INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707290001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: October 5, 2010
• Sequence Number: 1
• Publication Date: November 16, 1984
• Content Type: REPORT

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Directorate of ~6t- 25X1
Weekly
International
Economic & Energy
D/ IEEW 84-046
16 November /984
~oPy 6 9 4
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Secret
Secret
16 November 1984
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International
Economic & Energy
Weekly
Synopsis
Perspective-New GATT Round?
While a 1985 start has often been mentioned, GATT members have not yet
agreed on timing, agenda, or even whether to hold a new round. GATT's
annual meeting this month is not likely to provide answers to these major
questions.
11 GATT Annual Meeting: Polarization on the Major Issues
The annual meeting beginning 26 November of the 90 signatories to the
General Agreement on Tariffs and Trade (GATT) probably will do little to ad-
vance the goal of the United States. and the other industrial countries to
initiate a new round of multilateral trade negotiations.
I S Mexico: Impact of Lower Oil Revenues
Mexico's announced plan to cut its oil exports will add to the country's
economic problems. Although the exact impact on oil revenue is not clear, it
could be as large as 10 percent.
19 The Philippines: Living With a Foreign Debt Overhang
After a year of haggling and procrastinating, Manila has reached tentative
agreement with the IMF on an economic stabilization program and completed
negotiations with commercial and official creditors on a plan to restructure
much of the Philippines' $25 billion foreign debt. Even with these agreements
in place, however, we believe that the economic outlook for the Philippines is
bleak during the rest of this decade.
23 Colombia: A Tottering Economy
President Betancur's attempts to keep campaign promises over the next few
months will clash head on with acash-flow crisis that is leading to a likely sus-
pension of some debt service payments. To save face and secure foreign
financial support, Betancur will probably adopt IMF-backed austerity mea-
sures that, although economically beneficial in the longer run, will generate
higher unemployment and inflation, lower economic growth, and political and
social unrest through 1985.
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DI IEEW 84-046
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27 NICs: Accelerated Penetration of World Markets
The newly industrializing countries (NICs) continue to sharply increase their
penetration of world markets, particularly since 1980. The NICs have almost
doubled their share over the past decade, in large part because of sizable gains
in the US market.
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DI IEEW 84-046
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Perspective
Weekly
International
Economic & Energy
questions.
Five years after the Tokyo Round trade agreements, many government and
business officials in the developed countries are pushing for the new round of
multilateral talks under the:General Agreement on Tariffs and Trade (GATT).
They hope that talks will reestablish the trade-liberalizing momentum of
previous rounds, improve observance of GATT rules, promote further integra-
tion of LDCs into the GATT system; and expand GATT activities into new
fields. While a 1985 start has often been mentioned, GATT members have not
yet agreed on timing, agenda, or even whether to hold a new round. GATT's
annual meeting this month is not likely to provide answers to these major
for 1984.
On the eve of this year's meeting, the. international trading system faces
perhaps -its greatest challenges since GATT's founding in 1948:
? GATT rules and procedures-particularly concerning safeguards, agricul-
ture, and preferential arrangements-have often proved inadequate.
? Market-sharing and trade-restraining arrangements that circumvent GATT
rules have .spread;. prominent examples include Japanese automobile export
restraints or the network of industrial. country steel restrictions.
? Industrial countries have been unable or unwilling to absorb large quantities
of increasingly. competitive LDC manufactured exports. Nevertheless, LDC
debtors demand greater access to industrial country markets so they can
service their debt and support economic recovery.
? Countries with growing services sectors, such as the United States or Japan,
have no adequate international forum where they cari seek improved market
access for their services exports (for example, banking, insurance, data
processing, or construction) and investments.
? The United States needs substantial liberalization of international markets
to help cope with its trade deficit, now projected to be well over $100 billion
market-sharing arrangements, and does little to deter new barriers. 25X1
multilateral efforts-settling disputes bilaterally-is slow, often results in
Advocates of continued trade liberalization hope all of these problems-and
others, such as agricultural export subsidies---can be addressed in new
multilateral negotiations. While this is an ambitious goal, major trade
liberalizing deals have paradoxically often been easier to achieve than smaller
agreements covering narrow interests. Multilateral rounds allow for wide-
ranging bargains and better focus the attention of political leaders who have
the authority to approve broad compromises. The traditional alternative to
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Prospects for initiating broad-based multilateral trade negotiations on the
pattern of the Tokyo or Kennedy Rounds are, however, uncertain. There is
much LDC resistance to reducing their own trade barriers. Latin American
and South Asian GATT members, in particular, fear competing with industri-
al country imports and oppose greater foreign presence in local economies.
Many LDCs are hostile to GATT and would rather give LDC-controlled
UNCTAD the primary responsibility for developing and enforcing rules of the
international trading system.
If progress toward-anew round is stymied, the United States has indicated a
willingness to pursue trade and services liberalization issue by issue outside
GATT among interested countries. US negotiators call this alternative an "a
la carte" format, as opposed to negotiations according to a fixed agenda
approved by a ministerial-level GATT meeting. Many industrial and develop-
ing countries have criticized the concept, saying that it could injure GATT and
the multilateral trading system. Critics, however, are probably also concerned
that this format would result in trade liberalization agreements from which
they would not automatically benefit, which they might be unwilling to join,
and which might divert trade from them.
We believe significant trade liberalization can be achieved over the long run.
The best outcome would be for Brazil, India, Argentina, and other opponents
of a new trade round to recognize that their opposition could harm their own
trade prospects, and to agree to comprehensive negotiations under GATT. If a
multilateral approach fails, however, negotiations among smaller groups of
countries will become the only alternative. Under this scenario, nations with an
interest in discussing liberalization-Japan, Canada, Australia, advanced East
Asian developing countries, the EC in many areas, and perhaps a few LDC
debtors seeking greater access for their exports-could join the United States
in negotiating trade-barrier reductions.
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16 November 1989
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Energy
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Saudis Increase
Security at Major
Oil Facilities
bunkers each capable of housing 100 workers for at least a week have been
built and stocked-11 at the Ras Tanura refinery, five at the Ras Tanura
storage and export terminal, and seven at the main processing area at Abgaiq
have been placed on Abgaiq's eastern approaches, and a radar system-
designed for shipping control but also useful for surveillance-has been
installed on the Ras Tanura and Dammam shipping channel. This radar
supplements a similar system installed several years ago at Ju'aymah, Saudi
Arabia's other major Gulf oil export terminal. Consulate sources report that
Consulate reporting) )indicate that Saudi Arabia is
continuing to upgrade physical security at its Ras Tanura and Abqaiq oil
facilities, which handle more than half of Saudi production. Antiaircraft guns
New Oil Pipelines
Increase Omani
Production
required to reduce the system's vulnerability substantially. 25X1
Despite this growing Saudi effort to protect its oil system from
terrorists as well as the Iranian military threat, numerous additional measures
to enhance security and develop effective contingency planning would be
Replacement of severely corroded pipelines in Oman has enabled Muscat to
increase oil production to 420,000 barrels per day (b/d) in recent months.
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southern fields with the Mina al Fahal export terminal is expected to raise ca- 25X1
pacity to 430,000 b/d by yearend and 450,000 b/d next year. Limitations
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i6 November 1984
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Proposals
for New Pipeline
Across Central America
Australian
Self-Sufficiency
in Oil Near
Portugal's IMF
Program About To Die
Prematurely,
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l6 November 1984
least reduce future increases.
posed by pipeline capacity constrained output in 1983 to 389,000 b/d. Until
now, Oman has had little difficulty marketing its crude because of relatively
attractive prices and its advantageous location outside the Persian Gulf.
