INTERNATIONAL ECONOMIC & ENERGY WEEKLY 24 JUNE 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200120006-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: December 22, 2016
• Document Release Date: February 18, 2011
• Sequence Number: 6
• Publication Date: June 24, 1983
• Content Type: REPORT

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Directorate ofd
Intelligence
International
Economic & Energy
Weekly
DI IEEW 83-025
24 June 1983
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Secret
International
Economic & Energy
Weekly
1 Perspective-Mitterrand's Austerity Headed For a Fall?
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed t Directorate of Intelligence,
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Secret
International
Economic & Energy
Weekly F__]
Synopsis
Perspective-Mitterrand's Austerity Headed for a Fall?
The austerity program of France's Socialist government is in trouble as
evidenced by some government backsliding on its implementation and several
unwelcome price and wage developments. The toughest test is likely this fall
when the government's resolve to hold the line against catchup wage demands
from the major unions will come under renewed pressure on the franc.
West Germany: On the Verge of a Modest Upswing) 25X1
After three years of weak performance, the West German economy shows
signs of recovery. Nonetheless, we doubt the recovery will be robust enough to
have much impact on unemployment
Foreign Labor in the USSR 25X1
The economic impact of foreign labor in the USSR has been commensurate
with its small share of the Soviet labor force. Even in construction and
timber-where most foreign labor is concentrated-it accounts for a very
small proportion of total employment. Foreign workers in the USSR are
generally volunteers, despite rumors among Vietnamese refugees that their
countrymen are there as forced labor.
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Secret
International
Economic & Energy
Weekly
Perspective Mitterrand's Austerity Headedfor a Fall?
The austerity program of France's Socialist government is in trouble as
evidenced by some government backsliding on its implementation and several
unwelcome price and wage developments. A wave of demonstrations and
scattered violence this spring, some of which can be attributed to dissatisfac-
tion over the program, has contributed to a climate of malaise and falling
The toughest test is likely this fall when the government's resolve to hold the
line against catchup wage demands from the major unions will come under
pressure. President Mitterrand will again be faced with the choice of sticking
to his guns or giving in to increasingly vocal criticism from both the
Communists and leftwing Socialists to return to growth-oriented policies that
failed disastrously. We believe it unlikely that Mitterrand will write off the po-
litical and economic capital that his government has already invested in the
austerity program. Nonetheless, the continuing pressure from the left for an
"alternative" approach emphasizes the importance of achieving favorable
The current version of Socialist austerity was announced in late March as a
complement to the franc's third devaluation under Mitterrand. The new
program was tough in outline. Taxes were increased, public utility prices were
hiked, and Paris cut government and public-sector outlays. Monetary growth
targets were also lowered. In addition, the government reaffirmed its 8-percent
target for nominal wage growth in 1983. The stated goals for the year were to
limit inflation to 8 percent and to halve the trade deficit. Next year, inflation
was to be reduced further and the trade deficit eliminated.
Reducing the trade deficit has been given greater urgency by a rapid buildup
in the level of French foreign debt. Although estimates of the size of the debt
vary, the effect of mounting interest payments has become noticeable. The
practice of widespread foreign borrowing began during the Giscard adminis-
tration, and Mitterrand's mar in for additional borr was thus already
limited when he took office. 25X1
The government has somewhat diminished the potential effect of the austerity
program by modifying and delaying some of the measures. Moreover, the
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Finance Ministry has admitted that the 1983 targets-perhaps too ambitious
at the outset-are not likely to be met:
? The seasonally adjusted trade deficit for the first quarter was $3.5 billion,
about half the target for the year as a whole.
? Consumer prices increased during the first quarter at a nearly 11-percent
annual rate.
A semiofficial forecast prepared in mid-May estimates that the trade deficit
will exceed the target by at least 40 percent and that prices will increase by 9.0
to 9.5 percent. Moreover, the trade deficit forecast is based on a franc/dollar
exchange rate for the second half that could well prove optimistic.
Wage settlements, up at a 12.5-percent annual rate in the first quarter, are
also worrisome. The government has played down the significance of a single
statistic, but public perceptions flowing from an increase of this magnitude will
make it harder for the government to resist demands for wage catchups,
especially in the bellwether civil service. Better monthly CPI results between
now and the fall will be necessary if Paris is to have much of a chance to lower
the rate of wage growth.
To hold the program together, the government will need to stop whittling away
at it. Whatever the motivation, changes have done nothing to instill confi-
dence. The government will need to brace itself for a rash of strikes this fall
over the wage issue, relying on sympathetic union leaders to make sure the
strikes do not get out of hand. And Paris will need to ignore the sniping from
its critics on the left, who assume the program will fail. Given the need to come
as close to hitting the price and trade deficit goals as possible, Mitterrand will
probably find that supplementary steps to reduce purchasing power in the
economy are necessary.
Mitterrand would do well to act sooner rather than later. Better results on in-
flation and trade would not remove the need for another devaluation later this
year or early next because France's inflation differential is still too great. In
addition, they would not take the steam out of labor demands but would allow
Mitterrand to demonstrate that the government is on the right track. Even if
he finds it politically necessary to link new measures with import restraints for
a specified period, he will be better able to answer his domestic critics without
moving too far toward the economic nationalism they advocate.
