INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807740001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: September 13, 2010
• Sequence Number: 1
• Publication Date: October 18, 1985
• Content Type: REPORT

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Directorate of Sit
-,5"- e~~
Weekly
International
Economic & Energy
Wit-
DI ljlW S5 042
18 L tuber 1985
COQ' 6 A 6
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International
Economic & Energy Weekly
iii jnopsis
L
I / Perspective-Japan's Growin
C-Japan: Growin
Trade Surplus: What Can Tokyo Do?
South Africa: Impending Debt Negotiations
Venezuela: Economic Controls Limit Growth
ALA
17 atin America: Continued~ Danger From Inflation
21 EMA's Troubled Consumer Goods Industries: A Soviet Perspective
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25 Briefs
25
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Energy
International Finance
Global and Regional Developments
National Developments
% Comments and queries re arding this publication are welcome. They may be
directed to Directorate of Intelligence,
Secret
DI IEEW 85-042
18 October 1985
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International
Economic & Energy Weekly
Synopsis
Perspective-Japan's Growing Trade Surplus: What Can Tokyo Do? I 125X1
There probably is little Tokyo can do-short of sharply restricting exports-to
keep the trade surplus with the United States much below its current $45
billion annual rate over the next year. Nonetheless, we believe Tokyo could
take a number of steps-in the form of a coordinated program-to slow and
perhaps reduce its trade surplus with the United States within two to three
EC-Japan: Growing Trade Tensions
West European leaders are becoming increasingly frustrated with Tokyo over
Japan's growing trade surplus with Western Europe, the concentration of
Japanese exports in manufactures sensitive to the West Europeans, and the
unwillingness of Tokyo to open up Japanese markets to EC exports.F____1 25X1
South Africa: Impending Debt Negotiations) 25X1
Talks involving South African financial officials and the country's major
creditors are scheduled to begin next week. We expect a rescheduling
agreement will be forthcoming, but recalcitrance on the part of the South
Africans or a new political or economic shock could unravel the proceedings.
Venezuela's reliance in recent years on economic controls has allowed it to
protect itself from some, mostly short-term, economic blows, but at the cost of
more fundamental distortions in the structure and efficiency of the economy.
Despite some recent loosening of controls, we believe President Lusinchi plans
only to tinker with the current system rather than implement the broad
economic liberalization that business says it wants.
Latin America: Continued Danger From Inflation
Popular discontent with price rises and the resultant declines in living
standards have recently led most Latin American governments to implement
tougher anti-inflationary measures. We doubt they will succeed in bringing
down high inflation, which we believe will continue to omic
recovery and to alienate the middle and lower classes.
iii Secret
DI IEEW 85-042
18 October 1985
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CEMA's Troubled Consumer Goods Industries: A Soviet Perspective
Faced with chronic shortages of common consumer items and production
bottlenecks, Moscow is calling on its CEMA allies to increase exports of
finished consumer goods. Eastern Europe, however, may be hard pressed to
meet Soviet expectations for soft goods because production prospects to the
year 2000 appear bleak.
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International
Economic & Energy Weekly
Perspective Japan's Growing Trade Surplus: What Can Tokyo Do?
In his meeting with President Reagan next week, Prime Minister Nakasone
will probably insist Japan is doing all it can to reduce its trade surplus with the
United States. Nakasone is likely to cite the recent acceleration in planned
tariff cuts, easing of product and certification standards, the joint currency
intervention begun last month, and measures to expand domestic demand
currently under discussion in the Diet. The Prime Minister is also likely to
stress planned increases in foreign aid and defense spending as examples of Ja-
pan's growing role in the international community.
There probably is little Tokyo can do-short of sharply restricting exports-to
keep the trade surplus with the United States much below its current $45
billion annual rate over the next year. Even export restrictions might prove
ineffective for products, such as automobiles, in which price increases could
offset the drop in export volume. At the same time, a number of studies by US
academics suggest that, if Tokyo were to remove all of its trade barriers, its
imports would increase by at most $5-10 billion-with no guarantee that most
of this would go to US firms. The easing of some agricultural barriers over the
past year, for example, has resulted in sharply increased imports from
Australia. Moreover, even if currency intervention is successful in a sustained
strengthening of the yen, it will probably take 12 to 15 months before the im-
pact shows up in trade statistics.
Nonetheless, we believe Tokyo could take a number of steps-in the form of a
coordinated program- to slow and perhaps reduce its trade surplus with the
United States within two to three years. Measures to stimulate Japanese
domestic demand would have the most visible impact on the trade balance over
the medium term, in our view. Stimulative measures would boost economic
growth-thus raising imports-and also absorb some of the excess domestic
savings now flowing abroad and depressing the value of the yen. Tokyo could:
? Cut taxes or implement tax credits to encourage consumer spending, housing
construction, and domestic infrastructure investment.
? Revise its monetary policy to provide easier credit for housing and consumer
goods, while being careful not to reduce Japanese interest rates enough to ac-
celerate the capital outflow.
? Expand government spending on public works or social insurance programs.
? Accelerate efforts to open its market and liberalize its financial sector.
? Embark on longer-term measures to reduce the high savings rate and
increase domestic consumption and investment-such as reducing or elimi-
nating the tax exemption on personal savings.
? Adopt policies designed to reorient private investment from productivity-
enhancing plant and equipment toward domestic infrastructure.
1 Secret
DI IEEW 85-042
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Tokyo could also encourage the Japanese private sector to accelerate actions
that may ease the trade imbalance in the next few years. Japanese automobile
and electronics companies are stepping up equity investment in the United
States to circumvent possible export restrictions, reducing their future need to
export such products. Japanese securities firms-fearing an eventual sharp fall
in the dollar-may soon cut back on the purchases of US stocks and bonds,
even if the interest rate differential remains. This would ease downward
pressure on the yen.
Political realities in Japan-including the commitment to reducing the deficit
without tax increases and powerful opposition to changing the central role of
savings in the Japanese economy-make large-scale adoption of public-sector
measures unlikely any time soon. Nonetheless, concern in recent months over
possible US trade restrictions has led Tokyo to consider some of these
proposals, especially domestic demand expansion, more seriously than in the
past; some minor tax cuts and housing incentive measures may be adopted in
the current Diet session. Fear of US actions has eased a bit in the past few
weeks, however, with the perception of Japanese officials that Congress is now
less likely to pass stiff protectionist legislation aimed at Japan.
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EC-Japan: Growing Trade
Tensions
West European leaders are becoming increasingly
frustrated with Tokyo over Japan's growing trade
surplus with Western Europe, the concentration of
Japanese exports in manufactures sensitive to the
West Europeans, and the unwillingness of Tokyo to
open up Japanese markets to EC exports. An EC-
Japan trade ministerial meeting next month in
Tokyo probably will not produce enough results to
ease West European concerns. In the meantime,
Community members continue to take protectionist
steps to keep the pressure on Tokyo to do more.
EC-Japanese Trade
Western Europe's trade with Japan has grown
more lopsided in the last few years. Last year the
Community's deficit with Japan was a record $10.9
billion, or fourfold the amount nine years ago and
nearly equivalent to the EC's total trade deficit.
The deficit has grown steadily since 1980-despite
a 40-percent appreciation of the yen against the
West European currencies-and the 1985 figure
will be on a par with, or slightly exceed, the 1984
deficit. According to our econometric model, bar-
ring a recession in Western Europe, the bilateral
deficit would climb to $12 billion in 1986 and $13
billion in 1987. Excluding intra-Community trade,
purchases of Japanese goods now account for 6.5
percent of EC imports, while sales to Japan amount
to only 2.5 percent of total EC exports.