According to the US Embassy, recent weak market conditions have caused
customers to press for lower prices. At the same time, we expect non-OPEC-
member Oman will come under pressure from OPEC to reduce output or at
could be completed by 1986.
Lack of demand has stymied efforts in Costa Rica and Guatemala for a second
crude oil pipeline across the Central American isthmus. Interest in a second
pipeline has been spawned by the profitability of the two-year-old Panamanian
pipeline. This year, however, the pipeline has been shipping only about 600,000
barrels per day (b/dull Alaskan crude-compared with a capacity of
850,000 b/d and a flow of 650,000 b/d in 1982. According to the US Embassy
in San Jose, Costa Rica's Ministry of Industry, Energy, and Mines is studying
a $755 million proposal from the French firm SPIECAPAG fora 600,000-b/d
pipeline running west to east, and a parallel 400,000-b/d line in the opposite
direction. The US Embassy in Guatemala reports that a business group there
is seeking support for an alternative pipeline across Guatemala. Both projects
apparently are languishing, despite their potential strategic value to US and
Japanese oil trade, because adequate throughput cannot be guaranteed.
Further consideration of either probably will hinge on the progress of a
proposed 16,000-kilometer crude pipeline from California to Texas, which
drillings per year with a success rate of between 8 and 10 percent.
Increasing domestic crude production is rapidly moving Australia toward self-
sufficiency in oil. Domestic production accounted for 93 percent of Australia's
total oil requirements in the first seven months of 1984-up from 72 percent
for the same period in 1982. Output from domestic fields hit 543,000 barrels
per day (b/d) in the first seven months of this year compared with 427,000 b/d
for the same period in 1982. According to the Minister of Energy, virtual self-
sufficiency is possible by the early 1990s-much sooner than had been
previously projected. The Australian Petroleum Exploration Association,
however, estimates that Australia must undertake at least 200 exploratory
The Embassy reports that Lisbon's standby program, originally scheduled to
end in February 1985, has been effectively scrapped. The Fund suspended
drawings for the last two quarters of this year after Lisbon exceeded the target
on public-sector domestic credit, and has refused to renegotiate the program.
It did agree to consider waiving the July limit on short-term debt to unblock
previously suspended funds contingent upon the IMF's review of the program,
Lisbon's 1985 budget, and price hikes. There is little hope for the waiver,.
however, because of Lisbon's dismal record on austerity measures for the Fund
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Secret .
The program's collapse should not lead to liquidity problems this year. Next
year, however, Lisbon's easier policies are likely to push the current account
deeper in the red, and jittery bankers may cut back their exposure. With
elections in the fall of 1985, the government cannot afford to submit to another
IMF program. This leaves Lisbon with few options: gold-backed loans from
the Bank for International Settlements to buy time, a pitch to the United
States for increased aid, and an appeal to the European Community if Lisbon
becomes a member in 1986.
Global and Regional Developments
Libya-Belgium Tripoli is threatening to strengthen nuclear cooperation with Moscow if
Nuclear Cooperation Brussels does not approve the preliminary nuclear agreement concluded last
spring. Qadhafi publicly has accused the United States of conspiring to block
Libya's peaceful economic progress by increasing pressure on Belgian officials
reluctant to alienate Washington. Debate has raged in the Belgian Cabinet
since late summer between factions favoring stronger economic ties with Libya
and those who prefer to appease US.and Western concerns over Qadhafi's
misuse of nuclear technology. Brussels probably will delay additional nuclear
cooperation as long as other West European governments do not step in to re-
place Belgium-the United Kingdom, France, Spain, and West Germany
already have stated that they will not export nuclear technology to Libya.
Nevertheless, Qadhafi probably will continue to negotiate with Brussels as
part of a broader campaign to improve relations with Western Europe as well
as to secure alternate sources of nuclear technology. In the interim, Tripoli. can
turn to the Soviets, who have supplied the equipment for Libya's small
research reactor and have recently agreed to provide two 440-MW reactors for
electric power generation.
Ariane Pricing The West European consortium, Arianespace, is winning launch contracts
Policy Wins Customers away from NASA because of an aggressive pricing strategy. Arianespace, for
example, recently won the launch contract for the third Australian communi-
cations satellite with a bid of $20 million; the US price was $32 million for
each of the first two. In contrast, we believe Arianespace charges its European
customers about $40 million per satellite. Representatives of the French space
agency recently said that Ariane pricing is based on five launches per year-
three.for European and two for other customers. If these reports are correct,
the Europeans could be subsidizing about half of the cost of launches for
export customers. If this practice continues, the fledgling US commercial
launch industry will find it increasingly difficult to compete.
Austria and East During Chancellor Sinowatz's visit to East Berlin last week, Austria and East
Germany Expand Germany signed four new economic and industrial cooperation agreements,
Trade Ties .[~ which should boost already close economic relations. Bilateral trade has
mushroomed in recent years, as East Berlin has cultivated Vienna to obtain
credits and diversify its Western sources of capital and foodstuffs. As a result,
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16 November t 984
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India's Tea
Policies Boost
World Prices
increased by more than 70 percent to $313 million.
Austria has become East Germany's second-largest Western trade partner.
Although East German trade with the non-Communist countries has shifted
into surplus for the past two years, sizable deficits with Austria-$220 million
in 1983-have continued. For Vienna, East Germany is second only to the
Soviet Union among CEMA states as a market, particularly for goods from
Austria's troubled state industries. Last year, total exports to East Germany
soared 66 percent to $352 million, while the sale of manufactured goods
Tea prices have surged above $1.60 per pound following India's recent decision
to limit 1984 exports to 215,000 metric tons-about one-fourth of global
exports. Prices hit a record $1.95 per pound last January, after India ceased
most tea exports because of a shortage at home. Shipments resumed in May,
but for the first 10 months of 1984 world tea prices have averaged $1.58 per
pound-50 percent higher than for all of 1983. Drought in Kenya, also a large
tea exporter, and low stocks in importing countries have contributed to the
price runup. With the rapid rise in India's domestic tea use, maintaining
adequate domestic supplies at reasonable prices is likely to be an important
policy goal of the new regime. Despite record tea production, the press reports
that New Delhi is considering monthly quotas to limit exports to 220,000 tons
~~
International Court A 12 October International Court of Justice (ICJ) decision ended a 15-year
--~--~~oj.7ustice Resolves dispute between Canada and the United States. The decision delimited the
US-Canada Dispute boundary between the two countries in the Gulf of Maine and, more
important, on the Georges Bank, one of the world's most productive fisheries
and a possible offshore oilfield. Negotiations on the boundary began in 1970
but were eclipsed by the Law of the Sea talks. No further negotiations were
held until both countries declared 200-mile fishing zones in 1977. Amid
pressures from fishing interests on both sides in 1978, each country closed its
fishing zone to the other's fishermen for a short time. With no solution in sight,
the two governments agreed in 1979 to turn the matter over to the ICJ.
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16 November 1984
The Court's decision essentially split the difference between the Canadian
claim to half the Bank and the US claim to all of the Bank. It gave the United
States two-thirds of the Gulf and three-fourths of the Bank. Petroleum
exploration to date, which has been impeded by fishing and environmental
lobbies,, has not made any commercial discoveries. Aggressive prospecting on
the Canadian side of the line, however, could spur renewed efforts by US
companies. As expected, the decision drew grumbling from both countries'
fishermen because they are now barred from some areas they historically
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National Developments
Developed Countries
Government borrowing to bolster foreign exchange reserves and to meet
Foreign Military Sales obligations to the United States was the major factor in
the $1.2 billion increase in foreign debt during the second quarter of this year.
