INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707180001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: September 21, 1984
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
- t
DI IEEW 84-038
21 September 1984
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Secret
International
Economic & Energy
Weekly
21 September 1984
iii Synopsis
Perspective-LDC Debt at the IMF/IBRD Annual Meetings
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Energy
International Finance
Global and Regional Developments
National Developments
11 estern Europe's Airbus Industrie: Pan Am Deal Will Spawn
Further Success
15 ,Su th Korea: Foreign Investment Liberalization
19 ,'Morocco: Austerity and Education-Troubles Ahead
23 Ivory Coast: Coping With Financial Shortfalls
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Comments and queries regarding this publication are welcome. They may be
Directorate of Intelligence 25X I
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21 September 1984
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Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective-LDC Debt at the IMF/IBRD Annual Meetings 25X1
The world debt situation will be a major topic of discussion at the joint annual
meetings in Washington of the IMF and IBRD, which begin on 24 September.
The centerpiece of the discussion will be the current debt strategy and the need
for alterations to permit growth and longer term recovery.
11 Western Europe's Airbus Industrie: Pan Am Deal Will Spawn
Further Success 25X1
The Pan Am-Airbus Industrie agreement announced last week adds signifi-
cantly to Airbus's worldwide prestige and makes additional sales of the all-
new, 150-seat, narrow-body A320 design much more likely.
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15 South Korea: Foreign Investment Liberalization I 25X1
Seoul has adopted foreign investment regulations that are designed to attract
advanced technology from abroad and reduce reliance on foreign borrowing
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19 Morocco: Austerity and Education-Troubles Aheadl 25X1
Morocco's effort to reform the expensive educational system is sparking fierce
political debate and significantly increases the potential for student disorder in
the coming school year.
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23 Ivory Coast: Coping With Financial Shortfalls I 25X1
Ivory Coast probably will record its third. consecutive year of declining GDP in
1984. Weak markets for major exports, mushrooming debt payments, public-
spending cuts, and shortages of vital imports probably will cause another drop
in 1985, when President Houphouet Boigny must seek reelection.
Secret
DI IEEW 84-038
21 September 1984
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Secret
International
Economic & Energy
Weekly
21 September 1984
Perspective LDC Debt at the IMF/IBRD Annual Meetings
The world debt situation will be a major topic at the joint annual meetings in
Washington of the IMF and IBRD, which begin on 24 September. Much of
the discussion will occur outside the regularly scheduled meetings. These
informal gatherings have produced significant results in the past. At the 1982
annual meetings in Toronto, for example, the details of Mexico's financial
rescue package were worked out
The centerpiece of the discussion will be the current debt strategy and the need
for alterations to permit growth and longer term recovery. Most creditors will
state that the immediate crisis-the threat to the stability of the international
financial system-has passed and that the current strategy is working. The
debtors, however, will claim that a number of problems remain. Although
creditors have adopted a medium-term approach to deal with the burden of
principal repayments, most banks are reluctant to lend large amounts of new
money for development needs, even to countries such as Mexico and Brazil,
which have complied with their IMF-supported programs. With a large share
of current export earnings being applied toward interest payments, debtors are
concerned about future economic growth prospects.
In addition to seeking greater new lending from commercial banks, which hold
nearly two-thirds of LDC debt, debtors will push Western governments, the
IMF, and the World Bank for increased assistance. Latin American debtors
have been the most vocal on this subject, particularly after the Cartagena
meeting in June. These countries-most notably Argentina-are proposing a
joint conference of creditor and debtor nations in an effort to politicize the
debt issue and put greater pressure on commercial banks to be less stringent on
financial packages for troubled debtors.
For their part, the IMF and the IBRD will examine additional ways of
assisting debtors. Proposals that will be discussed by the IMF include:
? An extension of the enlarged access facility, which is supported by most
industrial countries.
? A new special fund for countries hard hit by rising world interest rates.
? A new issue of special drawing rights (SDRs), a move favored by the French.
The World Bank will debate whether more of its loans should be oriented to
general programs as opposed to being strictly tied to specific projects.
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DI IEEW 84-038
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A related area of discussion concerns actions that could be taken to restore
LDC growth. This question will not be resolved at the IMF/IBRD annual
meetings, but the opportunity exists for creditors and debtors to move beyond
immediate repayment problems and into issues of long-term development, such
as greater investment flows, reduced barriers to trade, and private-sector
revitalization. Consideration of these issues would be a positive sign that
creditors and debtors recognize the need to shift into the next phase of the debt
problem.
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21 September 1984
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Briefs
/iban Oil Barter Deals Tripoli increasingly is trying to pay for essential imports with crude oil.
We estimate that about 40 percent of Libya's current oil exports of about 1
million barrels per day is shipped under barter arrangements. Libya's national
oil company, however, is having difficulty expanding small barter exchanges
and offshore processing agreements because of the oversupply of crude in West
European markets, and Western contractors increasingly are resisting accept-
ing oil for their services.
Libyan Pipeline Libya's export terminal at Marsa el Brega reportedly has been shut down since
E onion late August by an explosion and fire on a dual-use crude and natural gas 25X1
pipeline from the Zelten field to the terminal. The pipeline had been
transporting over 100,000 b/d of oil along with associated natural gas, and its
ill
bl
b
average
y w
a
shutdown is part of the reason Libyan on production pro
only 900 entember. The i eline should return to operation in
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Deferral of maintenance and repair
because of budgetary constraints has caused widespread deterioration in
Libya's petroleum production and transportation equipment in recent years,
and we expect continuing problems in Libya's oil production and transporta-
tion system.