The Japanese have been able to overcome the
exchange-rate factor through aggressive export pol-
icies. Since profits from sales to the United States
have generally been good, the Japanese also have
been willing to cut profit margins in Europe to
maintain market share. Low prices on Japanese
photocopiers, typewriters, excavators, and ball
bearings have led to recent dumping investigations
by the European Commission.
West Europeans have added to the deficit problem
by ignoring the Japanese market, preferring to
concentrate on their larger, more familiar EC
market. With high Community unemployment and
slow economic growth, EC countries are now more
willing to tackle the Japanese market. Their efforts,
however, have been hampered by inept marketing,
impatience in developing ties to Japanese wholesale
and retail distributors, and failure to meet the
standards of the quality-conscious Japanese con-
sumers. In addition, Japanese nontariff barriers-
licensing procedures, product standards, the retail
distribution system, and attitudes toward foreign
products-contribute to the low level of EC exports
to Japan.
In addition to the growing deficit, West Europeans
are also concerned about the increasing concentra-
tion of Japanese exports in machinery and trans-
portation equipment-mainly autos. Since 1980,
their share of EC imports has risen from 54 percent
to 64 percent. In 1984, autos, stereos, computers,
cameras, and ships accounted for 44 percent of EC
imports from Japan up from 31 percent in 1980.
West Europeans argue that this product concentra-
tion has contributed to the problems faced by some
EC industries, such as the British motorcycle and
German camera industries. West European govern-
ments are especially concerned about the impact of
foreign competition on traditional industries with
large work forces-machinery, autos, and ship-
building-and on those areas where they hope to
improve competitiveness, particularly in high tech-
nology and electronics
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European Community-Japanese Trade
Exports
Imports
Balance
Exports
Imports
Balance
European Community
3,408
6,006
-2,598
8,543
19,403
-10,861
West Germany
1,137
1,658
-521
2,649
6,621
-3,973
United Kingdom
810
1,471
-661
1,522
4,675
-3,153
Netherlands
214
726
-511
434
1,816
-1,381
Belgium-Luxembourg
162
509
-348
459
1,349
-891
Greece
39
336
-297
76
791
-715___
France
500
699
-199
1,237
1,936
-699
Denmark
146
216
_-69
878
937
-58
Ireland
34
58
-24
239
247
-8
Italy
365
333
32
1,049
1,032
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EC Response
Without trade restrictions, Japanese penetration of
the EC market would be even higher. France, for
example, restricts the import of Japanese cars to
only 3 percent of its market, while Italy allows just
2,500 Japanese cars to be imported per year. As a
result, Japanese cars account for 10 percent of the
EC market, compared to about 20 percent in the
United States.
Since 1982 West European governments have tak-
en an increasingly tough position on trade issues
with Japan. The EC in 1983 enacted a long list of
nontariff restrictions covering vehicles, video re-
corders, TVs, machinery, and other goods. Most
recently, the EC Commission boosted the import
duty on VCRs by 6 percentage points to 14 percent;
the action was timed to coincide with the expiration
of the restraint agreement with Japanese VCR
producers. The Europeans are probably willing to
impose more costly tariffs if Japanese sales of
VCRs in the Community greatly exceed last year's
quota of 2.25 million units.
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EC: Trade With Japan, 1975-84
EC: Imports from Japan, by Type
EC imports 1975
6.0 billion US $
EC deficit
with Japan
1980
0 1975 80 84 17.1 billion US $
Japan's Response: Too Little, Too Late
Japanese efforts this year to reduce trade tensions
with the Community have been unsuccessful and
backfired in one case. Japan and the EC in January
set up the Trade Expansion Committee (TEC) as a
trial forum to resolve trade problems, mainly
through increasing EC exports. Instead of lowering
tensions, the TEC has become an additional source
of Community irritation with the Japanese, making
an extension beyond 1 February 1986 doubtful.
Two TEC meetings have been held thus far and,
according to US Embassy reporting, the EC dele-
gates are "extremely unhappy" because there has
been "no progress on anything."
The EC's evaluation of Japan's "action pro-
gram"-the latest effort by Tokyo to soften foreign
criticism of Japanese import restrictions-has been
largely negative. The tariff reduction portion,
which consisted of reductions by 20 percent or
more on a list of 1,800 items, was viewed by
1984
19.4 billion US $
307012 10-85
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EC and Member Countries:
Major Restrictions
on Japanese Products
Color TVs
and radios
"Unofficial" agreement be-
tween British auto industry and
Japan's. Same measure im-
posed on light-commercial
vehicles in 1981.
Voluntary quotas.
Video
cassette
recorders
1983
EC-wide
Video
cassette
recorders
Color TV
tubes
Color TVs
Autos
Numerical-
ly controlled
machine
tools
mercial
vehicles
Motorcycles
Quartz
watches
Cast iron
piping
accessories
Various restrictions, e.g., "cus- relations
toms formalities" and prior im-
port reporting.
Voluntary restraint of 2.25 mil-
lion units in 1984 (3.95 million
in 1983).
Voluntary restraint of 900,000
units.
Voluntary restraint through an
export forecast by Japan (West
Germany in 1981).
Voluntary restraint through ex-
port forecast by Japan (West
Germany and Benelux in 1981).
Voluntary restraint through ex-
port forecast by Japan.
Moderation of exports by
Japan.
Community leaders as modest and directed more
toward the United States. A recent EC Commis-
sion study noted that agricultural products, choco-
late, biscuits, leather, and shoes-products of par-
ticular interest to the EC-were not included.
Tariff reductions on wine and spirits, which the
Community has long sought, will not be effective
until 1987. In addition, the study concluded that
the action program's measures dealing with the
more important nontariff barriers will not have
much effect on the trade deficit. Nakasone's efforts
to sell the action program when he visited Western
Europe in July failed to ease West European
concerns, and, partly as a result, EC Commission
this time.
Community officials probably will make the flaws
they find with the action program and lack of
progress in TEC the dominant topics of the Novem-
ber meeting. We expect little to come out of the
discussion to satisfy the EC's major complaint-the
growing trade deficit. Tokyo's major concern in the
short run is its trade relations with the United
States-the largest market for Japan-making any
major new trade concession for the EC doubtful at
Japanese intransigence on trade liberalization will
likely draw more protectionist responses from the
West Europeans, as well as complicate the way to
Moderation of exports by GATT negotiations next year. Without serious
Japan. market-opening measures, Japan faces more tariff
Moderation of exports by
Japan.
Quantitative restriction through
import licensing.
1984
France
Video
Import monitoring (a priori).
cassette
recorders
Hi-fi equip-
ment and
motorcycles
Import surveillance.
UK
Numerical-
ly controlled
machine
tools
Interindustry agreements.
increases, more antidumping actions, broader use
of voluntary export restraints, and other similar
restrictive actions on the part of the West Europe-
ans. Continued consultations in the TEC may
produce results in a few areas-most likely Japa-
nese promises to increase foreign investment in
western Europe. Japanese direct investment-pri-
marily auto plants-in the EC now totals $7.7
billion, up 42 percent from 1982. Nevertheless, the
Motorcycles Surveillance and administrative President Delors proposed holding a ministerial-
guidance to importers. level meeting in November to discuss EC-Japanese
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West Europeans are growing more weary and will
probably look to the upcoming GATT round as a
more persuasive forum to rein in the Japanese.
We believe West European leaders would be recep-
tive to any coordinated effort to put pressure on
Japan to open its markets. Both Washington and
the Community, however, are wary of actions by
the other which might divert more Japanese ex-
ports to their markets. As a result, any major
protectionist measures implemented by the Com-
munity, or a member country, probably would
increase protectionist sentiment in the United
States.