According to the Bank of Israel, outstanding foreign debt now totals $23.8
billion. As a result of the new borrowing, short-term debt now represents 16.8
percent of total debt compared with 13.9 percent at the end of the first quarter.
Change in Canadian
Economic Policy
Frustrated
Mexican Attempts
To Sell Public
Companies
French Interest
in Caribbean Basin
Initiative
Finance Minister Wilson, in his first major economic statement on 8 Novem-
ber, stressed spending cuts and revenue increases to reduce the fiscal 1986
budget by $2.7 billion-to $26.5 billion. The cuts are broad based and affect 25X1
defense, housing subsidies, unemployment compensation, and state-owned
corporations. The government also announced that 1,500 civil service jobs will
be eliminated in 1985. Ottawa also will allow the price of Canadian oil to rise
to world levels, which will increase tax revenues, and soon will announce
changes in the Foreign Investment Review Agency and the National Energy
Program designed to encourage investment. Although Prime'Minister
Mulroney promised thousands of jobs during the campaign, the government
goal of reducing the current 11.8-percent unemployment rate to 10.9 percent
by end of 1985 is unlikely to be achieved. The economic program has been de-
nounced by the opposition Liberal and New Democratic Parties but embraced .. .
by business. It is likely to be followed by stronger cuts and deficit reduction 25X1
Less Developed Countries
Government efforts to divest its public companies are making little headway.
Only a small fraction of the public enterprises offered for sale have been
placed with the private sector. Leftist unions fear that private owners would 25X1
cut jobs and renegotiate generous labor contracts and have vocally opposed the
sales, At the same time, 25X1
private entrepreneurs ave not s own muc interest in uying public firms -~
with high debt structures and weak financial positions. Moreover, businessmen
and bureaucrats continue to disagree over equity positions, debt guarantees, 25X1
Political and business leaders in the French Caribbean are demonstrating
considerable interest in the Caribbean Basin Initiative (CBI), according to the
US Consul General in Martinique. The French Ministers of Commerce and
Overseas Territories have strongly encouraged local French businessmen to
participate through joint ventures with independent Caribbean islands, and at
least 40 political and business leaders will attend the Caribbean Conference in
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Sri Lanka~/t
Economy Improves
its Caribbean territories the same access as their independent neighbors.
Miami in early December. Paris officials, however, have expressed concern
that the CBI will hurt Martinique's and Guadeloupe's ability to compete with
their independent neighbors' fueling activities of radical independence
groups-a concern they claim is shared in the Antilles. These concerns and
pressure from local business interests are likely to cause France to seek an
amendment to the Caribbean Basin Economic Recovery Act that would allow
sector industries continue to burden the economy.
Sri Lanka has improved its international and domestic economic performance
in 1984, despite problems stemming from the communal violence against the
Tamil minority last year. Tea exports, buoyed by high world prices as well as
increased output, are likely to double from last year, according to US Embassy
and press reports. Increases in other exports, and slower import growth-Sri
Lanka is now nearly self-sufficient in rice-probably will enable Colombo to
register a substantial improvement in its 1984 international payments position
and forgo the need for a new IMF standby loan. With lower domestic
expenditures and increased revenues from export duties, the government also
hopes to further reduce both the budget deficit and inflation, which has
averaged nearly 18 percent this year. On the negative side, tourism-a major
foreign exchange earner-remains in the doldrums, and inefficient public-
Burmese Joint Venture Rangoon last month approved the first direct foreign investment outside the
offshore oil industry since Ne Win took power in 1962. While the details have
yet to be worked out, under the agreement with the Ministry of Heavy
Industries, the West German state-owned firm Fritz Werner will provide
equipment and expertise to upgrade Burma's dilapidated industrial sector.
Rangoon's new partner-a longtime weapons supplier-was probably chosen
on the basis of its close ties to top Burmese officials. It is too early to tell if this
signals a softening in Burma's xenophobic attitudes toward foreign ownership.
Tunisia Tightens
Its Belt
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16 November 1984
budget, but of his ability to succeed ailing President Bourguiba.
The US Embassy in Tunis says that government officials are putting final
touches on a stiff austerity budget for 1985. Projected spending will drop about
5 percent in real terms over the 1984 level. Price increases will be phased in for
all subsidized goods including petroleum, and wage levels will remain frozen
for the third year. These adjustments would boost this year's 10=percent
inflation to about 14 percent in 1985. An additional $320 million in foreign
borrowing will still be necessary to cover the budget deficit. Price increases on
cereal products and cooking oil, those considered most likely to cause domestic
unrest, will be held off until July, but civil disturbances could begin sooner as
the purchasing power of the poor and unemployed is eroded. The US Embassy
believes, and we agree, that how Prime Minister Mzali handles sensitive wage
and price issues will be a crucial test not only of his ability to manage the
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China Reorganizes Beijing has announced plans to reorganize and decentralize the Civil Aviation
Civil Aviation Sector Administration of China (CAAC).,CAAC's airline operations are scheduled to
break up into five companies during the first half of 1985. Beijing-based Air
China initially will serve all international and many of the major domestic
routes. The Shanghai-based China Eastern Airways and Guangzhou-based
China Southern Airways will begin flying on major domestic routes with
service on international routes scheduled for some time in the future. The
Chengdu-based China Southwestern Airways and Beijing-based China
Capital Helicopter Company will be limited mainly to domestic services.
CAAC will continue to be responsible for air traffic control and flight
coordination and will also exercise unified control over civil air services and
safety. This formation of an FAA-type organization places the Chinese in a
better position for negotiating a US-PRC bilateral airworthiness agreement,
which they have wanted for some time. The decentralization, however, which
gives each airline the right to conclude contracts for buying or leasing
airplanes, could further complicate US sales of aircraft to China.
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GATT Annual Meeting:
Polarization
on the Major Issues
The annual meeting beginning 26 November of the
90 signatories to the General Agreement on Tariffs
and Trade (GATT) probably will do little to ad-
vance the goal of the United States and the other
industrial countries to initiate a new round of
multilateral trade negotiations. As was the case at
the 1982 GATT Ministerial, opposition from the
LDCs-led by Brazil-will be the major obstacle.
The 1982 meeting approved atwo-year work pro-
gram that the United States and several other
developed countries anticipated would develop into
a new trade round, but Brazil is arguing that many
work program commitments have not been ob-
served by the industrial countries. Tfiis year the
most contentious issues appear to be counterfeit
goods, services, agricultural trade, and safeguards.
The latter two are particularly difficult because
they involve disc reements among industrial coun-
tries.
State of Play on Major Issues
Four major issues that could impede the launching
of a new trade round-agricultural trade, safe-
guards, trade in counterfeit goods and services-
will probably come up at the GATT meeting.
Agriculture and safeguards are particularly trou-
blesome because they involve disagreements among
industrial countries. It will, in fact, be difficult for
the industrial countries to demonstrate substantial
results after two years' work on these issues. Dis-
agreement is likely with developing countries over
US efforts to establish working parties on services
and counterfeit goods. Creation of working parties
would be a major step in assuring that these items
would be covered in a new round.
Agricultural trade rules for years have been a
source of intense disagreement between the EC and
other major agricultural exporters. This summer all
the members of GATT's Agriculture Committee,
including the EC Commission, approved a draft
negotiating a framework that contained a ban, with
some exceptions, on agricultural export subsidies.
The EC Commission apparently was using the
Agricultural Committee to try to reduce subsidiza-
tion of EC agriculture, but went further than EC
member states would tolerate. Consequently, in
September all EC member states except the Neth-
erlands rejected the draft, leaving the committee
with nothing to present to this month's GATT
annual "meeting. Diplomatic reporting indicates "
that some European officials have shown interest in
developing a broader draft that would not, as they
claim the first draft did, focus on export subsidies.
