INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707010001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: March 28, 2011
• Sequence Number: 1
• Publication Date: May 25, 1984
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly n
~ee~e~
DI IEEW 84-021
15 May 1984
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Secret
International
Economic & Energy
Weekly ~~
25 May 1984
iii Synopsis
1 erspective-International Oil Market: More Shock Waves From the Persian
Gulf 0
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Energy
International Finance
Summit Issues
Global and Regional Developments
National Developments
13 /Summit Issues: Big Six Unemployment and the Recovery
17 mmit Issues: The Soviet Economic Stake in Western Europe
~.~i~
23 I ternational Financial Situation: Political Update
rkey's Military: The Impact of Economic Problems
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33 N~rbec: Symbol of Saudi Arabia's More Aggressive Oil Policy
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of'Intelligence,
~f 3~1
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25 May 1984
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Secret
International
Economic & Energy.
Weekly n
Synopsis
Perspective-International Oil Market: More Shock Waves From the Persian
Gulf ~~ 25X1
The escalation of attacks against tankers by Iraq and Iran has slowed Iranian
oil exports and increased the risk that Tehran will step up retaliatory attacks
against other oil exporters in the Persian Gu1f.0 25X1
13 Summit Issues: Big Six Unemployment and the Recovery
The year-long economic recovery under way in most of the Big Six countries
has done little to reduce unemployment. ~~ 25X1
17 Summit Issues: The Soviet Economic Stake in Western Europe
Moscow runs a strong trade surplus with Western Europe, more than $7
billion in 1983. These earnings help finance Soviet hard currency trade deficits
with the United States, Japan, Canada, and Argentina.
23 International Financial Situation: Political Update
Austerity measures directly contributed to turmoil this past month in the
Dominican Republic and Bolivia and have added to political tensions in other
.key debtor countries. 25X1
25 Turkey's Military: The Impact of Economic Problems
Economic problems have significantly affected Turkish military capabilities.
Ankara's efforts to secure foreign military assistance, however, will continue to
be hampered by budgetary constraints in donor countries and difficulties with
various NATO Allies over human rights issues, the pace of democratic
reforms, and the Cyprus issue.~~ 25X1
iii Secret
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' _ 25 May 1984
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Perspective
International
Economic & Energy
Weeklyn
25 May 1984
International Oil Market: More Shock Waves From the Persian Gu4f'
as long as Saudi oil is generally available.
The escalation of attacks against tankers by Iraq and Iran has slowed Iranian
oil exports and increased the- risk that Tehran will .step up retaliatory attacks
against other oil exporters in the Persian Gulf. Tehran continues to threaten to
block oil shipments from the Gulf if its own exports are reduced significantly.
Such action could lead to reduced oil exports from Kuwait and Saudi Arabia
by increasing the reluctance of shipowners to send tankers into the area or by
damaging oil facilities. The market's abilit t' y o Cope remains substantial only
Iran's main oil export facility at Khark Island over 25X1
over similar periods m April and early May.
the. past seven days shows only five tankers loading, compared with 10 to 15 - 25X1
steeply.
some companies have postponed scheduled tanker loadings at Khark in
response to the rising risk and cost-hull and cargo insurance rates for tankers
calling at Khark have more than tripled since early May. Rates for tankers
sent to Saudi Arabia and Kuwait, although much lower, have also risen
The oil market reaction to events in the Gulf has generally been calm.
Although reports of incidents briefly pushed up spot prices on 16 and 18 May,
volumes traded were small, and prices subsided quickly. Traders fear being
stuck with high-priced oil if conditions do not worsen, and buyers remain
uncertain about the added cost of insurance and freight. ~~
We expect Iran to take immediate action to boost exports. In the past, Tehran
has responded to depressed exports by offering discounts and by transshipping
oil in its own tankers from Khark to the southern part of the Gulf. Some nego-
tiations with major customers are already taking place. While these negotia-
tions are likely to provide some shipments, we believe Iraq will continue its ef-
forts to curtail Iranian exports. Moreover, Baghdad will be able to increase the
frequency of its attacks later this summer after it begins to take delivery of at
least 10 Exocet-armed Mirage F11 aircraft.0 25X1
More Iranian airstrikes against Saudi and Kuwaiti shipping are likely if Iraq
continues to attack tankers bound for Iran. The impact of further tanker
attacks on the oil market will hinge largely on the willingness of shipowners
and oil purchasers to continue to send vessels into the Gulf. While the number
of tankers chartered for Persian Gulf voyages dropped noticeably following
last week's attacks, some shipowners probably will continue to trade in the
Gulf as long as insurance is available.~~
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More ominous to the oil trade, however, would be a successful Iranian attack
against oil facilities in Kuwait or Saudi Arabia-a move Tehran might take,
especially if exports drop well below 1 million b/d for an extended period.
Editorials in the Iranian media already are calling for strikes against Saudi
Arabia and Kuwait, possibly preparing Iranians for a widening of the war. If
Iran were to seriously damage or close major Gulf oil export facilities; the
impact on world oil supplies could be severe. The market's ability to adjust to a
disruption without major price increases remains substantial only as long as
Saudi oil is generally available. Surplus productive capacity in Saudi Arabia
and outside the Persian Gulf is adequate to offset the loss of crude exports
from all other Gulf producers.~~
A disruption involving the Saudis, however, could not be readily offset with in-
creased production from other producers. In such a case, oil stocks would have
to play a major role in slowing price increases. Preliminary IEA data suggest
that non-Communist commercial inventories fell only about 1.75 million b/d
during the first quarter, leaving on-land stocks at about 3.9 billion barrels on 1
April. Although the first-quarter drawdown of commercial stocks was appar-
ently less than normal this year, commer-
cial inventories presently would provide only marginal help in offsetting a
supply shortfall. As a result, the disposition of government oil stocks in the
United States, West Germany, and Japan-and the floating stocks. maintained
by Saudi Arabia-will play a key role in providing consuming countries with
additional protection against a short disruption in oil supplies from the Gulf.
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Secret
Briefs
Energy
Indonesian Exploration Jakarta signed its first two production=sharing contracts this year in late April.
