INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100460001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 30
• Document Creation Date: December 22, 2016
• Document Release Date: June 13, 2011
• Sequence Number: 1
• Publication Date: August 15, 1986
• Content Type: REPORT

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Weekly
International
Economic & Energy
15 August 1986
,ecret
DI IEEW 86-033 v
15 August 1986
Directorate of
Intelligence
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674
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International
Economic & Energy WeeklyF___1 25X1
15 August 1986
1 Perspective-International Oil Market: Implications of Increased Iranian Military
Activity
Egypt: Economic Crisis at Hand
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directed to Directorate of Intelligence
Energy
International Finance
International Trade
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
i Secret
DI /EEW 86-033
15 August 1986
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International
Economic & Energy WeeklyF___1 25X1
Synopsis
1 Perspective-International Oil Market: Implications of Increased Iranian Military
Activity 25X1
Increased Iranian military activity could set off a chain of events that would
seriously threaten oil supplies and accelerate recent oil price gains.
world-even in Iran where the system is furthest advanced.
The Islamic economic system, under which market practices and distribution of
income reflect Koranic teachings, has little future in today's turbulent Muslim
5 Egypt: Economic Crisis at Hand
Within the next few months President Mubarak will probably be forced to decide
how to implement long overdue economic policy reforms to stem the rapid
deterioration of Egypt's economy. Striking a balance between economic realities
and political necessity, however, may prove beyond the capabilities of the current
regime.
resolve by individual countries.
In our judgment, Sub-Saharan countries are adopting economic reform because
they recognize that past economic policies have failed, but also because they are
being prodded by foreign bilateral donors and multilateral financial institutions.
Even so, we believe the reform measures are being pursued with varying degrees of
iii Secret
DI /EEW 86-033
15 August 1986
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Secret
International
Economic & Energy Weekly
15 August 1986
Perspective International Oil Market: Implications of Increased Iranian Military Activity
Increased Iranian military activity could set off a chain of events that would
seriously threaten oil supplies and accelerate recent oil price gains. Iran's general
mobilization of troops and Tehran's vow to end the war by spring 1987 are among
signs that Iran is preparing to launch a major ground assault.
Iraq already has responded to recent Iranian military preparations by stepping up
its campaign against key economic targets including the Sirri Island oil transship-
ment facility and the Khark Island oil terminal. These follow earlier strikes
against oil production, pipeline, and processing facilities. These attacks have
substantially reduced excess capacity in Iran's oil export facilities. Repeated,
successful bombings against critical elements of the system would be necessary to
shut down Iranian exports for an extended period.
The increasing frequency of Iraq's airstrikes has led Iran to step up its retaliatory
strikes against Persian Gulf shipping. Moreover, Tehran, in our view, was behind
the recent terrorist attack on Kuwait's oil export system. Iran is capable of
additional terrorist attacks or launching missiles against oil facilities on the
Peninsula.
Market fears of a Persian Gulf oil supply disruption have ebbed in the face of a
large buildup in surplus production capacity and this year's plunge in oil prices.
Nonetheless, of the roughly 8 million b/d of surplus crude oil production capacity
worldwide, less than 3 million b/d is outside the Persian Gulf-mostly in
Venezuela, Libya, and Nigeria. Within the Gulf, the availability of Saudi supplies
remains the key to avoiding a major disruption. Any loss of supplies that does not
affect Saudi capacity could be offset by Riyadh and the surplus outside the Gulf.
If Saudi exports were seriously affected, however, the market would be confronted
with a net supply shortfall. Under these circumstances, we estimate prices could
rise by about $5 to $10 per barrel for each million b/d net supply shortfall.F_25X1
Actual shortages are not necessary, however, for large spot price runups. Iranian
success in ground attacks and concern over an extended disruption of Gulf supplies
could create sufficient market uncertainty to boost spot prices by at least several
dollars per barrel. The psychology of the market as well as the length and severity
of the damage or disruption would determine how long the higher prices persist.
Secret
DI IEEW 86-033
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More ominous would be a major Iranian military success that could lead to greater
Iranian influence in the region and within OPEC. Iran has already used its
military success to warn Kuwait and Saudi Arabia to abandon efforts to dampen
oil prices. Indeed, Iran's Oil Minister asserted last week that, if Iran ever gained
control of Iraq's oil facilities, oil prices would rise well above last year's level.
Within OPEC, Saudi Gulf allies, fearful of Iranian retaliation, probably would
grow more reluctant to take a stand against Iran. Should oil prices rise
substantially due to supply disruptions, greater influence may allow Iran to keep
them high for an extended period
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The Islamic Economic System and
Its Prospects in Iran t
The Islamic economic system, under which market
practices and distribution of income reflect Koranic
teachings, has little future in today's turbulent Mus-
lim world-even in Iran where the system is furthest
advanced. Under the Ayatollah Khomeini, Islamic
economic philosophy has been implemented only in
piecemeal fashion, and, once the war with Iraq ends,
the secular needs of reviving the economy will proba-
bly prevail over fundamentalist principles.
? The greatest possible reliance on goods and technol-
ogy from domestic sources or from brother Islamic
countries.
Since Khomeini's accession to power in Iran in 1979,
his government has installed the Islamic economic
system only in piecemeal fashion because of the
survival of strong secularist elements, the preoccupa-
tion with the bloody war with Iraq (now in its sixth
year), and the Ayatollah's own lack of focus on
The model Islamic economic system serves as a
subordinate component of a militant Islamic state
whose people believe in the primacy of Allah, His
ownership of productive resources, and the position of
man as His trustee in the allocation of these resources.
Life for each individual is a test, of whether he will
use his God-given free will to choose good over evil
and thus maximize his benefits in the afterlife.
Against this essential background of deep-rooted spir-
itual beliefs, the Islamic economic system features the
following operational characteristics:
? The private ownership and use of productive re-
sources within religiously determined constraints.
? The support of the poor by the well-to-do, through
alms, taxes, charitable contributions, and the paying
of fair wages.
? A strict prohibition against payment of interest as
not justified by labor effort or risk and as, historical-
ly, a scourge on the backs of the poor.
? A ban on pork, liquor, prostitution, gambling, spec-
ulation, and hoarding.
? Strong restrictions on insurance, equating it with
gambling or encouraging reckless business behavior.
? A code of fair dealing in the marketplace, which
prohibits taking advantage of the ignorance or
poverty of either buyer or seller.
' This article presents the conclusions of an economic research
contract sponsored by the Office of Near Eastern and South Asian
Analysis.F___1
economic affairs.