Since the end of the Tokyo Round, sc~eguards
discussions among the United States, the EC,
Japan, and LDCs have not resolved tough issues,
such as compensation, selective application of safe-
guards, treatment of existing unreported ("gray
area") protectionist measures, and how to deal with
textiles. Diplomatic sources report that all negotia-
tors hope to present this month's GATT meeting
with a consensus on minor safeguards topics,
which, however, leaves the difficult issues unre-
solved. Arecent GATT Secretariat study requested
by safeguards negotiators reasserts GATT princi-
ples of nonselective application of safeguards. By
redirecting attention to this intractable issue, the
Secretariat study may undermine the effort to
focus on minor issues. According to diplomatic
sources, some EC member states believe the Com-
munity should not make any concessions before a
new trade round begins, although minor conces=
sions before the November meeting are possible.
The United States, Japan, the EC, Canada, Swit-
zerland, and Sweden support a working party on
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According to US diplomatic sources, Brazil-the
irtformal leader of developing countries in
GATT-and other LDCs demand completion of
the 1982 GATT Ministerial work program before
they enter into commitments on new multilateral
trade negotiations. This position is the primary
obstacle to placing the GATT on track toward a
new trade round. Work program commitments that
Brasilia says have not been observed by industrial
countries include:
? A pledge not to initiate or maintain protectionist
measures inconsistent with the GATT.
? Negotiating a comprehensive agreement on safe-
guards (measures to protect industries injured by
imports).
? Improving GATT rules on agriculture, including
market access and export subsidies.
? Expanding favorable treatment for developing
countries.
? Liberalizing trade in tropical products.
? Examining liberalization of trade in textiles and
clothing.
While recognizing the importance of the work
program, industrial countries are resisting LDC
ejorts to, in ejfect, obtain trade concessions in
exchange for their participation in negotiations.
Industrial countries point out that the work pro-
gram cannot be separated from the new round as
the LDCs are attempting to do. Indeed, if the work
program were finished as LDCs demand, many new
trade round goals would also be fulfilled.
In response, some LDC officials assert that the
problems of the world trading system have been
created by industrial countries and it is up to the
industrial countries to correct them, without
assistancelrom LDCs. Brazil argues that complet-
ingthe work program would demonstrate the
'good will" of the industrial countries. East Asian
developing countries have been more positive to-
ward anew round but have also expressed interest
in completing the work program.
Secret
]6 November /984
trade in counterfeit goods. Many LDCs, including
Brazil, India, Argentina, Singapore, and South
Korea, are opposed. US negotiators indicate that
some LDCs recognize counterfeit trade as a legiti-
mate GATT concern, but these LDCs worry that a
working party might detract from other LDC
objectives.
US efforts to establish a working party on trade in
services are supported by the EC, Japan, Canada,
the Nordic countries, and Israel. At the 1982
GATT Ministerial, the United States could only
obtain endorsement for independent studies by
"interested" members, followed by consideration at
this month's meeting of whether to proceed multi-
laterally. LDC opposition to a working party is led
by Brazil and India. They deny GATT competence
in the area, and argue that they need time to build
their own services sectors before developing inter-
national rules. Many LDCs view the services issue
as an attempt by the developed countries to open
Third World markets for their own growing service
economies. Brazil and India also reject .US argu-
ments that greater worldwide services activity
would allow more rapid structural adjustment in
industrial countries and more markets for LDC
manufactured exports. The Chairman of the
GATT Council has suggested a compromise estab-
lishing an "information group" on services, but this
suggestion falls far short of US objectives
The battle over services that may develop at the
GATT annual meeting could parallel a similar
struggle likely sometime in 1985 over whether to go
ahead with a new GATT round. On both issues
industrial countries confront LDCs, and the respec-
tive leading actors-the United States and Bra-
zil-are both firm in their positions. Indeed, we
have seen no indication that the leading candidate
in Brazil's January presidential elections, Tancredo
Neves, would change Brazilian policy in GATT.
Brazil, however, might be more approachable on
these issues after the elections
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Secret
We believe a decision on whether to hold another
trade negotiating round under GATT will be de-
layed at least until February. According to Japa-
nese press reports, the United States and Japan
were unable to obtain developing country assent to
their new round plans at a late October meeting of.
GATT's Consultative Group of 18 (a steering group
of leading members). At GATT Director General
Dunkel's suggestion, the subject was put off until
after the Brazilian elections and January's turnover
in EC Commission membership.
Until the 1970s, support from the United States,
the EC, and Japan constituted the critical mass
needed to get anything done in GATT. Today, with
the increased importance of the advanced develop-
ing countries, a consensus within GATT is no
longer possible without these countries' participa-
tion. If Brazil and other leading LDCs continue to
oppose a new round and can maintain general LDC
support for this position, a deadlock will result. In
this case, the United States could be forced to look
outside the traditional multilateral GATT frame-
work to achieve meaningful trade liberalization
during this decade.
13 Secret
16 November /984
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Secret
Mexico: Impact of Lower
Oil Revenues
Mexico's announced plan to cut its oil exports will
add to the country's economic problems. Although
the exact impact on oil revenue is not clear, it could
be as large as 10-percent. ~In the absence of a
Mexican policy response, a 10-percent fall in oil
revenues would reduce_ projected economic growth
from 2.0 to -1.5 percent, according to our econo-
metric model. The revenue shortfall would further
constrain depressed government spending, import
capacity, consumer demand, and private invest-
Rather than accept economic contraction, however,
we believe Mexico City would lobby hard for more
lenient IMF targets on government deficit levels.
Even before the latest weakening of the oil market,
we believe that Mexico City was planning to ask
the Fund for spending relief. This would allow the
government to boost its outlays to limit the dropoff
in economic growth. In addition to higher spending,
other policy responses such as reserve drawdowns,
lower imports, and currency devaluations probably
would be necessary to offset the economic losses
caused by a sustained drop in oil revenues. Even
with such policy moves, there is the risk that
prolonged difficulties in the petroleum sector could
result in a new debt crisis.
The Decision To Cut Exports
Mexican officials have publicly stated that effective
1 November Mexico would reduce its oil exports
between 7 and 10 percent. Their statements fol-
lowed OPEC's decision to reduce its production
ceiling by 9 percent in an attem t to defend its
$29 per barrel benchmark price.
Government concern about the potential impact of
falling oil prices has led to closer cooperation with
OPEC. Indeed, in strategy sessions preceding re-
cent OPEC meetings, Mexico, a nonmember,
played a prominent role. For example, Secretary of
Energy, Mines, and Parastatal Industries Francisco
Labastida joined Saudi Oil Minister Yamani and
liis Venezuelan..counterpart on an unsuccessful visit
to Lagos to request that Nigeria rescind its price 25X1
~~
Mexico has a major financial stake in stabilizing
the world oil market. The government, for example,
is currently negotiating a $48.5 billion debt re-
scheduling package with more than 500 banks that 25X1
is based on the assumption of steady oil revenues.
Moreover, the sharper the fall in oil revenues-
either due to export cutbacks or price decreases-
the more difficult it will be for Mexico City to meet
debt obligations, maintain growth, and adhere to
IMF targets. Finally, any revenue crunch would be
magnified by the continuing reduction in foreign
investment that has resulted primarily from the
trend toward greater state control over industry.
The exact impact on export revenue is not clear.
