NEAR EAST AND SOUTH ASIA REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP05S02029R000300970003-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 22, 2016
• Document Release Date: July 27, 2012
• Sequence Number: 3
• Publication Date: October 9, 1987
• Content Type: REPORT

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Directorate of
Intelligence
Near East and
South Asia Review
9 October 1987
Sccrct
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NESA NESAR 87-023
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Near East and
South Asia Review
9 October 1987
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Articles Middle East: Economic Relief Despite Long-Term Problems
The short-term economic outlook for most countries in the Middle
East has brightened as a result of government austerity measures
and the increase in earnings for oil exporters. Basic problems facing
the economies?including a large debt burden and high
unemployment?have not been resolved, however, posing a longer
term challenge.
The Impact of Canceling the Lavi on Israel's Aircraft Industry
Israel's decision to kill the Lavi fighter aircraft program will force
the country's largest defense firm?Israel Aircraft Industries?to
restructure itself. Despite government efforts to minimize the
impact of the cancellation, Likud politicians will seek to keep the
issue alive in anticipation of next year's national election.
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Lebanon: Junblatt's Motives for Sending Fighters to Libya
Druze leader Walid Junblatt's decision to send fighters to Libya in
its war against Chad is motivated largely by economic factors.
Political concerns also played a significant part, however, because
the request from Libya provided Junblatt with a means of ridding
himself of political opponents within his militia.
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Lebanon's Communist Party
The increased interest of the Soviet Union in Lebanon, combined
with the failures of Western-inspired solutions for peace in the area,
have laid the groundwork for an increased role for the Lebanese
Communist Party. Nevertheless, the party is hindered by the growth
of Islamic fundamentalism in Lebanon and recurring Syrian
animosity.
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NESA NESAR 87-023
9 October 1987
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Sudan's Economy: Is Reform Possible?
Khartoum and the International Monetary Fund have worked out a
reform package that is scheduled to be implemented sometime this
fall, but much more will be necessary before sustained economic
recovery can begin. In the interim, the economy will remain a source
of vulnerability to whatever Sudanese ?vernment is in power.
Egyptian Counterterrorist Units: Limited Capabilities
Cairo's efforts to develop counterterrorist forces have intensified
during the past few years, but progress toward this goal has been
slow and hindered by economic constraints. As a result, Egypt's
dedicated counterterrorist units remain largely incapable of
fulfilling their missions.
Iraq's Security Services: Saddam's Ruthless Octopus
President Saddam Husayn's pervasive and ruthless security services
have thwarted coup attempts by the Iraqi Army, Ba'th Party, and
Iraqi dissidents. The effectiveness of the services has helped Saddam
to prosecute the war with Iran as he sees fit and will help fend off
challenges to his rule after the war's end.
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United Arab Emirates: Economic Disparities Test the Federation
Economic growth in the United Arab Emirates in the next several
years probably will be insufficient to provide adequate jobs for the
growing number of well-educated youth and will further frustrate
federal efforts to deal with regional economic disparities.
The Impact of Corruption on Stability: A Look at Oman
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Government graft has been linked to Sultan Qaboos's reign since he
seized power from his father in 1970. Most Omanis do not perceive
this as drastically deviating from accepted norms or tangibly
damaging Oman's prosperity,
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Brief
Syria: Construction Projects in South Lebanon
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Some articles in the Near East and South Asia Review are preliminary views of a
subject or speculative, but the contents normally will be coordinated as
appropriate with other offices within CIA. Occasionally an article will represent
the view of a single analyst; an item like this will be designated as a
noncoordinated view.
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Near East and
South Asia Review
Articles
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Middle East: Economic Relief
Despite Long-Term Problems
The short-term economic outlook for most countries
in the Middle East has brightened. We believe that
government austerity measures and the increase in
earnings for oil exporters have laid much of the
groundwork for a slow economic recovery. GDP
growth of 2 percent is likely in the region in 1988 if,
as we estimate, oil prices average $18 to $21 per
barrel. Real economic activity probably will contract
0.5 percent in 1987 as compared with 4.6 percent in
1986 and 1.6 percent in 1985. The combined Middle
Eastern current account and budget deficits for 1987
probably will be about 25 and 10 percent lower,
respectively, than their 1986 levels. With a few
exceptions?Lebanon, Syria, and Libya?economies
in the region seem to have adjusted to the regional
recession and austerity measures of the last two years.
Despite the evidence of an upturn, basic problems
facing the economies?including a large debt burden
and high unemployment?have not been resolved.
They will continue to test government efforts to
modernize and maintain political support in the long
run.
Background
Hard currency earnings plummeted during 1985 and
1986 in the Middle East because of lower oil demand
and prices, reduced tourism receipts, and the lower
value of the dollar. In addition, remittances to labor-
exporting countries such as Jordan, North Yemen,
and Sudan fell significantly as thousands of workers
returned home because of fewer job opportunities in
the Gulf states. Only a few non-oil-producing
countries in the region?Israel, Jordan, Mauritania,
and Morocco?increased growth in 1986, helped by a
combination of lower oil prices and good harvests.
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Virtually all of the governments in the region
implemented austerity measures to cope with the
recession. They voluntarily cut development
expenditures, reduced wages and benefits, slashed
imports, and increased taxes to reduce budget and
current account deficits, according to press and US
Embassy reporting. Mauritania, Morocco, and
Tunisia were willing to reform their economies along
International Monetary Fund (IMF) guidelines?for
example, increasing prices of some goods such as
bread and gasoline, controlling money supply growth,
and devaluing their currencies. Austerity measures
further dampened or reversed growth, especially in
sectors heavily dependent on government spending,
such as construction and trade. We believe that tight
budgets forced the richer Arab states to more
carefully consider their foreign aid policies. For
example, the Saudi Government more closely reviews
the intended uses of, and potential returns from, its
aid commitments, according to the US Embassy in
Riyadh.
As a result of OPEC compliance with the 1986
production quota agreement, average crude oil prices
rose from a low of $12.80 per barrel in the third
quarter of 1986 to about $17.60 per barrel in the
second quarter of 1987. Oil revenues of Gulf
Cooperation Council members, which declined by 32
percent in 1986, rose over 6 percent during the first
seven months in 1987, according to reliable economic
press. OPEC members led by Iraq, Kuwait, and the
UAE have recently exceeded their 16.6 million
barrels per day production quota by over 2 million
barrels per day, but oil prices have not fallen
significantly primarily because of the risk premium
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NESA NESAR 87-023
9 October 1987
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Percent
10
B
4
2
0
-2
-4
-6
-8
to
MIDDLE EAST Se NORTH AFRICA ill
REAL GDP GROWTH RATE a
1982 83 84 85 68
87o 88b aac
FOREIGN EXCHANGE RESERVES
Billions of US Dollars
100
90 -
Bo - 74.9
2.0 701
60
46.9
Ill 54.2
50
40 -
90 - 41.4
38.6 33.8 98.7 mu 40.6
20-
10 - 1111111
0
88d 1982 83 84 85 86 870 aso 880 88d
CURRENT ACCOUNT BALANCES f
Billions of US Dollars
7
1_11.11-?!
-20.7 _23.6
50
40-
30-
20-
10
-so
7
-20
7
- 20.8
-20.5
-90
7
-28
-27.5
-40
-
-BO
83
84
85
88
1982
87o aft aac 88d
BUDGET DEFICFf f
Billions of US Dollars
0
-10
-20
-30
-40
-50
-60
-70
ADO
-SO
MW
1982 83 64 85 88 87a 88b 88c Bad
a: Oil prices at $113-19/barrel
b: Oil prices at $1.13-21/barrel, most likely scenario
c: Oil prices at $15-18/barrel, less likely scenario
d: Oil prices at VI/barrel or above, least likely scenario
e: Weighted average, estimated
f: Estimated
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AVERAGE CRUDE OIL SALES PRICE-41
US $ Per Barrel
1
7
/
Z
I II III IV I II III IV
1985 1986
7
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Egypt: Case Study in Local Business Expansion
Many Egyptian businessmen have begun to
manufacture consumer goods locally, particularly
finished textiles and processed foods, rather than
becoming importers, according to US press reports.