The revolutionary regime has failed to arrange for
private operation of the large industrial enterprises
seized from the Shah's supporters or to settle disputes
over land ownership resulting from the Shah's land
reform and the flight of many landowners. The new
regime has generally succeeded in putting a floor 25X1
under consumption through the rationing of basic
items, but the poor still suffer bitterly from the drastic
overcrowding of housing, growing shortages of con-
sumer goods, dislocations stemming from the war, a
20-percent annual inflation rate, and massive unem-
ployment. The nationalized banking system continues
to pay interest under the guise of dividends from
pooled investment funds, and private currency trans-
actions flourish at several times the official exchange
rate. People continue to drink and enjoy luxuries in
private. The marketplace retains its traditional Irani-
an qualities of lively wheeling and dealing, illegal
trafficking in smuggled and rationed goods, bribery,
and sale of some goods of abysmally low quality. As
for economic self-reliance, oil still must be sold and
weapons procured in non-Islamic markets, despite the
oft-repeated slogan "Neither East nor West." In the
meantime, the population has risen rapidly under the
Ayatollah-from 37 million to 46 million people-
without a like increase in food production, housing,
utilities, and jobs.F____1 25X1
Secret
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15 August 1986
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The Islamic economic system in Iran probably has
reached its high water mark. The conflicting interests
of religion and technocratic factions will determine its
future course. Once Iran loses the cementing influ-
ence of the Ayatollah, the spiritual energy necessary
for the further development of the system almost
certainly will fade. When the war ends, the Iranian
people, although retaining their Islamic coloration,
will have to address the secular tasks of pumping
more oil, replacing deteriorated industrial plants, and
securing additional quantities of food. Broad trade
and educational contacts with the secular West will
continue.
An Islamic economic system, because of its spiritual
underpinnings, loses its essential identity when diluted
by substantial secular elements. In contrast, a capital-
ist system of individual initiative and decentralized
market alternatives retains its fundamental identity
even in the presence of extensive government owner-
ship and regulation; and a Marxist-Leninist socialist
system retains the "feel" of centrally planned alloca-
tion of resources and one-party control even with a
flourishing second economy of small private moon-
lighters.
Outside of Iran, the other Muslim states in this
postcolonial era have installed secularly minded rulers
and have retained their close links to foreign sources
of technology and weapons, thus drawing fire from
militant advocates of Islamization. The principal ac-
commodation other Muslim nations have made to
Islamic economics is in the area of domestic bank-
ing-Pakistan and Sudan are major examples. Al-
though they have outlawed interest, such payments
continue under the veil of acceptable Islamic terms.
Chances of their adopting a truly Islamic economic
system appear small in view of the strength of global
technological and secularist forces
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Egypt:
Economic Crisis at Hand
Within the next few months President Mubarak will
probably be forced to decide how to implement long
overdue economic policy reforms to stem the rapid
deterioration of Egypt's economy. Such reforms are
also critical in gaining international support for badly
needed debt relief and additional financial aid. Strik-
ing a balance between economic realities and political
necessity, however, may prove beyond the capabilities
of the current regime. The government appears re-
signed to the need for an IMF program, but, if
economic hardship resulting from a rigorous reform
program were perceived as having been "imposed" on
Egypt, the threat of domestic unrest would be serious.
Even if the Mubarak regime can implement and
survive the initial shock of economic adjustments, the
process required to produce self-sustained economic
growth in Egypt will require at least several years of
austerity. As a result, economic conditions provide a
fertile breeding ground for the growth of radical
Islamic fundamentalism and further political unrest.
Bleak Outlook for
Foreign Currency Earnings
Egyptian hard currency earnings have plummeted
during the first half of 1986, show few signs of
improvement over the remainder of the year, and will
only gradually recover thereafter. Much of the decline
can be attributed to falling oil revenues that netted
only $315 million during the first six months of the
year, a 66-percent decline over the same period last
year. For Egypt, the effect of sagging world oil prices
has been compounded by its inflexible pricing policy
in a weakening oil market. This has, in turn, left
Egyptian crude consistently higher priced than com-
petitors and virtually halted liftings for export cus-
tomers in May and June. Even if oil prices average
$15 per barrel during the second half of the year,
revenues are unlikely to exceed $1 billion during 1986
compared with oil earnings of $2.4 billion in 1985.
Egypt's other primary source of foreign currency
earnings, remittances from expatriate workers, is also
falling. At least one-fourth of Egypt's 2.2 million
expatriate work force is returning home this year,
largely as
a result of the economic downturn in the Persian Gulf.
Layoffs appear to be primarily affecting unskilled
agricultural and construction workers, but higher
skilled professionals are also reportedly taking pay
and benefit cuts. The impact on remittances has been
only marginal to date, because many workers report-
edly are returning with accrued savings. Nevertheless,
a probable steep drop in second-half 1986 earnings is
likely to result in only $2 billion in official remittances
for the year, compared with nearly $3 billion in 1985.
Moreover, a rebound in the Gulf economies-and
their demand for foreign workers-would be largely
dependent on a significant increase in world oil prices,
a dim prospect over the next few years.
Although Suez Canal revenues are likely to increase
by $100 million during 1986 largely as a result of
higher tolls, this will provide little offset for the
shortfall in oil and remittance earnings. Tourist earn-
ings, on the other hand, will probably remain flat
during the remainder of 1986 and recover only slowly
thereafter from the adverse publicity of terrorist
incidents in the Middle East and the February Cairo
police riots.
The Mubarak government is now confronting an
acute liquidity crisis. Payment arrearages on debt
obligations totaled over $1 billion last year and most
certainly have grown over the past six months.
Alarmed by Egypt's growing arrearages and deterio-
rating earning prospects, commercial banks and offi-
cial export credit agencies have begun to drastically
cut back on short-term lending and credit guarantees
to Egypt.
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Egypt: Projected Balance of Payments
-6.4
2.6
2.7
5.2
1.9
2.5
numbers of workers returning from overseas and
roughly 400,000 entering the job market annually.
The combination of foreign currency shortages and
contracting credit lines has already begun to squeeze
the domestic economy. US Embassy and press report-
ing suggest growing consumer goods shortages and
substantial price increases, implying the regime has
already been forced to impose fairly substantial im-
port cutbacks. If the government attempts to hold
food imports near current levels, a likely scenario
given the sensitivity of food supplies, the burden of
cutbacks in official imports will fall on Egypt's im-
port-dependent industries. This would have a signifi-
cant near-term impact on growth and employment,
and at a particularly inopportune time, with large
A growing sense of urgency characterizes the Mu-
barak regime's actions as the full magnitude of the
economic crisis becomes clearer. Recent visits by
Defense Minister Abu Ghazalla and an economic
delegation to the United States and by Mubarak to
West European capitals have projected an image of a
regime desperately attempting to stave off a rigorous
IMF standby program by pleading its case for bilater-
al debt relief and additional financial assistance. On
the domestic front, the government-controlled media
continues to emphasize the need for major reform of
the subsidy system-but not at the expense of the
poor.