Before the OPEC meeting, Mexican officials were
considering a 10-percent cut in crude exports
(150,000 barrels per day). Since then, they have
announced a cut of 7 percent (100,000 barrels per
day), but have not specified how this cut will be
calculated. Before this announcement, we expected
1985 oil exports to be at their former ceiling of 1.5
million barrels per day (b/d). If a cut of 7 percent is
applied to this figure and carried out, the revenue
loss would also be 7 percent. Through-most of 1984,
however, exports have been above the ceiling. If
Mexico took this higher figure as the base and
applied a 7-percent cut, there would be little or no
impact on revenue. The actual result probably will
lie between these extremes
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Mexico: Impact of Reduced Oil Export Volumes, 1985
No
adjustment
With
adjustment
No
adjustment
With
adjustment
2
.
0
-2
^
-4
-6
With the Mexican economy already in difficulty,
any loss of oil revenue will have a negative impact.
To quantify this impact, we used our Mexican
econometric model to simulate what would happen
in 1985 if crude oil revenues remained constant
(Baseline Case), declined by 10 percent (Case II), or
fell by 25 percent (Case III). Because of the
country's problems, even the baseline case assumes
the IMF would allow Mexico some leniency in
meeting the 1985 targets set two years ago. Specifi-
cally, this scenario posits a 5-percent increase in
real government spending, no change in interna-
tional reserves, and oil exports at their former
ceiling of 1.5 million b/d at $27.00 per barrel. We
also assume a $500 million reduction in debt
service caused by an expected one-half-percentage-
point drop in the London InterBank Offered Rate.
For cases II and III we did two simulations, one
assuming no Mexican policy response and a second
Secret
16 November 1984
incorporating policy shifts that Mexico is likely to
implement in response to the forecasted declines in
economic activity.
Baseline.Case: Constant Oil Revenues. Even under
this scenario, Mexico would be unable to expand its
economy much next year. Reduced foreign borrow-
ing and tight IMF financial targets will continue,to
hold down government consumption and invest-
ment, while financial problems and weak business
confidence will keep private investment depressed.
As. things now stand, we expect Mexico City to
press the IMF to loosen strictures on reflating the
economy, even if oil revenues do not decline next
year. After three years of falling consumption,
Mexico City is under strong pressure to ease
austerity and stimulate the economy. With national
elections approaching next July, the government
may adopt even more reflationary policies than the
GDP
Private consumption
Private investment
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Secret
ones we posited. We have indications that Mexico
City later this month will ask the Fund to boost
substantially its 1985 target for the public-sector
deficit, which was earlier set at only 3.5 percent of
GDP. If this target is not revised upward, we
estimate the economy will decline slightly.
If Mexico City boosts the increase in real govern-
ment spending by several percentage points to 5
percent, our model indicates that real GDP growth
is possible in 1985. We believe Mexico City would
have difficulty selling reflation to the IMF without
deeper import cuts and an increase in the daily
depreciation of the peso against the US dollar from
a 40-percent to a 50-percent annual rate. Taking all
of these policy adjustments into account, our model
suggests that the Mexican economy could expand
by about 2 percent next year at the cost of high
inflation.
Case II: Moderate Decline in Oil Revenues. A
10-percent drop in oil revenues next year (equiva-
lent to either a price fall of about $2.70 per barrel
or a 150,000-b/d sales reduction) would have a
substantial impact on the economy. Assuming all
other policy variables were held constant, such a
drop would cause an economic contraction of 1.5
percent-3.5 percentage points below the baseline.
Only by adopting dramatic, multifaceted policies
could the government offset the impact of lower oil
revenues. Such a response would almost surely
require additional revisions in IMF targets, includ-
ing higher spending, drawdowns in international
reserves, further cuts in imports, and an increase in
the daily depreciation of the peso. Model results
indicate, for example, that just to maintain baseline
economic activity, Mexico City would have to raise
spending another 3 percentage points, reduce inter-
national reserves by $1 billion, and increase the
annual rate of depreciation of the peso to 60
percent. The cumulative effect of these actions
would reduce imports 8 percent and boost inflation.
Case III: Oil Revenues Plummet. Our econometric
analysis indicates that a 25-percent drop in oil
revenues next year (equivalent to either a $6.75 per
barrel price cut or a nearly 400,000-b/d sales
reduction) would have a devastating effect on the
Mexican economy. In the absence of offsetting
policy responses, this unlikely scenario would cause
GDP to decline 7 percent and would drive private 25X1
consumption and investment down dramatically.
In these circumstances, measures needed to prevent
economic decline would require fundamental
changes in economic policy. Mexico would virtually
have to abandon its IMF-sponsored austerity pro-
gram, although a substantial drawdown in reserves
could temporarily delay any unilateral actions to
increase debt relief. Only when the growth of
government spending in the baseline case is more
than doubled, international reserves reduced by
$2.5 billion, and the annual depreciation of the peso
increased to 80 percent, does the model simulate 25X1
positive GDP growth. We estimate that these mea-
sures would cut imports by 20 percent and push
inflation back toward triple-digit levels.~~ 25X1
Beyond 1985
.Depressed oil revenues beyond next year would not
only torpedo the economic adjustment program,
but would also probably prevent Mexico from 25X1
meeting rescheduled debt obligations. The intensi-
fying liquidity crisis would probably drive Mexican
economic decision making toward more statist poli-
cies, rather than inducing the government to lift its
many restrictions on private investment. Mexico
City might again blame the economic decline on
the private sector and the US-led world economic
structure. Such conditions also might encourage
Mexico to reinvoke a moratorium on debt service.
In turn, these actions would greatly increase the
already strong resistance of bankers to new loans
for Mexico and trigger another strong surge in
Lower oil revenues, disinvestment, and the cutoff of
international capital could plunge the economy into
a stagflation trap. Efforts to reinvigorate the econo-
my by increasing government spending would un-
leash an inflationary explosion that would further
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16 November /984
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Mexico: Impact of Reduced Oil Export Revenue a
No Policy
Adjustmeht
With Policy
Adjustment
No Policy
Adjustment
With Policy
Adjustment
Percent Change Fr
om Previous Ye
ar
GDP
1.0
2.0
-1.5
1.7
-6.8
0.2
GDP deflator
65.5
60.8
61.7
64.4
63.0
71.8 '
Private consumption
1.9
3.6
xect.
2.2
-5.2
-0.8
Private investment
-4.8
3.4
-2.9
1.5
-12.3
-4.1
Real government consumption
1.0
5.0
5.0
8.0
5.0
12.0
Real government investment
2.0
S.0
5.0
8.0
5.0
12.0
Billion US S
Foreign exchange income
30.8
32.8
31.3
31.3
29.1
29.0
Petroleum exports
14.9
14.8
13.3
13.3
11.1
11.1
Other merchandise exports
7.8
8.8
8.8
8.9
8.8
9.0
Other n
8.1
9.2
9.2
9.1
9.2
8.9
Foreign exchange outlays
31.3
32.7
32.0
33.0
31.0
32.0
Debt service
17.1
17.1
17.1
17.1
17.1
17.1
Merchandise imports
9.0
10.0
9.6
9.2
9.1
8.0
Other ~.
5.2
5.6
5.3
6.7
4.9
7.0
Foreign exchange balance
-0.4
0.1
-0.7
-1.7
-2.0
-3.0
Change in reserves
2.0
0
0
- 1.0
0
- 2.5
a Assumes oil grade mixtures are constant.
b Includes service inflows, in-bond plants, and direct foreign
investment.
Includes outflows from services and capital flight.
a Trade balance includes exports of goods, in-bond industries, and
transportation minus imports of goods.
cut real wages and crowd out private investment.
Rapid increases in the cost of living and unemploy-
ment would sharply erode living standards and
prompt new highs in social tensions and illegal
migration to the United States.
