagreements over agriculture and the treatment of new issues-
services, intellectual property rights (IPR), and investment-portend difficult
negotiations once the new GATT round of multilateral trade negotiations gets
under way. Before the launching of the the new round at the 15 September GATT
Ministerial in Punta del Este, Uruguay, the trade ministers from the 92 member
countries must iron out disagreements over a draft agenda for the negotiations-
something that the Preparatory Committee (Prepcom), after seven months of
discussions, was unable to do. GATT members believe there has been a severe
deterioration in the trade environment since the Tokyo Round (1973-79) and
question whether GATT's structure and enforcement abilities adequately meet
today's needs. Developing countries have been particularly critical of actions that
they say restrict access to developed country markets-such as the extension of the
Multi-Fiber Arrangement-and claim the US Farm Bill and Washington's recent
decision to expand wheat subsidies puts their commodity exports at a competitive
investment.
The GATT Prepcom proposed an ambitious agenda for the negotiations. Key
proposals include:
? Preventing new protectionist measures and rolling back existing trade barriers.
? Strengthening GATT's ability to resolve trade disputes.
? Reviewing the codes negotiated in the Tokyo Round, such as import licensing
and government procurement.
? Bringing agriculture and textiles into the GATT system.
? Expanding GATT coverage into the areas of trade in services, IPR, and foreign
participate in negotiations if such linkage is attempted.
Although the LDCs support the new round, many argue that the agenda is
overloaded and that previous commitments should be met before GATT is
expanded to cover new issues. Their negotiating priorities are to improve
regulations governing trade in agriculture, to focus on tropical and natural
resource products, and to enhance the special treatment for LDCs that minimizes
their obligations to adhere to GATT rules. Most LDCs are extremely wary of the
new issues, although some plan not to block their inclusion on the agenda in the
hope of getting better treatment for LDC priority issues. The developing countries'
main fear is that developed countries will seek to link increased liberalization in
goods trade to an agreement reducing LDC barriers to developed country services,
such as banking or telecommunications. We believe many LDCs probably will not
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Developed countries want the new round primarily to improve the functioning of
the GATT system; strengthen requirements authorizing temporary import re-
straints; increase the adherence to GATT rules by the more advanced LDCs, and
expand GATT to cover services, IPR, and investment. Even though there are few
international standards and growing protectionism in these new areas, several
developed countries would prefer to limit negotiations until they are studied
further.
Before the new round is launched, a final agenda must be distilled from the three
drafts that the Prepcom forwarded to the Ministers. One is a compromise text
negotiated among 48 developed and developing country members, but differences
remain on textiles, the three new issues, and agriculture. On the last item, the
French blocked consensus at the last minute, objecting to language on export
subsidies. The second draft agenda is supported by 10 hardline LDCs, led by
Brazil, and excludes investment, services, and IPR. Its sponsors believe that
GATT has no competence to handle these issues. In an attempt to forge a
compromise, Argentina, a cosponsor of the second draft, has drafted a third
agenda that is similar to Brazil's but includes services. According to Embassy
reporting, Brazil, India, and the EC have been meeting informally to discuss
services and may propose at the Ministerial that there be separate meetings for
services and goods-the United States wants both negotiated together.
Most countries are optimistic that a new round will be successfully launched and
are working informally to resolve differences before the Ministerial. EC members
are attempting to pressure the French to drop their objections to direct references
to agricultural subsidies. The GATT services group has been unable to reach an
agreement but will have a final meeting on 29 August to formulate their
recommendations for presentation in Punta del Este. Although Brazil and India
are not likely to agree to link-
ing negotiations of goods and services. They have not even considered IPR or
investment. Given the heavy and controversial agenda proposed, the new round
could easily drag on beyond the four years allotted, with members relying on
bilateral negotiations to resolve acute trade disputes.
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Agriculture in the
New GATT Round
Liberalizing agricultural trade will be one of the most
contentious issues in the coming GATT round. Most
GATT members support the inclusion of agriculture
in the new round, and many developing countries
claim that, unless agriculture is given top priority,
they will have little interest in negotiations. The major
stumblingblock, the European Community (EC), with
France as the driving force, will resist major commit-
ments that will force changes in its Common Agricul-
tural Policy (CAP). As a result, agricultural discus-
sions in the GATT negotiations are likely to be highly
politicized and drawn out. Nonetheless, there is some
potential for success, particularly as increased budget
costs of the CAP strain EC unity.
Since the Tokyo Round ended in 1979, overproduc-
tion and burdensome stocks in many agricultural
commodities have made export competition more
intense. Moreover, the transition of former LDC
importers such as Brazil to agricultural exporters has
driven developed countries toward greater agricultur-
al trade protectionism:
? Import barriers-including tariffs, quotas, health
restrictions and other nontariff trade barriers
(NTBs)-are employed by developed countries to
protect their domestic farmers, cutting off market
access for the LDCs' burgeoning exports.
GA TT Provisions for Agriculture
GATT has traditionally recognized the "special char-
acteristics" of agriculture by applying its rules more
leniently than on industrial goods. Specifically, im-
port quotas may be applied by member countries to:
? Prevent or relieve food shortages.
? Enforce domestic marketng or production control
programs, or remove temporary surpluses.
? Apply standards for classification, grading, or mar-
keting of commodities.
In addition, export subsidies may be used to support
primary products if they do not give more than an
"equitable" world market share in the product to the
exporting country. These special provisions for agri-
culture have historically been interpreted by GATT
members such as the EC to allow domestic supports
and export programs to protect their farmers from
the uncertainty and aggressive competition of world
markets. More recently, these provisions have been
cited to justify the expanded use of restrictive mea-
sures to protect agricultural sectors.
this area will likely be the most highly charged,
because farm support programs have strong social
and political ramifications.
? Export subsidies such as Canadian grain freight
subsidies, the EC's favorable credit terms, and US
payment-in-kind bonuses have provoked complaints
from exporters such as Australia, New Zealand,
and Thailand that subsidies are driving down al-
ready low commodity prices.
? Domestic agricultural subsidies in the form of
income supports and guaranteed minimum prices
encourage overproduction because they are seldom
tied to actual market conditions. Negotiations in
In preparing a draft agenda for trade liberalization in
agriculture, the Preparatory Committee (Prepcom)
based its deliberations on recommendations of the
Committee on Trade in Agriculture (CTA) adopted
by GATT in 1984. A majority of GATT Prepcom
delegations-with the EC dissenting-has proposed a
final draft on agricultural trade that calls for:
? Minimum levels of market access for all agricultur-
al products.
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Self-proclaimed agricultural nonsubsidizers-led by
Canada, Australia, and Thailand-are in the midst
of a series of strategy sessions designed to jointly
combat the trade-damaging effects of subsidies and
protectionist policies. A meeting last month in
Phatthaya, Thailand, achieved a show of solidarity
and strong commitment for reform among the 12
participants:
Argentina
Chile
New Zealand
Australia
Hungary
Philippines
Brazil
Indonesia
Thailand
Canada
Malaysia
Uruguay
A conference of the same countries to be held in
Cairns, Australia, on 26-27 August will probably
press for stronger language on subsidies, in light of
the failure of the Prepcom to achieve an acceptable
text on agriculture and the recent US decision to
subsidize wheat sales to the USSR. According to
Embassy reports, Canberra plans to assemble a solid
group of trade ministers who will insist on strong
language at Punta del Este. Though the 12 countries
do not share negotiating strategies for agriculture
and other topics in the new round, they agree that, if
a strong pledge for agricultural reform cannot be
achieved, they may question the value of
participating.
? A phase out of agricultural export subsidies within
an agreed time frame.
? Minimal NTBs on trade in agriculture.