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Implications for the United States
The Mubarak government will pressure US policy-
makers to provide financial relief as its economic
plight worsens. Three Egyptian priorities are:
? FMS Debt Relief. Cairo believes the United States
has already committed itself to resolving the For-
eign Military Sales (FMS) issue in the near term. A
$91 million interest payment is due on 2 September
to avoid triggering a cutoff of US aid under provi-
sions of the Brooke amendment. At a minimum, the
Egyptians hope to refinance FMS loans, currently
more than $500 million in arrears, at lower interest
rates. Ideally, they would also like repayments
frozen until 1988.
? Increased Cash Component for ESF. Cairo wants
the cash component of Economic Support Funding
(ESF) increased from the current $110 million level
to $500 million for US fiscal year 1987.
? Intervention With the IMF. Most important, the
Mubarak regime is seeking assistance in easing the
terms of any IMF standby program. Cairo is per-
haps most concerned with preventing rapid move-
ment toward a unified exchange rate and any
further large cuts in the domestic budget, since
either measure will quickly force substantial modi-
fication of politically sensitive subsidies and price
controls.
Moving Toward an IMF Program
Recent statements by Mubarak and other high-level
Egyptian officials suggest that Cairo has accepted the
inevitability of an IMF-endorsed program but still
hopes to extract a "soft" reform package from the
Fund. Mubarak has made a number of recent appeals
to Western governments to intervene on Egypt's
behalf with the IMF to ensure "lenient" terms under
any standby program.
Negotiations between Egypt and the IMF over what
constitutes an effective and workable economic re-
form program could easily falter. Fund officials, while
Egypt: Foreign Military Sales Million US $
Debt Repayments a
cognizant of domestic political realities in Egypt, will
find it difficult, if not impossible, to grant Cairo more
lenient terms than those provided recently to Mexico.
Moreover, while the terms of the Mexican agreement
are softer than some previous IMF standby programs,
they still require painful internal economic adjust-
ments. Although some Egyptian officials have hinted
recently that differences have narrowed, Egypt and
the Fund probably remain far apart in three key
areas:
? Budget Deficit. The budget-cutting measures pro-
posed by Cairo would lower the deficit by only 600
million Egyptian pounds (LE). IMF calculations,
however, project a budget deficit LE 2 billion higher
than Egyptian projections.
? Credit Expansion. Growth in public- and private-
sector credit is excessively high and must be con-
trolled, the IMF maintains, by raising interest rates.
Egyptian officials contend that the effective interest
rate is already high and further hikes would meet
with fundamentalist Muslim opposition.
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? Exchange Rate Reform. Egypt's recent currency
reform-aimed at simplifying its system of multiple
exchange rates-eliminated the official incentive
exchange (LE 0.83 per dollar) rate and made a
commitment to move the commercial bank rate to
the free market rate (currently about LE 1.9 per
dollar) in two to three years. This is insufficient,
according to the IMF. While the IMF has not yet
spelled out an acceptable currency reform, we sus-
pect eventual elimination of the official exchange
(LE 0.7 per dollar) rate is high on their list along
with a much more rapid merging of the commercial
bank and free market rates-perhaps within one
year.
Egyptian officials are wary of any changes that will
entail immediate restructuring of the pervasive system
of subsidies and price controls. Low cost basic food
supplies and price controls on a variety of other goods
and services from gasoline to telephone service bene-
fit, in one way or another, an estimated 90 percent of
the population. The system has become so entrenched
in the public mind as a fundamental right that wide-
spread reductions may be perceived not only as a real
loss of income but also as an abrogation of the
government's solemn pledge to protect the living
standards of average Egyptians. Perhaps more impor-
tant, if such hardships are viewed by the populace as
having been imposed on Egypt by the IMF and
meekly accepted by the Mubarak government, we
believe the threat of large-scale domestic unrest would
be serious
While the regime appears to have accepted the need
for an IMF program, its basic strategy still involves
making minimal economic adjustments to achieve its
goal. In our view, only when it is made absolutely
clear that no other options exist and all sources of
credit are exhausted will the regime acquiese to
tougher IMF-supported guidelines. Delaying until
economic conditions compel immediate action would
almost certainly fuel the popular perception that
reforms were externally forced upon Egypt. More-
over, the probable haste and confusion in their imple-
mentation would undoubtedly produce exactly the
political tinderbox the regime has been attempting to
Prospects for IMF Program Compliance
As difficult as hammering out an effective reform
program will be, getting the Egyptians to adhere to
the terms of an agreement may prove even more
arduous. We suspect that, should civil unrest break
out after implementation of a standby program, the
regime's first response may be to rescind newly
announced measures and delay enacting additional
reforms. There are ample precedents for such a move
by the Egyptian Government, stretching back to the
bread riots of 1977. Should this occur, the flow of
IMF and other multilateral funds contingent on the
standby program would be suspended. Debt resched-
uling under the Paris Club would be similarly affect-
ed. Achieving a second-round agreement between
Cairo and the IMF may then prove even more
difficult than the first, while Egypt's economic deteri-
oration would continue unchecked.
If the Mubarak regime adheres to the terms of an
IMF agreement, despite initial domestic unrest, the
government faces an extended period of political
turbulence. Despite the higher and more sustained
growth that an IMF program would ultimately gener-
ate, there would almost certainly be a long period of
wrenching adjustment-perhaps as much as two to
three years-with rising unemployment, declining
living standards, and negative growth. Until the bene-
fits of new economic policies become evident, disgrun-
tlement over deteriorating economic conditions will
almost certainly fuel a resurgence of radical Islamic
fundamentalism and heightened popular discontent.
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Sub-Saharan Africa:
The Status of Economic Reform
A growing number of Sub-Saharan African countries
are turning to economic reform programs to rescue
their battered economies. In our judgment, Sub-
Saharan countries are adopting economic reform be-
cause they recognize that past economic policies have
failed, but also because they are being prodded by
foreign bilateral donors and multilateral financial
institutions. Even so, we believe the reform measures
are being pursued with varying degrees of resolve by
individual countries. If sustained, these programs will
probably strengthen the African economies over the
longer term and create a more favorable environment
for economic activity. In the meantime, the reform
programs have potentially serious political and social
implications because already poor countries are being
called on for additional economic sacrifices.