As a result of the devaluation of the Egyptian pound
by almost 60 percent in May 1987, Egyptian demand
for locally produced clothing soared in preference to
more expensive European clothing. In addition,
factories are beginning to sell their products abroad.
The government would like to expand private-sector
industrial production?currently one-third of total
industrial production?because it believes that the
private sector is more efficient than the public sector.
The government is offering new incentives to local
manufacturers?a 10-year tax exemption for new
factories, customs exemptions for machinery imports,
and the elimination of some of the bureaucratic red
tape involved in exporting.
associated with increased tensions in the Persian Gulf.
Most private-sector oil market analysts expect prices
to remain in the $18 to $19 range for the remainder of
the year, a view that we support.
Some Positive Signs for 1987
A more optimistic atmosphere prevails throughout the
region:
? According to press and US Embassy reporting,
domestic shortages of consumer goods have eased in
Iran and Sudan. Payments to suppliers have become
more punctual in Algeria, Egypt, and Sudan.
? Industrial and agricultural sectors in countries such
as Iraq and Morocco are likely to perform better
following government reforms aimed at reducing
bureaucratic delays and expanding production.
? Tunisia has met the targets presented in the 1986
IMF standby agreement for reducing current
account and budget deficits.
? Saudi businessmen have begun to restock
inventories and report renewed confidence in the
economy, according to the US Embassy in Riyadh.
? Banks in Kuwait are cautiously resuming lending to
local businesses, according to press reports.
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Higher oil prices have enabled the oil producers to
recover more quickly from slow economic growth than
nonoil states. Construction firms that remained in
business despite the recession have already benefited
from higher levels of government spending. So far in
1987, Saudi Arabia and Kuwait have significantly
increased awards for housing and small development
projects. The US Embassy in Riyadh indicates that
the Saudi economy has begun to expand again. The
Omani Government has issued a scaled-down version
of the five-year development plan that it originally
shelved in 1986, according to the US Embassy in
Muscat. Spending under the new plan probably will
begin in late 1987, and more than half the outlays will
focus on completing old projects.
Remittances to some labor-sending Arab countries
began to increase slightly in 1987. The oil-rich Gulf
states?short on domestic technical, construction, and
management manpower?have slowly resumed their
hiring of foreign Arab labor. Workers from labor-
sending countries also increasingly are seeking
employment in Western Europe and North America.
Tourism in countries such as Egypt, Jordan, and
Tunisia has recovered strongly after the slump of late
1985 and early 1986, according to press and US
Embassy reporting. Arab and Western tourists are
returning in greater numbers, largely because of
improved facilities, fewer terrorist incidents in the
area, and more favorable exchange rates.
In contrast to other developing nations, most Middle
Eastern countries have relatively low inflation. Cuts
in government expenditures and freezes on public-
sector wages have helped to control inflation. Annual
rates range from 2 percent in Jordan and Tunisia to
about 20 percent in Egypt, Israel, and North
Yemen?as compared with 35 percent in Latin
American developing nations. Syria and Lebanon are
exceptions, with annual inflation of about 100 and
200 percent, respectively?mainly the result of large
military expenditures and overvalued currencies.
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Lessons Learned From the Recession
We believe the recession has led some governments to
take a more pragmatic approach to economic decision
making. It remains to be seen how lasting this
approach will be, but positive changes include:
? The governments in Tunisia, Morocco, and Jordan
have increasingly pursued economic diversification,
stressing light industries?without heavy capital
outlays?to increase foreign exchange earnings and
job opportunities. According to the US Embassy,
Tunisia will encourage labor-intensive rather than
capital-intensive investment?an appropriate choice
for countries with high birth and unemployment
rates.
? Some countries are trying harder to promote
exports. Morocco is marketing its phosphate
products more aggressively even though prices
remain depressed. Jordan probably will expand
agricultural exports as much as 5 percent in 1988,
as a result of the government's attempt to encourage
farmers to grow crops in demand in other Arab
countries. Devaluations in Egypt and Tunisia have
boosted textile, leather, and food product exports.
? Some countries are attempting to offer more
incentives for private investment and capital
formation. Saudi Arabia, for instance, has decided
to transfer jurisdiction over bank loan disputes from
the courts to the Saudi Arabia Monetary Agency,
which probably will rule more fairly and quickly,
Lingering Strains
Although austerity measures and higher oil revenues
have removed some difficulties created by the 1985-
86 recession, fundamental problems persist and will
plague government efforts to increase economic
development and maintain political stability.
Debt. The region's combined nonmilitary debt is over
$140 billion, with annual debt service payments of
about $30 billion, according to our estimates. The
North African countries, except for Libya, have been
the heaviest borrowers. Iraq also has increased its
borrowing substantially since 1983 to cover deficits
and is continually trying to reschedule its debts.
Borrowing by Egypt and Algeria has increased their
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already high debt service ratios to over 50 percent
each. International financial institutions consider a 25
percent ratio to be dangerous.
The IMF and other international lending
organizations have played an important role in
negotiating bilateral debt agreements in some cases,
according to US Embassies in the region. For
example, the IMF has helped Tunisia obtain
additional aid. The Paris Club?a group of
international creditors?has provided Egypt and
Morocco some short-term relief by allowing them to
reschedule $12 billion and $900 million, respectively,
of debt service payments as a result of IMF approval
of the governments' economic reform programs. The
IMF and other international institutions, however,
have been forced to put pressure on some debtors,
such as Sudan and Syria, to meet their commitments.
Unemployment. Many Middle Eastern states?
especially Algeria, Bahrain, Egypt, and Tunisia?
continue to face severe unemployment problems that
contribute to social unrest. Rapid population growth,
increasing female participation rates, and growing
urbanization throughout the area feed the problem
and hamper government attempts to meet the growing
demand for jobs. As a result of budget cuts
throughout the region, college graduates are no longer
assured employment in desired government positions.
Unemployment estimates range from 18 to 25 percent
in North Africa. Maghreb countries have had to lay
off workers in the automobile, cement, and phosphate
industries, according to US Embassy reporting.
Tunisia's 1987 budget calls for the creation of 40,000
jobs, but 69,000 young Tunisians will enter the labor
market this year.
Bahrain was particularly hard hit by the recession and
was forced to lay off a large number of workers.
According to US Government officials, 15 percent of
the population is unemployed, with the majority of
these Shias. We believe further large layoffs will
occur to avoid bankruptcies in major Bahraini
industries.
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e
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SELECTED DEBT SERVICE RATIOS
1980---1985
Algeria
Egypt
Structural Inefficiencies. We believe that too often
governments in the region have pinned their hopes for
the future on the continued strength of some sectors of
the economy?such as hydrocarbons, phosphates, and
remittances by expatriate labor?rather than
diversifying economic activity. In addition, political
expediency?rather than market processes?has
played a major role in the course of economic growth.
The Persian Gulf states have not sufficiently
diversified their economies?resulting in the potential
for "feast or famine," given oil market conditions.
Countries such as Algeria, Syria, and Iraq invested
heavily in public-sector industry in the 1970s and
early 1980s, but the returns have been poor and there
have been chronic shortages of raw materials and
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Tunisia
Legend
BM 1980
IBM 1985
spare parts because of foreign exchange shortages.
Nationalized industrial sectors throughout the region
are not competitive in international markets for
manufactured products. The Egyptian labor force has
experienced a serious decline in productivity,
according to the US Embassy in Cairo. Managers
blame low productivity on labor laws that protect
unproductive workers, while workers blame low wages
and poor working conditions.
Defense. Libya, Syria, Iran, and Iraq suffer the
distorting and inflationary effects of heavy defense
spending. The Iran-Iraq war continues to be a
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financial burden to the two antagonists, with each
spending about 40 percent of its budget on military
expenditures.
Food. The Middle East constitutes the fastest growing
food deficit region in the world. Self-sufficiency in
food production is an aim of Middle Eastern and
North African governments, but few are likely to
achieve the goal because of soil deficiencies, water
scarcities, and the harsh climate. Several countries in
the region?including Egypt, Iraq, Kuwait, Saudi
Arabia, and the UAE?import at least 60 percent of
their food requirements.