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South Africa:
Impending Debt Negotiations
Talks involving South African financial officials
and the country's major creditors are scheduled to
begin next week, but Pretoria has already acknowl-
edged it likely will extend its four-month moratori-
um on principal repayments before rescheduling
can be completed. South Africa's long-term debt
strategy appears to revolve around paying a premi-
um to keep credit lines open with West European
banks while gradually paying off creditors uninter-
ested in maintaining their current South African
exposure. We expect a rescheduling agreement
eventually will be forthcoming, but recalcitrance on
the part of the South Africans or a new political or
economic shock could unravel the proceedings.
Preparations for Debt Talks
South Africa's commercial bank creditors seem
resigned to a rescheduling of the country's $14
billion in short-term debts, and both Pretoria and
creditor banks are preparing for negotiations. =
South Africa: Total Foreign Debt
by Length of Maturitys
Billion US $
Due in 6 months or less
Due in 6 to 12 months
Due in more than 12 months
a Estimated as of October 1985. US banks are owed
$3.5 billion of the $14 billion due in 12 months or less.
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initial talks are sched-
uled to begin in London the week of 21 October.
Pretoria has advised banks it will need to extend its
four-month moratorium, however, to gather the
mechanics of international finance, making him
better suited for the technical talks with foreign
necessary data for a rescheduling. Unlike the Latin
American debtor countries, most South African
borrowers are private banks and firms, making
tabulation of the total debt more difficult. Pretoria
must gather data from some 50,000 South African
individuals and businesses on their foreign liabil-
ities, according to the US Embassy.
On the South African side, Director General of
Finance Chris Stals will lead the country's newly
formed Standstill Coordinating Committee, which
will gather data on the debt, represent Pretoria in
debt negotiations, and adjudicate disputes under
the moratorium. Although lacking the international
stature of Reserve Bank Governor Gerhard de
Kock, Stals probably has a keener grasp on the
The organization of foreign bank creditors is less
clear. Debtor nations and commercial banks tradi-
tionally have negotiated reschedulings face to face.
Many bankers are leery of appearing to help South
Africa out of its crisis, however, and Pretoria
sought to defuse the political tension by appointing
an intermediary between the countr and its credi-
tors. Fritz
Leutwiler, former president of Switzerland's cen-
tral bank and of the Bank for International Settle-
ments, has agreed to act as mediator.
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DI IEEW 85-042
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The definition of Leutwiler's role remains murky,
however, and some international banks are encour-
aging formation of a bank advisory committee to
negotiate on their behalf. The committee method-
using a geographically balanced representation of
key creditor banks-has been used with the debt-
troubled Latin American countries since 1982 and
is the method with which bankers are most com-
fortable. a major
Swiss bank is assuming leadership o the creditor
banks, after several other banks refused the posi-
tion. This would be the first time a US bank will
not lead a major international private debt resched-
uling.
Even if foreign banks organize into a traditional
advisory committee, they still may be hesitant to
bargain directly with Pretoria. In this case,
Leutwiler might be required to shuttle between
South African officials and foreign bankers at
separate-even if nearby-locations. We believe
Leutwiler's primary value will not be in substantive
negotiations, however, but rather as a focus for
outside attention, thus deflecting criticism from the
commercial banks.
Domestic Concerns:
Complicating the Negotiations
Economic austerity measures-imposed in August
1984 to reduce South African inflation and over-
seas borrowing by cutting import demand-have
pushed the economy into a severe recession. These
measures, which included a record 25-percent
prime lending rate and restrictions on consumer
borrowing, failed initially to cut foreign debt as
intended. According to US Embassy sources, South
African banks profited from the high domestic
interest rates by borrowing cheaply abroad to lend
at home.
Meanwhile, the deepening reces-
sion added to tensions in black townships by raising
unemployment rates and lowering real wages. The
riot-torn eastern Cape Province was hit especially
hard as high prime lending rates and restrictions on
consumer borrowing hurt the sales of the local
automobile industry.
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Pretoria has responded to growing black unemploy-
ment and the bankruptcy of many white businesses
by gradually easing restrictive policies as the econ-
omy bottomed out. The prime rate has fallen to 25X1
18.5 percent. Late last month Pretoria announced
projects to create jobs, assist small businesses, and
provide additional food relief. Credit restrictions
and automobile sales taxes also were reduced
slightly. In our judgment, the measures probably
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will keep the economy from slumping further but
will do little directly to reduce black unemploy-
ment-now running at more than 25 percent.
South African officials clearly recognize that
measures to stimulate the economy will raise im-
port demand and complicate debt negotiations by
leaving less foreign exchange for debt repayment.
Pretoria last month raised customs duties on goods
not covered under GATT (about 55 percent of
South African imports) by 10 percent. The $200
million in expected revenues will be used to fund
the job creation program. The growth of import
demand also will be slowed by the weak value of
the South African rand-now worth about 40 cents
compared to 90 cents in 1983-and the higher cost
and more limited availability of trade credit.
The domestic economic situation probably will
cause Pretoria to approach the debt talks cautious-
ly. Although some influential Afrikaner business-
men probably favor a tough stance in the debt
rescheduling talks--including a tacit threat to re-
nounce the debt altogether and go it alone-the
government appears committed to repayment,
though at a pace it feels will not unduly penalize its
domestic economy. South African officials believe
that their country will have to repay less than half
of its current debt before new credit will be offered.
Meanwhile, South Africa borrowers are paying
premiums to maintain current credit lines with
West European banks,
Although we believe South Africa and foreign
banks eventually will reach agreement on a re- 25X1
scheduling package, we cannot rule out develop-
ments on both sides that might set back debt
negotiations and possibly compound Pretoria's fi-
nancial troubles over the short term. While the
large money center banks seem willing to go along
with a rescheduling, a disgruntled smaller bank
could demand immediate repayment of all its loans.
Publicity over such a move would put pressure on
other creditors to be less accommodating and fur-
ther complicate banks' efforts toward a unified
bargaining position. In addition, a new political or
economic shock in South Africa remains a possibili-
ty. The arrest of another key antiapartheid leader,
another major clash between demonstrators and 25X1
police, or new controls on international capital
flows might result in still further cuts in the
country's credit lines. Moreover, continued vacilla-
tion by Pretoria-which already has wavered on
the categories of debt included under the standstill
and also recently backdated the moratorium by five
extra days-could draw a hostile response from 25X1
foreign bankers.
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Venezuela: Economic Controls
Limit Growth
Venezuela's reliance in recent years on economic
controls has allowed it to protect itself from some,
mostly short-term, economic blows, but at the cost
of more fundamental distortions in the structure
and efficiency of the economy. Tight controls have
enabled Caracas to shore up the foreign payments
account and hold inflation in check, for example,
but they also hastened the reduction of private-
sector investment and enlarged the public-sector
role in the economy. Despite some recent loosening
of controls, we believe President Lusinchi plans
only to tinker with the current system rather than
implement the broad economic liberalization that
business says it wants. Thus, we project continued
near-term economic stagnation for Venezuela,
bleak prospects for trade and investment, and some
risks for creditors even under the imminent mul-
tiyear debt rescheduling agreement.
Growing Reliance on Controls
Since 1982, Caracas has increasingly resorted to a
wide range of restrictions to manage the economy.
Tough foreign exchange controls were adopted to
cut imports and stop capital flight to prevent a cash
crisis, according to the US Embassy. Despite fre-
quent promises to loosen economic restraints, Lu-
sinchi, since taking office in 1984, has continued to
use them to combat specific problems.