? Adjustment of national policies to facilitate full
integration of the agricultural sector with GATT
rules.
? Special and differential treatment for agriculture of
developing countries.
Negotiating Positions of Key Players
EC members agree on the need to proceed cautiously
on agriculture to avoid further attacks on the CAP.
The EC, therefore, wants agriculture discussions con-
fined to the CTA in order to limit concessions.
However, there is growing pressure within the EC for
CAP reform and a negotiated halt to the budget-
crippling grain export subsidy war-the EC spends
almost three-fourths of its budget on agriculture, and
in 1986 expects an increase in the budget shortfall of
almost $1 billion stemming from increased subsidies.
Within the EC, France remains the hardline member,
with West Germany more flexible and the United
Kingdom acting as mediator in its current role as
Commission president. The EC's grain market-shar-
ing proposal met strong resistance at the recent Grain
Exporters' Summit in Vancouver but could be revived
as a transitional mechanism while export subsidies are
being phased out over several years.
France blocked EC endorsement of the majority
Prepcom draft by refusing to accept the strong lan-
guage on agricultural export subsidies that are inte-
gral to EC farm policy.
accor mg to massy reports, France has said it
will not let disagreement over agriculture block the
launching of the new round, and other Community
members are optimistic that compromise language
will be worked out before or during the GATT
Ministerial.
Japan probably will continue to maintain a low profile
in the negotiations. Tokyo's agricultural policy sup-
ports farm incomes through quantitative restrictions,
subsidies, and heavily restricted access to domestic
markets. Since 1983, Japan has made a start at
liberalization, decreasing its overall farm support
10 percent and reducing its direct export subsidies 25
percent. The Nakasone administration, however,
probably believes that agricultural spending cuts have
reached politically acceptable limits, according to
press and Embassy reporting. Therefore, Japan will
probably resist LDC and developed country agricul-
tural exporters' attempts to liberalize access to this
lucrative market.
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Selected GATT Members: Agricultural Export Market Share,
1979 and 1986a
Brazil 2.5
Australia
5.7
Canada, Australia, and New Zealand claim that EC
and US subsidies have forced down their export levels,
especially for wheat and dairy products. Australia has
been the most vocal supporter of agricultural negotia-
tions in the new round and has adamantly called for a
timetable on elimination of agricultural export subsi-
dies. EC subsidies
have cost Canberra over $600 million per year in
export earnings due to lower world grain prices. In
addition, the US decision to extend wheat export
subsidies to the USSR has provoked strong protests
from Ottawa and Canberra.
LDCs-especially Thailand-believe that, unless the
Prepcom draft declaration contains strong language
for the liberalization of agricultural trade, the negoti-
ations will accomplish little. Argentina and Chile
have declared that the protection of agriculture in the
industrialized nations has led to large distortions in
international markets and has constrained the ability
of developing countries to compete in world markets
or maintain food self-sufficiency. Many LDCs are
seeking broader market access to Japan and the EC
for their expanding agricultural exports. They also are
calling for a thorough overhaul of trade subsidies to
ensure that the subsidy war among grain exporters
does not continue to harm the trade interests of
smaller exporting nations. Bangkok, for example, has
accused Washington of unfairly subsidizing US rice
exports, depriving Thailand of at least $60 million a
year in foreign exchange earnings.
Better market access and greater discipline in export
competition are the primary goals for participants in
upcoming GATT talks on agriculture. Some mem-
bers-such as the EC and Argentina-feel agricultur-
al issues should be confined to the CTA, while
ASEAN and other members want discussion to cut
across the subsidies, quantitative restrictions, and
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tariffs committees. This broader treatment would
presumably foster more broad-based solutions to
structural problems in agriculture, as opposed to the
bilateral fixes a contained discussion might encour-
age.
GATT progress in agriculture will be closely followed
by both importers and exporters because of the in-
creasing politicization of grain trade. Progress on
agricultural liberalization is likely to be slow at best,
given the conflicts between domestic pressures for
farm protection and international demands for freer
trade. On the other hand, glutted agricultural markets
and the aggressive export provisions of the new US
Farm Bill could put cracks in the EC unity on
protecting the CAP. In the end, mounting budgetary
burdens from increased subsidy costs may eventually
provide the necessary momentum for reform.
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New Issues in the GATT Round:
Intellectual Property and
International Investment
The inclusion of intellectual property rights (IPRs)
and investment issues in the GATT, both US initia-
tives, are two controversial subjects that will be
addressed at the GATT Ministerial beginning in mid-
September in Punta del Este. Although there is
support from many GATT members to discuss both
problems, hardline opposition from a number of
LDCs-particularly in the investment area-threat-
ens to hinder progress on negotiations.
Trade in counterfeit products-those that infringe on
patents, copyrights, and trademarks-has become a
serious problem in international trade affecting both
developed and developing countries and involving a
wide range of goods. Counterfeit goods account for
approximately 3 to 9 percent of world trade-upward
of $170 billion-each year, according to an industry
group. Many GATT contracting parties have experi-
enced substantial economic losses as a result of this
illicit trade:
? United States. The infringement of IPRs costs US
companies as much as $20 billion in sales annually,
resulting in a loss of up to 750,000 jobs, according to
US Government and other studies.
? United Kingdom. British automobile spare-part
manufacturers lost more than $200 million in ex-
ports, according to an EC study.
? Switzerland. According to the Swiss watch indus-
try, there are as many as 10 million fake Swiss
watches produced and sold each year, resulting in
losses estimated as high as $500 million.
? West Africa. Cocoa farmers lost about $20 million
worth of their 1984 crop as a result of ineffective
counterfeit fungicide
To reduce these prob ems, some mem ers propose
that trade-related aspects of IPRs should be ad-
dressed in the GATT. An agreement on intellectual
property is aimed at reducing trade in counterfeit
goods, raising the minimum standard of protection
required under certain international IPR conventions,
and strengthening protection for the products of new
technologies such as semiconductors and biotechnolo-
gy. To date, most discussions have centered around
international trade in counterfeit trademarked items.
An agreement to improve protection of patented and
copyrighted works would attempt to lengthen patent
terms, increase the patent protection for such goods as
chemicals and pharmaceutical compounds, and ex-
tend copyright protection to computer software. In
addition, it would create a dispute settlement mecha-
nism to litigate contentious bilateral issues. This
multilateral approach would supplement bilateral ef-
forts by the United States to improve protection in
these areas. So far, however, there has been little
discussion or agreement among GATT members to
focus on patents and copyrights in the new round until
an agreement on trademarks is worked out.
A code governing trade in counterfeit trademarked
goods would seek to eliminate the economic incentive
to trade in products carrying fake trademarks while
minimizing obstacles to legitimate trade. The code
would provide governments with a standardized
means of either denying entry to counterfeit prod-
ucts-giving customs' authorities the power to seize
goods-or creating a judicial mechanism through
which such products can be taken out of the market-
place.
While countries could establish their own laws regu-
lating the importation of counterfeit trademarked
goods, there are several benefits derived from multi-
lateral action:
? Coordinated international measures would increase
the chances that trade in counterfeit products will
be reduced.
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? A GATT code would facilitate action in third
countries against the importation of counterfeit
goods that could displace the legitimate exports of
other countries.
? An internationally agreed upon mechanism to regu-
late the importation of suspect goods would prevent
the proliferation of dissimilar national laws that
could create nontariff barriersl
There is broad support among most developed coun-
tries-particularly from nations such as Switzerland,
France, and Japan whose firms rely heavily on brand
name and trademark recognition-to conclude an
anticounterfeiting code. A small group of developing
countries led by Brazil and India, however, oppose the
inclusion of a trademark code-as well as a code for
patents and copyrights-in the GATT. They claim
that:
? The GATT is not the appropriate forum because it
lacks the technical expertise and authority to deal
with IPRs. Instead, the hardliners claim that the
issue should be addressed by the UN-based World
Intellectual Property Rights Organization-a forum
that does not have an effective dispute settlement
mechanism.