More Aggressive Countries
Countries that have more aggressively approached
their economic reform programs include Cameroon,
Ghana, Ivory Coast, Kenya, Senegal, Zaire, and
Zambia. With the exception of Cameroon, these
countries have been conducting their reform under
IMF standby agreements. We believe that most of the
countries were more receptive to free market ideas
than the rest of Africa, even before implementing
economic reform programs. Among various reform
measures implemented by these countries:
? In Cameroon, recent and planned reform measures
include reduced interest rates to stimulate business
growth, decreased government involvement in state-
owned enterprises over the next five years, and
wider agricultural development, with emphasis on
continued food self-sufficiency and greater attention
to budget planning.
? In Ghana, major reforms include restructuring the
civil service, reorganizing state-owned enterprises,
and promoting private-sector production and em-
ployment, employing policy tools such as periodic
devaluations, removal of nearly all price controls,
and increases in key producer prices. Ghana has
recently agreed with the IMF on a new three-year
economic adjustment program.
? Following two years of severe budget restrictions,
Ivory Coast this year aims to limit the public sector
and current account deficits to 0.5 percent and 1.3
percent of GDP, respectively, with further improve-
ment in 1987 and 1988.
? Kenya has liberalized the external payments system
and has instituted strong budget and credit re-
straints. Nairobi's FY 1986/87 budget calls for
larger expenditures on agriculture, incentives to
rural industry, and the reduction of the government
deficit to below 4 percent of GDP.
? Senegal's present emphasis is on the expansion and
diversification of agriculture. The government is
restructuring agriculture's cooperative system and
has raised producer prices substantially, undertak-
ing major tax reform and planning fundamental
changes in industrial policy that will involve in-
creased privatization.
? Zaire's 1986 program aims at further reductions in
the current account and overall balance-of-pay-
ments deficits and at further curbs on inflation
through continued implementation of a flexible
exchange rate, increased budgetary revenues
through higher tax yields, and a restrictive mone-
tary policy.
? Zambia over the past two years removed all price
controls except those on fertilizer and corn, and
introduced a weekly foreign exchange auction sys-
tem accompanied by the removal of import licens-
ing.
In our view, other countries that deserve good marks
in their IMF-backed reform efforts include Madagas-
car, Mali, Mauritius, Niger, and Togo. Among the
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Sub-Saharan Africa: Selected Economic
Indicators, 1978-85
GDP Growth Inflation Rate
Percent Percent
Export Prices Change Import Prices Change
Percent Percent
Outstanding IMF Credit International Reserves
Billion US S Billion US $
group, however, Kenya and Zambia appear to be
backsliding. According to US Embassy reporting,
Kenyan government revenues this year will fall well
short of budgeted expenditures largely as a result of
an unexpected drop in coffee prices. Moreover, the
government has promised unbudgeted pay increases
to the military. These budget overruns will almost
certainly be financed by growth in the money supply,
fueling inflation. Zambia, this year, has exceeded
domestic credit targets, government finances have
worsened, and donor support has been lagging. In our
view, because of its dependence on foreign economic
support for survival, Zambia has little choice but to
continue the reform effort.
Less Aggressive Countries
Other Sub-Saharan countries are approaching eco-
nomic reform with less vigor or in less timely fashion
than their economic circumstances appear to warrant.
Also, in our judgment, leaders in a few of these
countries lack the political will and support to counter
the domestic unrest that may accompany an effective
reform program:
? Liberia's economic adjustment efforts have been
weak since mid-1984 when, in the uncertain politi-
cal climate preceding the 1985 presidential election,
the government neglected its IMF-assisted reform
program. Monrovia's public finances are in disarray
and the government is frequently unable to meet its
payrolls. In an effort to improve the budget situa-
tion, Monrovia this year suspended new government
construction and froze payments to government
suppliers. These measures have backfired by reduc-
ing business-sector confidence, according to US
Embassy reporting.
? Although its decline in oil revenues began in 1981,
Nigeria only started to address its economic prob-
lems seriously this year. The 1986 budget called for
a floating of the naira, a doubling of fuel prices, and
reduced defense expenditures. With the economy in
crisis following the collapse of oil prices this year,
Head of State Babangida announced a two-year
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Secret
Sub-Saharan Africa: IMF-Sponsored Economic
Programs in Effect as of 30 June 1986
structural adjustment program in June. The
program includes a two-tier foreign exchange mar-
ket that will effectively devalue the naira. However,
the two-tier market will not start until October.
Babangida has also promised increased privatization
of government corporations, a restructured tariff
regime, and trade and payments liberalization, but
no specifics have been publicized.
? Sudan's poor record in implementing policy reform
has caused Western donors of economic aid to
question the ability of the present government to
manage the economy. Economic measures adopted
this year include increases in sugar and petroleum
prices and currency devaluations, but these mea-
sures have not been sufficient to satisfy foreign
creditors.
? After over 15 years of socialist policies that have
precipitated economic bankruptcy, Tanzania is be-
ing forced to consider major economic reform at the
urging of foreign donors. So far, no major changes
Ending Date Amount
(Million US $)
have been announced, according to US Embassy
reporting. Since 1978, Tanzania has reduced its
formerly extensive system of price controls, raised
producer prices, reduced deficit financing, and
curbed government employment. Nevertheless,
these measures have not been vigorous enough to
have a significant positive impact, according to the
Embassy.
? Still regrouping in the aftermath of civil war,
Uganda has yet to come to grips with its economic
crisis and the policy failures of the Obote and
Okello regimes. Earlier this year President Muse-
veni engaged a multinational team to provide him
with economic stabilization options by July 1986,
but has not yet announced his decisions. In the
meantime, the country suffers from a critical short-
age of foreign exchange, lack of needed imports for
the manufacturing sector, a bloated civil service,
and high inflation.
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Secret
African economic reform measures carry political
risks for the countries implementing them, in large
measure because the reform programs frequently aim
at redressing biases in favor of the urban population, a
key source of political support and potential unrest.
The political fallout from reform efforts has varied
substantially:
? In Ivory Coast, teachers organized a strike against
reduced housing subsidies in 1983, and elements of
the General Union of Workers attempted to block
certain price increases in 1984. The government has
continued to implement reform and some trade
unions have now endorsed the government's policies,
according to US Embassy reporting.