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16 November 1984
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Secret
The Philippines:
Living With a Foreign
Debt Overhang
After a year of haggling and procrastinating,
Manila has reached tentative agreement with the
IMF on an economic program and completed nego-
tiations with commercial and official creditors on a
plan to restructure much of the Philippines' $25
billion foreign debt. Even with these agreements in
place, however, we believe that the economic out-
look for the Philippines is bleak during the rest of
this decade and additional debt reschedulings will
be required. Under the most favorable domestic
and international economic conditions, we envisage
GNP growth of no more than 4 percent annually
before 1990. This will coincide with a period of
rapid growth of the working-.age population-3.3
percent annually-the highest in Asia.
The Rescue Package
After a year of economic decline, political unrest,
and intense bargaining with its creditors, Manila is
about to complete negotiations on an economic
adjustment program that maps a long, difficult
path to financial stability by the early 1990s. The
program's key components area $615 million IMF
standby loan, an $8.5 billion financing .package
from commercial creditors consisting of new loans,
rescheduled debt payments, and revolving trade.
credits, and $2.4 billion in new loans and resched-
uled debt payments from official creditors.
The program is based on the IMF's calculations
that Manila faces a $3.8 billion financing gap
through 1985. Of this amount, Manila's commer-
cial creditors are to supply $925 million in new
loans and $775 million by rolling over arrears. The
commercial agreement will be formally approved in
early 1985, but loan disbursements will be back-
loaded-that is, $525 million will not be released
until late next year-and they will be tied to
continued compliance with IMF performance crite-
ria. This agreement also substantially reduces
Manila's amortization payments by postponing
over $2.1 billion in payments due during 1984 and
198.5. Furthermore, the package permits the for-
eign banks to extend rescheduling into 1986 at
their option-which would postpone another $1.2
billion in ai mortization payments on commercial 25X1
The IMF-supported program is designed to im-
prove the foreign payments position, reduce infla- 25X1
tion, restore trade financing, and redress some of
the economy's underlying structural weaknesses. If
Manila continues the "prior policy actions" already
in place-including the peso float, new taxes, and
tight monetary policies-the standby loan will be
approved by the Fund's Executive Board in mid-
December. An agreement to reschedule debt owed
to official creditors could follow shortly thereafter
at the Paris Club. 25X1
The Declining Economy
The foreign exchange crisis, economic austerity
policies, and eroding confidence in President
Marcos's political leadership have taken a heavy 25X1
toll on the economy. On the basis of reports to the
government's creditors, we believe that real GNP
over the last three years
after averaging no more than 15 percent annually
will decline this year by at least 5 percent, com-
pared with a 1.4-percent increase in 1983. Our
analysis suggests that public and private invest-
ment outlays have dropped by a third, while'gov-
ernment consumption has fallen 14 percent. Fur-
thermore, on the heels of successive devaluations
and rapid money supply growth in early 1984,
inflation is running at a 60-percent annual rate
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Anatomy of a Foreign Debt Crisis
Manila's foreign debt has increased tertfold since
1970, exceeding $24~billion in 1983. A decadelong
spending spree was made possible by an abundance
of government guarantees to private Filipino bor-
rowers linked to the Marcos administration and by
Manila's continued support for an overvalued
peso-which artificially cheapened imports. Al-
though foreign borrowing.financed GNP growth
rates averaging 6 percent annually since the early
1970s, it also resulted in a proliferation of uneco-
nomic investments by the private and public sec-
t ors.
The cost of the borrowing binge mounted rapidly in
the early 1980s. The Central Bank's growing de-
pendence on short-term borrowing-at high inter-
est rates-to.f~nance the trade deficit pushed debt
service payments up to $2.9 billion in 1983, ab-
sorbing over 35 percent of export earnings from
goods and services and placing an unsustainable
strain on foreign exchange reserves. Out of money
and credit, on 17 October 1983, Manila declared a
moratorium on principal repayments toforeign
creditors, froze foreign exchange transactions, and
asked the IMF and foreign bankers to organize
debt rescheduling.
Progress toward a.f~nancial rescue package was
slowed by Manila's foot-dragging. President Mar-
cos squandered several opportunities for speedy
approval of an IMF standby loan because of his
preoccupation with containing political opposition
in the wake of Benigno Aquino's assassination in
August 1983. According to US Embassy reporting,
Marcos's reluctance early this year to implement
economic policies sought by the Fund further
soured relations with the IMF and commercial
bankers-relations already strained by Manila's
penchant for procrastinating.on promised reforms
and falsifying macroeconomic data
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16 November 1984
Real wages have declined by 25 percent over the
past year, and basic commodities are widely report-
ed in short supply. This sharp reduction in govern-
ment spending is curtailing programs benefiting
rural areas and is increasing discontent among civil
servants and the military, according to US Embas-
sy reporting. Moreover, unemployment this year
has grown by 400,000 in Manila alone, according
to estimates by Philippine economists.
Another casualty of the economic decline has been
the country's financial system. Since midyear,
many Philippine banks have been pushed to the
brink of collapse by a flood of recession-induced
business failures and tight monetary policies. Over
a dozen bank runs and closures, including the near
failure of.the nation's largest savings bank, are
eroding public confidence in the country's financial
system.
One of the few bright spots is the country's external
trade position, which registered its first improve-
ment since 1977. We project that the current
account deficit will shrink by $1.2 billion this year,
largely due to a 23-percent decline in imports-
particularly capital goods. Furthermore, the nearly
65-percent depreciation of the peso since October
1983 promises to boost exporters' profits and en-
courage export-oriented production in the years
ahead.
Using an econometric model to highlight the econo-
my's response to the debt crisis, austerity measures,
and difi'erent external economic conditions, we
believe that over the next year Marcos will be faced
with choosing between the policy prescriptions of
his creditors-chiefly the IMF-or charting a
course that seems more politically expedient in the
short term.
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Secret
Philippines: Balance of Payments
Coconut products
965
759
756
590
622
753
Sugar
238
474
609
440
321
315
Lumber
484
433
383
293
323
325
Copper
330
679
544
313
242
335
Nontraditional
manufactures
1,520
2,108
2,609
2,380
2,354
2,662
Imports
6,142
7,727
-7,946
7,667
7,487
5,787
Oil
1,385
2,248
-2,458
2,105
2,132
1,831
Services
-311
-399
-309
-1,040
-747
-1,305
Interest payments
-626
-975
-1,374
-1,990
-1,929
-2,380
Transfers
355
434
472
486
472
250
Capital account
894
1,532
1,329
1,562
633
-744
Direct investment (net)
20
-102
175
17
112'
-20
Medium- and long-term loans (net)
1,151
1,032
1,332
1,548
1,392
-364
Short-term loans (net)
-558
196
-213
-56
-836
-500
Other
281
406
35
53
- 35
140
OveraO balance
-603
-372
-732
-1,638
-2,124
-2,286
Cumulative arrears on interest and
principal payments-including debt
payments covered by the moratorium.
1,600
2,700
Assuming favorable external economic conditions
and a relatively stable domestic political environ-
ment, we expect real GNP to decline 2 percent next
year and to grow by no more than 2 percent in
1986. Our analysis suggests austerity measures
requested by the IMF will reduce the current
account deficit to $1.1 billion next year and trim
the public-sector deficit to 1 percent of GNP. In
addition, our baseline assessment suggests that
tight monetary policies and wage restraint will trim
inflation to 20 percent in 1985 and 14 percent in
1986. Manila will need to extend commercial and
official debt rescheduling agreements into 1986
and 1987, however, to deal with amortization pay-
ments, which total $2 billion annually
The political costs of austerity, we believe, will be
substantial, and Manila's strained relations with its
creditors-and its recent record of tough negotia-
tions with the IMF-suggest that Marcos could be
tempted into a confrontation with the Fund over
economic policy. Continued domestic unrest could
prompt Marcos to grant tax, wage, or price relief-
moves that might jeopardize the hard-won financial
rescue package and intensify the 1985 downturn.