? There is a danger that procedures and sanctions
directed against imports of counterfeit goods could
be applied to imports of genuine goods.
? The problem is not sufficiently grave to warrant
GATT attention at a time when there are other
more pressing issues such as reducing existing trade
barriers.
GATT members have expressed only lukewarm sup-
port for negotiating removal of investment restrictions
under the New Round despite the potentially distor-
tive effect of such measures on the world economy.
Incentives or disincentives created by these policies
shift investment and therefore trade flows between
countries. The United States seeks an agreement
within the GATT for greater discipline on these
practices, thereby making foreign direct investment
Trade-Related Investment Issues. Many governments
offer a variety of incentives to lure foreign investors to
their country. Inducements typically involve tax
breaks, although protective tariffs, export rebates, and
cash grants are also offered. Such practices can
determine where a company chooses to invest, altering
natural trade and capital flows. In fact, developing
countries would benefit by not having to provide
costly concessions to attract foreign direct investment.
Another aspect of this issue that is likely to come up
at the GATT Ministerial is whether to negotiate an
agreement eliminating investment performance re-
quirements. Many governments use these require-
ments to enhance the benefits they receive from
foreign direct investment:
? Local content requirements can force foreign inves-
tors to purchase raw materials in country, or employ
a specified number of nationals. By requiring for-
eign investors to purchase host country goods, less
expensive imports are displaced.
? Export performance requirements obligate investors
to export a certain share of their output. For
example, Taiwan recently granted Toyota the right
to build an automobile plant in Taiwan subject to
the requirement that from 12.5 percent initially to
as much as 50 percent of its automobile production
in the late 1990s be exported. Such requirements
artificially raise the quantity of affected goods in
world markets-having the same effect as an export
subsidy.
Broader Investment Issues. Few nations automatical-
ly allow foreigners to invest in their country, and
many would probably oppose a GATT agreement as
an infringement of their sovereign right to control
foreign investment. Two major issues are the right of
establishment-limitations on foreigners setting up a
business-and lack of national treatment-whereby
governments provide a less favorable environment for
foreign-owned firms than for domestic ones. Restric-
tions on the right of establishment or discriminatory
treatment of foreign firms reduce opportunities for
technology transfer, employment, and exports, as well
decisions more responsive to market forces.
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Foreign Views on Including Investment Issues in the GATT
Supports/Agrees
Agrees in
No Objection/
With US Position
Principle
Possible Support
France
European Community
Canada
Japan
Italy
Finland
Spain
New Zealand
Indonesia
Switzerland
West Germany
Thailand
Togo
Norway
South Korea
Sweden
Tunisia
Ghana
Uruguay
Australia Argentina
Denmark Brazil
Iceland India
United Kingdom Egypt
Malaysia Yugoslavia
Pakistan Cuba
Singapore Colombia
as limit host country firms' ability to compete interna-
tionally. For example, Brasilia's practice of closing its
computer industry to foreign investors undoubtedly
dulls the competitiveness of Brazilian firms that pro-
duce products requiring the input of advanced com-
puter technology.
Country Positions. Most OECD governments cau-
tiously support the US initiative to include investment
issues in the new GATT round. The EC Commission
believes a system of protection for investment is
needed but not necessarily under the GATT. Many
OECD governments-including Bonn and London-
are concerned that hostile reaction toward investment
by the developing nations will adversely affect new
round negotiations covering services trade, a more
important issue to developed countries. Moreover,
they fear that discussing investment issues in the
GATT will overload an already crowded agenda.
Most LDCs, while not supporting the inclusion of
trade-related investment issues in the GATT, appear
willing to accept their inclusion as the price LDCs
must pay for concessions on other agenda items. No
LDC government, however, appears willing to accept
the inclusion of broader investment issues.
Despite opposition from certain LDCs, GATT mem-
bers will most likely agree to conclude work on an
anticounterfeiting code for trademarks. In the patents
and copyrights areas, the course of future negotiations
is less clear. Few countries support such action at this
time, preferring to see the final agreement on trade-
marks before committing to undertake measures con-
cerning copyrights and patents.
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On the investment issue, there is a moderate chance
that the contracting parties will agree in Punta del
Este and in future negotiations to increase discipline
over trade-related investment measures. The develop-
ing countries are likely to balk, however, at attempts
to include broader investment issues. In addition to
opposition from the LDCs, most OECD governments
are reluctant to include on any GATT agenda invest-
ment issues that are not trade related. In fact, the EC
is probably willing to drop the investment issue
entirely from new round negotiations.
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Non-OPEC Oil Producers:
Limited Prospects for Reductions
in Output
Several non-OPEC oil producers have reasserted their
commitments to join OPEC's effort to restrain output
and boost oil prices, but voluntary cutbacks are likely
to reduce output far less than what OPEC is hoping
for. Moreover, we believe total non-OPEC production
will probably rise during the remainder of the year as
increases in exports from the North Sea, Australia,
and net Communist exports will more than offset any
voluntary reductions in output from other non-OPEC
producers. As a result, price stability will continue to
depend on OPEC's willingness to restrain output.
OPEC has not abandoned its effort to gain production
restraint from non-OPEC producers. Indeed, Saudi
Oil Minister Yamani specified a cut in non-OPEC
production as a condition of the quota agreement and
conveyed this to the oil-producing countries that had
offered to cut their output earlier this year.
Angola, Egypt, Mexico,
Available Production
Capacity
IV
Quarter
II
Quarter
IV
Quarter a
Change a
27.8
26.6
27.1
0.5
3.0
2.8
2.8
0
0.9
0.8
0.8
0
0.3
0.3
0.3
0
0.55
0.18
North Sea
4.0
3.4
3.8
0.4
United States
10.7
10.5
10.5
0
Canada
1.8
1.8
1.8
0
Brunei, Malaysia, and Oman recently indicated they
will implement the cuts they had promised. Norway
reaffirmed that it may reconsider its oil policy now
that OPEC has decided to cut output.
Nonmembers might have renewed incentive to coop-
erate with OPEC in the near future, having experi-
enced the consequences of a price war. Few producers
had the capacity to raise production to offset the
effects of lower prices, and they all would benefit
substantially from a rebound to about $15 per barrel.
Even the poorer producers such as Mexico probably
will take steps to at least appear as if they are doing
their part to restrain output.
The non-OPEC producers face a number of con-
straints to cooperating with OPEC that will probably
limit the amount of production actually reduced:
? The major non-OPEC producers are also large oil
consumers, and most of their production is used to
fulfill domestic needs, leaving only modest amounts
available for export. Non-OPEC production is cur-
rently averaging roughly 26.6 million b/d, but net
exports are running only about 6.5 million b/d.
? Total non-OPEC production is already roughly
1.2 million b/d below capacity, and producers are
probably unwilling to go much lower. Marketing
problems for Mexico and Egypt have kept combined
oil output about 300,000 b/d below capacity. Sea-
sonal maintenance, especially in the UK North Sea,
are reportedly responsible for another 600,000 b/d
decline in output. We estimate only about 200,000
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Cooperating Nations
Mexico
Angola
Malaysia
Noncooperating Nations
Norway
lion b/d.
Mexico has reiterated its "offer" to cut exports to 1.35 million b/d. This spring
exports fell to 1.1 million b/d because of marketing problems, but have rebounded
since then to about 1.4. Mexico earlier this year set its export target at 1.35 mil-
fields.