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Secret
Energy
Spot Oil Market Spot crude oil prices rebounded slightly in recent weeks and are now close to or
Trends above official levels for many crudes. Arab Light is selling at $28.85 per barrel
versus the official price of $29; Bonny Light is quoted at $30.30 per barrel,
$0.30 above the official price. The increase in spot crude oil prices was led by
strengthening spot product prices, which led to an improvement in refiner
margins for the fifth straight week. US gasoline demand increased 2 percent
over the same period a year ago, and total product demand was only 1 percent
lower than year-earlier levels for the most recent four-week period. We expect
spot crude oil prices to continue to fluctuate within a narrow range in coming
weeks as buyers wait for clear signals of supply and demand patterns. 25X1
Nigerian Oil According to official Nigerian oil production figures, crude production in early
Production Exceeds June averaged 1.5 million b/d-200,000 b/d above Nigeria's OPEC-mandat-
Quota ed quota. Continued production at this level would put Nigeria's second-
quarter output over its allocation by 100,000 b/d. The Nigerians already drew
attention from OPEC's monitoring committee for even higher production
levels in May and claimed that oil production in June would be cut back to
meet its quarterly quota. Lagos reportedly was irritated that its May
production rate was well publicized in the open press and has told companies to
hold June figures closely. As long as the present price advantage for Nigerian
crude remains and buyer interest is keen, we believe Nigeria will continue to
produce oil in excess of its quota. 25X1
Lagos is hopeful that OPEC will raise Nigeria's quota to at least 1.4 million
b/d when it meets in Helsinki next month. 25X1
Increased Saudi Oil Saudi exports of crude oil to Iraq's customers jumped to over 300,000 barrels
Sales to Iraqi per day during the one-month period ending in mid-June-up from 80,000
Customers barrels per day the previous month. Almost all this oil, worth a total of nearly
$300 million, was taken by Japan and the USSR. The Soviets are shipping
their portion to India to satisfy their contracts with New Delhi. The US
Interests Section in Baghdad reports Iraq had agreed to provide the Soviets
$1.2 billion worth of oil this year to pay for military hardware, and it will owe
the Japanese an estimated $1.8 billion for imports and work on economic
projects.
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The current Saudi deliveries, combined with Baghdad's own output, are almost
equal to Iraq's OPEC production quota of 1.2 million barrels per day. Unless
Saudi Arabia further increases the amount of oil it makes available for Iraq in
the second half of the year, Baghdad will not be able to meet its payments to
Moscow and Tokyo. The Saudis, however, may not be willing to do so.
Canada's Incentive According to Embassy reporting, an incentive plan to encourage US purchases
Price Plan for Natural of Canadian natural gas is still being discussed by Ottawa and Alberta in the
Gas Exports Delayed context of a more general energy agreement between the two parties. Although
a Canadian official believes that such an agreement is possible by mid-July,
this may be optimistic in light of the contentious relationship between Ottawa
and Alberta. Canada's gas producing provinces-which continue to experience
a substantial volume of shut-in gas production-and Minister of Energy
Chreiten still appear to favor granting US importers an incentive price of
$3.30 per thousand cubic feet (tcf) for purchases above 50 percent of contract
volumes. Opposition from other Cabinet members, however, could force a
compromise incentive price of $3.40 to $3.50 per tcf. The uniform border price
for natural gas currently is $4.40 per tcf.
Bankers More Western commercial banks expect lending to the
Optimistic on USSR and to some East European countries-but not to Poland and
Lending to USSR Yugoslavia-to pick up soon. This more optimistic outlook is contingent upon
and Eastern Europe an anticipated improvement in the balance of payments and economic growth
in most of Eastern Europe. trade balances
are ex7e ed to im rove if recovery in the major develop e countries does not
falter. xpand their
loan portfolios in favor of some East European countries over opportunities in
Latin America, where loan rescheduling is widespread, and in Western
Europe, where interest rate margins on loans are still narrow. West European
bankers are generally more sanguine than their US counterparts about future
lending opportunities in Eastern Europe.
The optimism expressed by the bank officials is fragile. Banks are aware that
early signs of improvement in the East European economies can be quickly
reversed and that there are still basic economic adjustments that the East
European countries will have to make. West European banks have more
customers involved in trade with Eastern Europe than the US banks. As a re-
sult, they are likely to be more receptive to credit requests. For the rest of the
year at least, the West European banks probably will favor shorter loan terms
and seek official guarantees for trade credits to the USSR and Eastern
Europe.
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Nigerian Refinancing Nigerian officials and representatives of 24 international banks have agreed in
Negotiations principle to refinance one-fourth of Nigeria's $6 billion in overdue commercial
bills, although several difficult questions have yet to be resolved.
')FY'I
a formula to determine the size of new
loans, has yet to be worked out. The bankers, however, have agreed that
additional funds should be advanced. As a show of good faith in the
negotiations, some banks once again are confirming letters of credit for
Nigeria. 25X1
President Shagari has to move quickly to reach a final agreement with the
banks so that he can use the new money to increase the flow of imports before
elections in August. He hopes this will continue to keep the economy from be-
coming an issue. Meanwhile, the government remains vulnerable to another
sudden downturn in the price of oil. More than 90 percent of Nigeria's foreign
exchange earnings are derived from oil exports.
Financial Strains in The Philippines,) (needs up to $1 billion in
the Philippines emergency financing from foreign private banks to tide it over its current cash
shortage and to avoid rescheduling its foreign debts this year
25X1
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over the next 18 months the Philippines cannot meet its foreign debt
repayment obligations-about $3 billion annually-without a large infusion of
funds. 25X1
banks is wee began working on a program in cooperation with government
officials in Manila. The Philippines' balance of payments has not deteriorated
appreciably during the past six months, but 25X1
short-term credit lines have been substantially curtailed since early this year.
Manila also is under pressure from the IMF to limit new short-term
borrowing. 25X1
The government is increasingly liable for the foreign debt obligations of the
private sector as a result of assistance in underwriting the debts of financially
distressed firms. A bridge loan would ease the government's liquidity prob-
lems, enabling Manila to buy time until the country's external accounts
improve. The international banking community, however, probably would be
alarmed by an attempt to raise a large amount of money. When it secured a
$325 million commercial loan in January, Manila told participating banks that
its financing requirements were limited and would not compel more foreign
borrowing in 1983. The government is likely to wait until mid-July, after a
consortium of its aid donors and private creditors holds its annual meeting in
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Global and Regional Developments
OECD Export Credit The participants in the OECD agreement on officially supported export credits
Arrangement will reconvene next week in Paris to try to extend and revise the arrangement.