Externally, Venezuela now regulates most foreign
transactions to conserve its foreign exchange re-
serves and stimulate production of import substi-
tutes. US Embassy reports and the financial press
indicate that imports are limited by outright bans,
prior licensing rules, stiff luxury tariffs, and multi-
ple exchange rates.' The lower exchange rates are
' Currently the foreign exchange authority, RECADI, administers
rates of 4.3 and 7.5 bolivars per US dollar, and the Central Bank
maintains a managed "free-market" rate of about 14 bolivars per
granted only for debt payments and "essential
imports" such as foodstuffs, machinery, and spare
parts, while other goods and capital outflows incur
the highest rates.
Caracas now controls foreign investment in line
with the Andean Pact's Decision 24, which puts
limits on the share of foreign ownership and the
remittance of capital or profits abroad. Recently,
changes have been made to encourage greater
foreign investment, especially in construction, agri-
culture, tourism, and export industries, but the US
Embassy views these improvements as modest.
Domestically, the government sets prices, minimum
wages, and interest rates. Strict price controls cover
135 basic necessities, while other price hikes re-
quire 60-day notice. The government argues
against across-the-board wage increases in the pri-
vate sector and sets the minimum wage annually.
The Central Bank establishes interest rate ceilings
on bank loans and caps rates paid to depositors to
assist mortgage lenders and spur depressed con-
struction.
The government also frequently intervenes in the
operations of such enterprises as banking and auto
production. To stabilize the shaky banking system,
the government recently required all banks to join a
new deposit insurance fund. In the auto industry,
which is mainly under private control, Caracas
dictates the number of models allowed, minimum
volume of production, percent of local content, and
export requirements.
Secret
DI IEEW 85-042
18 October 1985
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Venezuela: Recent Economic
Performance, 1982-85
Inflation
Percent
We judge that the principal accomplishment of
controls has been protection of the foreign pay-
ments position. Bankers report that capital flight-
Public Investment
Billion Bolivars
which drained an estimated $35 billion in 1972-
83-has largely ceased under the tight controls.
Moreover, the Central Bank reports imports in
1984 were down more than 40 percent from 1982
levels, to less than $8 billion, resulting in a turn-
around in the current account from a 1982 deficit
of $4 billion to a $5 billion surplus in 1984. Official
reserves have climbed above $14 billion, although
there are significant interest arrears on the private
85 0 1982 83 84 85a
debt. Bankers have been impressed by these pay-
Private Investment Real GDP Growth ments improvements and have agreed to a mul-
Billion Bolivars Percent tivPar recrherl?linn -in, An- r,. 9.,.,1
Auto Sales
Thousand Units
Public Sector Exports
Billion US $
Imports
Billion US S
Private Sector Exports
Billion US S
Despite the external benefits, we judge that con-
trols have weakened domestic productivity, thereby
heightening future economic vulnerabilities. Since
1982, for example, two of four tire producers-
Uniroyal and General Tire-have closed down,
complaining to US Embassy officials that price
controls and import restraints eroded their profit-
ability. As a result, Venezuela has had to supple-
ment domestic production with imports of tires.
Many basic foodstuffs cannot be produced profit-
ably because of price controls. Food processors, for
example, now grow their own tomatoes-and im-
port to meet growing demand-because domestic
prices provide no incentive for farmers to grow and
Press and US Embassy reports reveal that these
distortions have provoked widespread private-sector
complaints. Venezuela's industries are considered
to be less efficient under controls because they face
less import competition and are forced to use lower
quality local inputs. At the same time, recent
narrow profit margins and stagnant demand under-
mine their ability to modernize. In this environ-
ment, private investment dropped in 1984 to less
than $1 billion-57 percent below its 1982 level-
and will likely fall further this year. As investment
has declined, production in the private sector-
autos, construction, housing, and appliances-has
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Secret
Current Debate on Controls
Although Lusinchi verbally supports the necessity for
decontrol, in practice, he has adopted more regula-
tion to combat short-term economic problems. A
major concern is to hold imports down to protect the
payments position, thereby encouraging foreign bank-
ers to conclude the debt rescheduling. By holding
prices stable, Lusinchi hopes to consolidate labor
support for his government, temper business criti-
cism, and avoid domestic unrest.
His strategy, however, is precipitating growing popu-
lar discontent over depressed living standards, and
business objections to controls have become more
frequent. A recent opinion poll indicates that approv-
al of the government is dropping sharply despite
Lusinchi's high personal popularity. Private-sector
leaders and the financial press regularly contend that
controls stifle incentive, import barriers hurt produc-
tion efficiency, and redtape clogs the system. Venezu-
elan businessmen also argue that controls favor
multinational firms, which can deal better with bu-
reaucracy, and contribute to increasing corruption.
Venezuela's businessmen also criticize public invest-
ment as preempting areas of profitable opportunity,
and doing so poorly. They blame lack of initiative
and inefficiency in state enterprises, most of which
have sharply underspent their investment budgets 25X1
recently The recent 25X1
announcement that coal would be mined only by the
public sector added to this criticism, leading some to
call for a private role in state industries
Nonetheless, public opinion appears to support regu-
lation of the economy. The US Embassy and press
reports indicate many believe business complaints are
self-serving and fear sharp price rises and foreign
domination of local industries if controls are lifted.
Administration officials also have criticized the pri-
vate sector for failing to respond to government
'favors, " such as preferential exchange rates to pay
private debt, wage restraints, and price hikes to offset
cost rises. Yet, private investment has not revived, 25X1
capital abroad has not returned, and Lusinchi has
publicly voiced his deep disappointment.
also contracted. Combined with the falloff in oil
revenues, Venezuela's GDP has shrunk nearly
7 percent since 1982.
The collapse of private investment has forced the
Lusinchi administration into greater reliance on
public spending to spark recovery. The public sec-
tor now accounts for 83 percent of total investment,
mainly in the oil, steel, aluminum, and electricity
sectors. Domestic and foreign businessmen indicate
that price distortions introduced by controls-plus
overstaffing-have led to large-scale production
inefficiencies. Public investment is also leading to
greater reliance on exports of primary products to
meet debt obligations. Oil and other public-sector
primary exports-mainly iron ore, steel, and
aluminum-now account for 97 percent of export
revenue
Outlook and Implications
On the basis of Lusinchi's record of merely stream-
lining regulations, we believe he will retain controls
with only modest loosening. Lower oil income will
likely lead him to rely even more heavily on import
and exchange controls to protect the foreign pay-
ments position. To ensure politically acceptable low
inflation plus a stable exchange rate, price controls
are also likely to remain. Administration concern
over depressed construction activity will impede
interest rate deregulation.
Continued controls, lower oil income, and the lack
of business confidence will spell further declines in
real GDP growth in 1985 and 1986. While inflation
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will be held in check, unemployment will probably
rise, although slowly. Economic revival will depend
on public spending, particularly investments by
state firms, as private-sector production continues
to languish. With exports hurt by a weak oil market
and private-sector stagnation, we foresee the cur-
rent account surplus shrinking to only $500 million
In this no-growth, public-sector environment, in-
vestment opportunities will remain unattractive. A
sharp fall in oil earnings could complicate debt
repayments, even under the multiyear rescheduling
agreement. Such a development would force
heavy-and politically embarrassing-use of for-
eign exchange reserves and lead to strong devalua-
tion pressures and defaults on private-sector debt
repayments.
Secret 16
25X1
25X1
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Secret
Latin America:
Continued Danger From Inflation
Inflation has been high in Latin America through-
out the past few decades and continues at an
accelerated pace. The region is home to four of the
five countries whose consumer price increases
topped 100 percent last year. Popular discontent
with price rises and the resultant declines in living
standards have recently led most of the region's
governments to implement tougher anti-inflation-
ary measures. Nevertheless, we believe several
countries-Argentina, Bolivia, Brazil, and Peru-
will remain vulnerable to rapidly accelerating infla-
tion that could threaten their nascent democracies.