Production has been declining since January to roughly 600,000 b/d in July due
to pricing problems. Promised only to keep output below 900,000 b/d. Imposed a
production cap of 860,000 b/d for FY 1986187 to prevent the overworking of older
Indicated in June that it would be prepared to cut its crude oil output from its
current level of 300,000 b/d, but no amount was specified.
production cut of 50,000 b/d from its current level of 510,000 b/d.
Following OPEC's decision, Malaysia announced it would reduce output by 10
percent, but only if prices increase "significantly." This implies a potential
that OPEC has reached an agreement.
Agreed in May to reduce production by 50,000-100,000 b/d. Has since increased
production by 50,000 b/d to 550,000 b/d but may cut back by some amount now
Reportedly agreed in May to reduce output by 10,000 b/d from its production
level of 180,000 b/d.
rate of production growth as a form of cooperation.
Announced it will decide whether to cooperate with OPEC by 1 September.
Indicated in June it would not alter current production but might slow down the
United Kingdom Refuses to take measures that would help raise prices but probably would not op-
pose independent actions by companies regarding production volumes that would
serve this purpose.
Canada
Australia
China
USSR
Refuses to cooperate with OPEC. Has seen some shut-in of high-cost production
but, overall, not much change in output.
Production fell by about 120,000 b/d this summer because of oil-worker strikes
and a high tax structure that made some production for export uneconomic.
Will try to keep exports at 600,000 b/d to earn needed hard currency.
the rest of the year
Facing. a substantial deterioration in hard currency earnings and an improved
production situation, Moscow could raise exports by roughly 100,000 b/d during
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Secret
b/d of output, mostly in the United States and
Canada, has been shut in because oil prices fell
below operating costs.
? Producers have divergent interests and no formal
mechanism for communication or coordination. The
countries are a disparate group that range from
LDCs that depend heavily on oil for revenue to
industrial nations with larger, more diversified
economies.
? Growing financial difficulties and budget deficits
are making it politically difficult for governments to
agree to production cuts when there are no guaran-
tees that all other oil producers will follow suit.
? Technical factors limit additional output cuts. For
example, certain fields in Norway-particularly
Statfjord-produce associated gas, all of which is
sold under long-term contract.
? The North Sea producers-members of the Interna-
tional Energy Agency-are particularly susceptible
to strong pressure from the United States, which
advocates a hands-off policy in the oil market. F_
Cooperation Will Be Limited
In our judgment, combined voluntary cutbacks by
several nonmembers will probably reduce output by
only a maximum of 100,000 b/d this year. Cuts by
smaller producers such as Malaysia and Oman will be
token gestures to OPEC. Mexico said it would hold its
exports to 1.4 million b/d for 1986-a 10-percent
reduction from last year. Exports for the first half of
1986 were only 1.3 million b/d, but Mexico could
keep sales during the second half at 1.4 million b/d
and still honor its commitment to OPEC. Egypt will
base its "cutbacks" on already planned reductions in
output for 1986-reductions from current production
are unlikely. Promises of cooperation from others such
as Angola and China were probably lipservice, in our
view, and are unlikely to translate into significant
decreases in output.
We expect increases in output from other non-OPEC
producers, however, will more than offset voluntary
production cuts, causing total non-OPEC production
to rise by as much as 500,000 b/d over the coming
months. Following completion of summer mainte-
nance programs, UK production is expected to rise by
at least 300,000 b/d in the next month or two. Also, a
recent tax revision in Australia has triggered a re-
sumption of exports of about 100,000 b/d, and the
USSR has steadily increased exports in recent weeks.
Consequently, changes in nonmember production will
fall far short of OPEC's expectations and are unlikely
to affect price movements significantly this year. The
burden of price stability will remain on OPEC, al-
though it is unclear at this point how these circum-
stances will affect OPEC's discipline. If another price
war should ensue, Saudi Arabia might believe that
non-OPEC producers have not learned their lesson
and attempt to keep prices at very low levels for a
prolonged period.
OPEC's recent agreement is tentative and could
rapidly collapse if members cheat on their quotas. The
Saudis would probably renew the market share fight
and force prices down again if violations occurred.
Kuwait and Indonesia made explicit that their partici-
pation in the new accord was contingent on strict
adherence to quotas and that cheating by any member
would absolve them of quota obligations. If OPEC
members were to participate in the struggle for
market share and attempt to force their remaining
capacity onto the market, oil prices could fall to about
$5 per barrel. Under these circumstances, some indus-
try analysts believe that oil prices could remain below
$10 per barrel for two years before market forces lead
to a rebound.
If the OPEC agreement collapses, nonmembers would
probably remove any production restraint and join the
price war. Should prices erode and approach $5 per
barrel, additional output in high-cost areas such as
the United States and some production in the North
Sea and Canada would be significantly affected for
the first time. During the first year or so, however, the
additional loss of non-OPEC supply-even at prices
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around $5 per barrel-would be relatively small,
perhaps about 500,000 to 1 million b/d. In the North
Sea, for example, only about 500,000 b/d of UK
production would be unprofitable at $5 per barrel, but
much of this would probably be produced anyway.
Also, shutting in production would entail considerable
costs, which might induce operators to continue pro-
ducing despite short-term losses.
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El Salvador:
Private-Sector Uneasiness
Relations between President Duarte and the private
sector in El Salvador have been marked by mutual
distrust, strong ideological differences, and conflict
over economic policy. Even though private-sector co-
operation is essential to revitalize El Salvador's econo-
my, Duarte has continued to concentrate on improv-
ing the economic and social conditions of the lower
classes and has largely ignored the needs of the
business community. As a result, businessmen have
remained unwilling to increase investment or expand
production. The adversarial relationship between
Duarte and the business community shows no signs of
abating, and the poor economic prospects suggested
by this standoff will probably force the government to
remain heavily dependent on US economic assistance
to generate even small levels of economic growth.
The differences between Duarte and the private sector
date to 1980 when Duarte, as head of a civilian-
military junta, spearheaded reforms aimed at redis-
tributing wealth and breaking the private sector's
control over the economy. The major initiatives-
agrarian reform and nationalization of export indus-
tries and the banking system-robbed the private
sector of both political and economic power. Even
though Duarte has not enacted major reforms since
his election as President in 1984,
he believes that Salvadoran business-
men and the upper class should bear most of the
sacrifices necessary to achieve a socially equitable
economic recovery.
Duarte's opposition to the private sector has hurt the
economy. The political and economic fallout from the
1980 reforms-coupled with the continuing insurgen-
cy, slack regional trade, and low prices for agricultur-
al export crops-has led to depressed levels of invest-
ment and reduced both agricultural and industrial
El Salvador: Gross Fixed Private
Domestic Investment, 1970-85
Investment
(million US $)
Annual Change Investment as a
in Investment Share GDP
(percent)
(percent)
NA
8.1
1971
209.3
7.0
8.3
1972
272.0
30.0
10.2
1973
245.7
-9.7
8.8
1975
320.3
14.0
10.2
1976
355.1
10.9
10.9
1977
430.8
21.3
12.5
1978
495.3
15.0
13.5
1979
371.2
-25.1
10.3
1980
189.4
-49.0
5.7
1981
161.3
-14.8
5.3
1982
151.0
-6.4
5.3
1983
164.0
8.6
5.7
1984
186.0
13.4
6.3
1985
202.7
9.0
6.8
production. Gross fixed private investment is roughly
equivalent to what it was in 1971, and less than half
the 1978 peak. The industrial sector is operating
under 70 percent of capacity, according to the World
Bank, while the 1985/86 coffee harvest may be the
lowest in 20 years, according to the US Embassy.