Prospects Linked to Oil Prices
The economic outlook for the Middle East will
continue to depend largely on the vagaries of the
world oil market, which in turn will depend on
tensions in the Persian Gulf and the intensity of
disagreements among OPEC members over oil prices
and production levels. In all of the scenarios that
follow, there will be some short-term improvements?
such as higher remittances and tourism receipts. In
addition, recent devaluations in some countries
probably will continue to help boost nonoil exports.
Recent optimism, however, probably would evaporate
if the Iran-Iraq conflict widens.
Under the most likely scenario of OPEC compliance
with production quotas?or even minimal
overproduction?oil prices probably will average $18
to $21 per barrel in 1988. Given these prices, no
significant disruption of exports through the Gulf, and
modest improvements in government efficiency, real
GDP growth of about 2 percent could be achieved in
1988. The richer oil-producing states probably will
have enough revenues to reduce current account and
budget deficits and increase aid to poorer Arab
neighbors. Most governments in the region probably
will proceed gradually with their modernization
policies, continuing to restart some development
programs that had been postponed and even
developing a few new small projects. Poorer oil
producers such as Egypt and Tunisia probably will be
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able to reduce their large foreign debts. Nonoil states
such as Morocco and Sudan almost certainly will
request more aid from the United States and the
richer Gulf states to help pay for their higher oil
import bills.
If OPEC significantly overproduces in 1988 and oil
prices fall to $15 to $18 per barrel, the region
probably would record GDP growth of about 1
percent. If the Iran-Iraq war ended, there would also
be downward pressure on prices as both countries
increased oil production. At the same time, Iran and
Iraq almost certainly would request aid from the
Persian Gulf states to help fund economic
reconstruction.
A unified effort by oil producers to reduce output and
drive up oil prices to $21 per barrel or more could
push GDP growth above 2.5 percent in the short run if
oil exports could be sustained. If oil prices rose
because of a spread in the Iran-Iraq conflict, some
countries, such as Kuwait and Saudi Arabia, might
face damage to their oil export capabilities and
decreased economic growth.
In the long run, problems such as debt, rising
unemployment, and structural inefficiencies will
constrain economic growth in the Middle East.
Shortages of trained managerial and technical
personnel will hinder efforts to improve productivity.
Population will continue to increase rapidly, causing
continued pressure on social services and food
supplies. Cumbersome and cautious decisionmaking
processes, as well as regime concerns about political
stability in the face of austerity programs, almost
certainly will lead to procrastination and loss of
critical momentum on economic reform. The outlook
is bleakest for countries that lack both resources and a
commitment to reform their economies, such as
Lebanon, Sudan, and Syria.
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The Impact of Canceling the Lavi
on Israel's Aircraft Industry
Israel's decision in late August to kill the Lavi fighter
aircraft program will force the country's largest
defense firm?Israel Aircraft Industries (IAI)?to
restructure itself. The state-owned firm will lose more
than $200 million per year in Lavi contracts as a
result of the canceling of the plane, and it also faces
stiff penalties for terminating Lavi-related contracts
with US firms. Moreover, as many as 3,000 skilled
IAI workers face layoffs. Some of these workers may
be considering job offers outside Israel?such as
assisting South Africa to modify Mirage III fighters.
Many, however, are likely eventually to be rehired by
IAI to work on advanced avionics and alternative
airframe programs, and others will be absorbed by
private Israeli high-technology firms.
The full impact of scrubbing the Lavi has been
minimized and delayed by Israel's decision to allot
IAI its full Lavi funding this year, even though the
plane is no longer being developed. In addition, the
22,000-strong, politically potent work force of the
firm has been promised $100 million in annual
government subsidies to help defray defunct Lavi
contracts. Part of these subsidies will go to continued
development of the third Lavi prototype, which is to
be used as a test bed for Israeli avionics systems,
according to This
will further soften the impact of the cancellation of
the program and will allow Israel Aircraft Industries
to retain many of its key aeronautics experts.
Lavi?Only One of IAI's Problems
According to the
IAI was in
serious financial trouble?as are many of Israel's
defense firms?even before the Lavi was killed. Cuts
in Israel's defense budget have reduced orders by the
military for IAI products, forcing the company
increasingly to seek overseas markets. Even with their
typically aggressive marketing strategies, the Israelis
recognized that export sales were unlikely to stave off
growing budget deficits. Instead, IAI had formulated
plans? before the Lavi program was scrapped?to
fire as many as 1,500 employees.
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Personnel benefits at IAI are unusually attractive and
prohibitively costly for the company. Engineers work
only about 32 hours per week and are paid better than
the average Israeli worker, who puts in 47 hours per
week. Severance benefits, which have become
particularly important with the Lavi's termination,
are also generous. Each engineer laid off will be paid
the equivalent of four years' salary?about $55,000.
In addition, a wasteful 25 percent of IAI's work force
are service and administrative employees, some of
whom were targeted for layoffs long before Lavi's
cancellation.
Lavi Termination Forces Restructuring
Lavi contracts accounted for nearly one-fourth of
IAI's workload during the past five years. More than
5,000 of IAI's 22,000 workers devoted their efforts to
developing the Lavi, and the company received more
than $200 million annually for Lavi contracts.
Largely because of money for Lavi development, IAI
expanded to an unmanageable size, according to the
and several unprofitable factories have
survived only because of infusions of US aid for the
Lavi. The Ramta plant in Beersheba, a perennial
money-loser for IAI, is a good example. Despite losing
money for years, the plant remained open in
expectation of fabricating components for the Lavi.
The Lavi's scrubbing will allow IAI management to
close the plant and cut losses.
IAI staked much of its international reputation on
developing and manufacturing the Lavi and now must
rebuild its image by boosting other less prestigious
weapons programs. Although the principal focus of
IAI in past years has been on the Lavi, the company
produces and is developing a wide variety of products
that can employ many, but not all displaced Lavi
workers. Some of the more promising projects are:
? Phantom 2000 radar. A new advanced technology
radar built by the electronics firm ELTA that IAI
hopes to incorporate in F-4E aircraft.
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The Israeli Air Force Reaction
Israel's air force long opposed the Lavi program on
the grounds that the money could be spent more
efficiently by buying proven US aircraft, with enough
left over to purchase other badly needed weaponry.
For years, the air force's plans have been complicated
by the Lavi's uncertain future and ravenous funding
demands. With the termination of the expensive and
controversial fighter, air force planners for the first
time in over five years can develop a cohesive long-
term force plan and explore alternative projects and
weapon systems.
? Falcon airborne early warning aircraft. The future
Israeli electronics collector to complement E-2C
Hawkeye and Boeing 707s. This Israeli version of
AWACS probably will get additional funding with
Lavi's demise. A potentially lucrative export
product.
? Kfir and A-4 upgrading programs. Since the air
force will not get Lavis, IAI could modernize these
older platforms, modernizing the avionics and
airframes to extend their lives to the late 1990s
when advanced US fighters will be available.
? RPVs. Some of IAI's hottest sellers and a
longstanding Israeli strength. An IAI subsidiary is
working on the Harpy attack RPV and expects
increased air force orders in the wake of the Lavi's
cancellation. The US Navy has purchased IAI's
Pioneer RPV.
? Precision-guided weapons. IAI is developing
alternative systems to the successful Popeye guided
munition produced by the Israel weapons
development authority Rafael and is also working
on modification kits for existing unguided weapons.
? Antitank missile systems. The Nimrod, a 26-
kilometer range missile system that can be mounted
on jeeps, aircraft, or tripods, is in production at IAI.
During US tests, it was found to be effective, and
greater numbers could be purchased by the Israeli
artillery corps.
The air force appears to be overestimating the
amount of funds likely to be freed by the cancellation
of the Lavi. The navy and ground forces also have
high-priority procurement and modernization plans
and will fight for their share of Lavi money. For its
part, the navy is planning to purchase expensive
submarines and corvettes, using some of the money
the air force hopes to secure. The army wants more
money to train its reserve force and is looking to
purchase modern antitank missiles, armored
reconnaissance vehicles, and a variety of upgrading
programs for its existing tank fleet
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Israeli Cabinet Eases Lavi Termination Impact
The impact on IAI of canceling the Lavi was
substantially reduced by the Israeli Cabinet decision
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Israel Aircraft Industries: Organizational Profile
Israel Aircraft Industries (IAI) was founded in 1953
as a maintenance base for the Israeli air force and El
Al Airlines. It has grown from a one hangar operation
with 200 employees to an enormous aerospace
complex with over 22,000 employees.