Moreover, we doubt most other Latin countries will
succeed in bringing down high inflation, which we
believe will continue to impede economic recovery
and to alienate the middle and lower classes
Current Inflation-Fighting Policies
Latin American governments have spent the last
two years grappling with foreign payments difficul-
ties but neglected to focus on tough inflation-
fighting programs. Heightened sensitivity to public
discontent with inflation, combined with a desire to
secure IMF support in order to obtain debt re-
scheduling and new money from international
bankers, has led most of the region's governments
to renew emphasis on controlling inflation.
Shock Treatment. In Bolivia-with the world's
highest inflation--consumer price increases hit an
annualized rate of 14,000 percent in July, accord-
ing to the US Embassy. With the collapse of fiscal
discipline and the economy in shambles, in August,
the new President, Paz Estenssoro, launched a
frontal attack on deficit spending. He curtailed
subsidies to nonprofitable public enterprises, im-
posed a four-month freeze on public-sector wages,
devalued the peso by 93 percent, and lifted controls
on prices and interest rates. Thus far, Paz Estens-
soro has stood firm, even in the face of labor unrest.
We believe the President's willingness to use the
military to quell unrest and the likelihood of sus-
tained armed forces support over the next few
months indicate that he will not back down on
major elements of his economic program, but its
severity is likely to result in continuing confronta-
tion with radical labor factions. Moreover, positive
action on promises to slash the deficit and reform
the monetary system will be needed to secure the
confidence of the business community. 25X1
Argentina's annualized price increases rose beyond
1,000 percent in June. US Embassy reporting
indicates that subsidies to unprofitable state enter-
prises were largely responsible. President Alfonsin
declared that inflation was a threat to democracy 25X1
and announced drastic stabilization measures in-
cluding a temporary price and wage freeze, spend-
ing cuts to balance the budget, a new currency, and
a promise not to print money to finance spending. 25X1
According to opinion polls, over two-thirds of the
population approve of Alfonsin's program, and a
one-day general strike by labor to protest austerity
did not receive widespread sup rt.
25X1
Orthodox Stabilization. Ecuador is battling infla-
tion under the auspices of an IMF adjustment 25X1
program based on strict fiscal discipline. President
Febres Cordero is pressing reforms that include
devaluations, a relaxation of price controls, and the
decontrol of interest rates. While these reforms are
likely to cause a slight increase in inflation to 30
percent this year, we believe Febres Cordero's
dedication to tight monetary control and free-
market policies will lead to lower rates thereafter.
Secret
DI IEEW 85-042
18 October 1985
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Western Hemisphere Inflation Rates, 1984
Secret 18
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Secret
Similarly, Chile has agreed to lower the budget
deficit and tighten monetary expansion to hold
inflation to 25 percent under its recently enacted
Fund program. Nevertheless, devaluations and eco-
nomic disruptions from the earthquake last March
caused prices to rise at a 37-percent rate during the
12 months ending in August. Moreover, the US
Embassy reports that Santiago's recent expansion
of the money supply to help quell domestic unrest
will cause additional inflationary pressures in the
future.
In contrast, Venezuela and Colombia have each
enacted self-imposed stabilization programs. Cara-
cas is running a budget surplus and using price
controls to keep inflation below 10 percent this
year. Nonetheless, the government has decided to
eliminate preferential exchange rates, and may
reflate the stagnating economy to assuage labor
concerns. Such moves would probably cause some
higher, but still manageable, inflation. Long accus-
tomed to low inflation and shocked by some private
forecasts of a 40-percent rate this year, Colombia is
instituting price controls. According to US Embas-
sy reports, Bogota has also cut public spending,
resisted wage increases, lifted import restrictions,
and increased taxes in an effort to reduce inflation-
ary momentum.
Mexico's inflation is rising, and public discontent is
growing in the face of declining real wages. Mexico
City recently announced an austerity package that
includes government hiring freezes, spending cuts,
and the sale of state-owned enterprises, as well as
import liberalization and peso devaluation. We
believe, however, that these measures will not be
fully implemented as political pressures will likely
compel the government to focus on reconstruction
in the wake of the recent earthquake. A stop and go
approach to austerity is likely to result in higher
inflation. Similarly, Uruguay's President Sanguin-
etti has publicly stated that tough economic adjust-
ments need to be subordinated to consolidating
democracy and appeasing labor. His growth-orient-
ed policies, based on public-sector investment, are
likely to exacerbate the country's 66-percent infla-
tion, despite pledges to the IMF.
Consumer Prices: Percent
Average Annual Growth
World
4
10
13
Industrialized countries
3
8
8
Non-oil-exporting Latin America
22
35
91
Argentina
22
133
313
Bolivia
6
16
352
Brazil
46
31
125
Chile
29
a
174
22
Mexico
3
15
56
Peru
10
27
84
1
7
13
Price Controls. President Sarney of Brazil has
imposed temporary price controls to attack the
triple-digit inflation that has plagued the country
for four years. He remains reluctant, however, to
undertake the structural reforms needed to address
the root causes of inflation. Brasilia's inadequate 25X1
public-sector spending cuts and rapid monetary
expansion continue to impede a new Fund agree-
ment. Moreover, according to the US Embassy, the
recent Cabinet shuffle indicates decreasing empha-
sis on controlling inflation in favor of increased
development spending.
Peru's recently inaugurated President Garcia has
declared cutting inflation-which reached an an-
nualized rate of 184 percent in August-his num-
ber-one economic priority. He is instituting a com-
prehensive set of price controls, and US Embassy
reports indicate the measures have stopped infla-
tion in its tracks. Although Garcia plans a govern-
ment hiring freeze, a reduction of management jobs
in state enterprises, and budget cuts to restrain
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future price rises, he also has promised to boost real
wages and initiate new social welfare programs. In
the long run, we believe Garcia's disjointed eco-
nomic policies will cause declines in production and
a shift of goods into the black market, fueling de
facto inflation.
Continued Progress in Doubt
Although several US econometric services are fore-
casting that Latin American inflation will soon
begin a gradual descent, we are less sanguine about
the prospects for inflation abating. We believe, for
example, that lack of followthrough on adjustment
programs may cause a resurgence of inflation in
Mexico, Chile, Colombia, and Uruguay. Unless
price controls are followed by comprehensive re-
structuring and stabilization programs, Brazil and
Peru will, in our view, be vulnerable to a rapid
acceleration of inflation next year. In addition, we
believe a return to hyperinflation is possible in
Bolivia and Argentina, should their programs un-
ravel. Only in Venezuela and Ecuador are we
confident that inflation will be kept under control.
Although persistent high inflation erodes a coun-
try's economic dynamism, Latin American govern-
ments will face political risks if they undertake
strict economic reform measures. Steps to break
inflation may be viewed as a sellout to the IMF and
a threat to middle-class interests, and engender
active opposition. Moreover, austerity measures are
likely to alienate the poor. Such measures will be
especially difficult to implement in a country such
as Brazil, where prolonged recession has lowered
living standards and where the Sarney government
possesses a weak political base. Finally, financial
constraints may result in cutbacks in military
spending that could impede efforts to control insur-
gent activity and heighten military resentment of
civilian government.