Businessmen remain concerned about their inability
to influence economic decision making and fear that
Duarte will attempt to increase the state's control over
the economy. Low business confidence is aggravated
by cumbersome bureaucratic procedures and misman-
agement. Embassy reporting provides numerous in-
stances where the lengthy and difficult process of
Secret
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El Salvador: Economic Indicators, 1979-85
Real Gross Domestic Product Growth
Percent
El
Manufacturing Output
Index: 1979=100
getting foreign exchange has cost business sales.
Businessmen correctly perceive that the government
has virtually ignored major macroeconomic problems
such as the need to earn foreign exchange by stimulat-
ing exports.
Nonetheless, strong backing from the United States
and the Salvadoran military has bolstered Duarte's
position vis-a-vis the private sector. The President's
ability to control policy is also enhanced by his party's
control of the National Assembly. Embassy reporting
indicates that the Salvadoran business community
realizes that US military and economic aid has
accelerated the downward trend in political violence,
substantially improved the counterinsurgency effort,
and raised El Salvador's international image. As a
result, the serious problem of capital flight-which
reached over $1 billion during the peak of violence in
1981-82-appears to be stemmed.
Despite the improvement in the security situation,
however, progress in subduing the insurgency has
Agricultural Output
Index: 1979=100
been gradual and costly. Moreover, the guerrillas
increasingly have focused on economic sabotage in an
effort to offset the superiority of the armed forces and
highlight the vulnerability of the government. As a
result, the domestic climate has remained tenuous and
strongly unfavorable to either domestic or foreign
investment.
Many in the government appear to recognize that the
cooperation of the private sector-which produces
roughly 70 percent of GDP-is essential for stable,
long-term economic growth.
Duarte is being pressured by members of
his own party to be more conciliatory. In particular,
Minister of Planning Chavez, who hopes to be the
next president, has attempted to establish cordial
relations with the business community.
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Duarte could ease tensions with the private sector,
both by providing economic incentives and by modify-
ing the way he deals with the business community,
but his options are constrained by his need to be
responsive to his constituents-particularly labor and
peasant groups. Embassy reporting indicates that the
President's concerns about the potential for leftist
labor agitation and his desire to strengthen his sup-
port among democratic unions caused him to soften
his January austerity program by maintaining price
controls and subsidies and including some salary
increases. Many of the reforms that would be most
effective in boosting private-sector confidence and
improving economic prospects-such as additional
devaluations-would impact negatively on the lower
classes and therefore tend to be rejected out of hand
will remain unwilling to boost investment or contrib-
ute to the revival of the economy without some signs
of conciliation from the government.
by Duarte.
Private-sector leaders have initiated dialogue with the
government on several occasions in an effort to im-
prove relations, and several business groups have
given Duarte proposals for revitalizing the economy.
The US Embassy reports that some moderate busi-
nessmen have made efforts to improve communica-
tion, but they feel
their suggestions have been ignored. Further compli-
cating matters, a hardline minority continues to fo-
ment opposition to the Duarte government. For exam-
ple, the January
announcement of the austerity package precipitated
efforts by rightist businessmen to mobilize public
protests and form a broad-based opposition front to
demand revisions in the program. These efforts so far
have failed, however, due to lack of broad private-
sector support, financial difficulties, and distrust of
rightist intentions by labor groups.
Relations between the private sector and the govern-
ment are unlikely to improve significantly in the next
two years, making the prospects for sustained eco-
nomic recovery poor. Despite the importance of the
private sector, we expect that President Duarte will
continue to lean toward satisfying popular demands at
the expense of measures to restore business confi-
dence. For its part, the business community probably
In our judgment, the private sector will not abandon
its cautious attitude or be able to significantly alter
the government's agenda. The country's seven major
business organizations lack the unity or political clout
to influence policy. Moreover, we believe that the
reelection earlier this year of moderates to lead major
private-sector groups indicates little desire on the part
of most businessmen to challenge the government.
Rather,
the business community will continue to work for a set
of fair, mutually agreeable ground rules.
As a result of the continuing stalemate in private-
sector relations, we expect economic growth to lan-
guish at 1 to 3 percent this year-well short of the
level necessary to reverse the slide in real per capita
income that started in 1980. In addition, we foresee
no end to a reliance on agriculture for export earn-
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ings, as the business community will remain unwilling 25X1
to move toward production of nontraditional exports
without incentives from the government.
Without increased private-sector involvement in the
economy, El Salvador's economic dependence on US
aid may increase. In our judgment, Duarte believes he
can rely on US economic aid to see him through hard
times without making the politically risky reforms
essential to restoring the economy or boosting private-
sector confidence. Duarte is unlikely to implement
conditions attached to US aid that call for increased
private-sector-government cooperation if he believes
they would weaken his popular support. Salvadoran
businessmen, on the other hand, are likely to increase
pressure on the United States to force Duarte to
accommodate their interests.
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UK North Sea
Oil Exploration
To Fall
would be profitable to increase exploration.
British oil companies will sharply cut North Sea exploration in second-half 1986
because of the continued slump in oil prices. The UK Offshore Operators'
Association reports that, by yearend, exploration could fall by as much as 40
percent from 1985 levels. Flagging activity is already evident with only 41 of 111
available drilling rigs in use over the past two months, a period when drilling
usually picks up due to calmer seas. Exploration activity is unlikely to pick up even
if oil prices rebound somewhat because oil companies have already slashed North
Sea exploration budgets-formulated with the assumption of oil prices of $15 to
$18 per barrel-by as much as 50 percent. Industry officials now estimate that oil
prices would have to rise to a sustained level of at least $18 per barrel before it
Libyan Libya is reorganizing its oil industry following the 30 June withdrawal of US
Oil Industry companies. all assets and operations of 25X1
Reorganization US oil companies will be incorporated into the Sirte Oil Company, whose activities
will be overseen by Mansur Muhummad Bin Niran of the Libyan National Oil
Company. Assuming the reorganization is completed, Sirte will be producing over
50 percent of Libya's total production of about 1.1 million b/d. The former Sirte
Oil Company was producing about 100,000 b/d, but production has slipped in
recent months due to a lack of oilfield investment. Sirte 25X1
has indefinitely suspended all new foreign oil equipment purchases because of
Libya's financial crisis. If Libya continues to neglect capital and operating
expenditures for its oil industry, Libya will be unable to maintain its productive ca-
pacity at its current estimated level of 1.6 million b/d. 25X1
23 Secret
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Reaction to Mexican Several Latin American countries are positioning themselves to take advantage of
Debt Agreement the innovative financial package recently put together by the IMF for Mexico.
Failure by these governments to obtain comparable terms tied to the prices of key
export commodities or to economic growth might provoke them to adopt confron-
tational tactics. For some, the commitment to large new loans for Mexico will raise
expectations of substantial new credit infusions:
? Argentina has delayed its talks with the Fund in an effort to obtain equal
treatment. Argentine Government officials recently noted that weak agricultural
prices are analogous to lower oil prices, according to the US Embassy. President
Alfonsin also has told the press that Argentina will request a sizable reduction in
interest payments because of the price-depressing effect of US-subsidized wheat
sales to the USSR.
? Although Venezuelan officials have not yet commented publicly on the Mexican
agreement, Finance Minister Azpurua told the US Ambassador in June that
Caracas was examining ways to link debt service to oil prices. Venezuela, which
relies on oil for 90 percent of its exports, will begin talks with foreign bankers
this fall to renegotiate terms on its rescheduling agreement.
? In his state-of-the-nation address on Sunday, Ecuadorean President Febres-
Cordero said that Quito would seek more favorable terms on its foreign debt if
oil prices do not rebound soon. Up to this point, Ecuador has cooperated fully
with creditors.