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21 September 1984
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furchases Refining
Technology From
Western Europe
Status of Philippine
Financial Rescue
ackage
ropean Currency
nit Redefine
Secret
21 September 1984
In early August, Czechoslovakia signed contracts with Austrian, West Ger-
man, and Italian companies for licenses to manufacture petroleum refinery
hydrocracking equipment. Hydrocracking is a sophisticated refining process
used to convert heavy fuel oil into lighter products such as gasoline, kerosene,
and diesel fuels. There currently are no hydrocracking units in Czechoslova-
kia's petroleum refineries, and until now the Bloc countries have not had the
technology to construct hydrocracking units. In addition to upgrading Czecho-
slovakia's petroleum refining industry, the purchase is significant because
Czechoslovakia is one of the largest suppliers of petroleum refining equipment
to the Soviet Union. The Soviets have been attempting-with little success-to
construct a hydrocracking unit in one of their refineries since 1976. Hydro-
crackers would help the Soviets accomplish their goal of increasing the
production of light petroleum products, without correspondingly increasing
Manila's efforts to assemble a financial rescue package are focused on
concluding difficult negotiations with its commercial bankers. The IMF's
executive directors cannot approve the Fund's proposed $630 million standby
loan without assurances that $4.3 billion in new financing-$2.65 billion from
official sources and $1.65 billion from commercial bankers-will be available
for Manila's loan arrearages and 1985 foreign exchange requirements.(
EC finance ministers meeting in Ireland last week decided to incorporate the
Greek drachma into the basket of currencies that make up the European
Currency Unit (ECU). Because Greek inflation is running more than 10
percentage points above the Italian rate-the next highest in the EC-Athens
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Reduced Sugar
Earnings For Latin
America
EC Wheat Exports
ay Rise
revalued against the ECU, which is worth about $0.75.
did not join the intervention mechanism of the European Monetary System
(EMS). As expected, the finance ministers adjusted the ECU basket to reduce
the weights for the West German mark, the Dutch guilder, and the Belgian
franc; the weights for the French franc, the British pound, the Italian lira, and
the Irish punt were raised. None of the EMS currencies was devalued or,
The change in the ECU probably will have little effect on the foreign exchange
and the Eurobond markets. The change in weights means that the EMS
countries with smaller weights can let their currencies deviate slightly more
from parity before being obliged to take action, while. those with higher
weights will have to intervene earlier. Yields on ECU bonds probably will be
slightly higher because the greater weight for currencies with higher inflation
21 to 22 cents guaranteed under the US sugar program.
Global and Regional Developments
New US sugar import quotas-which call for a 16-percent cut from 2.76
million metric tons-will hit the Dominican Republic, Colombia, Peru, Brazil,
and most of Central America especially hard. These countries depend on sugar
sales as a main source of foreign exchange and on the US market as their pri-
mary outlet. The Dominican Republic, for example, will lose about $65
million-8 percent of 1983 export earnings-because reduced quota shipments
will garner only about 5 cents per pound on the world market rather than the
to exceed consumption by about 2 percent.
World sugar prices-currently at their lowest level in 15 years-are expected
o remain extremely weak because of the expiration of the International Sugar
Agreement and large sugar stocks that continue to overhang the market.
Unless global production is cut sharply through acreage reductions or by a
series of poor growing seasons, low world sugar prices are likely to persist for
some time to come. Once again, this year's crop is growing well and is expected
recent years does not apply to unsubsidized wheat sales.
Because of a bumper wheat crop this year, the EC is under pressure to increase
worldwide wheat exports. The EC Commission estimates that 1984 Communi-
ty production may reach 69 million metric tons, about a 17-percent jump over
last year. Under the EC's Common Agricultural Policy, the Community
normally subsidizes its exports by offering "refunds" to wheat exporters to
offset the difference between high domestic support prices for wheat and
generally lower world market prices. Largely because of the strong US
dollar-the currency in which world grain trade is conducted-EC and world
wheat prices are converging, and, as a result, the Community probably will be-
gin to export unsubsidized wheat this month. Commission officials maintain
that the self-imposed 14-percent market share that the EC has adhered to in
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21 September 1984
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E,C Budget
risis Eases
EC members are nearing resolution of their short-term budget problems. The
United Kingdom apparently has dropped its opposition to EC loans from
member states to cover the EC's estimated. $1.5 billion budget shortfall. In
return, other EC members will agree to new directives aimed at controlling the
growth of EC agricultural spending. The ministers also discussed moving up to
next fall the implementation of new revenue measures originally scheduled for
1986. Although these arrangements-which probably will be finalized at
Council meetings in early October-should put the Community's financial
woes to rest for a year or two, the EC almost certainly will encounter renewed
difficulties when revenues again run low in 1986 or 1987.
Japanese Buy Grain China has sold 150,000 tons of corn to three Japanese firms in the first grain
From China deal between the two countries.
The Chinese contend that increased Japanese pur-
chases of agricultural products would help boost Chinese imports of Japanese
machinery and technology. Press sources report that the Japanese are
proceeding cautiously because of fears that increased purchases from China
would arouse opposition from Washington and from Japan's major suppliers in
the United States.
ossible Reappointment The US Mission in Geneva reports that UNCTAD Secretary General Gamani
1of UNCTAD Secretary Corea may be picking up Third World support for another term in office.
General UNCTAD is a forum for North-South economic negotiations, and Corea has
helped give it a pro-Third World bias. If reappointed for another five-year
term in December, he probably would try to stymie the US-sponsored effort to
reform the organization. UN Secretary General Perez de Cuellar has the
authority to nominate a candidate for the post but is allowing the developing
countries to make the choice. The developing countries, however, have been
unable to settle on a new candidate and may ask Perez to renominate Corea.
Developed Countries
New Israeli
Economic Measures
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21 September 1984
At its first Cabinet meeting on 16 September, Israel's new national unity
government approved in principle a $1 billion cut in the national budget,
devalued the shekel by 8.3 percent, and increased fuel prices by 9 percent.
Other elements of the government's economic plan have not been decided, but
some ministers predictably are protesting proposed cuts in their particular
budgets. By these early proposals, Prime Minister Peres hopes to signal to both
the Israeli public and the United States that- the Israeli Government is serious
about dealing with the ailing economy. No enforcement mechanism, however,
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Japan Seeking To
De elop New Ceramics
echnology
Gold Miners' Strike increase, ending a violent one-day walkout by half of the blacks at eight major
Ends __~ gold mines. The compromise left them still earning only .one-fifth as much as
effective monetary policies.
has yet been devised for the new proposals. It is also unlikely that the new gov-
ernment will tackle the structural problems at the root of Israel's economic cri-
sis, particularly the indexation of wages to the inflation rate and the absence of
automobile engines.