Commitments Shell has agreed to spend at least $110 million on exploration in the next 10
years, and British Petroleum has agreed to a six-year, $60 million exploration
program. The signings reflect the continuing. willingness of foreign oil
companies to make exploration commitments in Indonesia despite. obstacles
posed by Pertamina, the "state oil company. According to the US Embassy, oil
company managers have complained increasingly in the past few months that
Pertamina is now scrutinizing all activities of the foreign oil companies,
lengthening delays in gaining approvals for exploration programs, and even
disallowing expenses formerly considered recoverable by the oil companies.
Delays in. the approval process have forced oil companies to operate drilling
rigs for- more than a year without official permission and to skirt the
procurement rules to obtain spare parts.
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Secret
Status of Philippine- Manila's economic austerity policies probably will not produce results fast
IMF Negotiations enough to satisfy the IMF, and further delays in negotiating.the proposed $650
million loan from the Fund are likely. The austerity package includes
proposals to reduce the budget deficit-higher taxes and a spending cut of 5
percent-and new measures to restrain growth in the money supply. Manila
also has increased petroleum prices by 8 percent in a move designed to slash oil
imports by $500 million a year. In addition, the Cabinet last week approved a
proposal to. float the. exchange rate as soon as the IMF is satisfied that a sound
fiscal and monetary program is in place.)
Preelection spending by the government, however, financed by expanding the
money supply, has driven inflation up to an annual rate of 60 percent. Asa re-
sult, the IMF is now insisting that the new) announced austerit measures
show results before it agrees to a new loan.
The government's proposed economic policies -will not slow inflation and trim
imports until late summer at the earliest, and the IMF is likely to wait until at
least then before approving the new loan. Without an IMF program in place,
the Paris .Club will not reschedule the government's official foreign debt, new
lending by the World Bank will be suspended; and no progress will be made on
rescheduling foreign commercial debt. The danger for Manila is that, if
negotiations with the Fund require the rest of this year, foreign commercial
bankers will refuse to sustain foreign trade financing at current levels. This
would mean an even weaker economy than the government now anticipates.
World Bank officials already are projecting a 2-percent contraction in national
output this year.~~
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Secret
IMF Loan Programs The lack of functioning IMF-supported loan programs is adding to severe
Stalle in Central shortages of foreign exchange and eroding the basis for economic recovery in
A ica Costa Rica, Guatemala, and Honduras. Government reluctance to cut social
ait Stops Aid
programs further and to alienate key domestic interest groups is blocking
accommodations with the Fund:
?, Prolonged negotiations between Costa Rica and the IMF for a new loan
agreement have caused at least two foreign exchange crises so far this year.
One major obstacle is the Fund's request for a currency devaluation, which
San Jose is strongly resisting. Costa Rican officials worry that Communist-
led unions could exploit tougher economic measures to incite unrest similar
to the demonstrations last summer.
? Guatemala has rejected IMF requests for further fiscal austerity measures,
and this is blocking the Fund's disbursement of the remaining $60 million
under the current loan agreement. Guatemalan leaders reportedly are
concerned that tax increases would provoke a rightwing military coup.
? Honduras fell out of compliance with the Fund's budget limits late last year;
and the absence of a new loan agreement has held up a World Bank loan and
commercial debt rescheduling that together total about $300 million. The
government lacks the $20 million needed to pay current and overdue foreign
debts. With elections approaching in 1985, the Honduran Government
opposes a devaluation and other austerity measures 0 25X1
To delay coming to terms with the Fund,. Costa Rica and Honduras will
continue to urge the United States to disburse aid in advance of IMF-
requested measures. Guatemala, whose prospects for securin foreign aid are
less promising, may choose to do without the IMF funds. 25X1
suspension of its Baghdad payments-$550 million annually-still awaits
endorsement by the National Assembly, which is likely to approve the plan.
Kuwait plans to suspend its Baghdad Pact payments to the Arab Confronta-
tion States-Syria and Jordan-as well as the PLO this year, according to
press statements by the Foreign Minister. Kuwait already has delayed
payments to these countries, probably because of depressed oil revenues,
increased budget expenditures, and outstanding stock market debts. Kuwait's
Kuwait failed to meet its commitments to Syria last year,
Jordan's economy will be hurt; Amman has received about $200
million a year from Kuwait.
~malia's Economic Somalia continues to avoid a major financial crisis as well as coming to terms
Woes Ease with the IMF. The US Embassy in Mogadishu reports that Saudi Arabia
apparently has granted Somalia enough crude oil to cover the country's needs
for the next two to three months. The grant, replacing one that expired at the
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start of this year, will release up to $13 million in foreign exchange that could
be used to pay debt arrears. Moreover, inflation, largely fueled by food
shortages, should ease as increased international food aid shipments arrive.
These developments relieve immediate pressures on the government to reach
accommodation with the IMF over an $83 million Extended Fund Facility.
Nonetheless, we believe Mogadishu ultimately will have to reach agreement on
a Fund program. So far, President Siad has rejected IMF-mandated measures
to liberalize the state-run economy, largely because he fears they would limit
his ability to dispense patronage, an important element of his power base.
Mogadishu is likely to credit the oil grant to US intervention and may again
ask Washington to urge the IMF fo soften its conditions.
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E~Declaration on New The EC Foreign Ministers last week approved a declaration on the US- and
T ade Round Japanese-backed proposal for a new round of multilateral trade negotiations
under GATT. The declaration notes the potential importance of such a round,
but it asserts that commitments to reduce protectionist measures and complete
the current GATT work program should take priority. It calls for extensive
prior consultations among all GATT members and suggests asenior-level
GATT meeting by the end of 1985 to consider possible courses of action.