? Brazil's Finance Minister Funaro told the press in late July that Brazil needed to
cut its net debt payments to 2.5 percent of GDP next year to support a planned
7-percent growth rate.
? President Garcia of Peru is probably taking credit in private for the favorable
terms won by Mexico, suggesting that this vindicates Lima's hardline debt
policies. Garcia recently announced an indefinite extension of his unilateral limit
on Peru's debt service, placed new limits on foreign remittances, and paid only
part of the country's arrears to the IMF.
IMF Sanctions The IMF publicly declared Peru ineligible to draw on Fund resources last week
Against Peru when Lima failed to clear about $160 million in arrearages. Peru has paid $35 mil-
lion, and, according to official statements, the government was resigned to being
declared ineligible. Peru probably will not declare a total debt moratorium because
the government still hopes to receive continued loans from the World Bank and the
Inter-American Development Bank, as well as bilateral credits from some OECD
governments. The IMF declaration places new credits from the development banks
in jeopardy, but it should not affect loans currently being processed. President
Garcia has used the occasion to reiterate his assertion that developing countries
should only be expected to service their debts in accordance with their ability to
pay.
Secret 24
22 August 1986
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Venezuela Scraps Plan The Lusinchi administation has scrapped plans to assume most of the government-
To Assume Private approved private foreign debt. Passed by Congress last month, the scheme was
Foreign Debt intended to provide balance-of-payments relief and to raise revenues to cover next
year's fiscal deficit by forcing large private-sector debtors to purchase 15-year,
dollar-denominated government bonds to settle accounts with foreign creditors.
Although foreign banks favored a government assumption of the private-sector
debt, they strongly opposed the below-market interest rate the bonds would carry.
In reaction, banks refused to open negotiations to reschedule the public debt-
some, reportedly, cut trade credit lines. According to the Embassy, the government
now plans to require large private debtors to secure a five-year grace period on
principal repayments from their foreign creditors before being granted access to
preferential-rate dollars at the Central Bank. To cover the 1987 fiscal deficit-a
projected 8 percent of GDP-the administration may allow the Central Bank to
increase significantly its holdings of Treasury debt. Some Venezuelan analysts,
however, have expressed concern that such a move would be inflationary. The
private debt fiasco has increased tensions with banks, has fueled opposition
criticism of Lusinchi's economic management and, in our judgment, is likely to
further depress investor confidence-making chances of economic recovery before
1988 even more remote.
Soviet LDC Debt The fall in world prices of oil and other raw materials is making it difficult for a
Collection Problems number of Third World countries to meet their hard currency payments to the
USSR, adding to Moscow's own foreign exchange problems. Estimated Libyan
backpayments have grown to as much as $1.2 billion over the past year. Many cli-
ents, including Angola and Iraq, have requested debt rescheduling. Some, such as
Syria and Nicaragua, have requested loans. Third World countries owe the USSR
approximately $25 billion, mostly for military purchases. About $10 billion is owed
by countries that Moscow knows will not be able to repay-for example, Ethiopia,
Mozambique, and South Yemen. In some cases Moscow has been increasingly
willing to accept goods-especially oil-in lieu of cash repayments. The USSR
currently has such arrangements with a number of LDCs, including Libya, Iraq,
and Peru. The recent extension of Soviet credit to Algeria allows for half the
repayment to be in industrial products. Moscow, however, is unlikely to press too
hard on the debt issue for economic as well as more obvious political and military
reasons. The LDCs represent Moscow's major Western outlet for exports of
manufactured goods and provide the Soviets with $3-4 billion per year even after
credits and payment reschedulings are taken into account.
Seychelles' Foreign According to US Embassy sources, Seychelles is suffering a critical
Exchange Crisis foreign exchange shortage t at cou adversely affect President Rene's political
prospects over the medium term. Although receipts from tourism, the main source
of foreign exchange, have been rising since 1983 to a record $47 million last year,
local banks and businessmen are having great difficulty in obtaining hard currency
from the Central Bank for new letters of credit or existing ones already approved.
25 Secret
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The government is in arrears to the African Development Bank, Air France, and
other important creditors. the crisis is mainly due to
Rene's misguided economic policies that have included an overvalued currency and
heavy spending on major projects and new government corporations. The govern-
ment is scrambling to obtain funds from abroad, but the prospects are gloomy,F_
Japan Moves To MITI, in response to a request from the EC, is moving to stem a sharp rise in ex-
Curb Auto Exports ports of Japanese autos to Western Europe. According to press reports, exports for
to the EC the first seven months of 1986 are 40 percent above the same period last year.
For the past five years, Japan's auto makers have held
approximately 10 percent of Europe's 10-.11 million car market. Japan's market
share will rise to approximately 12 percent in 1986, and could reach 15 to 16 per-
cent by the late 1980s as Japanese assembly plants in Europe come on line.
Reaction to Many LDCs have mixed feelings about the new Multi-Fiber Arrangement (MFA).
Extension of MFA They oppose the more restrictive provisions such as antisurge provisions, unilateral
restraint, and inclusion of new fibers such as ramie, linen, and silk blends. In
particular, China, Hong Kong, and India expressed disappointment. On the other
hand, several LDCs accepted the new MFA provisions in lieu of the threatened
veto override of the Textiles Trade and Enforcement Act of 1985 (Jenkins Bill) and
welcomed the bill's defeat early this month. Hong Kong was especially relieved
because the pending veto override placed them in a very vulnerable position. Most
of the LDCs believe that, unless the United States achieved major concessions
during bilaterals and MFA negotiations, a Congressional override would have
been assured. In addition, the new MFA
provides security and protects Thai exports from the dominant competitors-Hong
Kong, South Korea, Taiwan, and China. Some LDCs believe that US pressure to
control textile imports will continue, and countries such as Hong Kong and Taiwan
have threatened retaliatory steps if further restraints are implemented.
Global and Regional Developments
More EC-CEMA Talks EC officials have proposed a meeting with CEMA counterparts in September for
exploratory talks on establishing relations between the two organizations, accord-
ing to US Embassy sources. The EC's main goal remains bilateral agreements
with individual East European states, and it plans to go slowly in negotiations with
CEMA until at least two East European countries establish diplomatic relations
with the EC. Romania has indicated willingness for bilateral diplomatic as well as
economic agreements, possibly by the end of the year. Hungary, Czechoslovakia,
and Poland have shown interest in commercial agreements, while Bulgaria, East
Germany, and the USSR insist on progress in EC-CEMA relations first. The talks
Secret 26
22 August 1986
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are unlikely to produce formal EC-CEMA ties soon. Romania is the only CEMA
country close to establishing diplomatic relations with the EC. Some EC officials
place a high priority on a broad agreement with Hungary, but talks apparently
have bogged down over Budapest's longstanding demands for trade concessions.
EC concerns about human rights in Poland may complicate negotiations with
Warsaw.
Japanese Views of In his late July Vladivostok speech, General Secretary Gorbachev highlighted the
Soviet Joint previously proposed possibility of joint ventures with foreign corporations (largely
Venture Proposal Japanese) to speed the development of the Soviet Far East. Despite Gorbachev's
blessing, Japanese business is taking a wait-and-see attitude, according to the US
Embassy in Tokyo. Japanese companies are looking for progress in Soviet joint
venture legislation, profit/capital repatriation laws, relaxation of visa restrictions
for Japanese businessmen, and some exemption of joint ventures from supply
allocation and production quotas as a measure of Soviet intentions. Nonetheless,
Japanese officials and businessmen with whom Embassy officers recently spoke
believe some movement is likely in the next few years. In view of Moscow's hard
currency constraints, Japan probably will be unable to boost sales to the Soviet
Union without devising a way to increase Soviet exports. Joint ventures, moreover,
provide a way of securing products and resources suitable for Japanese or third-
country markets.