IAI's work force includes about 4,000 engineers,
4,500 technical engineers, 8,200 production workers,
and 5,600 service and administration employees. Of
these, about 5,000 were involved in the Lavi's
development?including about 1,500 engineers whom
IAI officials consider crucial to its future as a high-
technology center.
that research and development alternatives to Lavi
within IAI will provide employment for about 3,700
of the 5,000 workers involved in the Lavi program.
IAI is organized into five divisions:
? The Aircraft Manufacturing Division produces the
Kfir fighter, Arava transport plane, and Westwind
business jets, along with jet engine components,
machine parts, and mini-RPVs. Scrapped plans for
producing Lavi fighters in the 1990s are unlikely to
disturb the division, since it had not begun to gear
up seriously for the operation.
? The Electronics Division includes four plants?
ELTA, TAMAM, MBT, and MLM. ELTA
produces radars, computers, and communications
and has done considerable work on Lavi avionics?
as much as 60 percent,
Much of this work is applicable to other programs
or is valuable as pure research on future aircraft
systems. ELTA views the Lavi's cancellation as
only a minor setback.
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? The Engineering Division provides support to the
manufacturing units and is Israel's center for
aircraft design and development?including most of
the work on the Lavi airframe. Most of the lost
employment will come from this division. Thus,
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will decline.
? The Technologies Division produces patrol boats,
armored cars, artillery, and a wide variety of
support systems such as aircraft seats, helicopter
rotor blades and parts, tank mine plows, and
hydraulic systems for the Merkava tank. The
impact of canceling the Lavi will be minor for this
division.
? Bedek Aviation Division provides aircraft repair
and overhaul services. In addition to maintaining
Israeli aircraft, it has subsidiaries in Europe
working on NATO aircraft and is negotiating with
Turkey to modernize its F-4 fleet. The Lavi
decision will not significantly affect Bedek.
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to allocate IAI its full Lavi funding this year?about
$200 million?even though it is no longer developing
the aircraft. This funding will probably be used in
large part for termination costs and severance pay for
discharged IAI workers and to augment research and
development of other programs. In addition, Foreign
Minister Peres?a key advocate of an Israeli defense
industrial capability?agreed to scrub Lavi only if the
Cabinet assured the company $100 million in
subsidies to diminish the impact of losing Lavi
funding.
11
Defense Minister Rabin estimates that 3,000 IAI
employees will lose their jobs as a result of the Lavi's
demise, according to public interviews. But IAI
intends to implement the layoffs gradually throughout
the remainder of the Israeli fiscal year, which ends on
31 March 1988. The 3,000 layoffs will have only a
minimal effect on Israel's overall unemployment
rate?now at just over 6 percent?but Israeli officials
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are deeply concerned that many of the highly skilled
workers m f r ? tter paying jobs
elsewhere, that as many as 500
Lavi-dedicate engineers ave approached the South
African company working on the Cheetah?the
Israeli adaptation of the Mirage fighter aircraft.
Although South Africa probably could not employ all
500 engineers on the relatively simple and small-scale
Cheetah modification program, some Israeli engineers
probably will take advantage of the close ties between
the two countries' defense sectors to take lucrative
positions in South Africa.
Recent assessments in the Israeli press have
minimized the impact on employment of the canceling
of the Lavi. Lavi proponents like Minister Without
Portfolio Arens initially claimed that over 6,000 high-
technology jobs would be permanently lost. Now
Israeli assessments estimate that no more than half
this number of jobs will be forfeited. Although of
concern to IAI officials who worry about morale and
image problems, these lower job loss estimates
indicate that the Lavi's death will not significantly
increase Israel's overall unemployment rate and will
not appreciably erode the country's high-technology
capability
The most serious impact will be on IAI itself?and
particularly on the engineering division, which will be
hardest hit by layoffs since much of the work on the
Lavi has been research-oriented. To minimize the
impact, IAI is attempting to make the transition to
new programs as quickly as possible. Many of the
workers not absorbed probably will be hired by other
high-technology firms in Israel, and others may be
hired by the military.
Implications for the United States
Public opinion polls indicate that most Israelis believe
that the Lavi was canceled because of US pressure.
As a result, many Israelis believe the United States
owes them a debt and expect the United States to help
pay for termination penalties, to provide funding for
alternative programs, and to increase cooperation and
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joint ventures in weapons development. IAI
specifically wants US funding for a variety of its
programs, including the Arrow antitactical ballistic
missile, which it hopes can be funded through the
Strategic Defense Initiative program.
An Israeli official has requested that the United
States increase offshore funding?that portion of
Israel's grant aid that can be spent in Israel?from
$300 million to $400 million per year to help make up
the $200 million annually that was spent on Lavi
contracts. In addition, Israel has requested that the
United States intercede with some of the more than
100 US companies working on Lavi contracts to seek
lower termination costs and has asked the United
States to help pay those termination penalties that
remain on the books. The official sees the decision to
cancel the Lavi as ultimately for the good of Israel,
but he also views the decision as a significant
concession to the United States and expects defense-
related cooperation between the two countries to
improve in the wake of the Lavi's termination.
(S NF OC)
The domestic political debate has been blistering, but
the longterm impact on next year's election will be
marginal. Trade Minister Sharon and former
Minister Without Portfolio Arens continue, weeks
after the program's termination, to attempt to
resuscitate it and blame the Labor Party for what
they describe as the action most damaging to Israel's
national security since the 1973 Arab-Israeli war.
They repeatedly have accused Labor?specifically
Peres and Rabin?of buckling to US pressure.
Although their attempts to save the Lavi almost
certainly will fail, Arens and Sharon appear to want
to keep the issue alive in anticipation of the national
election scheduled for November 1988.
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Lebanon: Junblatt's Motives for
Sending Fighters to Libya
Druze leader Walid Junblatt's decision to send
fighters to Libya in its war against Chad is motivated
largely by economic factors. Political concerns also
played a significant part, however, because the
request from Libya provided Junblatt with a means of
ridding himself of political opponents within his
militia. Economically, the deal will supply the Druze
with hard currency, petroleum, and possibly arms.
Junblatt has sent 800 to
1,100 Lebanese fighters, 250 to 300 from the
Progressive Socialist Party (PSP), to Libya. The rest
of the force was made up of fighters from other leftist
Lebanese groups including the Lebanese Communists,
Murabitun, the Syrian Socialist Nationalist Party,
and the Arab Democratic Front.
The non-Druze
members, who lived primarily in Beirut, have been a
financial and political burden for Junblatt and the
PSP since the Syrians disarmed the PSP militias in
West Beirut following the Syrian intervention in the
Lebanese capital in February. The PSP had continued
to pay and support several of the non-Druze members
even though they had lost their effectiveness and role
after the Syrian intervention. The PSP will no longer
have to pay or support the non-Druze members, and
Junblatt will not have obviously abandoned them.
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Another poliical advantage of the deal, according to
the US Embassy in Beirut, is the potential leverage it
could provide Junblatt in his dealings with Damascus.
Junblatt and his fighters expect to secure arms and
hard currency from Libya, allowing the Druze leader
to compensate for any strains between himself and
Damascus. Should the relationship with Libya
continue, the deal could improve Junblatt's ability to
maneuver around Damascus's wishes.
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provide the PSP with two shipments of gasoline, a
precious commodity in Lebanon. The shipment of
gasoline, if reexported, could provide the PSP with
much needed hard currency. An additional source of
hard currency will come from the reported individual
salaries of $500 to $2,000, if the money is returned to 25X1
Lebanon, where the average monthly salary has fallen 9X1
sharply with the rapid depreciation of the Lebanese 25X1
pound. We suspect Junblatt will receive a share of
these salaries and possibly Libyan military aid, both
of which will strengthen the PSP's position relative to
its opponents. The influx of hard currency will also
provide a boost for the Druze-controlled Shuf region,
which is depressed by the rapid decline of Lebanon's
economy.