MITI has announced a six-year $125 million R&D project that includes
development of advanced technologies for making ceramic parts. The proposed
R&D thrust-using high-energy beams to finish (cut and shave) ceramics
parts-exceeds the technical scope of MITI's ongoing Fine Ceramics Project
and would be the first major effort of its kind worldwide. The new technology
could be markedly superior to current mechanical finishing technologies,
primarily diamond grinding, that often weaken ceramic parts and could bring
closer the commercial use of precision ceramic parts in equipment such as
South African Mineowners and black miners this week agreed to a 4-percent real wage
Spain Eases
/Monetary Policy
New Zealand
Economic Summit.
white miners, but represented an important victory for the new National
Union of Mineworkers. Mineowners had originally offered a 2-percent real
wage increase and insisted they would fire striking miners. This was the first
legal black miners strike under labor reform laws passed in 1979, and we
believe it will boost the membership of the NUM, which now represents less
than 20 percent of South Africa's black miners. Wildcat strikes have
continued at mines not covered by the settlement.
agreement to greatly influence most firms' investment decisions.
Major Spanish banks, following discussions with the government, have agreed
to lower their prime rates 1.5 percentage points and deposit rates 1.75
percentage points. To accommodate the lower interest rates, Madrid is,
permitting somewhat faster monetary growth. With the inflation rate slowing
from about 12 percent last year to 9.2 percent this summer, the current
account swinging into surplus, and domestic demand slackening, the Socialists
clearly believe that they have enough leeway to ease their monetary policy
without jeopardizing the accomplishments of their austerity program. The
Gonzalez government is seeking to reverse an average annual decline of 2
percent in real investment and average annual job losses of 260,000 from 1975
to 1983. While investment in some interest rate-sensitive sectors such as
construction and automobiles may pick up, we do not expect the financial
A three-day economic summit of representatives of government, business, and
labor last week produced a show of consensus that would have been unattain-
able in the polarized atmosphere of the former National Party government of
Robert Muldoon. Union representatives, claiming that the longstanding wage
freeze has led to greater income inequality, gained promises of speedy relief for
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Secret
the economy.
lower paid and unemployed New Zealanders and a greater bargaining role for
labor in the wage-fixing process. In wage negotiations, labor agreed to a
government proposal to replace national awards with enterprise- and industry-
level settlements. The government also indicated that it would relax price and
wage controls as soon as the new budget is presented on 8 November. The du-
rability of the accord is open to question, however, in view of strong opposition
within Lange's Labor Party to his desire to reduce government intervention in
Less Developed Countries
Chilean Payments In response to a soaring current account deficit-$250 million above IMF
/ Pressures Intensify program limits in the first half of 1984-Finance Minister Escobar on
Monday announced a 24-percent devaluation of the peso and a uniform tariff
of 35 percent. The Chilean Government has pledged to get its IMF stabiliza-
tion program back on track by slowing economic growth
Santiago has responded
slowly to IMF calls for austerity, fearing that it would provoke more opposition
to the government. After the failure of a recent antiregime protest, however,
President Pinochet apparently is willing to make unpopular economic adjust-
The effects of the latest measures will not be felt until next year. Santiago
faces a balance-of-payments shortfall this year of $500 million and, by -using
some foreign exchange reserves to reduce the deficit, will not meet its IMF re-
serve target. Commercial bankers and the IMF may respond by suspending
the $300 million remaining in current loans. Chile probably will appeal to
major banks for a short-term loan until a new IMF agreement can be worked
out. If bankers refuse, Chile probably will suspend its payments on the foreign
Bangladesh's New Dhaka has decided to implement a new land reform program to increase farm
Land Reform Program productivity, reduce the ineoualitv in landholdings and irnnrnve the ranima'e
J
loomy Appraisal of
Indian Payment
Prospects
Secret
21 September 1984
popularity with rural voters before national elections in December. On the
basis of recommendations of the longstanding Land Reform Commission, the
government plans to reduce the ceiling on family landholdings from 12 to 8
hectares and entitle sharecroppers, who constitute about 35 percent of the
nation's farmers, to gain occupancy rights for up to five years. In our view, the
modest reforms are unlikely to achieve their development objectives because
they offer few major changes, will be difficult to administer, and can easily be
India's central bank, in contrast to its moderately optimisitc report last year,
now expects no significant new oil discoveries that could help lower India's oil
import bill over the next several years. The bank noted that Indian repayments
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Eastern Europe's
owing Trade Deficit
With the USSR
9 Secret
21 September 1984
proposals to forestall 'severe payment problems.
due the IMF and commercial banks will rise through 1989 and expressed
concern that greater competition from developing countries will lead to slower
growth in export earnings. The central bank sees little prospect for increased
foreign aid or private remittances and recommends intensified export promo-
tion efforts instead. The government's highest economic policy body earlier
this summer issued a similarly pessimistic analysis and recommended import
restraints as part of India's 1985-90 Five-Year Plan. Prime Minister Gandhi is
unlikely to make any major policy changes until after national elections, which
must be held by January 1985, but we believe the February 1985 central
government budget and April 1985 annual trade policy will include new
twice as fast as exports. East Germany was the only exception.
vakia and Hungary registered the largest increases, with imports growing
Eastern Europe's trade deficit with the USSR rose to $1.4 billion in the first
half of 1984, according to Soviet statistics. This is the largest gap at midyear
since the record deficit of 1981 and runs counter to reports that Moscow no
longer is willing to tolerate CEMA members' large trade deficits. Czechoslo-
1986-90 trade plans.
The rise in the deficit mainly reflects increasing costs of Soviet energy
deliveries and slowing growth of East European exports to the USSR.