25X1
25X1
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Secret
CEMA's Troubled Consumer Goods
Industries: A Soviet Perspective
Faced with chronic shortages of common consumer
items and production bottlenecks, Moscow is call-
ing on its CEMA allies to increase exports of
finished consumer goods.'
however, Eastern Europe may be
hard pressed to meet Soviet expectations for soft
goods-textiles, clothing, shoes, and other wearing
apparel-as production prospects to the year 2000
appear bleak.
A Neglected Industry
Although CEMA countries lead in the production
of cotton textiles and leather footwear,
they lag far behind
the West in output of most other soft goods. During
the 1970-83 period, CEMA soft goods industries
posted the lowest growth rate of all industrial
sectors, reflecting a low priority in resource alloca-
tion and a weak commitment-despite official
rhetoric-to improving light industrial output. Pro-
duction grew slowly in the late 1970s before stag-
nating-and, in a few cases, declining-in 1981-83.
CEMA's sluggish perfor-
mance during the late 1970s and early 1980s to
several major factors:
? Inadequate Raw Materials. Declining harvests
and production problems forced the USSR,
CEMA's major supplier of raw materials, to limit
deliveries of cotton, leather, and chemical fibers.
Moscow turned to international cotton markets to
prop up Eastern Europe's production of cotton
textiles, but was thwarted and angered by East-
ern Europe's reexport of the raw material to the
West.
' CEMA-the Council for Mutual Economic Assistance-is made
up of the USSR, Poland, East Germany, Czechoslovakia, Hungary,
The USSR's Long-Term Consumer Goods Program
As a supplement to the Food Program, work began 25X1
on the Long-Term Nonfood Consumer Goods and 25X1
Services Program Toward the Year 2000 under
General Secretary Andropov. Discussion of the
program continued under the Chernenko leader- 25X1
ship. Completion and publication was long de-
layed, however, by debate about where to find the
resources to support the program. Statements in
the Soviet press published during Chernenko's 25X1
tenure showed that the areas to be addressed
would include footwear, personal care, and repair
and telephone services
General Secretary Gorbachev, faced with the task
of providing incentives for improved worker perfor-
mance in order to revitalize the economy, recog-
nizes the need to increase availability and quality
of consumer goods and services. His anti-alcohol
campaign has heightened the urgency for such
increases: if sales of alcohol are reduced, the
public will have extra cash on hand, contributing
to the problem of excess purchasing power.
The consumer goods program was finally approved
by the Politburo in September. Details were re-
25X1
25X1
25X1
leased last week. Ambitious goals are set for 25X1
output of items such as consumer durables and
soft goods, and for services including communica-
tions, public transport, housing repair, and person-
al care. Soviet commentary on the program sug-
gests that gains are to come largely from more
efficient use of existing resources.
Secret
DI IEEW 85-042
18 October 1985
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CEMA: Average Annual Growth of Percent
Selected Soft Goods Production a
Cotton
2.0
1.2
0
Wool
2.7
0.8
-1.7
Silk
4.9
2.7
2.4
Knitted undergarments
3.9
3.2
0.1
Hosiery
3.0
2.8
2.3
? Insgfficient Investment. Changes in investment
policy left soft goods producers in the region with
a lower share of total investment, and diminished
funding has been directed to retooling instead of
new construction to expand output. A decision to
keep soft goods machinery in production past
their standard lifespan in order to meet output
goals led to an increase in breakdowns. This was
aggravated by concomitant declines-with the
exception of Czechoslovakia-in the region's
light industrial machine-building production.
? Declining CEMA Trade. A shift in East Europe-
an exports of consumer goods to hard currency
markets exacerbated shortages of soft goods,
particularly in the USSR.
? Failure of CEMA Cooperation. The CEMA
members have yet to conclude or to implement a
number of economic cooperation agreements to
expand the output and variety of natural and
synthetic raw materials and specialized equip-
ment.
The Road Ahead: Continued Stagnation
Based on data provided by the CEMA Permanent
Commission for Light Industry and Soviet organi-
zations, the working group produced two pessimis-
tic estimates of per capita output of soft goods in
CEMA: Per Capita Production of
Selected Soft Goods as a Percent
of Soviet Consumption Norms a
Knitted
outerwear
NA
NA
NA
68.0
NA
Knitted
undergarments
NA
NA
NA
61.5
NA
Leather
footwear
84.6
90.3
90.7
NA
91.0
a The working group applied the Soviet consumption standard to
other CEMA countries.
b Projections based on current-although unspecified-growth
rates of production. East European projections include exports and
accordingly overstate these CEMA-wide totals.
Projections based on draft target growth rates for the Soviet
Long-Term Consumer Goods and Services program.
CEMA countries for 1990 and 2000. Projections
show total production increases for CEMA soft
goods by the year 2000, but at best only modest per
capita growth. Under both scenarios, forecasts of
per capita production of key soft goods fall below
established Soviet consumption norms.' Leather
footwear and knitwear represent areas of particu-
larly sluggish growth. The lower set of projections
probably are more realistic
25X1
Z The Soviets have established "rational norms" for consumption.
These norms set standards for how much an average Soviet citizen 25X1
should consume in food, housing, clothing, and other goods and
services. They generally represent a comfortable living standard,
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Secret
Prescription for Improvement
Recommendations to avert this dismal production
outlook focus on the well-worn theme of increasing
CEMA coordination. High priority is to tap new
sources of raw materials. East European countries
expect their needs for textile fibers to exceed
availability of supplies from their domestic produc-
tion and Soviet exports by 50 percent in 1990.
Possible sources of additional imports include the
poorer CEMA countries-Vietnam, Mongolia, and
Cuba. recommends that CEMA:
? Seek out raw materials on LDC markets.
? Step up existing scientific programs to develop
new chemical fabrics and to make use of raw
material byproducts.
? Finance joint investments to construct spinning
mills in the Soviet Union
It also recommends modernization of the capital
base. Not only has past industrial strategy failed,
but it has resulted in increased dependence on
Western machinery and equipment. To avoid fur-
ther reliance on the West, CEMA should:
? Complete and rapidly implement stalled agree-
ments on producing specialized machinery to
relieve shortages of textile and footwear equip-
ment and upgrade technology. If these agree-
ments are not pushed through by 1986, light
industrial machine-building enterprises will not
begin work on these sought-after specialized ma-
chines until the next decade.
? Coordinate purchases of new technology from the
West to avoid duplication.
? Establish a separate group to coordinate CEMA-
wide planning in other industries involved in soft
goods production, including agriculture, light in-
dustrial machine building, and the chemical in-
dustry
Although Moscow won grudging commitments
from its East European partners at the June 1984
CEMA Summit to provide more and better con-
sumer goods, we have seen no mention of specific
levels. The working group-giving the first hint of
Soviet demands-called for East European soft
goods exports to the USSR to increase by the year
2000 by one-third over 1981-85 levels. In Moscow's
view, the East Europeans have adequate reserves to
meet these Soviet requirements. To pave the way
for this heightened trade with Eastern Europe, the
report recommends:
? The standing CEMA Commission on Foreign
Trade develop incentives to stimulate intra-
CEMA exports, and to redirect trade with the
West to the USSR.
? CEMA Foreign Trade Ministers draft measures 25X1
to improve the assortment of goods in direct trade
between CEMA soft goods producers and retail
traders.
? Imposition of stricter sanctions for the delivery of
poor quality goods and a reduction in prices for
less desirable products. 25X1
? Simplified coordination of CEMA consumer
goods agreements and contracts.
F
25X1
It is too early to make conclusive judgments, but we
believe Moscow will adopt these modest proposals
for greater CEMA integration. These could be
marginally helpful, but are no substitutes for
change in Soviet priorities and increased invest-
ment. General Secretary Gorbachev may instead
focus on other consumer problem areas-such as
food-where the prospects are not as gloomy as
they are for soft goods.