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Lebanon's Communist
Party
Lebanon's escalating political and economic woes,
coupled with stepped up Soviet activity in the Middle
East over the last few years?such as the recent failed
attempts to sponsor rapprochements between Syria
and the PLO and between Syria and Iraq increase
the potential significance of the pro-Soviet Lebanese
Communist Party (LCP). Although comparatively
small, the Lebanese Communist Party wields
influence in Lebanon beyond its size.
The most dramatic example of the LCP's growing
influence occurred earlier this year in the capital. In
February the LCP exhibited its strength in a
collaborative effort with the Druze Progressive
Socialist Party against the Shia Amal militia in some
of the fiercest fighting in years. In a surprisingly
strong showing the coalition won large sectors of
Amal-controlled West Beirut, forcing the Syrians to
intervene on behalf of their Shia surrogate. According
to the the LCP forces
numbered about 1,000 and proved to be well
organized and well trained.
the winter offensive
was inspired by the Soviets during a meeting between
Soviet envoy, Karen Brutents, and LCP and
Progressive Socialist Party officials in the Shuf
region.
a meeting did take place at the Lebanese
Communist Party congress shortly before the
outbreak of fighting.
Relations With Moscow
Founded in the early 1920s by a group of Lebanese
intellectuals, the LCP controlled Communist political
activity in both Syria and Lebanon until 1944, when
the parties split. The Lebanese Communist Party was
outlawed by the French mandatory government in
1939, but the ban was relaxed in 1943. The LCP
claims members from all economic and social groups
and is organized along traditional Communist lines.
The basic organizational unit is the group, composed
of seven to 10 members in a particular neighborhood.
The group elects a secretary who is responsible to the
15
George flawi, LCP Secretary General
Daily Star ?
Secretary General of the Lebanese Communist Party
since July 1979 . . has filled various posts in the
LCP. . . served as editor and administrative manager
of Al-Nida, party newspaper... Greek Orthodox . . .
born 1940.
regional committee, which in turn is responsible to the
Central Committee. From among its members the
Central Committee elects a Secretary General to
supervise party activities and elects the Political
Bureau to direct the party's daily affairs. George
Hawi has been Secretary General since 1979.
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The LCP has benefited greatly from its close ties to
the Soviet Union.
Soviets have supplied weapons and
military training to members of the LCP.
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LCP publications claim that its objective is not to set
up a Communist or a socialist order in Lebanon, but a
democratic system free of foreign influence.
Therefore, although the LCP may follow the Soviet
party line, it adapts it for its own use. In short, the
LCP rejects interference by any Arab state in internal
Lebanese politics and denounces Israel as an
aggressor and threat to the Arab world, a popular
stand in Lebanon.
Opportunities and Obstacles
The increased interest of the Soviet Union in
Lebanon, combined with the failures of Western-
inspired solutions for peace in the area, have laid the
groundwork for an increased role for the LCP.
Nevertheless, the LCP is hindered by the growth of
Islamic fundamentalism in Lebanon.
Strained relations with the Amal militia continue and
may alienate some Shias from the LCP. LCP officials
have accused Amal of murdering two LCP Central
Committee members this year.
LCP officials pledged to retaliate and
may begin assassinating Amal officials.
Secret
The Syrian entry into West Beirut in February posed
another obstacle to LCP goals and effectively denied
the LCP the strengthened position it could have
claimed by a successful struggle against Amal. The
coalition between the Progressive Socialist Party, the
LCP, and other leftist groups formed in February has
suffered dramatically since the Syrian intervention
robbed them of almost certain victory over Amal and
has further weakened their political clout.
Despite animosity toward the Syrians, the LCP
recently agreed to join the Syrian-sponsored Muslim
coalition, the Liberation and Unification Front, to
placate Damascus. The LCP has been allied with
Syria in the past, but these alliances have been of
limited scope and duration.
Outlook
The LCP will remain a small but important player in
Lebanon regardless of these setbacks, if only because
of its direct ties to the Soviet Union. The Soviets
appear determined to maintain independent channels
to the government and various factions in the country
despite the Syrian presence in Lebanon. As Lebanon
sinks further into its economic crisis, the financial and
political support of the Soviet Union may give the
LCP the freedom to maneuver through the perilous
political times in the coming months. The LCP's
relatively secure financial position may enable it to
increase recruiting throughout Lebanon and further
increase its role in Lebanon's political future.
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Sudan's Economy: Is Reform
Possible?
Khartoum and the International Monetary Fund
(IMF) have worked out a reform package the
Sudanese bill as a "comprehensive economic
program" that is scheduled to be implemented
sometime this fall. The program's innovative
approach to import financing, if allowed to function
properly, would ease critical shortages of goods. Much
more ingenuity, however, backed by cash from
Western donors and an ideological shift from
excessive government controls, will be necessary
before sustained economic recovery can begin. In the
interim, the economy will limp along and remain a
source of political vulnerability to whatever Sudanese
Government is in power.
A Legacy of Economic Decline
Enticed by an international credit market awash in
petrodollars, Khartoum embarked in the early 1970s
on an ambitious program of public-sector investment.
Sudan's public-sector enterprises, however, lacked the
managerial expertise to use this capital efficiently.
Many projects were poorly conceived and suffered
from an inadequate transportation network. Together
these factors produced results far below the projected
gains in exportable products or import substitutes. By
the late 1970s, when the grace periods on contracted
debts came to an end and new inflows of foreign
capital began to diminish, severe foreign payments
problems emerged and Sudan's expansionary bubble
burst.
Now, after nearly a decade of attempts to halt the
economic slide, the Sudanese economy is operating at
a very low level of capacity. Gross domestic product
hovers at $7.8 billion, or at about its 1980 level when
adjusted for inflation. We believe only the underlying
strength of the parallel economy?trade, investment,
and employment activity fueled by unrecorded worker
remittances?has prevented a total collapse. Drought
in recent years, together with the interminable civil
war in the south, have also contributed to Khartoum's
economic woes, although Sudan has received ample
foreign aid to overcome the direct impact of food
shortages.
17
In our opinion, Sudan's economic woes can be
attributed largely to the government's lack of
financial discipline and to excessive reliance on
controls and regulations. In addition, Khartoum's
economic adjustment efforts have been applied in a
partial and unsustained manner that has done little to
convince consumers and investors that economic
stability will result. The Sudanese currency's
consistently overvalued exchange rate has proved to
be perhaps the most insidious danger to the economy,
discouraging import substitution and export
production and creating an incentive structure
favoring services and trading activities rather than the
production of commodities. The government's
periodic attempts to adjust the exchange rate have
failed. Exchange rate devaluations have proved to be
either too late or inadequate in size, or, in the few
cases in which they were adequate, their positive
impact was quickly eroded by high domestic inflation
whose root cause lay in the government's large budget
deficits.
Failed Government Efforts
Donor expectations in 1986 that the regime of Prime
Minister Sadiq al-Mahdi might move quickly on
economic reform have been dashed by nearly 18
months of inaction and policy drift. Preoccupied with
squabbling among the various factions of his coalition
government and with the war in the south, Sadiq has
until recently been unsympathetic to new economic
initiatives. Moreover, memories of the April 1985 civil
disturbances sparked by President Nimeiri's ill-fated
IMF-inspired reforms and their role in unseating the
government probably remain fresh in Sadiq's mind.
Regime efforts have been directed at acquiring
stopgap external assistance to bridge critical
shortages of petroleum and other commodities and at
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maintaining price controls on basic consumer
commodities in a vain effort to protect urban living
standards:
? Overtures to Libya and Iran as well as inaction on
economic reform have served to alienate important
donors?notably Saudi Arabia?and have led some
to withhold urgently needed financial support. For
example, a six-month supply of petroleum from
Saudi Arabia valued at $120 million is being held
up, in part, we believe, because of Saudi displeasure
with Sadiq's foreign policy gestures to Iran.