Developed Countries
Politics of Implementation of Tokyo's long-anticipated tax reform package is likely to be
Japanese Tax delayed from 1987 to 1988
Reform ONonetheless, the government's intentions are already clear-
reductions in personal and corporate tax rates to be financed by a new VAT type
plus some form of taxation of now tax-exempt savings accounts. Although Prime
Minister Nakasone promised during the July general election campaign not to
introduce "a new large-scale indirect tax" or to revise the tax-exempt savings
system, he has, since the election, allowed the tax council to consider both. Despite
Nakasone's stand, the ruling Liberal Democratic Party's (LDP) recent election
landslide probably strenghtened the hand of those who could delay, if not block,
reform. Many LDP candidates campaigned against new taxes and feel the need to
protect their supporters-farmers, small businesses, retailers, and the postal
savings lobby. The tug of war between the government's tax reform council and
the parallel LDP study group over issues such as the VAT and taxation of savings
accounts is likely to cause the original October date for submission of tax reform
proposals to the Cabinet to slip.
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British Labor Party An independent study of Labor Party spending plans concludes that London's
Spending Plans budget deficit would increase to $39 billion by 1990-four times this year's
Under Attack projected deficit-while doing little to decrease unemployment. The study by the
widely respected Item Club projects that the increased spending would reduce
unemployment by only 500,000 over two years, half of what Labor has promised.
By 1990, however, the sharp increase in spending would boost inflation, create a
huge balance-of-payments deficit, and reduce economic growth-reversing the
initial gains against unemployment. The study supports charges by Conservative
spokesmen that Labor's plans, even if phased in over several years, would put a
heavy burden on British finances;' a Treasury official charged that funding Labor's
programs by increasing taxes would force the government to raise the basic rate of
income tax from 29 to 53 percent. Because Labor probably would not be able to
implement all of these plans-especially renationalization of industry-the study
probably overestimates the actual impact on the economy of a Labor government.
Nevertheless, it will provide powerful ammunition for the Conservatives, anxious
to portray Labor leaders as free spenders who are dangerous to the British
economy.
West German Economics Minister Bangemann announced last week that the economy grew 3 to
Economic Growth 3.5 percent in the second quarter over the same period last year. He predicted that
growth would accelerate during the rest of 1986 and into 1987 and rejected US
calls for Bonn to stimulate domestic demand. West Germany's major economic
institutes have recently lowered their forecasts, but still predict respectable growth
of 2.5 to 3 percent in 1986 and continued expansion next year. Two quarters of
negative growth preceded the rebound this spring. Chancellor Kohl's coalition
hopes that strong, noninflationary growth during the remainder of the year will
vindicate its tight economic policies before the national election in January. Bonn's
main concern is that additional appreciation of the mark will further depress
already sagging exports. If the dollar drops sharply, West Germany will probably
call on the United States and Japan for coordinated action to stabilize its value.
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Lisbon Reduces The Portuguese Government lowered interest rates by 3 percentage points last
Interest Rates month in an effort to boost investment-the central plank of Prime Minister
Again Silva's economic recovery plan. Despite the cut-the third since he took office last
fall-lagging private-sector confidence probably will not create the investment
boom Portuguese officials have been anticipating. We expect investment to
increase 5 to 7 percent this year-a marked improvement after three consecutive
years of decline, but well below the government's 9-percent target. Business
confidence is still being hurt by the perceived fragility of the minority government
and doubts about Lisbon's willingness to liberalize the economy and give a greater
role to market forces. Relatively high excess capacity in a number of sectors also is
discouraging new investment. We believe Lisbon will gradually step up its efforts
to boost investor confidence to pave the way for the long-awaited recovery in
investment.
Greek Foreign To attract more foreign investment to ease serious foreign payments difficulties,
Investment the Bank of Greece last month extended to non-EC residents the May presidential
Liberalization Extended decree that allows EC investors to freely repatriate profits, dividends, and interest
to Non-EC Residents on new direct investments, and to re-export the investment funds after three years.
The only restriction is that transactions must be registered in advance to ensure
their legality. Some investments made prior to 25 July may also be eligible if they
fall into a special investment category. Many potential foreign investors in the past
had complained that strict Greek controls on capital repatriation were a disincen-
tive to investment. The new regulations appear to be working because the Bank of
Greece has recorded $35 million in new foreign investment in the 15 days since
they were published.
Israeli Cabinet Votes According to the US Embassy, the Israeli Cabinet voted early this week to reduce
To Cut Government government expenditures by about $210 million. These cuts will come as an across-
Expenditures the-board, 3.9-percent reduction by all ministries, except for Defense whose
proposed cuts are still under discussion. Press reports state that Finance Minister
Nissim remains confident the defense cuts will not be less than $67 million.
Nissim's optimism may be unfounded, however, especially if Defense Minister
Rabin gains the $60 million he has requested as compensationf6r the falling
purchasing power of US grant aid to defense industries for procurement and
development projects. The Cabinet also stated that, until each ministry presents a
detailed plan on its cuts, there will be a 75-percent freeze on all contracts. This
partial freeze, however, will not affect prior defense, housing, and education
ministry commitments.
Less Developed Countries
Brazilian Reaction The third round of consultations between Brasilia and Washington on Brazil's
to Informatics protectionist policies on informatics-computer and software sales-ended last
Dispute week in Paris without Brasilia's modifying its hardline stance. Brazil has indicated
that it will not be able to meet US concerns before the deadline of 16 September.
The US Embassy reports that the meetings are receiving widespread press
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coverage in Brazil and that hardline supporters of the restrictive policy are urging
Brasilia not to give in to US demands. Brazilian officials privately warned the US
Ambassador that President Sarney probably would postpone his visit to Washing-
ton, scheduled for 10 September, if he believed that the United States will
retaliate. Rising economic nationalism over the informatics issue is likely to
constrain Sarney from making sufficient concessions to resolve the dispute before
16 September. Sarney faces a political dilemma: concessions would undercut his
supporters in the coming congressional elections, but US retaliation would reduce
significantly the political dividends he hopes to gain from the visit.
Brazil Pushes A proposed decree that calls for strict limitations on foreign participation in the
Increased Foreign Brazilian pharmaceutical industry highlights growing domestic support for nation-
Investment Controls alist economic policies. Brazilian officials, according to the US Embassy, argue
that the draft law only codifies current regulations by restricting imports of
products manufactured domestically-investment in the sector through joint
ventures would continue. Nonetheless,, the proposed legislation is more exclusion-
ary than current regulations, according to the US Embassy, and hardliners
probably will intensify their lobbying for more restrictive policies in the coming
electoral campaign, when nationalist sentiments will run high. The President is
prepared to veto proposals for a market reserve in pharmaceuticals, according to
an internal government document, but he probably would change his mind if the
current informatics dispute with Washington results in US retaliation.
Ecuador Administers The government recently announced implementation of IMF-supported economic
Adjustment Measures measures in order to obtain Fund credits of approximately $138 million. The
economic package allows a floating foreign exchange rate for private-sector
transactions and eliminates interest rate ceilings on domestic bank savings and
loans. The IMF standby arrangement will be used to repay a $150 million loan the
United States granted in June to cover Ecuador's 1986 financing gap. According
to US Embassy reporting, the measures will stimulate the export-led agricultural
and fisheries sectors, but will hinder imports and create inflationary pressures.
President Febres-Cordero's problems with the leftist-dominated Congress are
likely to be exacerbated by his continuing dependence on US and IMF credits.