Nevertheless, the deficit for the year still may fall below last year's level of
$2.2 billion if Moscow is successful in prodding the East Europeans to meet ex-.
port commitments. While the USSR probably will tolerate trade deficits in the
short run, it.probably will push harder to reduce or eliminate the deficits in
Eastern Europe-USSR Trade,
January-June 1983 and 1984
Million US $
1983
1984
Percent
Change
1983
1984
Percent
Change
1983
1984
Total
18,524
20,470
10.5
19,518
21,914
12.3
-995
-1,444
Bulgaria
3,472
3,810
9.7
3,887
4,283
10.2
-415
-474
Czechoslovakia
3,733
4,043
8.3
3,853
4,516
17.2
-121
-472
GDR
4,356
5,090
16.9
4,482
4,835
7.9
-127
255
Hungary
2,545
2,756
8.3
2,646
3,058
15.6
-101
-304
Poland
3,215
3,501
8.9
3,502
3,935
12.4
-289
-435
Romania
1,204
1,273
5.7
1,146
1,285
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Western Europe's Airbus Industrie:
Pan Am Deal Will Spawn
Further Success
The Pan Am-Airbus Industrie agreement an-
nounced last week adds significantly to Airbus's
worldwide prestige, and makes additional sales of
the all-new, 150-seat, narrow-body A320 design
much more likely. If the Pan Am board approves,
and if all options are exercised, the agreement
could involve 91 aircraft valued at some $3 billion,
according to Airbus. The deal will benefit both
parties; it removes Airbus's inventory overhang of
widebody designs and increases the consortium's
ability to develop a "family" of aircraft. In turn,
Pan Am gains a quick increase in passenger capaci-
ty with a minimum financial commitment. Al-
though the deal involves both wide-body and nar-
row-body aircraft, the strongest implications for
the United States stem from the A320 sale-.
aviation experts believe the 150-seat market should
total 2,300 aircraft, worth $70-75 billion during
1986-2000.
The massive Pan Am-Airbus agreement covers up
to 91 aircraft: the purchase of 28 Airbus Industrie
jets, the lease of another 16, and options on 47
more. The 28 aircraft Pan Am will purchase
include both A310s and A320s; delivery is sched-
uled to begin in 1987. In the interim, Pan Am will
lease 12 A300s and four A310s. These aircraft are
available immediately. Over the longer term, Pan
Am also has an option to buy 13 additional A310s
and another 34 A320s.
Although specific terms of the purchase and leasing
agreements were not disclosed,
Pan Am will make an initial
$22 million payment to Airbus by yearend. The
overall deal is set forth in a letter of intent that is
subject to final approval by Pan Am's board. The
transaction also depends on the carrier's winning
favorable contracts with its labor unions. Each of
The Airbus A320 Design at a Glance
According to Airbus Industrie officials, the basic
A320 design concept is targeted for low-density,
medium-range routes in Western Europe. We be-
lieve, however, that even in the conceptual stage
Airbus designers were looking at markets around
the world, especially in the Third World. Airbus
officials indicate that two models are contemplat-
ed: a 100 series that offers a range of 1,800
nautical miles (nm) with 150 seats and a 200 series
that offers a 2,100-nm range.
The Airbus Industrie consortium-France, the
United Kingdom, West Germany, and Spain-
manages the program. France is the driving force,
with Aerospatiale as the systems integrator as well
as manufacturer of the front fuselage, flight deck,
center wing box, and engine nacelles. British Aero-
space builds the wings, Deutsche Airbus the fuse-
lage and tailfin, and CASA of Spain the horizontal
stabilizer and landing gear. Power plants will be
supplied by International Aero Engine Co., a con-
sortium with Pratt Whitney, Rolls-Royce, Japan
Aero Engine, Motoren and Turbinen Union, and
Fiat, or by CFM International with General Elec-
tric and SNECMA as members.
the wide-body Airbus jets costs between $40 mil-
lion and $50 million. The narrow-body A320 is
priced at $26 million, according to Airbus.
The deal provides both parties with immediate
benefits: the interim lease reduces Airbus's inven-
tory at the main assembly plant in Toulouse,
France. Because of an increase in production to
some five units a month and a slowdown in orders,
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the consortium currently has an inventory of 26
unsold aircraft-known in the industry as "white-
tails." For Pan Am, the lease provides a quick
capacity increase until the newer planes are avail-
able. The leased planes will be returned as the
A310-300s are delivered. The A320s will be used
primarily to replace Pan Am's fleet of Boeing 737s
on domestic routes and on its flights to West Berlin.
The Competitive Landscape
Airbus believes the Pan Am deal enhances the
competitive position of the consortium's aircraft
and justifies the decision earlier this year to launch
the A320. The new 150-seat aircraft is scheduled to
be available in mid-1988-at least a year earlier
than any all-new US design. The consortium be-
lieves the new-technology A320 will sell well
against US manufacturers now offering only deriv-
atives of existing aircraft-primarily the MD-80
from McDonnell Douglas and the Boeing 737-
300/400. Airbus believes that the McDonnell
Douglas decision to delay concept work on several
new designs makes it unlikely that the US firm will
build its own all-new design-the D3300. More-
over, Airbus has said that even if Boeing goes
ahead with its all-new design, the 7-7, the A320
will retain its competitive edge, since the 7-7 will
not be ready until mid-1989.
150-Seat Aircraft: The Next Big Market
Aviation analysts in the United States and Western
Europe believe that demand for new aircraft will
center on the 150-seat, narrow-body sector of the
market.' Aviation experts believe these aircraft will
account for some 2,300 sales between 1985 and
2000. The United States will account for 45 per-
cent of these sales, Western Europe 25 percent,
Australia, Canada, and Japan 10 percent, with the
remainder in the Third World. Most of the demand
comes from replacements for existing aircraft,
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21 September 1984
which industry analysts expect to reach about
1,600 aircraft. In addition, another 700 units will
be needed to meet growth in traffic.
Pan Am's acquisition of the entire mix of aircraft
currently manufactured by Airbus will give a boost
to the consortium's worldwide marketing efforts.