? Attempts to maintain stable prices for urban
consumers have resulted in steadily dwindling
supplies of goods. The US Embassy in Khartoum
reports that practically all imported commodities
are scarce in Sudan, and petroleum stocks are
estimated at no more than a few weeks' supply.
A New Economic Initiative?
Mounting domestic dissatisfaction with economic
conditions, highlighted by the spate of strikes in July
and the imposition of a new state of emergency,
appears to have convinced the Sadiq government to
move forward with an economic program. The core of
the "comprehensive" program under consideration
consists of a new system of import financing that
allows importers to self-finance imports using foreign
exchange that does not require proof of origin?black-
market dollars. The program also calls for reducing
the bank-financed portion of the government deficit
from 34 percent to 23 percent, devaluation of the
official exchange rate, increases in government
revenues, and reform of state-owned companies. The
plan has received qualified endorsement from the
IMF, but it does not constitute a formal standby
arrangement. To qualify for a standby, Sudan would
have to settle more than $600 million in overdue
obligations to the Fund.
Critical to the entire reform program will be the
manner in which the import-financing scheme is
allowed to develop. If, as US Embassy reporting
suggests, the government has revised its regulations
and will require only 10 percent of the value of the
imports be deposited with the Central Bank and a
negotiable amount with a commercial bank before a
Secret
letter of credit is issued, then the business community
may decide to participate in the program. Previously
the government insisted upon a 20-percent deposit
with the Central Bank and an 80-percent deposit with
a commercial bank. The new system could
theoretically attract several billion dollars from bank
accounts held overseas and from the estimated $2
billion a year in earnings of Sudanese workers abroad.
Moreover, the additional customs revenues the new
import system would bring would go a long way
toward helping to reduce the bank-financed portion of
the budget deficit.
The Limits of Reform
Critical to the success or failure of the economic
program will be the exchange rate at which imported
goods will be costed under the new import system.
According to Embassy reporting, the government has
informally agreed to cost imports under the self-
financing scheme at 6 Sudanese pounds per dollar,
close to the free market rate. This may prove to be
sufficient to stimulate business interest, providing the
government adjusts the rate in line with further
changes in the free market rate. Such flexibility on
the part of Sudan's political leadership on economic
matters has not been exhibited in the past, however,
and involves issues that strike at the heart of Sudan's
seeming inability to implement a sustained reform
effort.
A de facto devaluation along the lines indicated by
the self-financing program would undoubtedly push
domestic inflation, already estimated at over 50
percent, even higher and could fuel the kind of
discontent that led to Nimeiri's removal. Given the
fragile nature of the coalition government and Sadiq's
increasingly vulnerable position vis-a-vis both the
political opposition and the military, it is difficult to
see this government moving ahead boldly with reform.
On the other hand, Sadiq's choices are limited. If he
dithers, he will risk unrest because of higher prices or
because goods simply are unavailable. Recent
experience in Egypt seems to suggest that a populace
will tolerate higher prices?except on basic food
commodities?if it has been prepared for such an
eventuality by the regime.
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Further Actions Required
Adopting the new self-financing import scheme would
represent a significant first step, but moving forward
with the other measures outlined in the economic
program will be necessary to sustain economic
momentum. Most important, we believe Khartoum's
political leaders must abandon their penchant for
statist economic solutions and at a minimum adopt a
more tolerant view of market-oriented policies. The
government must also project a clearer and more
consistent policy on exchange rate adjustments and
other regulatory procedures to present the business
community with a more predictable investment
climate.
None of these actions will come easy in Sudan's
unsettled and fragile political environment. We
believe Western aid and encouragement would play a
crucial role in prodding the Sudanese to act. At a
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19
minimum, Khartoum will have to demonstrate its
ability to maintain effective controls on basic food
items to show its continued commitment to the urban
population's welfare. Western support in building up
critical commodity supplies may instill a greater sense
of confidence within the regime to proceed with the
economic program. Continued Western aid, however,
will require an unambiguous and sustained effort by
the Sudanese Government to proceed with reform.
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Egyptian Counterterrorist Units:
Limited Capabilities
Cairo's efforts to develop counterterrorist forces date
to the time of the Camp David accord, when the
Egyptians feared they would be especially vulnerable
to attacks by groups unfavorable to Egypt's separate
peace with Israel. Such efforts have intensified during
the past few years as a result of a series of violent
incidents like the hijacking of an Egyptian aircraft to
Malta in November 1985, and more recently the
attacks on prominent Egyptians and US Embassy
personnel in Cairo. The disastrous raid on the Egypt
Air flight in Malta, in particular, shook Cairo's
confidence in its counterrorist capabilities. Its
progress in improving them, however, has been slow
and hindered by economic constraints.
We believe Egypt's dedicated counterterrorist units?
Unit 777 and the Hostage Rescue Force (HRF)?
remain largely incapable of fulfilling their missions
and have a less than even chance of favorably
resolving new terrorist incidents.' Efforts to correct
shortcomings in the special units are likely to continue
to fail without substantial foreign financial and
training assistance.
Nonetheless, national pride probably will cause Cairo
to rely on its own counterterrorist forces, especially to
resolve domestic terrorist incidents, rather than
transfer responsibility for rescue tasks to more
capable foreign teams. The Egyptians most likely will
turn to other states, including the United States,
primarily for advice and equipment and will cooperate
with them in resolving international incidents. Even
so, weaknesses in its counterterrorist forces probably
will make Cairo more cautious in deploying Unit 777
abroad and less likely to authorize risky or bold
action
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Unit 333
In addition to its other counterterrorist units, Egypt
has a secret civilian police unit, 333. We have little
detailed information on the force, but reporting from
ays that, like the HRF, it can 25X1
be tasked to carry out counterterrorist operations
inside Egypt to protect civilian facilities and
personnel. It is also responsible for responding to
terrorist incidents at Cairo International Airport.
The unit probably is small and is trained in
paramilitary operations to include demolitions.
Besides counterterrorism, we believe the force may
function as a special police unit to respond to
situations that could prove embarrassing or a threat
to Cairo. For example, it probably was used to
quietly and efficiently arrest protestors during a
demonstration in Cairo in April, according to the
Counterterrorist Units
Egypt has one of the largest intelligence and security
apparatuses in the world?including thousands of
personnel in the General Directorate for State
Security Investigations and General Intelligence and
Military Intelligence services as well up to 500,000
Central Security Force members?and part of its
activities are directed at detecting and preventing
terrorism. In particular, the Ministries of Defense and
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hat
, ti
Unit symbol for 777
Interior have designated units to deal with specific
terrorist threats and incidents in which hostages are
taken:
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Unit 777 enlisted barracks and compound
Unit 777 is Egypt's largest force dedicated
specifically to counterterrorist operations, and it is
organized to perform a variety of missions. According
to about 100
men serve in support roles, and some 150 form six
operational groups. The operational groups in turn are
divided into four teams, each with designated shooters
for clearing rooms and a sniper. All operational
personnel are volunteers, including some long-service
professionals, and most officers are highly qualified
graduates of Egypt's military academy.
individuals must
complete ranger training (two and a half months) and
an introductory counterterrorist course (two months).
All groups are trained in tactics to counter terrorists
in buildings, buses, and trains; and each is also
receiving instruction to perform operations against
aircraft and to carry out scuba-related missions.
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city sr: r?
Two story addition above 777 enlisted barracks
used in urban assault training
Cairo has been attempting to improve the rescue skills
of its counterterrorist units, but economic constraints
continue to stymie progress. Unit morale has suffered
as personnel have attempted to adjust to a tight
operational budget.
Training remains inadequate, despite help from
Western countries, including the United States, West
Germany, and the United Kingdom
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In addition, the counterterrorist units lack thorough
contingency plans, and future operations are likely to
suffer from insufficient standard operating
procedures. Problems in the 1985 rescue attempt in
Malta were made worse because the 777 personnel
involved had not worked out in advance simple signals
to learn such things as the number of terrorists and
the condition of passengers, according to defense
attache reporting
Poor coordination between counterterrorist forces and
other security or military units increases the chances
for a mishap during a crisis.
Cairo also has
increased its reliance on 777 after
several assassination attempts against Egyptian and
US personnel during the past six months and out of
concern that the appeal of radical Islam is
widenening.