The current accord, which was due to expire 1 May, was extended through
1 July because of an impasse in negotiations. The arrangement, designed to
limit government subsidization of export financing, established minimum
interest rates for different categories of borrowers. Consensus rates now range
from 10.0 percent for loans to the least developed countries to 12.4 percent for
long-term loans to relatively rich countries. Over the past year commercial
lending rates in many OECD countries have fallen below consensus rates,
creating new divisions within the arrangement. Among the major participants,
only France and Italy at present have interest rates exceeding consensus rates.
According to diplomatic traffic, most countries with below-consensus rates,
such as Japan, want a new differentiated rate system (DRS) under which
export credit agencies would be required to lend at rates that approximate
commercial borrowing costs. The United States favors an unsubsidized DRS
across the board, while Japan wants unsubsidized rates only for relatively rich
countries. France, on the other hand, prefers to stay with the present system of
consensus rates. According to Embassy reporting, France is prepared to bear
the budgetary burden of interest rate subsidies so long as its trade deficits and
high interest rates continue. The chairman of the arrangement will probably
propose a compromise that will extend the agreement for at least another year.
While keeping relatively higher consensus rates, preferred by France, such a
compromise will also probably include a DRS for low interest rate partici-
pants. The threat of renewed export credit competition will probably lead to
agreement by all the members, including France, whose views have been
moderated by pressure from other EC members, particularly West Germany.
East German Purchase East Germany purchased 1.5 million tons of Canadian feed wheat and barley
of Grain From Canada earlier this month with two- to three-year credits guaranteed by the Canadian
Government t current market prices, the
contract would be worth an estimated $170 million.
25X1
2bAl
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The sale is equal to about one-half of East Germany's annual grain import re-
quirements. It will further erode the US market share, which in recent years
has amounted to two-thirds of East German grain imports. Unlike their
Canadian and West European counterparts, US banks and grain companies
over the past 1$ months have generally been unwilling to extend financing
beyond one year. This has prompted many East European countries to turn
elsewhere for their grain import needs.
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Tentative EC Budget The United Kingdom has won a $675 million refund this year from the
Rebate for the United European Community, contingent on endorsement of a plan to reform EC
Kingdom finances. Prime Minister Thatcher had hoped for a $1.2 billion rebate and
insisted that the acrimonious budget debate take precedence at the EC
Summit in Stuttgart last weekend. West German Chancellor Kohl played a
mediator's role, acknowledging the legitimacy of the United Kingdom's claim
that it pays the EC far more than it receives in benefits. Kohl insisted,
however, on linking the refund to reductions in the costly agricultural subsidy
program and corrections in the uneven distribution of contributions to the $24
billion EC budget. Most EC members-especially those with the greatest
profit from EC farm programs-have rejected making any cuts in subsidies
solely to accommodate British demands 25X1
EC leaders may have difficulty achieving final approval of the rebate because
of continuing divisions over the agricultural subsidy issue and because
Thatcher has rejected the leaders' demands for increased contributions from
value-added taxes-a major source of EC income. The EC will run out of
money next year if it fails to reform its financing arrangements. Thatcher,
however, has won large rebates for the past three years by threatening to
withhold the British budget contribution. The Prime Minister's adamant
position on a rebate increases her image among British voters as a tough and
capable leader, although it has angered her EC partners. By reducing the
British budget deficit, the rebate will help Thatcher carry out a main plank in
Israeli Actions Keep Israeli actions in occupied southern Lebanon and Lebanese reactions to them
Southern Lebanon's are depressing the south's primarily agricultural economy. Israel continues
Economy Depressed routinely to violate its 1982 pledge not to export to Lebanon any goods-
mainly foodstuffs-that compete with Lebanese commodities. Inexpensive
Israeli produce shipped in Lebanese trucks has taken a large share of the
Beirut fruit markets traditionally supplied by the Shiite farmers of southern
Lebanon. Farmers are also being hurt by the Israeli Defense Forces' (IDF)
practice of detaining trucks carrying Lebanese produce north to Beirut and
holding them in the hot sun until the produce is spoiled. Although the IDF fre-
quently closes the Sidon-Beirut road-citing the need for strict security checks
of passing traffic-the IDF usually keeps open the highway from Sidon to
Israel. Israel also continues to allow Lebanese to import goods duty free via the
Israeli port of Haifa. 25X1
These IDF moves lead many Lebanese to suspect that Israel wants to disrupt
the south's ties to Beirut and redirect its trade. to Israel. Local resentment is
heightened by a recent Lebanese press report that the IDF will not permit
merchandise from Beirut or elsewhere in Lebanon to enter the Israeli-occupied
area without prior approval of the Israeli military commander in Sidon. To
protest these moves and other perceived IDF injustices, merchants in Sidon-
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the major city in the south-recently went on two general strikes. The strikes
in turn provoked a short-lived IDF retaliation, the temporary closing of some
shops of the activists.
We believe the main goal of these Israeli moves is to ensure that politically
powerful groups in Lebanon have a financial interest in maintaining close
economic and political ties with Israel. Israel probably recognizes that those
segments of Lebanese society that profit from the Israeli moves-importers of
manufactured goods and consumers in Beirut-are primarily politically
influential Christians and Sunnis. By contrast, the farmers in the south who
suffer from the Israeli restrictions are mostly powerless Shia, who would have
little say in Beirut's decisions regarding Israeli-Lebanese ties.
Libya Terminates their
Barter Accord barter arrangement, under which Libya shipped oil at discounted prices to the
With USSR USSR in exchange for arms, would be ended and future Libyan trade with the
USSR would be for cash only.
The improvement in the economy and the recent firming o
spot oil prices have strengthened Tripoli's ability to pay cash for Soviet arms.
Tripoli has been disturbed by Soviet dumping of Libyan oil on the spot market
because it undercut Libyan oil sales and depressed the price of OPEC crude.
The USSR's request for increased payment for its advisers may be an effort to
recoup some of the income that will be lost through the termination of the bar-
ter accord.