? On the basis of US Embassy reporting, Zambia's
reform efforts have run into opposition from the
labor movement. In July 1984 the Congress of
Trade Unions threatened to boycott a national
conference on the economy unless an announced 20-
percent price increase for corn was canceled. Ac-
cording to press reporting, key critics of the govern-
ment remain bitterly opposed to reductions in
central planning and subsidies.
? Despite the near collapse of the economy, Nigerian
reform efforts face opposition from government
bureaucrats and elements of the military who stand
to lose privileges, according to US Embassy report-
ing. In our view, the government will be hard
pressed to implement the planned economic
program.
? In our judgment, Tanzania is stymied by a firmly
entrenched bureaucracy committed to socialist ide-
ology and by the behind-the-scenes maneuvering of
ex-President Nyerere who has long resisted an IMF-
sponsored program.
Despite the political risks involved, we believe most
African states will continue to implement some mea-
sure of economic reform over the medium term. They
have little choice in the matter in view of their high
dependence on foreign economic assistance and recog-
nition that some action must be taken. Because of
impatience with Africa's failed economic policies, we
do not foresee change any time soon in donor insis-
tence on reform. Although the reforms carry some
political risks, we do not see the reform movement as
destabilizing for the region as a whole.
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Chinese Oil
Discovery in
Taiwan Strait
Jordanian
Oil Exploration
Agreement Signed
Status of Mexico's
Bank Negotiations
oilfield in the Taiwan Strait near the city Hsin-chu.
Beijing announced last week that it has found two basins in the Taiwan Strait that
probably contain oil and gas. One is between the mainland city Xiamen and
Taiwan's P'eng-hu Islands and is up to 120 kilometers long and 50 kilometers
wide. Beijing will increase the risk of a confrontation with Taipei in the strait if it
decides to exploit these tracts. Taiwan's naval ships pass through this region to
supply garrisions on Chin-men Island opposite Xiamen, and Taiwan considers the
P'eng-hus to be part of its frontline defense. Taipei is also developing an offshore
Hunt will drill at least four exploratory wells.
According to press reports, Jordan signed a production-sharing oil exploration
agreement with the US Hunt Oil Company last week. The new agreement follows
an earlier oil exploration agreement signed in late March with the US firm
Amoco. Under terms of the agreement, Hunt will search for oil in the Al Jafr area
northeast of Al 'Aqabah. The agreement extends for seven and a half years, with
the company obligated to conduct extensive field studies in the exploration area.
Mexico's recent agreement with the IMF has set the stage for talks with
commercial banks.
makes the structural changes needed to put the economy on sound footing.
likely to be prolonged and difficult. In addition, we expect some European and
smaller regional banks to balk at increasing their exposure. In the end, however,
most are likely to fall in line; those opting out will not carry enough weight to jeop-
ardize the loan package. We believe the new financial package would provide a
short-term respite, but the longer term will remain troubling until Mexico City
Because most bankers believe Mexico's needs are overstated, the negotiations are25X1
Cuban
Debt Rescheduling
Difficulties
Cuba has had only limited success in rescheduling official and commercial hard
currency debt, and apparently is facing a severe hard currency shortage. In July,
Havana was forced to agree to tough performance targets-including a current
account surplus and a cut in real imports-before rescheduling current maturities
and official debt coming due from the 1983 rescheduling. Paris Club creditors
committed no new lending and refused to refinance rescheduled debts from 1984
17 Secret
DI IEEW 86-033
15 August 1986
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Secret
and 1985. Negotiations with commercial creditors have been even less successful.
commercial creditors have called Havana's requests for
Tunisian Economic
Pressures Force
Policy Change
Indonesian Central Bank
Comments on
Rescheduling
term commercial credits last month, according to the US Interests Section.
new lending excessive and have insisted that interest payments be kept current
during rescheduling talks. Recent arrearages reflect the rapid erosion of Havana's
hard currency reserves, which we believe total far less than the $150 million
Havana claims. President Castro may believe that payments delays will cause
commercial creditors to cave in to Cuba's rescheduling terms, but the payments
suspensions are more likely to alienate creditors and essentially halt critical
Western imports this year. Japanese traders threatened to halt shipments and to
publicize Cuba's untrustworthiness after Havana suspended payments on short-
increasing social pressures on the shaky Bourguiba government.
Tunis has agreed to IMF targets for a $180 million standby-Tunisia's first major
Fund program-to head off a potentially destabilizing financial crisis. With
economic conditions worsening almost daily, Tunis will begin putting austerity
measures in place this month-including a 15-percent devaluation-before formal
approval of the accord this fall. The Bourguiba government is looking for a $60
million bridge loan from Washington to cover payments needs until IMF funds are
available in October. Tunis also is calling on other Western donors for help; Italy,
France, and Canada have already provided some assistance, according to US
Embassy sources. Stagnating foreign exchange earnings-particularly from oil-
have forced the government to drain its foreign reserve coffers to meet this year's
financial obligations. Foreign aid is needed to help keep the economy running at
least until IMF monies are disbursed, particularly as austerity measures are
implemented. Eroding living standards and sharply rising unemployment are
Brussels
Reaches Debt
Restructuring Plan
Secret
15 August 1986
reserves.
would be "substantially in deficit," and that they expect to reexamine Indonesia's
debt situation after the April 1987 parliamentary election. In our view, Jakarta
might seek to reschedule its foreign debt by mid-1987 if world oil prices do not
firm. We estimate that net external financing requirements for 1986 could go as
high as $5 billion, which would push Indonesia's total external debt above $40
billion. Moreover, Indonesia has substantially
increased its short-term financing-despite dramatic cutbacks in imports in recent
months-suggesting that Jakarta feels the need to conserve foreign exchange
Brussels has reached an agreement with Belgian banks and financial institutions
that will limit interest payments on outstanding loans and help the government
meet its deficit reduction targets. Brussels owes the banks about $32.5 billion,
most of which was borrowed at interest rates of 12 to 14 percent. The agreement,
which is conditional on the government's achieving other parts of its $4.5 billion
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Secret
EC Forging a
Consensus on
GA TT Agenda
deficit reduction plan next year, will limit direct interest on long-term debt to
8 percent. To compensate the banks for the lower interest payments, Brussels will
give them eight-year Treasury bonds issued at 7 percent but pegged to market
rates. Despite the expected savings of $814 million next year, the plan has been
criticized by the opposition, who argue that it only postpones interest payments.