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The EC declaration avoids committing the EC to the timing and content of a
new round of talks on multilateral trade. Except for West Germany, which has
publicly endorsed a new GATT round, EC members almost certainly will not
be more forthcoming on the issue at the London Economic Summit. The
Community fears that the liberalization measures resulting from a new trade
round would intensify the unemployment problem in Western Europe.
lobal Negotiations
Mexico, the chairman of the Third World's UN caucus, probably will press the
major industrial countries to place the so-called Global Negotiations on the
agenda of the London Economic Summit, according to the US Mission to the 25X1
UN. Global Negotiations is the LDC scheme to promote international
economic change by allowing,the UN General Assembly to issue recommenda-
tions to UN specialized agencies such as the IMF and the World Bank. Not
much has happened on this topic since 1982 when Third World countries
rejected the industrial countries' demand for guarantees that. the General
Assembly not encroach on the prerogatives of the specialized agencies. Earlier
this month, Mexico circulated a new proposal for launching Global Negotia-
tions, but even many developing countries have reservations. Mexico probably
wants the London Summit to give impetus to its proposal or, at a minimum, to
keep the idea of Global Negotiations alive by mentioning it in the conference
communique. ~~ ~ ~
torials stated the restraints are not justified and clearly are not voluntary. The
press has given favorable coverage to recent statements by some US officials
opposing an extension.
Global and Regional Developments
Japanese Press Reacts The Japanese press has. harshly criticized Liberal Democratic Party Vice
/to Statements on Auto President Nikaido for his recent statement favoring an extension of voluntary
Export Restraints . restraints on auto exports to the United States after 31 March 1985. Most edi-
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of rice by June, more than doubling rice imports this year. Rice stocks used to
support India's vast public distribution system have .declined sharply because
of the .drought last year and high domestic prices, which forced consumers to
rely oh subsidized rice supplies. India currently is trying to buy 200,000 tons of
rice from Burma, according to the US Embassy in Rangoon. Indian urchases
will tend to raise world prices and will squeeze African buyers, who~are
coping with drought conditions. If India experiences a poor monsoon this
summer, its import requirements could rise further, placing an additional
strain on record-low world stocks of export rice. ~~
Ifidian Rice Purchases Despite a bumper harvest, India is expected to buy anear-record 725,000 tons
Austria's Expanding The visit of Austrian Foreign Minister Erwin Lanc to Tehran, proposed for the
R ations With Iran
Vietnamese Workers
Sent to Iraq
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25 -May 1984
Austrian exports to Iran more t an ou e m 1983, rom approximately $135
million in 1982 to over $280 million, and Austrian Airlines recently inaugurat-
ed atwice-weekly service to Tehran to handle the increase in passengers and
cargo. Austria sells primarily machinery, iron and steel roducts, plastics, and
timber to Iran, while buying mostly oil and carpets.
ILLEGIB
end of this month, underscores the im rovin relatio
ns betw
een the two states
particularly their growing trade ties.
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Hanoi sent nearly 200 drivers, welders, and technicians to Iraq early this
month apparently as the first phase of a labor agreement. Although more than
50,000 Vietnamese are currently working in the Soviet Union and Eastern
Europe, this marks- Vietnam's first export of labor to the Middle East. The
agreement probably resembles arrangements with Moscow in which part of the
workers' earnings is withheld as payment on Vietnam's overdue foreign debt.
Hanoi is about $30 million behind in its payments to the Central Bank of Iraq
on loans taken out in the late 1970s to finance oil im orts. The remainder of
the workers' salaries will probably be paid in oil.
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National Developments
Developed Countries
Israeli Cost-oJ-Living The new cost-of-living adjustment formula agreed to last week will not help
Agreement the government's efforts to reduce inflation. Workers will be compensated
more frequently for price hikes. In addition, labor will still be able to bargain
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trade union organization, has been extremely-successful in recent years in
winning wage gains that more than compensate for the difference between the
cost-of-living adjustment and inflation
Turkish Business
oncerns
Under the complicated new formula:
? Wages will be adjusted any time the consumer price index (CPI) rises 12 per-
cent or more in a single month.
? Wages will also be adjusted whenever price increases since the last
adjustment reach 12 percent.
? If the CPI rise that triggers the adjustment is less than 25 percent, wages
will be increased by 80 percent of the price hike; otherwise, the linkage will
be 90 percent. ~~
Histadrut officials hope that they will receive credit for protecting real wages,
according to the US Embassy, thus helping their Labor Party allies in the 23
July national elections. They reacted angrily last week to Finance Ministry
charges that government efforts to slow inflation would have succeeded if the
Histadrut had entered a "social compact" on wages and prices. Finance
Minister Cohen-Orgad announced that the new formula will apply to govern-
ment workers, who comprise roughly one-fourth of the labor force. We believe
he only reluctantly agreed to do so because of fear of losing their votes.
poorly managed, and deep in debt.
Turkish business leaders remain skeptical of Prime Minister Ozal's economic
program, citing concerns over inflation, unemployment, and.low levels of
investment. industrialists complain that Ozal's
new trade policy, which liberalizes imports and provides export incentives,
favors large holding companies over small and medium-sized firms. Further-
more, they doubt that Ozal will be able to sell off the state economic
enterprises-which he has pledged to do-because the firms are overstaffed,
private buyers.
Despite the complaints, Ozal's program is showing results. Exports rose 37
percent in the first quarter of 1984 over the same period last year. Moreover,
preliminary data for January and February show. a substantial reduction in the
current account deficit. Ozal is aware, however, that he will need the backing
of the business community if he is to succeed in redirecting Turkey's economy
along free market lines. In a bid to win the support of business leaders, he has
promised to take additional measures to encourage investment, and he is likely
to implement new reforms to make the state enterprises more attractive to
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S prise Increase in . South Africa has increased its general sales tax from 7 to 10 percent,
outh f11rican Taxes exempting only some basic foodstuffs. The size and timing of the increase-
less than four months after a sales tax hike from 6 to 7percent-surprised
most local observers. The need for additional tax measures to help limit budget
deficits, however, was generally recognized. Record high interest rates have
increased the cost of government borrowing, and South African officials are
emphasizing tax increases and spending restraint in order to control the budget
deficit. Pretoria also is concerned about a growing current account deficit and
expects the increased sales tax will slow consumer spending and thus reduce
imports. The exemption of some foodstuffs from sales taxes is a concession to
blacks, who normally bear disproportionately more of the sales tax burden.
Nonetheless, several black leaders have criticized the new measures, contend-
ing that the benefits of the food tax exemption will be outweighed by the tax's
contractionary impact on the economy.
Tokyo To Boost MITI is drafting a bill fora "New Materials Development Promotion Law,"
S,r~pport,fbr Advanced according to press reporting. The bill, which MITI plans to submit to the Diet
Materials next year, would provide private industry with low-interest loans and tax
incentives to support high-risk, long-term R&D on advanced materials.