If Manila falls out of compliance with IMF targets
and disbursements are suspended-as they were in
1983-the Philippines would need to balance its
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external accounts rapidly, since small amounts of
new external financing and precariously low for-
eign exchange reserves would be insufficient to
support a large trade deficit. To cut the trade
deficit, Manila would probably impose additional
budget cuts, higher interest rates, and quantitative
restrictions on imports. It would also request
another moratorium on.external debt payments.
Under this noncompliance scenario, we believe real
GNP would fall by over 7 percent in 1985-5
percentage points worse than the decline projected
with the IMF program in place. Furthermore,
inflation would leap to about 45 percent as domes-
tic spending concentrates on the few available
imported and domestic goods. For their part, com-
mercial and official creditors would probably not
remain passive during another debt moratorium.
Banks probably would selectively refuse to renew
trade credits, and some official creditors would be
required to suspend further assistance, thus forcing
Marcos back into negotiations with the IMF.
Manila's foreign debt burden probably will contin-
ue to constrain economic growth through 1990,
depressing living standards and further aggravating
already high unemployment levels. Even with
sound economic policies, favorable world economic
conditions, and some restoration of business confi-
dence, by the late 1980s our simulations suggest
that annual GNP growth rates will not exceed 4
percent. This period of slow economic expansion
will coincide with growth in the working-age popu-
lation of 3.3 percent annually-Asia's highest.
payments on foreign debt`exceed' net capital iriflows
by $2 billion. Nonetheless, if Manila remains' in
compliance with the IMF and shows good faith in
initiating economic reforms, we believe that these
financing levels can be secured.
In any case, the Philippines' road back to financial
stability will continue to be long, difficult, and
easily derailed by external factors. The .Philippine
economic recovery is quite sensitive to changes in
world trade, international interest rates, and oil
prices:
? If GNP growth in the Philippines' major trading
partners falls 2 percentage points. below our best
case scenario, we project that by 1989 Philippine
GNP per capita would be 10 percent below the
best case level, while the debt service ratio would
climb from 36 percent to 43 percent.
? Similar results occur if international interest
rates are 3 percentage points higher than in our
best case scenario.
? If a new oil shock drives oil prices up by 50
percent, 1989 GNP per capita would be 20
percent lower than in our best case and financing
requirements between 1986 and 1989 would be
$10 billion higher.
25X1
25X1
Financing even these modest.growth .rates will
require about $1.4 billion in new net foreign lend-
ing each year between 1987 and 1990. Outstanding
foreign debt would rise to roughly $33 billion, and
we project that debt service payments will absorb
nearly 36 percent of export earnings in 1989: The
Philippines, however., will face net outflows of
foreign exchanges after 1985 as its annual interest
Secret
16 Novemberd984
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Secret
Colombia: A Tottering
Economy
President Betancur is facing his most difficult test
since tie entered office in August 1982. His at-
tempts to keep campaign promises over the next
few months will clash head on with acash-flow
crisis that is leading to a likely suspension of some
debt service payments. To save face and secure
foreign financial support, he will probably adopt
IMF-backed austerity measures that, although eco-
nomically beneficial in the longer run, will generate
higher unemployment and inflation, lower econom-
ic growth, and political and social unrest through
1.985.
The.administration has failed to engineer signifi-
cant economic improvements. Although Betancur
pursued expansionary policies to accommodate po-
litical pressure groups, the economy grew by only 1
percent last year-the worst performance since
1950-and unemployment continued to rise. In-
creased public spending, new subsidies, and eased
access to credit for farmers and other groups kept
inflation close to 20 percent.
Economic growth this year is still- depressed, ac-
cording to the US Embassy. Industry revived this
spring, but agriculture, commerce, and construc-
tion activity remain slack. Unemployment reached
a record 14 percent in' June, despite the administra-
tion's effort to create employment. Accelerated
monthly devaluations and import restraints helped
push prices up at an annual rate of 21 percent
during the first six months of the year, well above
the government goal of 14 percent
Financial problems persist despite some reforms.
The public deficit that tripled to record levels in
1983-$1.6 billion, according to government fig-
ures-is still growing despite new taxes. The gov-
ernment has exhausted available domestic credit
resources to bridge the growing fiscal gap and to
come up with matching funds for development
loans needed to relieve the external accounts. Lead-
ing Colombian firms, moreover, notified the gov-
ernment in February that they will no longer
service their foreign debt. They maintain that the
acceleration of monthly devaluations and their
cash-flow problems make further payments impos-
sible. The financial system also is reeling from 25X1
private-sector borrowers' lack of liquidity, wide-
spread domestic corru tion, and insider loans made
by the banks.~~ 25X1
Bogota's continuing economic problems are causing
some social restiveness and eroding Betancur's
popularity. According to US Embassy officials, the
latest polls show that the President lost about half
of his nearly 70-percent public approval rating
between August 1983 and August 1984, largely
because of delays in settling the insurgency and
declines in living standards. Colombians have been
reacting negatively not only to falling living stan-
dards, but also to a highly resented new value- 25X1
added tax. Organized labor, turned restive and
frustrated by the persistent recession, has ended its
two-year honeymoon with Betancur: teachers
struck for two months in April and busdrivers
demonstrated in August, when the government
vetoed fare hikes.
Secret
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16 November 1984
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Secret
Colombia: Selected Economic
Indicators, 1978-84
Real Economic Growth
Percent
Consumer Price InFlation
Percent
Current Account Balance
Excluding Official Transfers
Billion US $
0.5
0
-0.5
-1.0
- I.5
- 2.0
- 2.5
- 3.0
Total Debt
Billion US.$
Foreign Exchange Reserves a
Billion US $
Debl Service Ratio
Percent
End of year; excludes gold.
b Estimated.
Colombia solar has managed to service its $12
billion foreign debt without refinancing. Over half'
of the $8 billion government debt is owed to
international agencies like the World Bank and the
Inter-American Development Bank at lower inter-
est rates and longer terms than that owed to
commercial banks. The government estimates total
private foreign debt at $4 billion, including some
$1.2 billion in short=term obligations. While Co-
lombia's overall external debt is smaller in rela-
tion to the size of its economy than that oJ' many
other developing countries, the debt has been rising
sharply, and the debt service ratio more than
doubled between 1978 and 1983.
SOCret
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Secret
4,062
2,375
4,300
79
Estimate.
b Projection.
Reflects tightening of nonessential imports and accelerated
monthly devaluation pace.
Coping With Pressures
The next few weeks will be critical for an adminis-
tration that has few options. The burgeoning fiscal
deficit threatens the slim foreign reserves cushion,
which at the present pace of decline would be
exhausted by mid-1985. We doubt Bogota would
favor further import restrictions, because they
would be incompatible with plans for economic
growth. To avert a foreign exchange crisis, bankers
are urging Colombia to undertake an IMF stabili-
zation program
The cash shortage is forcing the Betancur adminis-
tration to weigh the economic consequences of
failing to make debt payments against the political
ramifications of a large devaluation and measures
to reduce the fiscal deficit. In our view, Betancur
probably will continue publicly to pretend that his
policies are working, but will privately undertake a
"shadow" IMF-backed austerity program.
In any case, we believe he will have difficulty
obtaining sufficient political backing for unpopular
adjustments. As the economic situation deteriorates
further:
? Various import-dependent interest groups will
demand relief.
? Influential coffee growers will press for higher
domestic support prices to offset increasing pro-
duction costs.