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GATT Meetings on
Services Trade
Japanese Likely To
Restrict South African
Coal Imports
rules, Bonn could be defeated easily.
objections over the treatment of agricultural subsidies prevented agreement at
Geneva during the final GATT preparatory meeting last month. If the French do
not relent at the EC's Trade Committee meeting scheduled for 5 September, Bonn
will try to isolate them by forcing an EC vote to endorse the agenda. A ministerial-
level meeting of GATT members begins 15 September in Uruguay. EC members
agree on most GATT issues, including the need to proceed cautiously on
agriculture in order to avoid further attacks on EC agricultural export subsidies.
Paris is still resolved to protect EC agriculture, but French officials recently
assured US diplomats that the failure in July was a misunderstanding and that
they have no intention of delaying the trade round. An EC vote on the agenda
would in any case be an extraordinary measure, and, under the weighted-voting
probably will be left for the ministers at the Punta del Este meeting.
Brazilian, Indian, and the EC Commission GATT representatives have informally
reached an understanding on the inclusion of services as a topic in the GATT min-
isterial meeting next month in Punta del Este, Uruguay. Their proposal calls for
two successive meetings-one to begin negotiations on goods, the other to take up
the services issue separately. Until now, Brazil and India have consistently opposed
the inclusion of services in the new round, arguing that GATT does not have
competence to handle trade in this area. However, while Brazil and India
apparently are privately willing to discuss the issue, the two-meeting approach
does not guarantee that services will be negotiated. The EC Commission represen-
tative did not consult with EC member-states before these discussions, and he may
lack the support of key countries such as France, West Germany, and the United
Kingdom. While informal discussions will continue, a formal decision on services
Tokyo is now considering sanctions against South Africa that would include a ban
on coal imports. South Africa would lose an export market worth about $400
million a year. Coal is a significant export for South Africa, and Japan has been its
biggest coal customer, accounting for about 20 percent of its exports. South Africa
will have difficulty shifting the coal to other major markets in Europe. The
19 Secret
15 August 1986
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Secret
EC Views on
US-Japanese
Semiconductor Pact
Italian Judges
Freeze Libyan Assets
African
Insect Plagues
Secret
15 August 1986
sanctions.
Europeans almost certainly will not accept higher volumes of coal in light of EC
movements to limit trade with South Africa. Tokyo is unlikely to enact the coal
restrictions unless the United States and the United Kingdom impose additional
port targets for EC products.
EC leaders are considering a GATT action on the 30 July US-Japanese
semiconductor agreement. EC officials believe the deal violates the GATT because
semiconductor prices will be set bilaterally by the United States and Japan, and
US firms will be given preferential access to Japan's chip market. Although
Western Europe imports about 85 percent of its semiconductor needs, European
leaders are taking steps to make their producers more competitive-such as
encouraging cooperation between semiconductor producers-and fear the semi-
conductor deal will undercut European efforts. Even if the EC does not initiate a
GATT action, the agreement is likely to make the EC more reluctant to discuss
high-technology trade during the coming GATT round. EC Commissioners Najes
and De Clerq described the agreement as an "inauspicious prelude" to GATT
discussions of high technology. The EC, however, may cite the agreement as a
precedent in its continuing trade dispute with Japan by insisting that Tokyo set im-
firms may try to attach Libya's 15-percent share of Fiat.
Two Italian firms, seeking payment from Libya for a $4.8 million debt, have
obtained a court order freezing Libyan assets in five Italian banks, and 20 more
creditor firms reportedly have begun similar proceedings. In all, Libya owes
Italian companies $800 million. The freeze is in effect until hearings are held next
May, but judges may grant the request of the five banks for an earlier release of
the funds. Tripoli also has asked the courts to lift the freeze and has threatened to
bar Italian firms from $1 billion in projects under the 1986-88 development plan.
To ease bilateral tensions, Rome would like to prevent other firms from seeking
similar freezes, but the government cannot interfere with court proceedings. Rome
however, is likely to press Libya for token payments in the hope of averting further
court action. Libya probably does not have sufficient assets in Italian banks to cov-
er the total debt, and Italian market analysts have speculated that the unpaid
than that of the famine.
According to reporting from US Embassies and the UN Food and Agriculture
Organization, the insect problem in Africa continues to worsen. The most critical
areas are along the Sudanese-Ethiopian and Malian-Mauritanian borders and
throughout Chad and Senegal. Southern Africa's insect problems also will increase
during the region's rainy season in October and November. Insects are likely to be
a problem for at least five more years, even if control measures improve next year.
Food shortages will probably reappear late this year or early next year, particular-
ly in the Sahel and the Horn, but aid conduits developed in the recent famine
should help limit starvation. The duration and extent of the insect plagues
probably will make the total cost of control measures and food relief even greater
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Tokyo Moves To
Weaken Yen
Japanese Rice
Prices Stable
Developed Countries
Tokyo's further easing last week of regulations governing the holding of foreign se-
curities by Japanese insurance companies, trust banks, and small financial
institutions is designed to stimulate capital outflows and weaken the yen-which
hit a record 153 per dollar early last week. The new regulations raise the share of
insurance company and trust bank pension account assets that can be held in the
form of foreign securities from 25 to 30 percent-the second increase in the last
five months. Moreover, the Finance Ministry is eliminating a "voluntary"
regulation that restricted the increase in insurance company holdings of foreign
securities to 40 percent of the monthly increase in total assets. On a smaller scale,
the Finance Ministry also lifted a ban on foreign asset holdings by credit
corporations and expanded the number of farm credit cooperatives allowed to
invest in foreign securities from 17 to 47. Tokyo estimates these moves could
expand holdings of foreign securities by $25 billion-nearly one-half of these
institutions' current holdings of overseas securities. The effect on the yen will
depend on how fast the financial institutions take advantage of the new limits.
In exchange for farmers agreeing to a new method for setting prices that may lead
to a reduction in price supports next year, Prime Minister Nakasone this week
froze the price the government will pay producers for rice at the 1984 level-al-
most three times the US price. Nakasone's compromise decision ends this year's
battle between the Liberal Democratic Party, which generally advocates generous
price supports that benefit key farming constituencies, and proponents of a price
cut-the Finance and Agriculture Ministries. The Ministries wanted to lower the
producer price of rice by 3.8 percent to reduce the 420 billion yen (nearly
$3 billion) deficit in the Food Control Account-which uses funds from the
Agriculture Ministry budget to fill the gap between the price consumers pay and
the amount producers receive. Budget cutting efforts in the past have led to cuts in
other price support programs, such as for dairy products, but political consider-
ations and the public's desire for rice self-sufficiency have blocked subsidy cuts in
this area.