Formation of Tin Malaysia, Thailand, and Indonesia, which account for almost two-thirds of
Producers Association world tin output, last week ratified an agreement to establish the Association
of Tin Producing Countries (ATPC). We believe Bolivia, Australia, Nigeria,
and Zaire, which provide an additional 23 percent of world tin production and
actively participated in discussions that led to the formation of the ATPC,
probably will also ratify the agreement. The ATPC was formed primarily to
promote tin usage, research, development, and marketing but also is empow-
ered to establish export and production controls, a buffer stock, minimum
pricing, and market intervention through financial and institutional arrange-
ments-measures Malaysia has traditionally advocated. The pact serves notice
to the International Tin Council (ITC) -a consortium of producers and
consumers-that producers are unhappy about its price support efforts and
offers a fallback position in the event the ITC fails to adequately address
producer concerns.
West Germany Seeking West German Interior Minister
To Restrict Turkish Zimmermann will present Bonn's proposals for limiting the size of the Turkish
Guest Workers population in West Germany during a meeting next month with President
Evren and other Turkish leaders. The West Germans will ask that Turkey
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voluntarily restrict the movement of its citizens to West Germany and accept a
l
d
p
an un
er which Bonn would offer financial payments to Turkish guest
The West German Government is unlikely to halt aid to Turkey. Zimmer-
mann, however, hopes a hard line will help persuade the Turkish Government
of the importance Bonn places on this issue. Although the return of large
numbers of Turks would aggravate Turkey's unemployment problem, Ankara
in the end probably would accommodate the West German initiatives. It would
not want to strain its close economic and security ties with Bonn.
National Developments
Developed Countries
Italian Economy on Eve Recently released government statistics indicate the Italian economy is in a
of Elections continuing slump and economic growth will, at best, stagnate this year.
Depressed capital investment and declining exports held real GDP to a 1.2
percent annual growth rate during the first quarter. Seasonally adjusted
industrial production fell nearly 13 percent in April, and the cumulative
January-April index was down 8.7 percent from the same period last year.
With inflation at about last year's 16-percent level because of a burgeoning
budget deficit and the depreciating lira, the monetary authorities probably will
keep a tight rein on the money supply and maintain high interest rates-the
prime rate is currently 19.5 percent. Another worrisome factor is that recent
labor unrest over the lack of progress in key wage negotiations could result in a
25X1
LORI
The state of the economy has become a major issue in national elections
scheduled for 26 and 27 June. Italian voters, however, disenchanted with the
power brokering activities of the parties, have generally been apathetic toward
campaign developments. Polls indicate that the outcome will be a relatively
unchanged coaliton government dominated by the Christian Democrats, who
advocate a stronger anti-inflation program, than the Socialists. If the coalition
can hold together, Rome is likely to adopt some watered-down version of
austerity this fall, consisting of a fiscal policy less expansionary than many
coalition members would like. The stimulative effects of any expansionary
policy will be blunted if the Bank of Italy keeps monetary policy restrictive.
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Less Developed Countries
Drought in Philippines The worst drought to hit the Philippines in 20 years will result in lower
agricultural exports and thus worsen balance-of-payments strains, according to
recent US Embassy reports. The Embassy estimates that production declines
in coconut and sugar-which together generate one-fifth of export earnings-
will total 10 and 25 percent, respectively. Corn and banana production is also
down significantly; government officials predict that corn imports alone will
exceed $100 million during 1983-roughly double last year's level. To avoid
becoming a net rice importer this year, Manila will draw down its 1.3-million-
ton buffer stock. The decline in agricultural exports will probably more than
offset expected gains from the rebound in international commodity prices this
year, which Manila had counted on to improve on the $2.8 billion trade deficit
recorded last year.
Food Shortages in the war has cut food availability in
Southwest Afghanistan southwest Afghanistan by reducing farm output and disrupting the internal
distribution system. Western observers and doctors working in hospitals in
Pakistan, near the southwest border of Afghanistan, report high levels of
malnutrition among wounded Afghan insurgents and Afghan refugees enter-
ing Pakistan during the first half of 1983. Although farmers are planting
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crops, yields reportedly have dropped sharply because of a lack of equipment
and labor and inadequate supplies of fertilizer and pesticides. We believe,
however, that distribution is a more immediate problem than domestic food
availability. Even under normal conditions, most of Afghanistan was depen-
dent at least in part on outside supplies, distributed both by government and
Mauritian Elections Prime Minister Jugnauth has decided to hold elections on 21 August rather
than risk a legislative defeat on the austerity budget that he had planned to im-
plement next month. A program to reduce government spending is crucial for
Mauritius to obtain assistance from the IMF and World Bank. Jugnauth needs
a strong popular mandate to push through not only the budget but also other
measures, including currency devaluation and a slowdown in wage increases
for government workers required by Western donors. We expect that economic
problems, particularly mounting unemployment and inflation, will be impor-
tant campaign issues; Jugnauth's principal opponent is his former finance
minister and the architect of the proposed austerity budget. Although both
leading contenders are avowed leftists, whoever emerges the winner will be
reluctant to pursue radical economic policies that would jeopardize access to
desperately needed Western funds.F____1 25X1
Soviet Grain Prospects Soviet grain prospects have deteriorated somewhat in recent weeks because of
crop damage caused by sukhovey conditions (hot, dry winds) in the southern
European USSR and a likely shortfall in the planned sown area. During late
May and early June, the southern portion of the Ukraine, the lower Volga Val-
ley, and the northern half of the North Caucasus were hit intermittently with
sukhovey conditions. We estimate that overall crop losses caused by the
sukhoveys totaled approximately 10 million tons. Nevertheless, an above
average crop of 205-210 million tons-well above the estimated annual output
of 185 million tons averaged during 1978-82-is still possible if excellent
weather prevails throughout the remainder of the season.