Proposed support is aimed at developing advanced structural materials:
ceramics, polymers, metals, and composites. Additionally, MITI proposes to
promote the distribution of information on advanced materials technology,
develop requirements for advanced materials in the public sector, and establish
standardized testing and evaluation systems. Tokyo is already supporting
development of advanced materials, particularly through the 10-year "Next-
Generation Industries Basic Technologies Research and Development Pro-
gram," which will spend an estimated $275 million for materials development.
Less Developed Countries
Nicaragua Exaggerates In an effort to gain international sympathy-and economic support-the
~Jamage Caused by Nicaraguan Government has magnified the dollar value of the economic
/Insurgency damage caused by the insurgents in 1983 by using a greatly overvalued
exchange rate. In a recent speech, Junta Coordinator Ortega claimed $128
million in physical damage to the economy last year. Later in the speech,
however; he referred to the damages in Cordoba terms that implied Managua
was using the official exchange rate of 10 cordobas to $1. The controlled
commercial rate, however, is 28 to $1, and the black-market rate recently
reached 140 to $1. We estimate that the fair market value of the Cordoba
ranged between 28 and 80 to $1 last year, and using a fair market rate would
reduce Ortega's damage estimates to no more than $46 million. This is in the
range of our own estimate of insurgent damages and is considerably smaller
than the economic losses comin from economic mismanagement and lower
commodity export piices.~
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Islamic Banking
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an already poor investment outlook in Sudan.
the plan under consideration would provide for a transition period to Islamic
banking principles by allowing existing contracts to continue through their ,
expiration date. Under Islamic banking, interest payments will be replaced by
profit-sharing and management fees; some banks in Sudan have been operat-
ing on an Islamic basis since 1978. The US Embassy reports that the foreign
business community is concerned that Islamization of the economy will worsen
start of the Islamic new year in September.
President Nimeiri is pressuring the governor of Sudan's central bank to begin
the Islamization. of all Sudanese banks, according to the US Embassy. An
Islamic banking law probably will be enacted soon and go into effect at the
. igeria's Currency Last month's unexpected currency conversion has temporarily tightened
liquidity, causing prices to drop. Black-market trafficking, however, resumed
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Power Shortage in
Sierra Leone
Heightens Discontent
T tai Trade D~cit
Continues High
almost imme
iately wit
new naira se
ing
ot
omestically an
in markets
across Nigeria's borders at close to the old rate. Although Lagos caught
several minor black-market offenders as part of its anticorruption campaign,
we believe that major operators had long since converted their naira into
.foreign currency. Nigeria's new currency has temporarily reduced the money
supply, but we believe the government has not addressed trade distortions
resulting from the overvalued naira and will have to take additional measures
to secure an IMF standby loan.~~
unpopular ministers and by conducting a Cabinet reshuffle.
Public dismay over the general deterioration of the economy has been
increased by recent power shortages. According to the US Embassy, aging
generators have broken down because of poor maintenance, while a shortage of
foreign exchange has cut fuel imports. The energy shortages have adversely
affected public transit, telephone communications, and food refrigeration;
particularly in Freetown, the capital. Austerity measures under an IMF-
supported loan program have proved especially unpopular in light of the
government's inability to stem corruption and smuggling of exports that could
otherwise earn hard currency. Sierra Leoneans-staggered by last year's 90-
percent inflation, which was the worst in a decade-face higher food prices as
shortages develop this summer and may take to the streets as they did in 1981.
President Stevens could buy time by blaming these economic woes on
Thailand posted an $869 million trade deficit in the first quarter of this year,
up 13 percent from the same period a year earlier. Despite credit restrictions
and higher interest rates imposed late last year in response to a record
$2.7 billion current account deficit, imports increased by 14 percent and offset
higher export earnings. Although the central bank publicly contends that
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second-quarter trade figures will show a marked improvement, we believe they
are overoptimistic. Thailand's economic recovery, increased capital require-
ments for large industrial projects just getting started, and persistent devalua-
tion rumors are likely to keep import demand .high. Moreover, export growth
will be constrained by an overvalued currency and protectionist measures in
Thailand's export markets. Barring more stringent import restrictions, we
expect the 1984 current account deficit will remain over $2 billion.
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Summit Issues: Big Six Unemployment
and the Recovery
The yearlong economic recovery under way in most
of the Big Six countries has done little to reduce
unemployment. In Western Europe and Canada,
unemployment rates remain at or near double-digit
levels; although Japan's unemployment rate never
got above 3 percent, it also has been slow to come
down. Despite predictions of a broader based,
moderate recovery running into 1985, we expect
unemployment to remain high throughout this peri-
od except in Japan. In most of the other countries,
firms in traditional industries are reducing jobs
faster than jobs are being created in the service and
high-technology sectors, and the number of new
entrants into the work force continues to grow.
Factors Influencing Unemployment Trends
caused an average decline of 20,000 jobs a month
in the past year;. the United Kingdom lost about
160,000 manufacturing jobs in 1983.~~
At least two factors that aggravated unemployment
in the past-rising labor costs and slow job creation
in the service sector-have turned around in the
past year and should help reduce unemployment.
Increases in manufacturing wages slowed dramati-
cally in all Big Six countries in 1983, and the pace
is expected to remain slow this year. In every
country, wage costs are expected to rise about half
as much in 1984 as they did on average during
1972-81: Job creation in the service sector resumed
in 1983 as the recovery began and is expected to
continue to grow. Service jobs expanded by 250,000
in the United Kingdom in the 12 months ending in
March of this year; the bulk of the 340,000 new
jobs in West Germany expected to be added by the
end of 1986 will be in services and the public
The economic recovery that began in early 1983 in
most of the Big Six countries has been too weak to
stimulate employment. GNP advanced only 1 per-
cent in the West European Big Four in 1983.
Growth in Japan was far below normal in the first
half of 1983 at 1.8 percent but rose to 5 percent the
second half for an annual growth rate of 3 percent;
unemployment still failed to come down. Even in
the growth industries, employers in all Big Six
countries are keeping their work forces lean. Given
the considerable costs involved in hiring new work-
ers, especially in Western Europe, firms have been
slow. to expand their work forces. Growth in Cana-
da was fairly strong in both halves of last year,
totaling 3 percent for the year, and Canada record-
ed the only decline in unemployment.