Britain's Experimental
Aircraft Program
The first flight last week of Britain's next-generation fighter aircraft testbed
(called the EAP) under the Experimental Aircraft Program, is a major milestone in
Britain's long-term investment in advanced aviation technologies. The program
alone has already cost some $270 million, of which the Defense Ministry
contributed just over $100 million; British Aerospace, Italy's Aeritalia, and other
minor contributors made up the balance. An additional $75 million or so is needed
for EAP flight testing, according to defense attache reporting. British Aerospace
officials hope this large investment will position them to take the lead on the
European Fighter Aircraft (EFA). According to our analysis, British developments
in advanced airframe composites, jet engines, and airborne attack radars are on
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15 August 1986
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Secret
Malta's Development
Plan Focuses on
Job Creation
South Africa
Weighs Sanction
Countermeasures
Morocco
Weighing Austerity
Secret
15 August 1986
place at the Farnborough Air Show late this summer.
the leading edge of European aviation technology. The composite wing of the EAP,
in particular, incorporates state-of-the-art technology to reduce weight and
improve maneuverability. The first public flight of the EAP will probably take
additional imports for the public works projects.
Last month the Maltese Government introduced a three-year development plan
that overoptimistically aims to reduce unemployment from the current 8.7 percent
to 4 percent by yearend 1988. The goal is to create 10,800 new jobs-half through
public works projects to improve the islands' water and electricity distribution
networks, upgrade roads and housing, and build a yacht marina and airport
terminal, and half through the private sector. Valletta will assist industry by
streamlining export and import procedures, providing startup and expansion
capital at low interest rates, and increasing manpower training. The Labor
government delayed the release of the plan by six months so the party could use it
to launch its campaign for a national election, due by May 1987. The plan may
backfire, however, because the ambitious projects will be costly and are not likely
to create enough jobs to meet the government's expectations. Financing the plan
will also put Malta's budget into deficit and increase the islands' foreign debt. In
addition, the trade deficit will probably deteriorate because Malta would need
exporters, according to Embassy reporting.
South Africa is considering countermeasures against possible sanctions on its
mineral exports. According to Embassy reporting, Pretoria may use foreign-flag
ships, offshore trading companies, false bills of lading, and overseas stockpiles.
South Africa also may enact countersanctions such as quotas on mineral sales to
offending countries. In addition, mineral exports to Yugoslavia, Israel, China,
Portugal, and Taiwan are possible, with resale to sanctioning countries expected
from these targeted markets. Furthermore, South African business officials have
threatened to sell minerals such as platinum to the Soviets who are currently net
Morocco has launched a "trial balloon" to gauge public reaction to reforms Rabat
must implement to ensure approval of a new IMF program, continued access to
World Bank funds, and a successful rescheduling of commercial debts. In an
unusual front page interview in the government daily in July, Finance Minister
Berrada spoke strongly in favor of controversial austerity measures-including
reduced consumer food subsidies and investment tax breaks-to right the ailing
economy. Berrada also advocated other adjustments long-endorsed by the interna-
tional community such as increased competition, government deregulation, and
privatization. Until now, the government has not publicly acknowledged that
drastic adjustments are necessary, fearing a repeat of the bloody January 1984
riots. Nevertheless, growing financial difficulties stemming largely from sluggish
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Secret
`- Libyan Reliance on
Foreign Nuclear
Expertise
South Korea's
First Trade
Surplus Likely
,New Foreign
Bank Rules in
South Korea
Berrada's speech.
earnings-Morocco's foreign reserves now cover less than two weeks' worth of
imports-leave the government with little choice. The extent of Rabat's reform
efforts, or at least the timetable, may well be determined by domestic reaction to
Libya is seeking foreign expertise to aid its developing nuclear program, which 25X1
suffers from a lack of qualified indigenous personnel. Although Libya currently is
engaged in nonsensitive nuclear cooperation with several Third World and Eastern
Bloc governments and firms, this assistance has proved piecemeal and unsatisfac-
tory to the Lib ans.
circles, private and governmental.
Center as of this summer. Earlier this summer, Al-Fateh had reportedly offered
positions, possibly nuclear related, to nine Indian academics. Links to individual
foreign nuclear scientists can provide Libya an entree to other national nuclear
Favorable external factors have helped Seoul post an $845 million trade surplus in
the first half of 1986, putting South Korea within range of an estimated $1.6
billion surplus for the year, according to the US Embassy. During first half 1985,
the trade deficit was $527 million. Largely because South Korea's crude oil bill 25X1
was slashed by one-third, or $830 million, imports grew only 10 percent, less than
half the increase in exports. The won-which has fallen by 21 percent against the
yen since January-has made Korean products more competitive in the European
and Japanese markets where exports grew 40 percent and 10 percent, respectively.
In the US market, exports through June increased 28 percent to $6.4 billion, while
imports dipped to $3.2 billion. The surplus-various forecasts put the 1986 current
account surplus in the $1-1.6 billion range-has led economic policymakers in
Seoul to increase their forecasts of real GNP growth from 8 to 10 percent.
Nonetheless, according to the press and US Embassy reporting, South Korean
technocrats recognize that international trends could reverse, and they are using
this year's windfall to stem the growth of a $47 billion foreign debt. They also rec-
ognize that increasingly lopsided trade with the United States could aggravate the
battered bilateral trading relationship. Seoul is probably already worried that new
US pressure to redress the trade imbalance in the wake of South Korea's recent
concessions on insurance and intellectual property rights and Washington's call for
a revaluation of the won vis-a-vis the dollar could rekindle anti-US and antigovern-
ment actions by radical and moderate opponents of the Chun presidency.725X1
Seoul continues its policy of gradually according equal treatment for foreign and
domestic banks, according to the US Embassy. New rules announced in July,
however, confront foreign bankers with a dilemma. In making the choice between
accepting the more equal treatment available under the new regulations or 25X1
continuing operations under the old rules, bankers must balance the value of the
23 Secret
15 August 1986
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Secret
'- South Korea
banks.
additional lines of business open to them under the new plan against the costs im-
posed by restrictions on banking activities that their homegrown counterparts have
always faced. The major new benefit long sought by foreign bankers is access to
the rediscount window of the Bank of Korea-a major source of loanable funds for
domestic banks. In return, foreign banks must set aside 35 percent of loanable
funds for small- and medium-sized firms. In addition, the new rules reduce the
profits from rediscount privileges for both foreign and domestic banks. Moreover,
the revised regulations reduce much of the profit on foreign exchange holdings that
are guaranteed by the Central Bank. The US Embassy reports that foreign
bankers will take their time in evaluating the new plan-something Seoul may
well have counted on to protect the technically insolvent domestic commercial
Almost a year and a half after Washington formally asked its allies to join in SDI,
Begins Looking at Seoul has iust begun serious discussions, and a favorable decision is far from
SDI Participation
and lacks the influence to sway government decisionmakers.