An additional 2-3 million tons of potential grain production has been lost
because of an estimated shortfall in plantings. On the basis of statistics
released by the USSR's Central Statistical Administration (CSA) on 6 June,
we believe that the area sown to grain this year will fall some 2-3 million hect-
ares short of the 124-million-hectare target. The CSA report indicated that
planting in the spring grain regions east of the Ural Mountains was running
seven to 10 days behind the average pace of recent years. Because the planting
season there ends in mid-June, we believe that 1-2 million hectares will not be
planted. In addition, a recent Soviet press report indicated that 1 million
hectares of land originally earmarked for grain were instead put into fallow.F_
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Areas Hardest Hit by Recent Sukhovey Conditions
500 1000
RP Slight
damage
grain growing region __ Z
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Minter and Spring
Graiins
Moderate to severe
damage
Black Sea
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Mediterranean ^~
Lebanon/ J
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Kara
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Cease-Fire Line - ! I
y-Chinese Iine
{? of control
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Delays at Chinese Ports Because of backward facilities Chinese ports have been unable to handle
shipments of US logs, wood pulp, and railroad ties. Imports of US timber and
pulp have increased rapidly since Beijing began purchases in 1980 and last
year totaled $237 million. Although the Chinese reportedly are working with
US suppliers to develop a computerized system whereby shipments would be
labeled for specific lumber mills, outdated port facilities will prevent an
increase in imports of wood and wood products from the United States for a
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West Germany: On the Verge
of a Modest Upswing
After three years of weak performance the West
German economy shows signs of recovery. The
government is convinced that accelerated private
investment is the key to reviving the economy and
reducing unemployment, and Chancellor Kohl has
pledged to provide incentives to industry while
curbing government spending. Nonetheless, we
doubt the recovery will be robust enough to have
much impact on unemployment. Moreover, achiev-
ing Kohl's budgetary goals will be difficult; trou-
fare costs stemming from the worst unemployment
in 30 years threaten to exceed projections.
institutes agree that a modest recovery is under
way. Their recent joint forecast puts real GNP
growth at 0.5 percent in 1983, with investment
leading the upturn. Our model yields slightly faster
growth, led by exports. If world import demand
picks up by the 2 percent expected by the IMF and
if oil prices remain stable or decline, we believe that
GNP growth could
r
eac
h 1
percent. Should interest
rates rebound sharply, however, the recovery could
stall before it really gets started.
West Germany: Percent
Real GNP Growth and Trade
Five
Institutes'
Forecast a
CIA
Model
Forecast
Domestic demand
-2.2
0.7
-0.1
Private consumption
-2.3
0
0.3
Government consumption
-0.1
0
-0.4
Equipment
-7.2
1.0
1.2
Construction
-4.5
3.0
3.7
Net foreign demand
29.3
-3.5
20.9
Exports of goods and services
3.7
0
2.8
Imports of goods and services
0.6
0.5
-0.6
Consumer price index
5.2
3.0
3.0
Current account balance
(billion vs $)
3
7
10.5
a The five leading economic research institutes in West Germany-
Kiel Institute of the World Economy; HWWA Institute, Hamburg;
IFO Institute, Munich; West German Institute for Economics
(DIW), Berlin; and Rhine Westphalian Institute, Essen-issued
their semiannual forecast on 2 May 1983.
Gaining Momentum
The West German economy appears to be turning
upward after three years of declining industrial
production and two years without any real GNP
growth. Except for a slight dip in April, business
sentiment has been noticeably upbeat since Novem-
ber, according to surveys taken by the Munich
Institute for Economic Research (IFO). IFO attri-
butes the brighter outlook to the reduced oil bill,
lower interest rates, Kohl's election victory in
March, and prospects for a revival in the world
economy-especially in the United States.
Domestic orders for industrial goods, which had
been dropping off until last autumn, are picking up.
Although the expiration of the investment tax
credit in December influenced the sharp jump in
orders for capital goods late in 1982, orders for
consumer goods, basic materials, and manufactures
have improved steadily. The decline in foreign
orders appears to be leveling off as well. Recent
government programs to subsidize housing should
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keep the construction industry moving. Housing
starts in February were 7 percent higher than at
the same time last year. Industrial production grew
at a 4-percent annual rate in the first quarter of
this year, suggesting that a broad upturn has
begun.
Consumer spending, which had been a drag on the
economy, was surprisingly strong in January-
March, exceeding the last quarter of 1982 by 2
percent, according to preliminary statistics. This
surge came largely through a drop in the savings
rate, and polls indicate that consumer attitudes are
growing more buoyant.
West Germany: Industrial Production
Current Policy Stance
Kohl's Christian Democratic-Free Democratic co-
alition, which came to power last October, has
pledged to trim the budget deficit and reduce the
government's role in the economy. As an initial
step, Bonn approved last December a revised bud-
get for 1983 that calls for a spending increase of 2.8
percent and a $17 billion borrowing requirement-
about 3 percent of GNP. To implement its plan,
Bonn has:
? Cut family allowances and student grants.
? Reduced some subsidies to industry and
agriculture.
? Restricted government salaries for employees not
covered by collective bargaining to 2 percent in
1983. .
? Delayed regular January increases in pensions
until 1 July.
? Boosted the private-sector share of unemploy-
ment insurance and pension contributions.
? Reduced ministry budgets across the board.
In addition, the value-added tax will be raised from
13 to 14 percent this July, and a controversial tax
surcharge for high income earners has been imple-
mented to finance additional subsidies to industry,
especially construction.
To assure budget restraint in 1984, the coalition
parties have agreed that spending increases should
be limited to 2 percent and borrowing should not
exceed $16 billion. To help meet this goal, the
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I I I I I I I I I I
589865 (A02618) 6-83
cabinet last month approved reductions in benefits
for the unemployed and imposed a pay freeze for
public-sector employees through March 1985. On
the revenue side, the coalition agreed that no new
taxes will be introduced in 1984. In fact, Bonn is
considering reductions in the corporate property
tax and higher depreciation allowances. The gov-
ernment has given no hints as to how it would offset
these tax losses.
The Bundesbank has gradually eased its monetary
policy to help stimulate private investment. The
central bank progressively lowered the Lombard
rate (a facility that supplements discount borrow-
ing) from 12 percent in October 1981 to 5 percent
in March 1983; the discount rate was cut from 7.5
percent to 4 percent over the same period. Firms
are now paying 8 to 9 percent for long-term funds
instead of the 14 to 15 percent that prevailed in
1981. The Bundesbank monetary growth target is 4
to 7 percent, but the intervention required to
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support the French franc within the European
Monetary System has caused a faster expansion.