The Airbus consortium has always placed special
importance on the North American market, and we
believe the Pan Am agreement is already generat-
ing additional targeting of US airlines.(
We expect a
particularly aggressive effort to sell the A320 to
Delta and United. Delta was one of the first airlines
to recognize its requirements for a 150-seat-aircraft
design. Pan Am's intent to use A320s on. its
domestic routes will increase pressure on other US
carriers to upgrade their fleets.
Elsewhere we believe Airbus will continue to press
for sales to Western Europe's major carriers and to
key airlines in the Third World. On the basis of our
assess-
ment of current aircraft fleets, we believe West
Germany's Lufthansa and British Airways are
primary targets for sales. In the Third World, we
believe Airbus will concentrate initial sales efforts
on past customers for the A300/A310.
Order Book and Government Support
The A320, with its 152 sales and options, reflects
the increased acceptance of Airbus by airline
companies. The consortium had only a dozen orders
for the A300 when it first flew in 1972; there was
an unsold inventory of some 50 units in 1976.
Massive financial support by France and West
Germany kept the consortium active until A300
sales picked up in 1977. The same pattern of
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government support underpins the A320.2 The ap-
proximate $2 billion cost of A320 development is
heavily underwritten by the governments of the
consortium members.
New Airbus Designs
The Pan Am deal is likely to spur Airbus to expand
its product line, thus enhancing its capability to
compete with US manufacturers. The A320 itself
will evolve into a series of derivatives with various
capacities and ranges. Moreover, decisions may be
speeded up for other wide-body designs: the TA-11,
a four-engine 225-passenger wide-body aircraft for
transoceanic operation; TA-9, a stretched version
of the A310; and the TA-12, a long-range twin-
engine aircraft.
Airbus consortium initially set a goal of attaining a
one-third market share with each of its designs.
With the focus now centered on the 150-seat
market, we believe the Pan Am buy of the A320
virtually guarantees this goal and sets the stage for
an even-higher Airbus share of this market. Al-
though the agreement is characterized as a "$3
billion sale of the century," its details have not been
publicized. It does contain "escape" clauses that
will'allow Pan Am to react to market demands or
to other airframe manufacturers if they offer an
attractive all-new aircraft design. The events of the
next six to 12 months will shape the total contract
and determine the future of the A320 and the long-
term winners in the 150-seat market. If US manu-
facturers cannot respond to the challenge posed by 25X1
Airbus, the industry faces the loss of more than
$1.5 billion in annual sales beginning in the late
1980s. 25X1
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South Korea: Foreign
Investment Liberalization
Seoul has adopted new foreign investment regula-
tions that are designed to attract advanced technol-
ogy from abroad and reduce reliance on foreign
borrowing. The revised rules, which took effect 1
July, open numerous areas for foreign investment
and streamline the approval process. Foreign inves-
tors should find increased opportunities, particular-
ly in the electronics, machinery, and transportation
industries, the areas where frictions between Wash-
ington and Seoul over investment issues have been
most pronounced.
The Liberalized Foreign
Investment Policy .
Revisions to the Foreign Capital Inducement Law
(FCIL)-which has governed foreign investment
since 1962-eliminate most barriers to direct for-
eign investment by:
? Allowing foreign investment in all industries ex-
cept those specifically proscribed by Seoul. Previ-
ously, investment was allowed only in industries
specifically identified as eligible.
? Replacing the requirement for prior approval for
technology transfer with an after-the-fact notifi-
cation system.
? Increasing the overall share of industrial sectors
allowing foreign investment from 44 to 67 per-
cent.
We believe that the new system-of listing only those
industries specifically closed to foreign investment
should clarify murky guidelines and will permit
investment in previously restricted areas. Seoul is
placing a high priority on attracting investment in
high-technology sectors, and many formerly re-
stricted areas-such as magnetic-storage media for
computers, steam and gas turbines, and industrial
robotics-are now open to foreign investment.
Industries Closed to Foreign Investment
by Inclusion on the Negative List
Of the 272 sectors closed to foreign investment, 82
have been designated as closed for the indefinite
future. The remaining 190 sectors may be opened
to foreign investment in the future or, in extraordi-
nary circumstances, may be reviewed on a case-by-
case basis for foreign investment at any time. In
publicly justifying the "restricted" category, Seoul
has characterized the industries included as those
which:
? Receive special government assistance (such as
subsidies or support for basic research).
? Generate pollution.
? Depend heavily on energy and/or imported
materials.
? Encourage consumption of luxury goods.
? Adversely affect the farm and fisheries sectors.
? Involve simple personal and household services.
? Are infant industries for which protection is
necessary for the near term.
Seoul has announced that it will update the nega-
tive list every six months with the intention of
reducing its size.
According to US Embassy reporting, jockeying
over the final version of the negative list continued
until its release on 27 June. Changes from an
earlier draft suggest that the influence of the
officials favoring liberalization was strong: sectors
that would benefit from innovation and technologi-
cal upgrading were removed from protection, while
sectors less attractive to investors with limited
opportunities for technology transfer were added.
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South Korea: Cumulative Direct Foreign Investment Approvals, 1962-83
Manufacturing-Sector Benefits
In the manufacturing sector, foreign majority own-
ership is allowed in 84 percent of all industries,
compared with 15 percent previously, and restric-
tions on foreign equity shares that affected 52
percent of manufacturing industries have been
abolished. The number of manufacturing areas in
which foreign investment of any kind is prohibited
is reduced from 19 to 10 under the new law. In 22
of the 70 industries on the negative list, the actual
proscription is limited to only a few of the many
possible products within the standard industrial
classification. For example, while the manufacture
of biological products is on the negative list, only
blood products are actually restricted.