Structural factors rather than growth continue to
have the major influence over Western Europe's
unemployment rates. Demographic trends-the
baby boom of the early 1960s and increasing
female participation rates-continue to boost the
supply of labor. Industrial. restructuring in France
sector.
The Government and Labor Response
Most Big Six governments continue to shun quick-
fix programs to put people back to work. They
remain convinced that restrictive fiscal and mone-
tary policies to limit budget deficits and inflation
are keys to long-term job creation. In addition,
most Big Six countries are stressing the importance
of restructuring to restore international competi-
tiveness and of promoting high-technology indus-
tries, even if jobs are lost in the short run. In Japan
the government has intervened to make restructur-
ing arelatively smooth evolutionary process; work-
er dislocations have been kept to a minimum. In
France, the United Kingdom, and West Germany,
however, governments have allowed recent massive
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Big Six: Unemployment, 1983-84a
Big Six: Hourly Earnings Percent change
in Manufacturing
I~~~~~~~~~~~I~~~ I~~~~~~~~~~~I~~~
s
I~~~~~~~~~~~I~~~ I I I
9 1983 1984 6 1983 II III
a Monthly data, except for Italy which is quarterly; seasonally adjusted.
layoffs in traditional industries, resulting in long-
term and perhaps permanent unemployment for
hundreds of thousands of workers. Only Italy has
introduced a small jobs program to create 100,000
new jobs in the next two years in the public
sector-primarily customs, tax collection, and the
judicial system. Italy as well as the other major
countries have introduced some measures to make
restructuring less painful, make investment more
attractive to the private sector, and create a more
market-oriented environment. All these efforts will
take time to implement, and more time will- elapse
before economies react and unemployment de-
clines.)
Organized labor in much of Western Europe and
Canada accepts that the introduction of high. tech-
nology in the workplace is inevitable but is not
convinced that the overall impact on jobs will be
positive. West German labor unions, in particular,
have stressed the need for sharing-available work
by reducing worktime. The important West Ger-
man metalworkers union went on strike in mid-
May over union demands fora 35-hour workweek,
and this has paralyzed the key West German auto
industry. ~~
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Secret
Prospects
We believe unemployment levels will stay roughly
unchanged in the Big Six countries at least through
mid-1985. Economic growth, a slowdown in labor
cost increases, and gains in service-sector employ-
ment should counter layoffs in traditional indus-
tries and labor force growth. This year we expect a
reduction in the unemployment rate in Canada and
West Germany of 1 percentage point or less. In
France and Italy, where layoffs in traditional in-
dustries are proceeding quickly, the unemployment
rate should continue to rise this year by perhaps
1 percentage point. The unemployment rate is
expected to finally stabilize in the United King-
dom. ~~
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Summit Issues:
The Soviet Economic Stake
in Western Europe
Moscow runs a strong trade surplus with Western
Europe, more than $7 billion in 1983.' These
earnings help finance Soviet hard currency trade
deficits with the United States, Japan, Canada, and
Argentina. Trade with Western Europe accounts
for 20 percent of Moscow's overall foreign com-
merce and 65 percent of its hard currency trade.
We expect the USSR will continue to avoid becom-
ing overly dependent on trade with the West. As a
result, Soviet imports of West European machinery
and equipment-which surged in 1982-83 with
deliveries for the gas pipeline from Siberia to
Western Europe-are likely to stagnate.0
Moscow is maintaining its cautious approach to
East-West trade and is pressuring its Communist
trading partners to provide more of the goods the
Soviet economy needs. This caution stems from the
Soviets' longstanding conservative approach to for-
eign borrowing, reluctance to rely too heavily on
non-Communist suppliers, and doubts about the
capacity of the Soviet economy to assimilate large
amounts of imported Western technology. More-
over, the Western trade sanctions imposed after the
invasion of Afghanistan and the Polish crisis damp-
ened the enthusiasm of Soviet planners for Western
imports. ~~
Despite factors limiting expansion, the Soviets
nonetheless believe that maintaining trade ties with
Western Europe carries both political and econom-
ic benefits. The Soviets see trade ties as a way of
diverting West European interests away from the
United States. Soviet trade with Western Europe is
largely an. exchange of fuels for steel and
machinery:
? Energy products account for roughly 80 percent
of Soviet exports to Western Europe.
? Soviet imports from Western Europe are domi-
nated by machinery-especially heavy industrial
machinery-and steel products, notably large-
diameter pipe. Imports of machinery and equip-
ment surged in 1982-83 with deliveries for the
Siberia-to-Western Europe gas pipeline.
As a trading partner, Western Europe is a far more
significant supplier to the USSR than the Soviets
_ are to the West Europeans. Trade with Western
Europe accounts for 20 percent of total Soviet
trade. The export gas pipeline project, for example,
required substantial imports. Imported Western
equipment has also been critical to Soviet efforts to
expand the chemical and automotive industries.
Moscow depends on West European suppliers for
certain specialty imports-notably plastics, pesti-
cides, and manmade fibers. ~~
On the other hand, exports to and imports from the
USSR represent less than 5 percent of Western
Europe's overall trade; the key exception is energy.
In 1983, Soviet oil deliveries accounted for nearly
10 percent of West European oil consumption, and
the share of gas was even higher. By the end of the
decade, when the Siberian gas pipeline system is
fully operational, the USSR could be providing as
much as one-third of the gas requirements of West
Germany, France, and Italy.
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USSR: Trade With Western Europe
USSR: Orders Placed for
West European Machinery
and Equipment
Million vs S
1980
1981
1982
1983
Total
2,066
5,380
3,184
1,310
West Germany
892
1,797
1,162
808
France
806
1,948
746
123
Italy
55
843
326
140
United Kingdom
139
462
177
103
Other Western Europe
174
330
'773
136
In 1983 the value of the USSR's trade with
Western Europe topped $40 billion,
Soviet exports to the area. amounte to
$25 billion, and imports totaled nearly $18 billion.
This trade is heavily skewed toward the major
industrial countries. West Germany, France, Italy,
and the United Kingdom accounted for almost 60
percent of West European-Soviet trade last year.