contrast to the interest of other US allies in acquiring high technology via SDI for
commercial gain, the South Korean SDI debate focuses more on long-term
strategic and near-term political risks SDI might spawn in the peninsula and the
surrounding region. Seoul is also concerned that participation in SDI could present
one more hurdle to the Soviets taking part in the 1988 Olympics. While South
Korea could conceivably contribute peripherally to SDI in several areas-
computers, metals, and fiber research-its industry has yet to take a stand on SDI,
Orders on Hold 500,0000-metric-ton order from the Italian firm Italsider for Arctic-grade large
diameter pipe scheduled for delivery in second half 1986, citing hard currency
shortages. Negotiations for another 400,000 tons of pipe stalled after Soviet trade
representatives insisted that a Japanese consortium reduce its price by 20 percent
to compensate for the recent appreciation of the yen. We believe these actions are
merely Soviet negotiating tactics. A cutback in pipe imports would slow West
Siberian gas development, retarding growth of gas output and interferring with
large-scale substitution of gas for oil. The Soviet gas industry has traditionally
been dependent on Western line pipe, and these orders represent about four
months' supply at current rates of construction. As the largest importer of large di-
ameter pipe, the Soviets have in the past used similar tactics to negotiate price.
The Italians may be willing to reduce their price or offer cutrate financing because
loss of Soviet business will seriously hurt heavily subsidized Italsider. The
Japanese, however, may balk because they reportedly are now offering the pipe at
cost.
Secret 24
15 August 1986
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Secret
Soviet Mine Flood
Threatens Potash
Exports
A potash mine at Berezniki, representing about 15 percent of domestic capacity,
was completely flooded in April when the Soviets ran into a water-bearing rock
formation. the mine probably will not reopen before
1990. The USSR, the world's second-largest source of potash, exported about one-
third of its total production in 1984. A halt in potash exports to the West would
cost the Soviets nearly $100 million (in 1986 prices) annually and would
exacerbate Moscow's unfavorable hard currency position. On the other hand,
diversion of potash exports to Eastern Europe for domestic use would force these
countries to purchase potash from the West, worsening their hard currency
positions. In addition, this could disrupt shipments of other commodities to the
USSR under bilateral trade agreements with Eastern Europe. Shortfalls in
domestic potash supplies, however, would lower Soviet crop yields and undermine
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Hungary Passes
Bankruptcy Law
China's Economic
Reformers Removing
Obstacles
the goals of the Food Program.
trade obligations, or affect defense interests.
To promote competition, efficiency, and financial discipline among state industrial
companies, Hungary recently adopted judicial procedures for liquidating chronic
loss-making companies when such companies and their creditors cannot agree on
actions to restore solvency. Under the new bankruptcy law, which will take effect
on 1 September, creditors of insolvent firms have the right to initiate liquidation
proceedings. Various government officials have stressed that budgetary constraints
and the need to restructure the country's industrial base preclude the continued
subsidization of poor performers. According to Finance Minister Hetenyi, about
30 major companies may be affected. Budapest, however, will be reluctant to face
the economic dislocations that wide-scale bankruptcies would cause, and probably
will give many of these companies an opportunity to develop restructuring plans-
under previous procedures the regime attempted to liquidate only two enterprises.
Earlier this year the state forgave the debts of Hungary's three largest steel
companies after they developed restructuring programs to produce more profitable
higher grade steels. Even under the new law the state may bail out firms whose
bankruptcy would cause major goods shortages or job losses, interfere with foreign
Beijing's economic reformists have recently begun to get tough with local party
and state officials guilty of resisting urban reforms designed to expand enterprise
decisionmaking power. In the last month, Beijing has convened numerous meetings
of provincial Communist Party disciplinary and propaganda bureau officials and
criticized them for not giving sufficient support to local reform efforts, according
to Chinese media reports. Reformist leaders have often accused these local
officials of hampering reforms by overly aggressive enforcement of China's vague
system of economic laws and regulations, and by failing to give local reformist
leaders favorable publicity. On 30 July, a high-ranking party official argued that
implementing reforms "will certainly violate some old rules and regulations," but
that local disciplinary officials should not be "sticks in the mud" regarding
legitimate reforms. Also, the government recently canceled several hundred
"outdated" laws that it claims hampered the reform drive. These moves are part of
a larger effort by Beijing's reformist to give local allies more room to experiment
by by low some of the legal constraints of the old centralized economic system.
25 Secret
15 August 1986
I Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-0077OR000100460001-2
 .
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100460001-2
Secret
China Opens
Experimental
Bond Market
China's Debate
Over Ownership
Systems
Secret
15 August 1986
collective enterprises sell to employees.
The city of Shenyang has opened China's first securities market that will deal
exclusively in bonds issued by industrial enterprises. Chinese enterprise bonds are
interest-bearing securities that in some cases may pay additional bonuses based on
enterprise profits. Although the bond prices on the Shenyang market will be set
primarily by the People's Bank of China, Chinese media reports indicate that
prices will reflect market demand and sellers' "proposed prices" to some degree,
suggesting that the market could sanction speculation on interest rates and
enterprise performance within narrow limits. Beijing does not permit state
enterprises to issue equity stocks, and normally forbids trading in shares that some
and price reforms, possibly as early as next year.
China's decision to open a small-scale bond market in the northeastern city of
Shenyang last week is part of a larger, politically sensitive debate now under way
over state ownership and control of enterprises. Since last spring, some leading
reformist economists have called publicly for the establishment of capital markets
for state and collective enterprises-including stock markets in major Chinese
cities-and greater autonomy for enterprise managers to adjust to market
demands. Reformers are also debating measures to give state enterprises greater
freedom to hire and fire workers, to create labor markets, and to permit inefficient
state enterprises to declare bankruptcy. By discussing their proposals now, as
preparatory meetings for the fall party plenum begin, reformers are trying to seize
the high ground in the debates over the economy. Infighting over high-level
personnel changes and uncertainty over the economic impact of the reforms will
limit the reformers' maneuvering rooms. If these reforms are successful, however,
party reformers hope to push for expanded enterprise autonomy, as well as wage
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-00770R000100460001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-0077OR000100460001-2
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-0077OR000100460001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-0077OR000100460001-2
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/01/25: CIA-RDP97-0077OR000100460001-2