Almost half the industries closed to foreign invest-
ment are in agricultural processing, printing, and
wood products. These businesses are primarily
small and medium sized, and their continued pro-
tection reflects Seoul's dedication to this type of
industry, as well as the political importance of the
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21 September 1984
Percent
Origin
The emerging automobile- and truck-manufactur-
ing sectors are protected from wholly owned for-
eign competition but are allowed access to foreign
technology and marketing assistance through joint
ventures. The infant semiconductor and computer
industries, while theoretically free to acquire need-
ed foreign capital and technology, may not be
allowed to import high-technology capital goods
and processes when domestically derived substi-
tutes are available. We believe that this will not be
a major restraint until South Korea's research and
development capabilities improve. The technology-
intensive sector receiving the greatest protection is
telecommunications equipment, primarily optical
fibers, which relies on licensing agreements for
advanced technology.
Bureaucratic Procedures Altered
To reduce bureaucratic roadblocks, Seoul has insti-
tuted automatic approval procedures for invest-
ments under $1 million if the venture exports 60
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South Korea: Cumulative Direct
Foreign Investment Approvals by
Industry and Country, 1962-83
United States Other countries
Japan
I
I-
0
1
I
0 1962-66" 67-71" 72-76" 77 78 79 80 81 82 83
South Korea: Direct Foreign
Investment, 1962-83
United States Other countries
Japan
percent or more of its product and has majority
Korean ownership. The foreign equity restriction is
waived if the products are free of import restric-
tions and are subject to a tariff of 10 percent or
less. We estimate, however, that less than 10
percent of the value of US investments will qualify
for automatic approval due to the large-scale na-
ture and concentration in capital-intensive manu-
facturing of these investments
Within the Economic Planning Board (EPB), a
division has been established to coordinate foreign
investment activities and eliminate delays and.in-'
convenience. Authority to approve foreign invest-
ment continues to rest, however, with the Ministry
of Finance (MOF).
The new rules reflect the conviction of many
economic policy makers that foreign investment
will bolster long-term growth by introducing cru-
cial technology. Planners also have argued that
increased foreign investment will reduce foreign
borrowing requirements. Even though Seoul main-
tains a strong credit rating among international
lenders, the global debt problem has hampered
Seoul's ability to expand foreign borrowing.
Outlook for Direct Foreign Investment
We believe that the new FCIL represents a signifi-
cant liberalization of foreign investment regulation
and should result in increased foreign equity
inflows. Many of the criticisms lodged against
-Seoul's handling of foreign investment have been
addressed by the new regulations. For instance,
removal of foreign equity restrictions should in-
crease inflows of high-technology investments by
giving foreign firms control over their proprietary
products and processes. Weak patent protection
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Selected Asian LDCs: Direct Foreign
Investment, 1978-83 a
Million US $
South Korea
147.5
113.4
141.0
145.3
187.8
267.8
Singapore
359.9
387.0
573.7
625.0
545.4
604.0
Taiwan
136.7
181.5
243.4
356.3
320.3
NA
Indonesia b
405.2
318.6
346.6
379.0
449.9
246.9 c
a Commitment basis.
b Arrival basis. Excludes investment in hydrocarbons, banking, and
insurance.
c Estimated.
and lax Korean attitudes toward contractual and
licensing agreements have hampered high-technol-
ogy inflows in the past.
Although the new law also eliminates the automat-
ic five-year tax holiday and subsequent three-year
50-percent tax reduction, this change should not
have a major impact on foreign capital inflows.
Special tax treatment is available for projects that
augment import substitution or export promotion;
have a high-technology component; or have large-
scale capital requirements. Moreover, fewer than
one-fifth of foreign investors considered the tax
concessions to have been important in their decision
to locate in Korea, according to an EPB study.
Seoul reserves discretion in granting'tax conces-
sions and we believe tax relief will be available to
investments in priority areas.
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21 September 1984
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Morocco: Austerity
and Education=
Troubles Ahead
Morocco's efforts to reform the expensive educa-
tional system is sparking fierce political debate and
significantly increases the potential for student
disorder in the coming school year. IMF and World
Bank pressure to reduce costs in the education
sector has convinced most Moroccan officials of the
need to modify the system of free universal educa-
tion. Convincing the average Moroccan family of
this necessity, however, will test King Hassan's
political skills.
Background
Poor economic performance since 1979 has reduced
government revenues and caused a decline in the
standard of living. Unemployment is nearly 30
percent in urban areas. The country is now operat-
ing under a stiff austerity program and must
proceed with major reforms to have continued
access to IMF assistance. Morocco's educational
system, which consumes over 27 percent of the
administrative budget, is high on the list of IMF-
suggested reforms. It is costly and cannot provide
quality education or employment opportunities for
the country's burgeoning, young population.
Educational facilities have not been able to cope
with a student enrollment that has almost doubled
in five years, according to the US Embassy. De-
spite the massive infusion of funds, overall literacy
is only 28 percent. Wealthy Moroccans have opted
for private education because public facilities have
been swamped, focusing increased attention on the
widening economic and social disparity between the
Moroccan upper class and the rest of the country.
Morocco: Administrative Budget, 1983
Defense-32
transfers- 14
Other-27 -
The Reform Program
Educational reform in Morocco has always been
controversial, and student strikes protesting at-
tempts to reduce educational services often have led
to violence. Increased school fees were a major
trigger for riots last January. More than half of
Morocco's population is under 20 years old, and
this adds to the sensitivity of the issue.
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2,896,800
4,336,700
6,174,700
Primary level
2,107,000
3,083,000
4,439,000
Secondary level
753,500
1,087,700
1,490,000
College level
36,300
166,000
245,700
Morocco: University Enrollment by Discipline Percent
Under IMF pressure, the Ministry of Education
last September limited the time any youth can
spend in primary school. The average Moroccan
student takes nine years to complete primary
school, normally a seven-year curriculum. The US
Embassy reports that the Ministry will limit the
number of students eligible to take entry tests for
both secondary schools and the nation's universi-
ties. This measure reportedly will bar 40,000 to
50,000 from higher education during the 1984-85
school year and reduce university enrollment by 20
percent.
the gov-
ernment*toughened university entrance require-
ments in June to substantially reduce the number
of students eligible to enter higher education this
fall. The pass rate reportedly was 5 percent in the
first examination session, but public outrage forced
the government to be more lenient in the second
session; the pass rate was 33 percent.
services and examinations, university tuitions, and
reduced housing stipends are also under discussion.