According to a US Embassy source, the assessment
sparked sharp debate in the formulation of Mos-
cow's Long-Term Consumer Goods and Services
program. There was little apparent disagreement
with the report's analysis or projections, but partici-
pants clashed over how to solve the industry's
problems. Increased investment apparently was the
major bone of contention, with key members of the 25X1
State Planning Committee (Gosplan) unwilling to
shift scarce funds from other sectors. Indeed, Gor-
bachev will be hard pressed to find the resources
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needed to pursue his stated goals of modernizing
the heavy industrial base and maintaining his
commitment to defense and at the same time
providing investment to boost consumption levels.
The General Secretary's program implies that
growth in consumer-oriented investment during
1986-90 could fall by some 60 percent compared
with 1981-85.
Implications for Eastern Europe
We believe this report signals new Soviet toughness
toward Eastern Europe, which can expect addition-
al pressure to expand its support for the USSR's
soft goods industry and redirect its trade with the
West. Harsh criticism of the East Europeans and a
desire to minimize resistance to programs for in-
creased CEMA integration and trade, however,
make it likely that the report-even in a diluted
version-will remain in Soviet internal circles.
With poor prospects for its own soft goods produc-
tion, Eastern Europe is likely to resist Moscow's
demands. Stagnating living standards and subse-
quent strains on political stability in the region
have placed narrow limits on cuts in consumer
goods supplies to the East European populace. Nor
can the area-in light of its debt problems-face
the loss of hard currency earnings from sales to the
West.
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25X1
25X1
25X1
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Secret
Energy
Turkey-USSR Natural Ankara is expected to sign a 20-year contract soon for the delivery of up to 6
Gas Contract Expected billion cubic meters per year of Soviet gas beginning in 1987, according to Em-
bassy reporting. At current prices Moscow could earn up to $750 million
annually if deliveries reach peak levels. Revised plans now call for a significant
portion of the gas to serve the residential and commercial sectors. Ankara has
no plans either to provide additional gas storage facilities in the first five to 10
years of the contract or to require industrial consumers switching to gas to
maintain the ability to use other fuels. This contract will make Ankara
vulnerable to interruptions in Soviet gas deliveries that are expected to meet 95
percent of Turkish gas needs, albeit only 5 percent of total energy require-
ments. Residential users would be hit hardest because they are unlikely to have
alternative sources of energy. The expense and inconvenience of installing a
domestic pipeline grid to serve the residential and commercial market are
likely to delay acceptance of full contract volumes.
/
Mexican
Private-Sector Debt
Obligations
year.
believe private-sector repayments will have to rescheduled by the end of next
repayment terms. International bankers
guarantee adequate foreign exchange to cover private-sector debt repayment
needs and already has begun to pressure foreign banks to agree to more lenient
Mexican Government officials believe that Mexico City will be unable to
foreign commercial banks.
however, principal obligations will jump substantially under agreements with
The Mexican private sector-unlike the government-has not used the
earthquake as an excuse to defer repayments on its roughly $20 billion debt.
Despite this positive sign, payment difficulties are likely to emerge late next
year. only negligible principal payments are
due this year, and only $200 million will be required next year. In FY 1987-90,
25 Secret
DI IEEW 85-042
18 October 1985
25X1
25X1
25X1
25X1
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Secret
Japanese Auto Makers
Strengthen Footholds
in Taiwan V
Global and Regional Developments
Nissan, Toyota, and Mitsubishi are strengthening their tieups with Taiwanese
auto makers. Nissan owns 25 percent of Yue Loong, Taiwan's top auto maker,
Toyota is seeking a 5-percent interest in Kouzui Motors, Ltd., and Mitsubishi
Motors wants to acquire a 25-percent share of China Motor Company.
Japanese auto makers plan to use Taiwan as a
base for the expansion of indirect exports. According to press reports, Japanese
auto makers generally believe that Nissan will start exporting to the United
States through Taiwan within the next few years. One report, however,
indicates that Yue Loong may begin to assemble Nissan's popular 1.0 liter
"March" model for export to the United States as early as the end of 1985.
National Developments
Developed Countries
emiconductor Capital
Expenditures
Secret
18 October 1985
Japanese semiconductor makers are adjusting their investment plans in
reaction to the continuing slump in the US semiconductor market and
increased trade friction with the United States. During September, the major
Japanese semiconductor makers reduced projected capital expenditures for FY
1985 for the second time. The reductions range from 10 percent to 40 percent
from their original plans. To counter US charges of overinvestment, in some
cases payments for equipment and new purchases are being deferred to next
We believe, however, that the major reason for Japanese cutbacks-
in investment is the decline in both Japanese semiconductor exports to the
United States and in the prices of their major exports, 64K and 256K
DRAMs.
25X1
25X1
25X1
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secret
est German
Unemployment Still
High
ew Greek Austerity
'easures i/
West German joblessness remains stubbornly high as new labor force entrants
offset healthy employment increases. The September unemployment rate held
steady at 9.4 percent but remains at a record level. Some 165,000 new jobs
have been created since mid-1984, but the labor force is increasing even faster.
Not only are large numbers of young people entering the labor force for the 25X1
first time, but workers long out of the market gradually are returning as
economic recovery continues. Bonn-projecting 3-percent real GNP growth
next year-expects a slight decline in the number of unemployed, which would
brighten the Kohl overnment's prospects heading into the January 1987
electionj
unions to fight the new policies, clearly a warning of possible strikes.
The austerity measures announced by Prime Minister Papandreou late last
week probably do not go far enough to reverse Greece's deteriorating balance-
of-payments situation or to deal with problems in the domestic economy. The
new measures include a 15-percent devaluation, a tighter policy on wages, and 25X1
new restrictions on imports. The US Embassy reports that the government also
wants to strengthen price controls and to reduce the large public-sector deficit.
The measures are aimed at reducing the current account deficit, paving the
way for a possible loan from the EC, and avoiding the need to request a
rescheduling of foreign debt. Total foreign debt will top $16 billion this year,
and the current account deficit is likely to surpass the record of $2.4 billion in
1981. Both the conservative opposition New Democracy party and the 25X1
Communists have criticized the new policies as harmful to workers. The
Communists have threatened to use their disproportionate strength in the labor
Less Developed Countries
dian Econ mic Prime Minister Gandhi's efforts to boost government revenue and private
Reforms investment are showing signs of success. Indian monetary officials believe tax
revenue will be 20 percent higher this year. In addition, private businessmen
have boosted new investment following government easing of licenses in 25X1
several industries, and the stock market continues to boom. The higher tax
revenue and booming stock market indicate that his incentive program-
including cutting taxes, easing government restrictions on private production,
and relaxing antimonopoly laws-and a crackdown on tax evasion have struck
a responsive note with the middle class and corporate leaders. Government
officials estimate more than $4 billion will surface from the underground
economy this year. Critics, however, continue to charge that Gandhi's
liberalization moves are widening the gap between the rich and poor. Gandhi
must also watch for signs that some businessmen, particularly those with
political influence, may withdraw support for his programs if they suffer from
increased domestic or foreign competitionF 7 25X1
27 Secret
18 October 1985
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 Results of the
Soviet Plenum
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Somalian Shipwreck- Mogadishu remains in peril from a chemical- and oil-laden freighter partially
A Chemical Timebomb sunken in its harbor. An estimated 200,000 oceanside residents face the danger
and other programs would be disrupted.