Given the fragility of the economic upturn, the
Bundesbank has been reluctant to try to absorb the
excess liquidity. Bank President Poehl has stated
that the Bundesbank has gone as far as it can to
bring down interest rates, given the high budget
deficits in the United States and continued high US
interest rates. We believe the recent strength of the
US dollar and fear of rekindling inflationary expec-
tations could force the central bank to bring mone-
tary growth within the target range more quickly,
even if it causes a temporary increase in interest
rates.
Short-Term Outlook
Mild Domestic Upturn. We expect the upturn in
investment that began in the first quarter to contin-
ue throughout 1983. Investment as a whole could
register about a 3-percent gain, with construc-
tion-boosted by lower interest rates and govern-
ment investment incentives-rising almost 4 per-
cent. On the other hand, the revival in machinery
and equipment investment probably will be weak
until firms are confident that the domestic recovery
has taken hold. Firms will look especially for signs
that foreign demand has picked up significantly.
Depressed equipment investment over the last sev-
eral years has created a replacement need, not only
because some facilities are old, but also because
some are technologically outdated. If a world re-
covery develops, we expect equipment spending to
make a strong rebound in 1984. Stockbuilding will
probably not pick up until later this year when
business activity increases.
Even with the strong rebound in the first quarter,
we expect consumer spending to register a gain of
under 0.5 percent for the year. Confidence in the
recovery, the drop in heating oil prices that offset
income losses somewhat, and the relatively mild
winter probably account for the surprising first-
quarter performance. However, shorter working
hours and modest wage settlements-3.2 percent
by the Metal Workers Union and the Chemical
Workers Union and 2.6 percent by the steelwork-
ers-have set the stage for limited pay increases
and suggest that, for the third year in a row, West
German workers could take a cut in real wages.
Moreover, reduced government transfers and the
prospect of still higher unemployment will further
dampen consumer behavior. Unemployment-more
than 9 percent in May-will remain high through-
out 1983, in part due to the unusually large
numbers of new entrants to the labor force. Ac-
cording to Bonn's calculations, real GNP growth
needs to reach at least 2.5 percent before unem-
ployment will begin to decline. Officials anticipate
that unemployment this year will average 2.35
million and possibly reach 2.8 million-10.4 per-
cent-during the winter.
A particularly bright spot in the joint institutes'
forecast is the falling inflation rate. Inflation
peaked at more than 6.5 percent in the fall of 1981
and is currently 3 percent. We, along with the
institutes, believe that reduced oil prices, modest
wage hikes, and low levels of capacity utilization
could keep inflation at the current rate for at least
the rest of the year.
The External Account. Neither Bonn nor private
West German economists expect much stimulus
from the foreign sector this year. The economic
institutes see exports holding at last year's level
while imports pick up slightly in response to the
domestic recovery. Export prices should rise moder-
ately while import prices continue to drop slightly.
The institutes estimate the current account surplus
could more than double in 1983 to $7 billion.
We estimate, however, that exports, equivalent to
25 percent of West Germany's GNP, will grow
slightly faster than the 2-percent growth generally
projected for world import demand. Lower oil
prices will not only hold down West Germany's
import bill, but they will have a positive impact in
most of West Germany's industrial trading part-
ners-a group that buys almost 80 percent of West
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German exports. On the negative side, the strong
mark, boosted by the March revaluation within the
European Monetary System, will hurt West Ger-
many's competitiveness in some major European
markets-particularly France.
Import volume should pick up slightly as the
domestic economy recovers-growing 1.4 percent
this year compared with about 0.8 percent last
year. The recent strength of the dollar will offset
some savings from oil price cuts; nonetheless, ex-
ports in value terms will be substantially larger
than imports, the difference contributing to most of
the expansion in GNP and swelling the current
account surplus to over $10 billion.
Among the uncertainties about West German ex-
port performance are the impact of international
debt problems, falling incomes of oil exporters,
protectionism, and policy adjustments in France.
Our model of the West German economy shows
that GNP growth is quite sensitive to changes in
world demand. If world import demand expands by
less than 1 percent instead 'of the 2 percent we have
assumed, the West German GNP growth rate
would fall by half,. fixed investment would slow,
and machinery and equipment investment would
actually decline slightly. Even with export growth
held to 1 percent, however, the current account
surplus still would reach about $8 billion.
Clouds on the Policymaking Horizon
Chancellor Kohl apparently is banking both on the
global recovery and on his ability to foster business
confidence through facilitating the growth of busi-
ness profits. However, if the redistribution of na-
tional income away from wages toward profits is
too pronounced-especially in the face of continued
high unemployment-some labor militancy could
result.
concerns: labor's moderation and good working
relations with business and government have been
instrumental in West Germany's postwar prosperi-
ty. Moreover, Kohl will not want to offend the
Christian Democrats' growing labor constituency,
or challenge the consensus in West Germany that a
certain level of social-welfare spending is desirable.
Some unions have publicly opposed the govern-
ment's economizing efforts, especially the proposed
delay in the cost-of-living increases for pensioners,
and have threatened "clashes" if this measure is
implemented. Moreover, both the West German
Trade Union Federation (DGB) and industry lead-
ers are demanding new subsidies for the ailing steel
and shipbuilding industries. The DGB claims that a
cut in the subsidies would lead to more job losses.
Acquiescence in either demand would undermine
Bonn's budget goals. Despite Finance Minister
Stoltenberg's adamant defense of the need to main-
tain austerity for several years, the government
may have reached the limits of this approach.
With unemployment running somewhat higher
than had been anticipated when the current budget
was drafted, Bonn may have to soften its stance.
The opposition, which has labeled the government's
course as long on principle but short on specifics, is
calling for stimulus in the form of additional job
creation programs. Because of his political commit-
ments, the widespread consensus that financial
order must be restored, and the current weakness of
the opposition, we do not believe Kohl will soon
abandon fiscal austerity. Instead, he might advance
the time schedule for public works projects in 1984.