Moroccanization of education is being promoted to
reduce the number and influence of foreign teach-
ers, whose salaries drain off as much as $30 million
in scarce foreign exchange. Furthermore, Moroc-
canization will increase domestic employment.
Efforts will be made to reorient higher education
away from humanities toward technical disciplines.
Rabat is pushing vocational training to absorb
youth ineligible for higher education and to bring
the education system more in step with Morocco's
social and economic needs.
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The Ministry of Education is considering even
more comprehensive reforms to lower the cost of
education. The number of new teaching positions
will be slashed to 8,000 in 1984-down from an
already reduced 15,000 new positions last year.
Double shifts may be implemented to trim school
construction costs. Fees for various educational
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Many informed Moroccans agree that some re-
forms are necessary, but they are concerned about
the political implications, according to the US
Embassy. A senior education official points out
that "the only thing the education system produces
is unemployed university and high school gradu-
ates." A recent study by the socialist party claims
that two-thirds of Morocco's 1983 college gradu-
ates are still without jobs.
King Hassan is giving considerable attention to the
reform issue. A major public information campaign
is under way to allay anxiety over pending educa-
tional reforms. The King chaired a Cabinet'meet-
ing on the subject in June and reviewed a reform
plan in July before talks with the IMF. In a speech
on 8 July, Hassan told Moroccans "not to look
down on vocational training" and extolled the
virtues of the working class.
Minister of Education Laraki's own Istiqlal (Inde-
pendence) Party has disavowed his reform efforts,
according to the US Embassy. The Istiqlal Party
press stated that austerity measures do not justify
"deprivation of children from school and the con-
demnation of hundreds of youth to unemployment
and marginalization." The paper labeled education
a "sacred and acquired right." The Communist
Party press commended the Istiqlal position but
remained critical of Istiqlal participation in formu-
lating the regime's proposals.
The General Union of Moroccan Students has
called for abolition of the government's reform
plans. Parents reportedly have begun a campaign of
protest letters to the Ministry of Education. A
veteran politician in Casablanca warned that cuts
in education are a potentially explosive move. The
politician said that an unemployed constituent re-
cently told him that he could tolerate food price
increases because his relatives would assist, he
could take unemployment because of the occasional
odd job, and he could tolerate living in a slum. The
constituent added, however, that if the regime took
away education for his children he would be out on
the streets demonstrating.
The recent Moroccan-Libyan union has raised pub-
lic expectations of jobs in Libya and substantial
financial assistance from Tripoli. This optimism
may temporarily diffuse tensions over educational
reforms and divert attention from Morocco's seri-
ous economic problems. Qadhafi's failure to deliver
on past promises of assistance-especially on mas-
sive economic aid-suggests that he will fall short
of his commitments. Any breach of the agreement
would seriously aggravate Hassan's difficulty in
containing unrest over educational and other un-
popular financial reforms.
Failure to make progress in reducing the cost of
education-a major point of Morocco's program
with the Fund-could jeopardize additional loans.
Nevertheless, violent demonstrations later this year
may cause the regime to reconsider school reforms
and back away from educational austerity meas-
ures.
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Morocco's youth blame the regime for mismanage-
ment of the economy and do not feel obligated to
make sacrifices. Adding young people not returning
to school this fall to the ranks of the unemployed
will further aggravate popular restiveness over so-
cial conditions. Moreover, the deaths from hunger
strikes of students arrested following riots last
January could incite unrest on campuses over the
coming school year.
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Ivory Coast: Coping With
Financial Shortfalls
The Ivory Coast probably will record its third
consecutive year of declining GDP in 1984. Weak
markets for major exports, mushrooming debt pay-
ments, public spending cuts, and shortages of vital
imports probably will cause another drop in 1985,
when President Houphouet Boigny must seek re-
election. Although Houphouet recognizes the need
to continue austerity, we believe that some slippage
is likely, particularly on politically sensitive issues
such as food prices, bus fares, and housing subsi-
dies.
Ivory Coast's financial problems began in the early
1980s with the decline of coffee and cocoa prices
and the burgeoning of debt obligations. By 1983,
,
international bankers, already wary of Abld~an s
growing debt service payments, backed away from
any new lending. Ivory Coast began accumulating
arrears. Amid rumors of impending large-scale
defaults, the IMF and the French Government
sought to assuage creditor uneasiness by pressuring
Ivory Coast not to enter private capital markets for
a planned $700 million, according to US Embassy
reports. Without this bank financing- Houphouet
was forced to reduce imports and slash public
expenditures.
Austerity measures, especially cutbacks in govern-
ment expenditures that reduced public-sector sala-
ries and housing subsidies, hit Ivorians hard. GDP
fell by at least 2 percent last year. Public invest-
ment-long the major engine of growth in Ivory
Coast-was slashed by 25 percent, according to the
US Embassy. Moreover, domestic banks faltered as
central bank borrowings to finance the budget
deficit drained them of monetary reserves that
could not be replenished because of franc zone
limitations on money creation.
Ivory Coast: Financial Indicators, Million US $
1980-84
Trade balance
506
670
83
411
840
Exports (f.o.b.)
3,109
2,742
2,270
2,152
2,440
Of which:
Cocoa
924
856
606
530
540
Coffee
681
485
504
, 441
680
Imports (c.i.f.)
2,603
2,072
2,187
1,741
1,600
Net services and
transfers
- -2,200
-1,888
-1,695
-1,567
-1,550
- Of which:
Interest on
external public
debt
-322
-375
-493
-547
-590
Salary
remittances
-644
-563
-463
-388
-330
Current account
balance
-1,694
-1,218
-1,612
-1,156
-710
a Estimated.
b Projected.