We
suspect that command and control problems are
intensified by service rivalries?especially in the
General Directorate for State Security Investigations.
Importance Increasing
Despite their shortcomings, Unit 777 and the HRF
are better prepared than other Egyptian forces to
respond to terrorist attacks, and Cairo is increasing its
Secret
US Embassy sources
report that officer was killed on 15 August
during an unsuccessful attempt by his team to capture
the men suspected of attacking former Interior
Minister Isma'il two days earlier.
Outlook
Improvements in Egyptian counterterrorist units
probably will continue to be slow and sporadic. New
commanders have taken over 777 in the
past year and have intensified efforts to upgrade
training and rescue skills. They also look favorably on
foreign assistance and will actively seek additional
help to enhance their units' skills and capabilities.
Nonetheless, Cairo's focus on its counterterrorist
forces in the past has been driven by specific terrorist
incidents and not by a long-range plan to enhance the
capabilities of the units. Cairo's interest and resources
provided to counterterrorist forces have diminished
with lulls in attacks.
Despite the limited capabilities of its counterterrorist
forces, Cairo will continue to advocate harsh
measures against terrorists, including using
to resolve domestic incidents and deploying 777
outside Egypt for rescue attempts. Nonetheless, the
Egyptians recognize that their forces suffer
significant weaknesses. After 777's poor performance
against the Egypt Air hijackers, Cairo probably will
be more cautious in assessing international terrorist
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situations and may send in 777 only as a last resort.
We suspect Cairo also would look to US or other
Western forces for support, though national pride
would preclude 777 from deferring responsibility for
the operations.
commander also would request foreign advisory
assistance for major operations against domestic
threats.
Reverse Blank
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Iraq's Security Services:
Saddam's Ruthless Octopus
President Saddam Husayn's pervasive and ruthless
security services have thwarted coup attempts from
the Iraqi Army, Ba'th Party, and Iraqi dissidents.
Saddam maintains control over his security
organizations by appointing trusted directors, purging
disloyal officials, and encouraging different agencies
to monitor each other. The effectiveness of the
services has helped Saddam to prosecute the war with
Iran as he sees fit and will help fend off challenges to
his rule after the war's end.
Saddam's Road to Power
Saddam Husayn has used Iraq's security services to
underpin his personal power base since the Ba'th
Party took power in 1968. As Vice President in 1970,
Saddam founded and headed the so-called Public
Relations Bureau, the predecessor of today's Iraqi
Intelligence Service (IIS), according to the US
Embassy. Saddam assumed direct control of the
Bureau because he was concerned that the purges
immediately after the 1968 coup had not assured the
loyalty of the civilian and military security services to
the new regime. After 1974, Saddam apparently took
command of the country's other two services, the
Directorate of General Security (DGS) and the
Directorate of Military Intelligence (DMI). The
importance of Saddam's links to these services was
heightened, in part, because Saddam had few ties to
the Army.
The Services' Priorities and Effectiveness
The services' primary domestic mission is to protect
the supremacy of the Ba'th Party from the Army. The
DMI and IIS have informants in all major Iraqi
Army units, according to the US Embassy. These
spies report directly to their respective headquarters
in Baghdad. The services' pervasive presence and
occasional purges of officers suspected of disloyalty
have created resentment among the military, but they
have so far appeared to stifle coup plotting.
The second priority of the services is to monitor and
intimidate dissident Iraqi Shias and Kurds. Iraqi
security services executed Iraq's leading Shia cleric,
27
Muhammad Baqr Sadr, in 1980. In 1983 six close
relatives of Muhammad Baqr Hakim, an exiled leader
of the Dawa Party, Iraq's largest Shia opposition
group, were executed after Hakim refused to return to
Iraq, according to the US Embassy. Moreover, Iraq
probably is still holding under detention members of
the Hakim clan to exert pressure on Shia dissidents.
Such executions and detentions, coupled with the
penetration of the Dawa Party and Iraq's expulsion of
over 60,000 Shias of Iranian extraction, probably
account for the sharp decline in Shia dissident acts in
Iraq since 1982.
Iraqi security also has closely monitored Kurdish
dissidents in northern Iraq, particularly since they
have become increasingly active following Iran's
stepped-up aid to them in 1984. Ali Hasan al-Majid,
Iraq's coordinator of internal security and
intelligence, was given overall supervision of the
Army's counterintelligence campaign in early 1987,
according to the US Embassy. The Army's ruthless
tactics, which have included the razing of Kurdish
villages and the control of food supplies, have reduced
dissident Kurdish activity.
Saddam has placed an equally important priority on
the services' control of the Ba'th Party and
government institutions. According to the US
Embassy, the pervasive security presence, which
includes security personnel in all government and
party offices, has greatly inhibited dissent.
Ensuring the Services' Loyalty
Saddam Husayn depends mainly on fellow clansmen
and family members from his home province, the
Tikrit area, to staff the upper echelons of his security
services.' Fadhil al-Barraq, director of the IIS, and
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Abd al-Rahman Duni, head of the DGS, are from the
Tikrit area, according to the US Embassy. Ali Hasan
al-Majid and Husayn Kamal al-Majid, head of
presidential security, are relatives of Saddam from
Tikrit.
Saddam does not hesitate to purge security personnel
whose loyalty and competence he doubts. In 1983,
Saddam purged the HS director, his half brother
Barzan al-Tikriti, and Barzan's followers in the ITS
because Barzan was suspected of building his own
power base and not reporting fully and accurately on
HS activities, Saddam
brought in a popular career military officer, Lt. Gen.
Hisham Sabah al-Fakri, to conduct the purges before
Secret
appointing Fadhil al-Barraq to head the organization.
The Iraqi leader also conducted a brutal purge of the
DGS in 1973 after an attempted coup by its chief,
Nazim Qazir.
Saddam uses a system of checks and balances to help
maintain control of his security services. Each service
serves a different function to ensure that no service
becomes too powerful, according to the US Embassy.
The ITS monitors the Ba'th Party, the DMI supervises
the Army except for Ba'th Party members, and the
DGS is responsible for internal dissidents such as the
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Shias and the Kurds. Saddam may have created Ali
Hasan al-Majid's position as coordinator of security
in late 1983 to monitor the HS following the dismissal
of Barzan.
Could the Services Fail Saddam?
The security services' effectiveness and Saddam's
control over them make a successful coup difficult.
Nonetheless, the services have not been expanded
since the beginning of the Iran-Iraq war and have
always been designed primarily to monitor and thwart
attempted coups involving relatively small numbers of
dissidents within the regime. They might find it
difficult to deal with security problems created by
large numbers of Iraqi draft dodgers and deserters in
the wake of major Iranian victories. The services
would also be spread thin by increased Kurdish
guerrilla actions that succeeded in cutting main roads
and damaging oil facilities in the north or by
increased Shia demonstrations and terrorism in
Baghdad and southern Iraq. Such developments
would increase Saddam's vulnerability.
Reverse Blank
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United Arab Emirates:
Economic Disparities Test the
Federation
Economic growth in the United Arab Emirates (UAE)
in the next several years probably will be insufficient
to provide adequate jobs for the growing number of
well-educated youth and will further frustrate federal
efforts to deal with regional economic disparities.
These problems, however, are unlikely to undermine
the long-term cohesion of the federation. The mutual
security needs and complementary constraints among
the seven emirates?disparities in manpower,
finances, and political participation?provide strong
motivations for keeping the federation together.
Dealing With Disparities
After almost 16 years of independence, the seven
states of the United Arab Emirates?Abu Dhabi,
Dubayy, Ash Shariqah, Ajman, Umm al Qaywayn,
Ra's al Khaymah, and Al Fujayrah?have made
considerable strides toward integrating their
economies, defenses, and political machinery. Oil is
the primary force holding the federation together.
Estimates by the International Monetary Fund show
that the petroleum sector accounts for 90 percent of
national revenues, 80 percent of export earnings, and
40 percent of gross domestic product. Abu Dhabi and,
to a lesser extent, Dubayy have used their vastly
greater oil wealth to finance the federal government,
provide for national defense, and fund development
programs. For the most part, the emirates have
directed their wealth toward the personal enrichment
of a large segment of the population and the
development of a relatively efficient economic
infrastructure.