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25 May 1984
Maintaining large trade surpluses with Western
Europe allows the USSR to cover the trade deficit
it runs with hard currency suppliers elsewhere. In
1983, Soviet trade with Japan, Cariada, Argentina,
and the United States was in deficit by $7 billion.
West Germany. West Germany is the Soviet
Union's largest hard currency trade partner, ac- --
counting for nearly one-fourth of Soviet trade with
Western Europe. Moscow values the quality of
industrial technology provided by the West Ger-
mans, who supply equipment and expertise for a
number of large-scale development projects in the
USSR. Their firms have provided nearly. half of the
large-diameter pipe, many of the turbines, and
much of the management and technical expertise
for the Siberian gas export pipeline. Soviet orders
for West German equipment, however, have fallen
more. than 50 percent since pipeline and other
contracts were signed in 1981, and in 1983 they
totaled only $800 million
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Soviet-West European Trade Issues
buyer of Soviet energy, but French manufacturers
appear to be at a disadvantage when competing
against other Western firms.
United Kingdom. Soviet trade relations with the
United Kingdom have been strained for several
years, with neither side inclined to launch a drive to
expand ties. British business and industry repre-
sentatives maintain contacts with Soviet counter-
parts, but their interest currently seems to be
Italy. Close economic ties between the Soviet
Union and Italy predate the growth in Soviet-
West European trade that occurred in the 1970s.
Trade relations, however, have been constrained by
the limited Soviet demand for Italian exports and
Rome's reliance on Soviet energy supplies. The $2
billion trade deficit the Italians ran with Moscow
last year was the largest in Western Europe. -Nev-
ertheless, Italian firms Conti m -
cessfully for Soviet business
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minimal.
Prospects
The large trade surpluses with Western Europe are
likely to continue through yearend, even if Soviet
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Secret
USSR: Trade Balances With Major West European Trade Partners, 1973-83
-0.5 1973 75 80 83 1973 75 80 ?83
1973 75 80 83
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exports stagnate. Nonetheless, Moscow's ability to
maintain its oil exports to the region could be
hindered by domestic oil production difficulties and
the soft oil market. Gas sales could suffer from- the
It appears that Moscow will try to hold down Soviet
reliance on economic ties with the West. Soviet
planners apparently hope to reduce imports from
the West this year, in order to offset the expected
sluggishness of exports. The plan for 1984 calls for
a rise of 10 percent in trade with Communist
countries and implies a decline of roughly 10
percent in trade with non-Communist countries.
Although the USSR continues to look to Western
nations for advanced technology to boost its lagging
productivity and growth, the value of Soviet orders.
for machinery and equipment declined last year.
After peaking in 1981 at more than $5 billion-
mostly for pipeline equipment-orders amounted to
just $1.3 billion in 1983. The value of Soviet orders
placed with West European firms last year was the
lowest since the early 1970s and 75 percent below
that of 1981. ~~
Over the longer term, we expect Moscow will give
priority to equipment imports necessary to develop
energy resources. The Soviet Food Program, which
gives priority to upgrading capital stock in all
phases of food production, is also likely to receive
special attention. Imports of machinery for other
sectors of the Soviet economy probably will suffer.
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25 May 1984
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Secret
International Financial Situation:
Political Update
Austerity measures taken to satisfy the IMF have
been directly responsible for political turmoil in the
Dominican Republic and Bolivia this past month.
In the face of domestic resistance, Yugoslavia
undertook tough economic measures in the hope of
completing a new IMF agreement. In Argentina,
President Alfonsin continues to be plagued by
sporadic strikes, making it increasingly difficult for
him to move forward on economic issues. Political
unrest in Chile and the Philippines could lessen
these governments' resolve to enforce austerity .
measures; any backsliding on economic reform
could jeopardize IMF and new bank loans .that are
essential to meeting these countries' foreign pay-
ments obligations this year. ~~
Government-ordered price increases on imports,
including many basic foodstuffs, provoked three
days of rioting and looting late last month in the
Dominican Republic. The protests broke out after
the recent agreement with the IMF that shifted
most imports from the official to the more costly
free market foreign exchange rate. Various opposi-
tion groups reportedly exploited the popular discon-
tent. The government's use of force and the arrest
of more than 100 members of opposition groups
and two labor leaders during recent weeks has kept
the lid on further demonstrations. In addition,
government actions to subsidize food for the poor
and to increase the minimum wage, dismissal of
Central Bank Governor Vega, and agreement to
meet regularly with union leaders have helped still
the labor federations. Nevertheless, the inflationary
impact of the devaluation continues to be a source
of popular discontent, and the anniversary of the
assassination of Trujillo on 30 May could be the
occasion for new outbreaks. President Jorge Blanco
remains determined to follow through on an IMF
agreement, according to the US Embassy, even
though several difficult issues remain unresolved,
including the shifting of petroleum products to a
more expensive exchange rate and the financing of
the government deficit. ~~
The Bolivian Government's decision last month to
undertake a 75-percent devaluation and increase
prices of basic foods and gasoline as preconditions
for an IMF agreement has spurred widespread
labor strikes. For example, the US Embassy reports
that an ongoing strike at the Central Bank has
nearly paralyzed- the banking system. Responding
to.growing public alarm, President Siles has imple-
mented agovernment takeover of the Central
Bank. A communique issued by the armed forces'
high command warns that the military will step in
if the government cannot maintain order. Siles may
accept the resignation of the Finance Minister to 25X1
placate workers. Labor, however, is also demanding
the revocation of austerity measures and the defer-
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The Yugoslav Government also implemented tough
measures to meet IMF requirements this month,
including the lifting of price controls imposed last
December and legislation cutting wages in firms
with persistent losses or failure to pay debts on
time. The IMF, however, is not completely satisfied
with the price measures, because the federal gov-
ernment can still intervene in cases where prices
rise too rapidly. Conclusion' of a Western financial
package for 1984 hinges on resolution of the prob-
lem. The .federal government-which changed its
top economic advisers this month-will face in-
creasing consumer frustration with inflation-now
about 60 percent annually-and pressures from
financially troubled industries. Regional resistance
to the federal government's economic stabilization
proposals remains strong.