Apparently Bonn is already speeding up by six
months such projects incorporated in this year's
budget. With unemployment expected to worsen
and some major industries still in serious trouble,
Kohl and his financial planners ultimately may be
forced to consider some further stimulus in the
form of a supplemental budget late in the year.
For Kohl to retain public support for his belt-
tightening measures, progress in creating jobs will
be necessary along with some evidence that labor is
not bearing all of the burden of economic adjust-
ment. In general, Kohl will not ignore labor's
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Secret
Foreign Labor in the USSR I
Most of the estimated 135,000 foreign workers in
the USSR come from Communist countries and
are employed primarily on construction and timber
cutting projects in remote areas of the USSR. The
economic impact of foreign labor in the USSR has
been commensurate with its small share of the
Soviet labor force. Even in construction and timber
it accounts for a very small proportion of total
employment. Foreign workers in the USSR are
generally volunteers, despite rumors among Viet-
namese refugees that their countrymen are there as
forced labor. By exporting labor, Communist coun-
tries are in effect bartering manpower for goods,
including energy and raw materials that might be
much more expensive if obtained elsewhere. In our
view, labor shortages in the primary labor export-
ing countries of Eastern Europe, as well as possible
Soviet concern for the political consequences of
allowing foreigners within Soviet borders, will con-
tinue to limit the use of foreign labor in the USSR.
Neither the Soviet Government nor other Commu-
nist governments sending workers to the USSR
publish figures on the number of foreign workers in
the Soviet Union. Our estimate, which is based on
fragmentary evidence and is intended primarily to
provide a proper order of magnitude, indicates that
in 1982 there were about 135,000 foreign workers
in the USSR. The principal source of uncertainty is
the wide range of figures-5,000 to 250,000-
provided in several conflicting reports on the num-
ber of Vietnamese workers in the USSR. We
believe the actual total is near the lower end of the
Total without Vietnamese 115,500
Total with 20,000 Vietnamese 135,500
Total with highest estimate of 365,500
Vietnamese
Finland
Other
1,500
10,000
11,000
500
7,000
2,500
a Maximum number of foreign workers believed to have been in the
USSR at any time in 1982.
range-between 10,000 and 20,000. Even in the
unlikely event that the upper end of the range were
correct and there were 365,000 foreign workers in
the USSR, the share of foreign labor in the work
force would still be only about one-fourth of 1
percent.
The largest contingent of foreign workers now in
the USSR is probably from Bulgaria. At a private
US-Soviet seminar in January 1982, the director of
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the World Economics and International Relations
Institute in Moscow stated that there were 50,000
Bulgarians working in the Soviet Union. Most of
the remaining workers come from the other East
European countries, North Korea, Vietnam, and
possibly Cuba. Less than 10 percent are from
Western countries, mainly Finland.
Soviet Motives in Using Foreign Labor
The Soviet Union has used foreign labor to:
? Facilitate construction work. Foreigners are
sought in large measure to provide labor for
construction projects in forbidding and remote
areas of the country where it is difficult to attract
Soviet workers.
? Help assimilate imported plant and equipment. A
small number of highly trained technicians, gen-
erally though not exclusively from Western coun-
tries, are hired to ensure that the facilities oper-
ate according to specifications and to instruct the
Soviets in their use.
? Help keep the USSR's external financial ac-
counts with other Communist countries in bal-
ance. Foreign labor services can be used to pay
for current Soviet exports of goods and services,
for future deliveries, or to repay debt, and the
Soviets frequently prefer to import labor as the
balancing item or as payment for future deliver-
ies.
So far, the Soviets do not seem to have relied on
foreign labor to help relieve the general labor
shortage they have been experiencing in recent
years. The number of workers imported has been
too small and the uses of these workers too restrict-
ed to have served that goal. Even where most
foreign workers are concentrated-the timber and
construction industries-they do not constitute a
large share of total workers. In 1982 foreign timber
workers were slightly over 1 percent of the overall
timber labor force of 2.5 million. For construction
the figure was slightly less than 1 percent of 11.3
The best examples of major construction projects in
which foreign workers have participated have been
the joint investment projects with other CEMA
countries. The largest of these was the Orenburg
pipeline, begun in 1974 and completed in 1979.
Although East European countries provided only
one-half the number of workers they originally
promised and also reneged on commitments to
furnish skilled labor, participation was substantial.
In 1977, for example, according to a Soviet news-
paper, a total of 13,550 workers from Czechoslova-
kia, East Germany, Hungary, and Poland were
employed on the project. Other Soviet construction
projects employ mainly Bulgarians.
The timber settlements in which foreigners work
are located in remote areas of the country. Since
1967, roughly 7,000 to 10,000 North Koreans have
been cutting timber in the Soviet Far East for
export to North Korea. In 1980 some 19,000
Bulgarians also were cutting timber in Siberia,
For supplying labor, the countries
participating in the forest projects retain part of the
timber, 40 percent in the case of the Soviet-
Bulgarian timber agreement.
Western technicians have participated in major
projects such as the construction of the Tol'yatti
automobile plant and hotels for the Moscow 1980
Olympics. American, Italian, West German, and
French technicians helped build the Kama River
truck factory. US companies also participated in
construction of the Orenburg gas pipeline and
various chemical plants. Recent or current projects
using Western technicians include:
? Construction of the Kostamuksha town and min-
ing complex in Soviet Karelia by Finnish con-
struction workers.
? Construction of the Novolipetsk and Kursk steel
plants, with the help of French and West German
technicians.
Researchers from CEMA countries are also partic-
million.
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24 June 1983
25X1
11
25X1
25X1
II
25X1
11
25X1
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Researchers from CEMA countries are also partic-
ipating in projects conducted at joint research
institutes such as the International Center for
Scientific and Technical Information, the CEMA
International Institute of Economic Problems, and
the Institute for Atomic Physics in Dubna near
Moscow.