Abidjan's economic woes were compounded by
widespread drought that hurt both domestic and
export crop production. Large brush fires severely
damaged many of Ivory Coast's agricultural plan-
tations. As reservoirs for Abidjan's hydroelectric
power dams dried up, electricity outages reached
crisis proportions, causing many industrial plants to
be shut down for long periods. Commercial and
industrial activity declined by 25 to 30 percent,
compared with 1982, causing unemployment to rise
substantially.
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Ivory Coast: Economic Indicators, 1978-84
Real GDP Growth Foreign Exchange Reserves
Percent Million US $
External Debt Service Ratio
Percent
Share of GDP
Percent
' Projected.
b Data not available.
External Debt
Billion US $
Houphouet Seeks Relief
Ivory Coast-now Sub-Saharan Africa's second-
largest debtor after Nigeria-was forced this year
to reschedule its $6.5 billion foreign debt. Principal
payments on debt incurred since 1979-nearly half
of Abidjan's total external obligations-were com-
ing due in 1984, boosting estimated debt service
obligations some 40 percent, to nearly $2 billion. A
sharp rise in the value of the US dollar and in world
interest rates helped push debt service to a project-
ed 50 percent of export earnings.
Negotiations were prolonged and not until August
was Abidjan able to complete the final steps to gain
about $1 billion in financial relief from a combina-
tion of debt reschedulings, World Bank and IMF
assistance, and new bank money:
? Abidjan reached agreement with the London
Club steering committee in August to reschedule
almost $550 million in 1984-85 principal
payments.
? Commercial banks have agreed to provide $125
million in new money in 1984 and have indicated
they may provide additional funding for 1985.
? Abidjan's commercial debt rescheduling closely
followed a Paris Club rescheduling of $220 mil-
lion in official debt and helped pave the way for
disbursement of an $82 million IMF standby
facility approved in May.
Even though President Houphouet has gained some
maneuvering room, he will have to struggle to make
ends meet. Payments arrears are still over $500
million, according to press reports, and the US
Embassy reports that delays in payments to suppli-
ers have slipped to nine months. The $125 million
in new money from commercial banks falls far
short of the nearly $400 million, two-year commit-
ment that Houphouet had hoped to obtain. Conse-
quently, Ivory Coast has had to arrange a $75
million prefinancing loan just to meet expenses
during the coffee- and cocoa-growing season. Hou-
phouet is counting heavily on the recent upswing in
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cocoa and coffee prices and a better-than-average
seasonal rainfall to boost foreign exchange earnings
this fall. We believe that the French are continuing
to provide financial support to the government, but
that President Mitterrand is making it clear to
Abidjan that it must bear the brunt of the burden
by further restricting public expenditures and ad-
hering to IMF and World Bank-mandated re-
forms.
Despite the rise in agricultural output, sharp cut-
backs in public expenditures and currency short-
ages have offset agricultural gains this year. Abi-
djan's IMF program calls for a reduction in the
public-sector deficit from 10 percent in 1983 to 4
percent of GDP. In response, the government is
canceling large investment programs including ma-
jor road, rail, and hydroelectric projects. Industry is
operating at only 30 to 40 percent of capacity,
according to the US Embassy. In addition, local
businessmen are not restocking rapidly dwindling
inventories because of the lack of domestic bank
financing, and many are closing down or laying off
workers. Meanwhile, the US Embassy reports that
many French companies are leaving and 500 for-
eign contracts are terminating this year because of
the increasingly poor economic conditions.
Even though the political fallout from the recession
has been minimal, the government remains alert to
signs of trouble. Houphouet, who remembers the
1983 nationwide teacher strike caused by hikes in
public housing rents, last month decided against
imposing further price increases for bread, bus
fares, and rents on nationally owned housing units.
Recognizing that corruption has become a public
issue, the regime is proceeding with unprecedented
and well-publicized trials of some corrupt govern-
ment officials. Relations between Ivorians and resi-
dent foreign Africans are becoming more openly
strained. The latter are being blamed by the gov-
ernment for a surge in crime over the past several
years and they have been unable to find jobs.
Ivory Coast's economic malaise comes at an awk-
ward moment-recurring crises caused by power
outages, soaring prices, declining French invest-
ment, rising crime, and blatant corruption are
converging at a time when Ivory Coast's political
future is unsettled because of the country's unre-
solved succession question. President Houphouet- 25X1
the country's 78-year-old founding father and only
president-has made it clear that he does not
intend to designate a constitutional successor until
after his reelection in October 1985. If Houphouet
dies or becomes incapacitated before then, there is
potential for a contentious and protracted power'
struggle.
Abidjan's foreign financial position is unlikely to
improve much next year. An expected increase in
export earnings caused by the upward.trend in
coffee and cocoa prices and a return to normal
rainfall will not be enough to finance the country's
minimum import and debt-servicing needs. Oil
sales, once considered the hope of Ivory Coast, are
unlikely to provide revenues in 1985 because of the
failure to find major reserves. Meanwhile, private
creditors are reluctant to lend large sums to Ivory
Coast until it eases its debt burden. Abidjan's
prospects, therefore, depend greatly on the govern-
ment's ability to secure financial relief from bilat- 25X1
eral and multilateral donors. Within limits, we
expect France to continue aid flows while pressing
Houphouet to stick with his economic austerity
program. On the brighter side, Abidjan probably
will be able to reschedule a portion of its projected
$2 billion 1985 debt obligation if the stabilization
program meets IMF demands.
Cuts in public expenditures, tight money, and
shortages of vital imported goods, however, will be
required, contributing to a GDP decline of at least
another 1 percent. Houphouet probably will at-
tempt to avoid further controversy over housing
Secret
21 September 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9
costs before the election, especially since allega-
tions of corruption in the industry have touched
even the President's wife and sister, according to
the US Embassy. Likewise, the President may ease
up on his campaign to alleviate domestic banking
strains that has involved cracking down on delin-
quent debtors, most of whom are prominent Ivor-
ians.
Secret
21 September 1984
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9
 Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9
Secret
Secret
Sanitized Copy Approved for Release 2011/03/07: CIA-RDP97-00771 R000707180001-9