Argentine labor unrest has increased over the past
few weeks, but work stoppages remain sporadic and
short lived. Stepped-up strike activity included a
24-hour railway stoppage-the first nationwide
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union action since.Alfonsin took office last Decem-
ber. Meanwhile, the President is moving to reach
an accommodation with his Peronist rivals on press-
ing economic issues. Most recently, he has initiated
a dialogue with the Peronists, led by former Presi-
dent Isabel Peron, that he hopes will result in~more
union flexibility. Even if an accord is reached on
wage and trade union policies, however, rising
interest rates are making the foreign debt issue
increasingly political, and Alfonsin is under pres-
sure to take stronger positions with the IMF acid
foreign lenders. In addition, a sharp cut in budget
expenditures could provoke grumbling from the .
military. ~~
In Chile this month's reduced participation by the
middle class and workers in nationwide protests
over political liberalization and continued high
unemployment will hurt efforts to call a national
strike before August. Nonetheless, we believe the
moderate Democratic Alliance and National
Workers' Command will continue to call for pro-
tests against the regime. For its part, the Pinochet
government has acted with restraint and avoided
provoking demonstrations. Concern about Chile's
political future has contributed to the reluctance of
US regional banks to complete Chile's $780 million
new money loan; it is 95 percent subscribed. Even
when the package is completed, more expansionist
policies that Finance Minister Escobar may deem
politically necessary could jeopardize IMF and
bank disbursements later this year.
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25 May / 984
In the Philippines, demonstrations-some violent-
protested government fraud in the 14 May Nation-
al Assembly elections. Early returns from
independent tallies and press reports showed im-
pressive gains by the opposition and surprised
President Marcos and his ruling party. Later an-
nouncements by the elections commission credited
the ruling party with wins in areas where opposition
candidates seemed assured of victory.
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Secret
Turkey's Military:
The Impact of Economic
Problems
Turkey's transition to democracy following three
years of military rule has gone smoothly. Newly
elected Prime Minister Turgut Ozal and President
Kenan Evren-who headed the military junta from
1980 to 1983-appear to have established a good
working relationship. The new constitution grants
substantial- powers to.the President, but Evren
generally supports Ozal's economic stabilization
program and is likely to continue giving the Prime
Minister a relatively free hand in pursuing econom-
ic and political. reforms. In return, despite tight
fiscal and monetary policies, Ozal is unlikely to
reduce resources devoted to the military. ~~ .
Ozal appears to share the military's belief that the
terrorism, which brought the country to the brink
of civil war in 1980, has only been contained, not
eradicated. Ozal recognizes the threat from Tur-
key's northern neighbor, the Soviet Union, and has
pledged his full support for the country's member-
ship in NATO. Furthermore, he recognizes that
increasingly important military challenges could
develop on the borders with Syria, Iran, and Iraq.
Turkey traditionally has devoted a large share of its
GDP to defense-the third highest in NATO-but
it is also by far the poorest NATO member, and
successive economic and political crises during the
past 30 years have left its military poorly trained
and ill equipped. A massive modernization program
was estimated by US officials in 1981 to cost at
least $18 billion, well beyond Turkey's resources.
Ankara's efforts to secure foreign military assis-
tance, however, will continue to be hampered by
budgetary constraints in donor countries and diffi-
culties with various NATO Allies over human
rights issues, the pace of democratic reforms, and
the Cyprus issue. ~~
The MiGtary's Role
The armed forces are perhaps the most highly
respected group in Turkish society and traditionally
have been viewed as the guardian of the state. The
military's role in Turkey has been extensive since
the days of Ataturk, the founder of the Turkish
republic. The restoration of law and order following
the military takeover in 1980 has probably in-
creased its prestige, and Turks believe the military
saved the country from anarchy.
The military's primary mission is to defend the
country from foreign attack and support NATO in
the defense of its southeastern flank-primarily by
protecting and controlling the vital Turkish Straits.
Turkey maintains an armed force of about 790,000
men-the second largest in NATO. The Turks
believe their primary threat is from the Soviet
Union, but they are increasingly concerned about
Syria's intentions and the growing Soviet influence
in Damascus. In addition, Turkey sees itself sur-
rounded by potentially hostile or unstable coun-
tries-Greece and Bulgaria to the west, and Iran
and Iraq to the south and east.
The Turkish Army is also assigned the task of
assisting the national police and internal security
forces (the Jandarma) and was responsible for
successfully controlling terrorism following the mil-
itary intervention in 1980. Martial law still exists in
all but 13 of the 67 provinces, and the military's
role in the political process continues to be exten-
sive.
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The military traditionally has had little difficulty in
securing adequate funding from the domestic budg-
et but continues to face hard currency shortages.
As President, Evren retains substantial powers
under the 1982 Constitution, and he can be expect-
ed to represent military interests in the new civilian
government. Defense spending as a share of the
national budget has averaged about 20 percent
since 1970 and nearly 5 percent of GDP. Under the
new constitution, the Chief of the Turkish General
Staff will continue to be a key player in determin-
ing security policy and the defense budget. Prime
Minister Ozal also recognizes the need to address
the military's interests and has accepted the "spe-
cial programs" initiated by the previous military
government, such as the F-16 coproduction protect,
middle-income families. They are selected at an
early age and receive extensive education between
14 and 22. While at school, the officer candidates
are indoctrinated with the principles of Ataturk
and military discipline. Their wages are generally
similar to civilian pay, but, as officers rise in their
careers, they receive generous perks, such as auto-
mobiles and shares in defense industries. The Foun-
dation for the Promotion of the Turkish Air Force,
for example, will have a 1.9-percent share in the
F-16 coproduction venture. On the other hand,
Turkish conscripts, who form over 90 percent of the
Army, are -not as well off. Their pay is extremely
low, and they do not receive the perks the officers
do. At best, the military keeps them employed and
.provides some training and education. ~~
Despite budget problems, Turkish military officers
are relatively well off. Officers are drawn from all
regions of the country and mainly from low- and
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Economic and Political Backdrop
Turkey is emerging from a period of grave econom-
ic and political turmoil, which reached its nadir in
1979-80. At the end of 1979, inflation was in triple
digits, the current account deficit was large, and
the country's access to private foreign credit had
been completely cut. Severe shortages of many
imported products-especially oil-caused great
hardships and severely disrupted production. In
part, this crisis was the product of fundamental
weaknesses in the economy, which was modeled
along the nationalistic lines enunciated by Ataturk.