Why Other Countries Supply Labor to the USSR
Most Communist countries and Finland provide
manpower to the USSR as payment for present or
future deliveries of goods, notably raw materials
and energy. For example, in return for work on the
Orenburg pipeline, the five East European coun-
tries that participated are each guaranteed annual
supplies of 2.8 billion cubic meters of gas over a 20-
year period; a portion is to be supplied by the
USSR free of charge, according to a Western
article on the project. Finnish construction services
and other exports are credited against imports of
Soviet raw materials and goods, particularly oil,
natural gas, electricity, and lumber.
It is difficult to determine whether a country is
getting a good deal by exporting workers in return
for Soviet resources; data on the terms of these
goods for labor exchanges are not available. Many
countries trading on bilateral accounts with the
USSR would find it difficult to pay hard currency
for much-needed energy and raw materials if they
turned to Western suppliers. On the other hand,
some of the East European countries that are short
of labor face a substantial cost in lost production
resulting from the export of workers.
East Europeans and North Koreans. Questions of
selection and compensation of workers and labor
codes are decided beforehand in agreements be-
tween the USSR and the country or firm supplying
the labor. The home country is responsible for
hiring individual workers or groups of workers,
according to a Hungarian emigre study.
Foreign workers are offered substantial material
and financial benefits to work in the USSR since
the conditions under which they labor are frequent-
ly harsh. Food is cheap, medical care free, and
lodging is available either free or for a nominal
rent. Wages are higher than in their native coun-
tries and often higher than Soviet pay rates. Pay-
ment is made either in rubles, in the worker's home
currency, or in special checks denominated in
dollars entitling the user to shop at stores closed to
ordinary consumers; the last two forms of payment
are supplemented by a ruble per diem.
Contact between foreign workers in the USSR and
the local populace is often limited. Foreign workers
are not allowed to travel freely in the USSR, and
they live apart from the populace. The higher
wages paid foreign workers and the more favorable
living standards enjoyed by the foreigners in their
home countries could lead to discontent among
Soviet nationals. Soviet leaders also may hope to
prevent "political contamination" of the populace.
Despite the substantial financial and material in-
centives offered, some countries, especially the
more affluent East European nations, find it diffi-
cult to recruit and retain laborers for work in the
Soviet Union.
25X1
25X1
I50 percent of the 25X1
Bulgarians who signed on for work did not stay to
fulfill their two-year contract.
Vietnamese Workers. The USSR recently began
importing Vietnamese workers on a substantial
scale under labor cooperation agreements signed in
early 1981. Despite Soviet claims that the current
program is a training program, the Vietnamese
Minister of Labor in the Vietnamese press referred
to it as "a new form of labor cooperation," distinct
from earlier programs. A refugee whose friend
escorted workers to CEMA countries said that
Vietnam initiated the export program in order to:
? Pay back foreign aid debts to the USSR and East
European countries.
? Resolve unemployment problems in Vietnam by
sending Vietnamese abroad.
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? Lessen the impact of food shortages by having
fewer people dependent on the consumer market.
? Bring in foreign exchange.
The information available indicates that the use of
Vietnamese workers differs from that of other
groups of foreign workers in three respects-the
kinds of industries in which Vietnamese work, the
wages paid, and the length of stay in the USSR.
According to Soviet and Vietnamese labor officials,
Vietnamese are working in Soviet enterprises pro-
ducing textiles, chemicals, and machinery as well
as in irrigation, land reclamation, coal mining, and
construction. This may reflect the Vietnamese Gov-
ernment's desire that Vietnamese youth learn skills
that will be useful when they return to Vietnam. To
date, however, we have no evidence that Vietnam-
ese are helping to construct oil or gas pipelines in
the Soviet Union.
Contrary to East European experience and Soviet
press reports that wages of Vietnamese workers
equal those of their Soviet coworkers (and therefore
are less than those of other foreign workers), por-
tions of the wages earned by Vietnamese workers
are being withheld in repayment of Hanoi's debt to
the USSR, according to diplomatic, refugee, and
other reports. The Vietnamese Government collects
a portion of workers' wages in the form of a tax
that is used to pay Hanoi's import bill to the Soviet
Union. The size of the reduction made for debt
repayment is not known-estimates from these
reports range from 30 to 70 percent.
A review of the often contradictory evidence indi-
cates that Vietnamese workers are not coerced into
working in the Soviet Union. For its part, the
USSR probably would be reluctant to accept a
large number of "politically unreliable" workers, if
only because of the difficulty of totally isolating
workers from the local populace. Diplomatic, refu-
gee, and other sources who have obtained their
information directly from participants or officials
involved in the Vietnamese labor cooperation pro-
gram say that it is voluntary. These reports seem on
balance more reliable than the reports-largely
based on rumor-that the program is involuntary.
The export program reportedly is popular with
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24 June 1983
Vietnamese as a means of legally escaping unem-
ployment and the low standard of living in Viet-
nam; selection apparently is limited to reliable
Vietnamese. Vietnamese families are eager to have
family members go abroad and send home consum-
er goods that are in short supply in Vietnam or can
be sold on the black market. Young Vietnamese
reportedly often bribe their way into the program.
Prospects
We doubt that tightening labor conditions in the
USSR will lead to a significant increase in the use
of foreign labor-either in the short or long term:
? The USSR's ability to increase its foreign labor
force is restricted by labor shortages in Eastern
Europe. Only Vietnam has a domestic economic
situation conducive to shipping labor abroad.
? The Soviet regime would probably oppose large-
scale expansion of labor from abroad, primarily
because of the potential that guest workers have
for causing discontent among the local populace.
(U)
The largest increment in foreign workers during
the 1983-85 period will come from Vietnam. Refu-
gee reports and Western press statements suggest
that the number of Vietnamese could reach a few
hundred thousand by 1985, but based on more
reliable reports from Vietnamese and Soviet offi-
cials and refugees connected with the program, we
think it much more likely that the number will not
exceed 100,000.
The largest increase in non-Vietnamese workers in
the next two or three years could come from East
Germans working on the West Siberia-Western
Europe natural gas pipeline. However, joint CEMA
projects in the USSR planned for the 1981-85
period are using no more, and possibly even fewer,
foreigners than projects under way during the
1970s. Therefore a large net increase in non-
Vietnamese foreign workers is unlikely.
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