Soft oil market conditions since 1981, however, have
tested the mettle of the federation. We estimate that
oil revenues of $7.5 billion last year were down over
63 percent from their peak at the start of the decade.
Real GDP also declined at an average annual rate of
8.4 percent since 1981. In contrast to the pace of
overall economic activity, the nonoil sector expanded
by 2.8 percent annually during the period, as past
investments evolved into viable ventures. Recession
has brought inflation to a near standstill in recent
31
years, but wages and employment have fallen sharply.
These events have not caused the reduction of the
large foreign worker force?almost one-third of the
population?desired by the government, because
conditions in the expatriates' home countries are often
worse than the depressed conditions in the UAE,
according to the US Embassy in Abu Dhabi. I
Disparities in the oil wealth of the individual emirates
increasingly serves to aggravate interemirate tensions.
Abu Dhabi's large onshore oil reserves have low
associated production costs and are subject to
minimal threat from the Iran-Iraq war. Dubayy's
relatively smaller oil resources are primarily located
in high-cost offshore fields that leave the emirate
more vulnerable to the ravages of the war and Iranian
pressure. Although the UAE is a member of OPEC,
Abu Dhabi is relegated to the role of swing producer
for the emirates by Dubayy, which generally produces
at maximum levels. By and large the oil resources of
the northern emirates have fallen far short of
expectations. The costly development of these short-
term resources has left the smaller emirates even
more beholden to the two larger and wealthier
emirates
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Waning oil revenues focus attention on emirate rather
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have reinforced the primacy of emirate budgets
through which emirate leaders distribute benefits to
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almost sole responsibility for financing the federal
government. Disputes over respective contributions to
the UAE budget have left federal ministries badly
underfunded in recent years and increased tensions,
especially between Abu Dhabi and Dubayy. Work on
interemirate development projects has slowed as a
result. The northern emirates are hardest hit by the
cutbacks because their relative isolation and small
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9 October 1987
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U.A.E.
ECONOMIC (PERCENT)
20 [
INDICATORS
1982-1987 is
12
REAL GOP GROWTH
1982 1983 1984 1985 1986 1987.
(MILLION US)
3500 ?
2800
2100i
1400 1-
700
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FOREIGN EXCHANGE RESERVES b
2200
2100
2300
3200
3500
3300
1962 9183 1984 1965 1988 1987.
a. PROJECTED
b. YEAREND
EXCLUDING
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United Arab Emirates: Current Account Balance
Million US $
1982
1983
1984
1985
1986a
1987b
Current account balance
5,093
4,329
5,530
5,944
602
220
Trade balance
7,893
6,729
7,130
7,344
1,602
1,020
Exports f.o.b.
17,333
15,085
14,173
14,254
8,243
7,520
Oil
15,930
12,800
11,440
11,040
6,384
6,020 c
Nonoil
1,403
2,285
2,733
3,214
1,859
1,500
Imports f.o.b.
9,440
8,356
7,043
6,910
6,641
6,500
Net services
-1,000
-1,800
-1,400
-1,300
-800
-600
Grants
-1,800
-600
-200
-100
-200
-200
a Estimated.
b Projected.
c Assumes average oil exports of 1 million b/d at $16.50 per barrel.
economies have the most to gain from national
integration. Development projects in Abu Dubai and
Dubayy, on the other hand, are moving apace.
The UAE's foreign payments position is another
source of friction. Despite the one-third cut in imports
and sharply lower grant assistance since 1981, the
nation's positive current account position has
continued to deteriorate. Moreover, the dirham and
oil prices are pegged to the US dollar, which has
depreciated against the currencies of the UAE's
major trading partners-Japan, the United Kingdom,
Italy, and West Germany. Even this burden has not
been equally shared. Increased tensions in the Gulf
have had no apparent effect on Dubayy's flourishing
reexport trade, especially with Iran, according to the
US Embassy in Abu Dhabi. Iranian mines off the
coast of the northern emirates this summer, however,
disrupted lucrative tanker bunkering operations-a
chief source of emirate revenue-at the Fujayrah port
of Khor Fakkan.
The Political Tableau
Emirate politics is more an art than a science. Power
still resides in the royal families who control through
an intricate process of co-optation, cooperation,
consensus, and crackdown. These leaders owe their
33
authority to local tribes whose allegiance has been
built up over many generations. Jealousy and
suspicion run high among the member states. Each
has its own budget and concentrates on domestic
problems, often to the detriment of the national
interest. Development projects remain the domain of
each emirate, laws and local customs are often
contradictory between the emirates, and each emirate
maintains its own army. The coup in Ash Shariqah in
June indicates how susceptible the emirates are to
adverse economic conditions and intrigue. The
autocratic ruling style leaves emirate leaders
personally vulnerable to criticism
Most emirate leaders have potentially life-shortening
health conditions that could be worsened by the
pressures of governing under conditions of austerity.
One of the demands on the tightly held dynastic
system of rule is the pressure for political
participation from a growing body of well-educated
young nationals. The country has achieved universal
primary education and is moving toward universal
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secondary education, according to the US Embassy in
Abu Dhabi. The Embassy says that pressure probably
will first appear in the job market and will be only
mildly affected by the fortunes of the oil economy.
The political rub will come as aspirants to higher level
managerial and technical jobs find those positions
filled, with previously unacceptable lower level jobs
their only alternative. The relative youth of the
population, slow economic growth in coming years,
and the large number of royal family members in
need of commensurate jobs, however, will sharply
limit the leadership's ability to manage this
potentially contentious issue.
Iran remains the UAE's greatest external threat.
Differing interests and experiences have produced
differences between Abu Dhabi and Dubayy in
dealing with Tehran, according to the US Embassy.
Dubayy's extensive commercial relations with Iran,
the proximity of its oilfields to Iranian territory, and a
large expatriate Iranian community give this emirate
strong motivation for maintaining cordial relations
with Tehran. The northern emirates' weak economies
and frustration with the level of benefits provided by
the wealthier emirates invite Iranian subversion. The
Iranian attack on Abu Dhabi's offshore oil facilities
last November leaves that emirate more wary of
Iranian intentions. These different views of Iran have
frustrated attempts to provide for a coordinated
national defense and a consistent foreign policy.
revenues could rise by up to 6 percent. As a result, we
project that gross domestic product probably will
increase by as much as 4 percent next year, the first
positive growth since 1981. Conditions in the nonoil
sector, in particular, should brighten as new oil funds
become available. Overall, public expenditure
probably will remain restricted as the government
continues to grapple with the problem of securing
emirate contributions to the national budget.
Over the longer term, the many irksome problems
confronting the emirates are far outweighed by the
benefits of maintaining the federation, in our view.
One particularly strong force that will work against
dissolution of the federation is the Iranian threat,
which will continue even after the Iran-Iraq war. The
emirates' security interests are basically similar?
cautious, nonprovocative, and defensive?a fact that
ultimately will cause emirate security policies to
converge. Complementary resource constraints
between the emirates?financial constraints in the
northern emirates and manpower constraints in Abu
Dhabi and Dubayy?will probably strengthen interest
in further integration. We believe that even political
differences, especially between Abu Dhabi and
Dubayy, will succumb to a growing interest in
resolving pressing security and economic issues
Prospects for the Federation
Economic conditions probably will improve slowly
over the next several years. With oil prices likely to
fluctuate around $18 per barrel next year, UAE oil
Secret
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Near East and
South Asia Brief
Syria Construction Projects in South Lebanon
Reverse Blank
Syria is engaged in several road construction projects in South Lebanon that are
aimed at supporting Shia Amal leader Nabih Barri and possibly facilitating Syrian
intelligence activities in the south.
The
Council of the South is a quasi-official organization that has served as a means for
Barri to widen his support among Shias in the south. For Syria the projects
represent practically the only remaining financial support for Amal. In addition,
Damascus probably hopes to capitalize on the road construction to place Syrian
intelligence officers near the Israeli-controlled Security Zone.
41
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9 October 1987
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