Uruguay's The Uruguayan legislature voted late last month to raise pensions for some
Increased Pensions 700,000 former government employees-roughly one-fourth of the population-
by 107 percent, retroactive to April 1986. The bill emerged as a compromise
between President Sanguinetti and the center-left opposition parties that control
Congress. Sanguinetti, according to the US Embassy, acceded to the measure to
prevent an opposition override of his veto of an even more extravagant proposal.
We concur with Finance Minister Zerbino's public assessment that the bill is,
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nevertheless, a budget-buster that could hobble Uruguay's nascent economic
recovery. Although Montevideo will try to cut spending elsewhere, the administra-
tion, in our view, probably will have to print money to cover the pension increase.
This could cause Uruguay to miss fiscal deficit and monetary targets in its IMF-
supported program, delaying more than $100 million in IMF, World Bank, and
commercial loans.
Syrian Exchange In an effort to correct its unrealistic exchange rate structure, the Syrian
Rate Reforms Government last week introduced a new rate for tourists and expatriate workers.
The buying rate for the pound will be 22 per dollar-compared with the illegal
market rate of 25.5 per dollar and the former tourist rate of 9.75. The measure is
part of an overall effort to bring more transactions into legal channels but will not
significantly curtail unofficial currency dealings. Other partial devaluation mea-
sures enacted this year include moving the rate for exporters to a more profitable
level and requiring state trading companies to purchase imports at 11.25 rather
than the official rate of 3.9 per dollar. Syrian authorities also have arrested illegal
moneychangers seven times this year. Despite the limited reforms, most currency
trading and import deals will continue at the lower illegal rate. The government
does not have sufficient international reserves to support the multitiered exchange 25X1
structure-opening of letters of credit takes up to a year-and the new lower
official rates could put further downward pressure on the black-market rate.
Jordan Plans To According to the US Embassy, the government announced early last week a $360
Spend Funds To million program to stimulate the economy over the next two years. The spending is
Stimulate Economy to include about $290 million of accelerated investment during the recently
formulated 1986-90 development plan. The remaining $70 million is to be
financed by borrowing from the cash reserves of the Social Security Corporation
and is to be spent on a variety of government projects. Given an estimated 1986
central government budget deficit of $400-500 million and a recent Central Bank
declaration that it does not plan any international borrowing this year, it is not
clear how the government intends to finance the $290 million in investment
spending. Moreover, this additional spending would exceed the spending targets in
the recently released five-year development plan. If the spending does not occur,
however, the government will have raised domestic expectations unrealistically-a
charge already being leveled at its $1.3 billion five-year development plan for the
occupied territories.
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Indonesian Economic According to US Embassy reporting, Jakarta's top economists agree that 1986 is
Contraction shaping up to be the worst year since the New Order government came to power
20 years ago. The dramatic drop in oil prices has caused Indonesia's oil exports to
plunge 43 percent in the first two quarters of 1986 compared with the same period
in 1985. the economy could contract
as much as 2 percent or the year even if the recent rebound in oil prices is sus-
tained. The US Embassy also reports that a major debate is brewing over how to
deal with an expected $3 billion shortfall in government revenues. Nevertheless,
inflation-wary finance officials have so far resisted pressures to engage in deficit
financing or to speed drawdowns of foreign reserves. The regime is worried about
not only the near-term impact of the economic slump on Indonesia's restive labor
force-urban unemployed exceeds 35 percent-but also the political impact of
continued budget cuts on next April's parliamentary elections.
Gorbachev Gains Recent top-level decisions suggest that General Secretary Gorbachev's economic
Momentum on program may be gaining speed after several months of slow progress following the
Economic Issues party congress. Soviet media report that a Politburo meeting last week made
decisions on a range of outstanding issues, including expanding the role of
member-run cooperatives in producing consumer goods and providing services.
The Politburo also announced plans to reorganize the State Committee for
Construction Affairs. On Monday the chairman of the State Committee for
Prices, Nikolay Glushkov, was removed. The details of the Politburo decisions are
not yet available, and they may not have gone as far as Gorbachev would have
liked. Glushkov's retirement removes an unabashed opponent of price reform and
may pave the way for a more open discussion of the issue. Reorganization of the
construction committee suggests renewed momentum on streamlining the bureau-
cracy-a key element of Gorbachev's strategy for revamping economic manage-
ment. The decision on cooperatives-which some officials fear could provide too
much competition for the grossly inefficient state consumer sector-appears to
respond to proposals that Gorbachev aired at the party congress and again during
his recent tour of the Soviet Far East.
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Growing Pressure The Soviet press reports that a high-level conference was held recently to discuss
on the Soviet the need for "radical enhancement" of the machine-building sector. Politburo
Machine-Building Sector member Zaykov decried the sector's slow progress in modernizing and improving
product quality, especially after being allocated "absolutely everything that our
economy can permit." The conference is but the latest indication of Moscow's
concern over the mixed performance of the sector General Secretary Gorbachev is
relying on to spur economic revitalization and to improve military capabilities.
Although output grew at a respectable pace during the first six months of 1986,
the sector failed to meet the overly ambitious targets for quality and technological
advance. Leadership expectations, at least in the short term, are unrealistic given
the sector's inability to absorb the massive transfer of resources to support the
modernization campaign.
Troubles in More than 700 Hungarian coal miners at the Borsod and Tatabanya mines have
Hungarian Coal resigned since mid-July, when the government announced plans to restructure the
Industry troubled coal mining industry to reduce its financial losses and to stabilize
declining output. The regime intends to close at least seven uneconomical mines
(out of a total of 36), cut back underground production in favor of less expensive
open-pit operations, and extend the workweek to six days, reducing overtime
payments. Production costs have escalated as coal output has declined because of
the difficult geological conditions and labor shortages that have necessitated more
overtime. Despite above-average earnings, about 1,600 miners leave the industry
annually, because of harsh working conditions, poor safety standards, and flagging
prospects. Industry Minister Kapolyi has publicly stressed that displaced miners
will be assured work in the same mining basin, possibly to avert further
resignations and promote the orderly relocation of miners to pits that are short on
manpower. His assurances may also reflect regime sensitivity to the problem of
unemployment in economically depressed regions-a problem that could become
an increasing concern for the government if it follows through with plans to close
insolvent firms in declining industries.
Cuban Economic Policy President Castro's latest economic program calls for drastic action against inept
Inches Leftward management and corruption, but these are only the symptoms of Cuba's economic
problems, and his efforts are likely to bring minor improvements at best. The
government's "action plan" aims at combating widespread cheating on production
records, salaries, and perquisites; corrupt and inept business administration; and
insufficient law enforcement The plan
tightens use of some market incentives and relies more on the reinforcement of
moral and revolutionary ideals. Nine ministerial working groups were established
this month to study long-term remedies to administrative weaknesses and labor
deficiencies. According to a source of the US Interests Section, the conclusions of
the groups will be presented at a special session of the Cuban Third Party
Congress in December. The working group's agenda indicates that new policies
will focus on tougher labor discipline, reduced consumption, revisions in planning
and investment processes, and political exhortations. Concentrating on voluntary
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labor and deemphasizing profitability of enterprises suggest a move leftward but
probably do not portend a reversion to the radical policies of the 1960s when the
Cuban leader attempted a shortcut to "pure Communism." The Soviets have
probably urged restraint on Castro and are likely to continue doing so. Nonethe-
less, the move away from some market incentives is likely to dampen economic
output further. Cuban workers, hit by eroding incomes, shortages of goods, and
calls for greater sacrifices, are likely to become increasingly outspoken, possibly
forcing the regime to turn more to repressive measures.
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