Soviet Planning
Chief Replaced
economic agenda. The Central Committee approved drafts of the new party
program, party statutes, and the release of draft directives of the five-year plan
for 1986-90. In his speech, Gorbachev said that it had not been easy to reach
agreement on the new plan and complained of problems created by officials
still bound by inertia. He set an ambitious goal for growth in annual national
income through the year 2000 of almost 5 percent-a marked improvement
over the 3-percent rate achieved in 1979-84. The growth target is to be met in
part by improving management, worker incentives, and economic efficiency.
Gorbachev's criticism of economic cadres and the consolidation of his new
economic team suggests that further personnel changes are ahead in the
Council of Ministers. Although the plenum appears to be giving Gorbachev a
green light for proceeding with his economic agenda, its failure to remove
additional Brezhnev holdovers from the Politburo and Secretariat may be a
sign of lingering political resistance. Both reportedly are on the General
Secretary's hit list.
The retirement this week of Nikolay Baybakov, 74, who has headed the State
Planning Committee (Gosplan) for 20 years, will give General Secretary
Gorbachev a freer hand in implementing his economic agenda. Replacing him
is Nikolay Talyzin, who was simultaneously promoted to First Deputy
Premier, a step higher than his predecessor. Baybakov, a Brezhnev-era
appointee, was a staunch advocate of strong centralized economic controls and
traditional priorities. He may have been involved in high-level controversy over
the draft economic plan for 1986-90 and the guidelines for the period up to the
year 2000 because his retirement comes on the eve of a Central Committee
plenum scheduled to discuss the draft. Former Premier Tikhonov may also
have opposed the general thrust of Gorbachev's program. As Premier, he
would have been the speaker to address that subject at the plenum. Talyzin
represents a break with the past because of his relative youth and lack of
experience in national economic planning. His promotion indicates he is a
member of Gorbachev's team
Secret
18 October 1985
of major explosions, fires, toxic fumes, and smoke from the ship's hazardous
substances. Further dangers to the local population include exposure to
carcinogenic substances. A Dutch salvage firm has contracted to remove the
wreckage and clean up the shore. Its equipment should arrive in Mogadishu
around 20 October, but the 4 to 6 weeks' salvage operations could be disrupted
during the monsoon season. Closure of the port for the estimated monthlong
cleanup would hurt the country's weakened economy. Mogadishu is the most
important of Somalia's three commercial ports. It handles two-thirds of the
country's imports and 5 percent of the exports. Moreover, US humanitarian
The results of the party Central Committee plenum yesterday indicate
General Secretary Gorbachev is preparing to move ahead forcefully with his
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Secret
Industrial A terse domestic announcement reports that the Politburo recently examined a
Modernization Plans draft program for the "chemicalization" of the Soviet economy in the 1986-
Continue 2000 period. Among the program's main points are a substantial increase in
production of fertilizers, pesticides, plastics, and synthetic fibers. The Central
Committee and the Council of Ministers also passed a resolution to increase 25X1
capacity and to broaden use of modern equipment and technology in the
nonferrous metals industry during the 12th Five-Year Plan (1986-90). These
moves are further evidence that the Soviets view a modern, efficient industrial
base as crucial to the success of Gorbachev's modernization program. Earlier
this year, the Central Committee and the Council of Ministers adopted a
program for the re-equipping of the ferrous metallurgy industry. These sectors,
however, will face stiff competition for additional investment, especially from
energy, agriculture, and machine building 25X1
'raise for East German A recent article in Pravda by East German leader Erich Honecker is yet
conomic Management another sign that the leadership in Moscow may be looking to East Germany
as a model for economic management reform. The long article on East
Germany's strong economic performance addresses the success of the kom- 25X1
binat system-the grouping of enterprises and research organizations for
specific production tasks. They have assumed major production responsibil-
ities, but not at the expense of tight central control. Honecker also praises the
combines for promoting more efficient use of resources and speeding the
introduction of technological advances into the production process-major
themes in Mikhail Gorbachev's prescriptions for the Soviet economy. Gorba-
chev also praised the kombinat system and other East German economic
management practices in two speeches last spring, and his close economic
adviser Abel Aganbegyan underlined in an article last August the combines'
role in promoting technological innovation. Of all the models available to 25X1
Soviet planners within the socialist community, the East German example is
probably the most attractive because of its demonstrated ability to boost
economic performance without decentralization or other radical reform.~~
East German Economic East Germany last week reported that economic growth accelerated in the
rowth Accelerates third quarter and that by the end of September all major economic indicators
met, or exceeded, plan targets. During the first nine months of 1985, national
income was 4.4 percent higher than the same period last year-equal to the
annual goal. Weather-related problems early this year had held growth to 4.1 25X1
percent during January to June. Industrial growth was 4.5 percent through
September. Gains in efficiency provided the key source of growth, as East
Berlin announced a 7.9-percent increase in labor productivity and a 2.2-
percent cut in unit production costs. Meanwhile, the government recently
raised its estimate of this year's grain harvest to 11.6 million metric tons, its
second consecutive record crop. The acceleration of growth suggests that most
full-year targets probably will be overfulfilled. With hefty hard currency
reserves and projected trade surpluses with both East and West, East Germany
likely will maintain its position as Eastern Europe's standout economic I?tixl
Secret
18 October 1985
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Total
Exports
15,170
30,478
15,953
Imports
16,237
32,393
16,368
Trade Balance
-1,067
-1,915
-415
Bulgaria
Exports
2,823
5,608
2,912
3,174
6,124
3,156
Exports
2,996
6,017
3,246
Imports
3,346
6,591
3,317
Balance
-350
-574
-71
Exports
3,772
7,367
3,821
Imports
3,583
7,481
3,710
Balance
189
-114
111
2,916
6,069
3,089
-322
-772
-478
Exports
943
1,755
1,083
Imports
952
1,807
889
Balance
-9
-52
194
Secret
18 October 1985
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Secret
astern Europe's A sharp drop in Eastern Europe's trade deficit with the USSR during the first
Trade Deficit With half of 1985, as compared with same period last year, was the result of slower
the USSR- growth of Soviet exports and of Moscow's pressure to balance trade. The East
Chinese Economy
Still Overheated
European trade deficit with the Soviets fell by 60 percent. Poland was the only
country with a larger deficit. Soviet exports picked up slightly in the second
quarter, but deliveries for the six-month period remained about the same as in 25X1
the first half of 1984. Imports from Eastern Europe increased 5 percent. The
trade deficit-now at its lowest level at midyear since 1976-reflects Soviet
efforts to pressure Eastern Europe to increase exports. Although Soviet exports
may pick up in the second half, the deficit for the year is almost certain to be
much lower than last year's total. The boost in exports to the USSR from Ro-
mania, Hungary, and Czechoslovakia coincides with a drop in their exports to
the West, suggesting stronger efforts by these countries to comply with Soviet
demands. The rising deficit in Poland reflects special treatment by the Soviets
in consideration of Warsaw's economic difficulties 25X1
Official Chinese statistics show that the economy is continuing to grow at a
rapid pace, with industrial output increasing 21.1 percent faster during the
first three quarters of this year than in the corresponding period last year. 25X1
Energy output rose by almost 11 percent-because of new oil finds and
reforms in the coal industry. The exceptionally rapid growth this year has
aggravated longstanding economic bottlenecks. Although the industrial growth
rate is down slightly from the January-June level, the decline can be attributed
more to the normal third-quarter slowdown than to remedial measures.
Despite the rapid growth in energy production, China's serious energy
shortage continues, and its failure to expand rail transport has made it difficult
to utilize its growing stock of coal. The overheated economy has been caused in
large measure by an inflationary surge in capital investment-45 percent
during the first half of 1985-and by a hike in the cost of labor of more than
20 percent. 25X1
31 Secret
18 October 1985
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Secret
Secret
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