Economic activity was largely directed by the state,
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foreign investment was discouraged, and export
industries were ignored. The economic collapse also
resulted from policy errors as successive weak
coalition governments in the 1970s resorted to price
controls, expansionary fiscal and monetary policies,
and an overvalued exchange rate to avoid adjusting
to the oil price shock of 1973/74.
The country's institutions were almost paralyzed.
Terrorist acts were multiplying and at their peak
claimed more than 20 lives a day. The number of
"liberated areas"-effectively out of the control of
government security forces-was proliferating
throughout the country.
The turning point for the economy came with the
January 1980 economic stabilization program.
Largely drafted by Turgut Ozal-then chief eco-
nomic adviser to the newly formed conservative
coalition government of Prime Minister' Demirel-
the program was a serious attempt to reshape the
economy along export-oriented, free market lines.
It was supported by more than $4 billion in loans
from the IMF, the OECD, and the World Bank
and achieved dramatic results during the next two
years as inflation eased, exports boomed, and GNP
growth resumed. Domestic violen_ ce, however; con-
tinued.)
The military intervened on 12 September 1980 to
restore order. They suspended constitutional rights
and imprisoned thousands of suspected terrorists.
In an effort to depoliticize the bureaucracy, the
military government rewrote the .civil service laws .
to bar public employees from politics and barred
leaders of established political parties from political
activity for 10 years. The generals turned.over the
reins of power in November 1983 to a civilian
government elected under a new constitution.
Following his election victory in November 1983, .
Prime Minister Ozal instituted a series of economic
reforms to further his 1980 stabilization program
and rejuvenate an economy that showed signs of
slowing. Although GNP grew 3.2 percent in 1983,
exports stagnated and the current account deficit
grew to about $2 billion. In addition, the inflation
rate rose to about 40 percent by yearend, up from
25 percent in early 1983.~~
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25 May 1984
Ozal's new measures included liberalizing import
controls, improving export incentives, and abolish-
ing most foreign exchange controls. Interest rates
were raised above the inflation rate, and the prices
of several subsidized goods were increased substan-
tially. In addition, Ozal pushed through the Grand
National Assembly a controversial bill permitting
the state to sell shares in state enterprises to private
investors-a dramatic departure from Ataturk's
state capitalism. The measures have encouraged
optimism among international bankers about Tur-
key's economic prospects, and the country is begin-
ning to regain its access to the private credit
market.
We expect Ozal's policies will improve Turkey's
economic performance. Inflation should begin to .
fall by the end of this year but probably will remain
around 35 percent for 1984 because of recent price
hikes on several subsidized goods. GNP is expected
to rise by as much as 5 percent in 1984, and exports
will probably increase 15 to 20 percent, aided by
the new export incentives and daily adjustments in
the exchange rate. Preliminary results for the first
quarter are encouraging; export receipts were up
nearly 37 ercent over the same period a year
earlier.
In addition, Turkey's transition to democracy has
gone smoothly since the parliamentary election in
November, even though Ozal was not Evren's
favored candidate. The recent municipal elections
gave a further boost to Turkish democracy and
another solid victory to Ozal's Motherland Party. A
dark note is that terrorist acts are on the rise again.
As a result, Ozal and Evren have been reluctant to
push for an amnesty bill or lift martial law. ~
Economic Stringencies and the Military
Economic problems have significantly affected
Turkish military capabilities. Inflation and a short-
age of foreign exchange have had a significant
impact on military spending, since nearly all of
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Secret
Turkey's military equipment is purchased abroad.
Defense spending, which rose sharply in the mid-
1970s following the invasion of Cyprus, has slowed
since 1978 and would have declined in real terms
without assistance from Turkey's NATO Allies. In
addition, the US arms embargo following the Cy-
prus invasion further reduced Turkey's defense
capabilities. ~~
Economic difficulties have forced several important .
programs to be delayed or scaled back, including
the replacement of F-5 and F-100 squadrons, the
purchase of ASW helicopters and short-range air
defense missiles, and the building of sufficient war
reserve ammunition stocks. There is insufficient
live-fire training in all three services because of
ammunition shortages. Both the Army and Air
Force have had difficulties in retaining skilled and
experienced personnel. Equipment procurement has
been particularly hard hit, with only 10 percent of
the military budget devoted to this purpose-the
lowest share in NATO. Moreover, the Turks have
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been forced to spend a high proportion of their
budget on operations and maintenance because
much of their equipment is obsolete.
Turkey is almost totally dependent on foreign aid to
fund military equipment purchases. Over the past
several years, foreign military aid has accounted
for roughly 15 to 20 percent of the total Turkish
defense budget and nearly one-fourth of syendinQ
for operations and maintenance.
A large
reduction in aid would force Turkey to abandon
several important projects, such as the F-16 copro-
duction deal and ammunition procurement. ~~
Turkey recently has begun a major effort to devel-
op adomestic arms industry to reduce the country's
dependence on foreign suppliers. Much of this
effort, however, is tied to foreign military assist-
ance programs or offset arrangements. For exam-
ple, the Turks plan to assemble some of the frigates
purchased from West Germany and are now build-
ing submarines with West German assistance. The
Turks will make some parts for the 160 F-16s they
Secret
25 May 1984
are buying from the United States and will assem-
ble the aircraft at a new aerospace factory at
Murted to be completed by 1989. A small techno-
logical base and lack of a highly skilled labor force
will hamper Turkey's efforts to establish an indige-
nous arms industry over the next several years.
Moreover, political differences between Turkey and
its allies over human rights, the extent of democra-
cy, and Cyprus have affected aid levels and contin-
Implications for the United States
Economic difficulties probably will not seriously
weaken the ability of the Army and Jandarma to
deal effectively with internal security threats, but
Turkey's external military capabilities and modern-
ization efforts will fall short of their perceived-
requirements. Financial constraints will grow, as _
large rescheduled debt payments begin to come due
later this year. Turkey's ability to match the
military strength of its neighbors is likely to deteri-
orate unless military aid is increased sufficiently to
permit a large modernization effort. ~~
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