? Labor will call for wage hikes and more public 25X1
spending to maintain buying power and ease
unemployment.
? Business critics will insist Betancur hold down
labor costs and devalue the currency.
The President will have to contend with both
political resistance and inadequate financial re-
sources in his efforts to implement the reforms he
pledged in a nationwide truce with the guerrillas.
Secret
16 November 1984
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Economic Impact of Narcotics
and Other Contraband on the Colombian Economy
Trends in.financial.flows associated with drug
production, as reported by the US Embassy in
Bogota, do not support the belief, common both
inside and outside Colombia, that "black money"
continues to be a source of strength for the Colom-
bian economy. The US Embassy reports that earn-
ings from cocaine and marijuana have declined
sharply since 1982 as a percent of GDP and have
actually had a contractionary effect on the money
supply because other exports have not risen enough
to compensatelorfalling drug earnings. Thus,
drug income does not serve as a countercyclical
economic force for Colombia, but appears to move
in the same direction as the economy as a whole,
worsening the problems of the legitimate economy
and impeding government efforts to deal with its
financial difficulties.
The government has promised to reintegrate the
guerrillas into the civilian population by putting
them on the government payroll for a year at the
minimum wage, granting them credits to establish
small businesses, and, in some cases, giving them
land. These offers have provoked complaints from
many corners of society and stiff congressional
opposition. Peace on these terms would entail high
short-run costs but, in our view, bestow significant
benefits over the longer term.
Most forecasts of the pace of recovery in the
developed countries indicate that Colombian ex-
ports are unlikely to post the strong rebound needed
to reduce the persistent current account deficit.
According to US Embassy estimates, sales of coal
from the El Cerrejon project, scheduled to start
next February, will provide only modest relief.
Major infrastructure investments needed to exploit
substantial oil reserves in the interior will also delay
any near-term help from the energy sector. We
believe international bankers will resist financing a
Secret
16 November 1984
large payments deficit and providing the loans for
new development projects without an IMF stabili-
zation program in place.
Such a strategy will probably lead to further near-
term economic decline. While austerity measures
are essential over the longer term, in the short run
they will produce higher unemployment, inflation,
and lower real wages and economic growth. Thus,
we expect economic stagnation to continue in 1985,
with growth at a 2-percent pace.
We believe Betancur will avoid much of the politi-
cal fallout for these conditions. He has blamed
former Finance Minister Edgar Gutierrez for the
domestic economic troubles and external factors-
such as low commodity prices, protectionism by
Colombia's principal trading partners, and foreign
bankers' reluctance to lend-for the cash-flow cri-
sis. If the opposition Liberals, who control Con-
gress, reject the President's proposals for tax in-
creases or fail to give the administration emergency
authority to restructure the public sector, Betancur
will have an additional scapegoat.
25X1
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NICs: Accelerated
Penetration
of World Markets
The newly industrializing countries (NICs)' have
sharply increased their penetration of world
markets, particularly since 1980. In the OECD
import market, the NICs have almost doubled their
share over the past decade, in large part because of
sizable gains in the US market. In the LDCs,
where overall imports dipped between 1980 and
1983, purchases from the NICs continued to rise
sharply. The upward trend in the NIC share of
world trade is likely to continue at least in the near
term because of the growing competitiveness of
these countries in many product lines. In response,
we can expect growing protectionist pressures
against the NICs, particularly in the industrial
countries.
The NICs have been gradually increasing their
share of both industrial and developing country
markets since 1970. The pace at which they have
been penetrating world markets, however, has ac-
celerated since 1980. This is particularly evident in
the case of the OECD market. Last year the NICs
accounted for nearly 8 percent of OECD imports,
compared with 5.5 percent in 1980. First-half 1984
trade data for the Big Seven show an even further
penetration, with imports from the NICs account-
ing for 9.5 percent of total Big Seven foreign "
purchases, compared with 9.2 percent for all of "
1983
Most of the recent gain in the NICs' share of the
OECD import market has stemmed from sharp
increases in exports to the rebounding US economy.
NIC sales rose 46 percent between 1980 and 1983,
boosting the NICs' share of the US market from 14
percent of US imports to over 19 percent. First-half
1984 trade statistics for the United States show
Newly Industrialized Countries:
Share of World Imports
OECD 1970
1975
1980
1983
United States
Japan
Big Four
Canada
LDCs
25X1
continued growth in purchases from the NICs,
reflecting the continued rise in US import demand.
Increased NIC exports to the United States con-
sisted mainly of manufactures such as chemicals,
textiles, electrical machinery, and consumer elec- 25X1
tronics. US imports from the six NICs were up
nearly 31 percent in the first half from a year
earlier and accounted for about one-fifth of total
US foreign purchases.~~ 25X1
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NIC penetration of other OECD markets has been
less dramatic because of weaker trade links and
trade barriers in Western Europe, particularly for
steel and textiles. Last year NIC sales to the Big
Four European nations accounted for only 3.6
percent of their imports-barely higher than the
share in 1980. Among the major West European
nations, the NICs have been most successful in
penetrating the UK market, where they accounted
for 5 percent of foreign purchases in 1983. In
France and Italy, on the other hand, the NIC share
was just 3 percent. NIC sales to Japan last year
amounted to $11.7 billion or just over 9 percent of
total Japanese imports, up from 7 percent in 1980.
Although LDC imports overall fell by 3.8 percent
between 1980 and 1983; purchases from the NICs
rose 35 percent. As a result; the NICs' share of the
LDC import market climbed from 4.6 percent in
1980 to 6.4 percent in 1983: 1Vlajbr items imported
by the LDCs include petroleum products, some
foodstuffs, and manufactures such as textiles, steel,
and consumer electronics. First-half 1984 figures
show a continuing upward trend in .NIC exports to
the LDCs, with NIC sales to these.countries up an
estimated 14 percent over the same period last
year
Underlying Factors
In recent years, the NICs have become more
competitive in many lines of manufacturing rang-
ing from textiles and shoes to steel products and
electronics. The rapid growth of export-oriented
electronics industries in most of these countries has
been a major factor in boosting their sales to the
industrial West. Many NICs have targeted certain
industries for expansion and have made great ef-
forts to attract foreign investment to develop these
industries.. South Korea, for example, has entered
joint ventures with US firms to acquire the technol-
ogy to produce more advanced semiconductors. The
NICs have also been marketing their products
more aggressively in both industrial and developing
countries. Mexico and Brazil, for instance, have
been promoting their exports through currency
Secret
16 November 1984
United States
4.1
10.8
35.6
52.0
Japan
1.0
3.9
9.9
11.7
Western Europe
2.7
8.5
25.3
25.1
West Germany
0.7
2.5
6.5
5.7
France
0.2
0.7
3.1
3.1
United Kingdom
0.6
1.6
4.6
4.7
Italy
0.3
0.7
2.3
2.3
Other
0.9
3.0
8.8
9.3
Canada
0.3
0.9
2.2
3.8
Other
0.2
0.8
2.6
2.6
devaluation and various fiscal incentives to increase
foreign exchange earnings with which to service
The upward trend in NIC penetration of world
import markets will probably continue in the near
term. With many_LDCs still unable to increase
foreign purchases substantially because of their
financial problems, the NICs are likely to focus
their sales drives on the more open industrial
country markets. Further penetration of OECD
markets will probably lead to new protectionist
measures against the NICs. The West Europeans,
for instance, have expressed concern over increased
NIC competitiveness in declining industries such as
steel and textiles and may try to further limit NIC
access to their markets. While the Japanese are, in
general, less concerned, they are worried about the
competitiveness of their steel industry, particularly
in third country markets.
25X1
25X1
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