INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807820001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 45
• Document Creation Date: December 22, 2016
• Document Release Date: October 7, 2010
• Sequence Number: 1
• Publication Date: December 20, 1985
• Content Type: REPORT

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Directorate of Seim
Intelligence
International
Economic & Energy
Weekly
or l9ss
X685.
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 Secret
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International
Economic & Energy Weekly 25X1
Synopsi
ispective-Free Trade Agreements With the United States
anada:,Piosnects for Freer Trade With the United Staten
outh Korea: Ready To Deal on Trade Issues?
? 13 / Argentina: Trade Policy and Prospects
Intra-African Smuggling: A Pervasive Phenomenon
23 .J.Kmaica: Accelerating Economic Slid
China Nonferrous Metals Trade: From Imports to Exports?
Energy
International Finance
Global and Regional Developments
National Developments
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Comments and queries regarding this publication are welcome. They may be 25X1
directed t Directorate of Intelligence, 25X1
Secret
DI IEEW 85-050
20 December 1985
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-Free Trade Agreements With the United States
The US' offer to discuss free trade agreements (FTAs) with foreign countries
has met with mixed response. Interest in FTAs would probably rise if progress
on the new GATT round stalls.
3 25X6X1
7 South Korea: Ready To Deal on Trade Issues?
Seoul has signaled its willingness to settle specific trade disputes now on the
table-access to the Korean insurance market and protection of intellectual
property rights-by offering concessions during bilateral trade discussions last
week. Even so, we expect that concrete results in these areas and progress on
other outstanding trade issues will be slow.
13 Argentina: Trade Policy and Prospects
Argentina's ability to export its way out of the debt crisis has been hampered
by its inconsistent trade policies. We judge that President Alfonsin will
continue to subordinate trade expansion to other economic and political policy
goals over the near term.
19 Intra-African Smuggling: A Pervasive Phenomenon
Smuggling is rampant in Sub-Saharan Africa-equaling, or exceeding, the
value of recorded nonoil trade according to our estimates-and involves a wide
variety of goods. While usually viewed by African governments as undesirable,
smuggling, nonetheless, has benefits to the extent that it provides a way for
Sub-Saharan economies to overcome the difficulties caused by inefficient
government policies
Secret
DI IEEW 85-050
20 December 1985
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23 Jamaica: Accelerating Economic Slide
Unless Jamaica substantially improves its track record with the IMF and steps
up diversification, its economy-hobbled largely by sagging bauxite/alumina
production-probably will continue to deteriorate over the next few years.
Meanwhile, Jamaica's continuing economic decline will further erode Prime
Minister Seaga's already weak popular support and boost the electoral chances
of f r rime Minister Manley and his leftist People's National Party.
29 China Nonferrous Metals Trade: From Imports to Exports?
China's drive for industrialization has created serious domestic metals short-
ages, especially in copper and aluminum. Beijing aims to double nonferrous
metals production during its Seventh Five-Year Plan (1986-90), but inade-
quate infrastructure and a shortage of capital and technology are major
stumbling blocks.
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Secret
International
Economic & Energy Weekly 25X1
Perspective Free Trade Agreements With the United States
The US offer to discuss free trade agreements (FTAs) with foreign countries
has met with mixed response. Earlier this year the United States and Israel
signed such an agreement, and Canada has officially notified Washington of
its interest in discussing freer trade. Elsewhere, however, interest has been
muted.
Interest in bilateral free trade agreements has been stimulated by lack of
progress in trade liberalization through the multilateral trading structure.
Supporters of FTAs believe they provide several advantages: they liberalize
trade; demonstrate a commitment to, and the advantages of, market-oriented
policies; can address issues specific to the bilateral trade relationship; and
guarantee long-term access to a market. Opponents claim FTAs will lead to a
lopsided system of discriminatory agreements that exclude many LDCs,
alienate nonparticipants, are politically motivated, and have no clear advan-
tages. For an FTA to be compatible with the GATT it must cover substantially
all trade between the countries, be implemented within a reasonable time, and
not increase barriers to nonsignatories. Many countries say they are reluctant
to deviate from their commitment to the multilateral framework.
Except for Canada and Israel, few countries have expressed interest in FTAs,
although the possibility of FTAs has been raised with the six nations of
ASEAN and Saudi Arabia. At resent none of the seven countries has
requested negotiations.~~
The restrained response is due to a variety of factors:
? Singapore is promoting an ASEAN-US FTA, but response from other
ASEAN nations has been cool. Their comments indicate that they want the
United States to take the initiative and demonstrate evidence of concrete
benefit to their economies. They are suspicious of Singapore's motives,
believing it would be the largest beneficiary due to its already open economy.
In addition, an FTA would permit open access to their markets for the
United States. They would prefer the agreement to be development-oriented
along the lines of the Caribbean Basin Initiative. If Singapore cannot get
ASEAN support, it may initiate a bilateral agreement on its own.
Secret
DI IEEW 85-050
20 December 1985
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? Few other countries have expressed a serious interest in an FTA which meets
all the US and GATT requirements. Saudi Arabia would be interested
primarily in protecting its access to the US market for petroleum exports;
Uruguayan officials have expressed interest in an agreement for the smaller
Latin countries; and a Taiwanese economics minister has said he favors an
FTA as a long-term device for narrowing the trade gap with the United
States.
Future initiation of FTAs will probably be slow as attention is focused on the
preparatory phase of the new GATT round scheduled to begin in September
1986. Interest in FTAs would probably rise if progress on the new round stalls.
LDCs are afforded special treatment in the GATT system and have indicated
they expect the same in bilateral agreements. They are interested in guaran-
teed access to the US market, but they want the United States to make most of
the concessions. They are unsure of the impact of an FTA, with many
believing their national sovereignty would be threatened. Nonetheless, a lack
of alternate forums to negotiate trade liberalization and US-market access
might encourage them to consider it
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Secret
South Korea: Ready To
Deal on Trade Issues?
After four months of fanning the public outcries
against US pressure for market-opening measures,
Seoul signaled its willingness to settle specific trade
disputes now on the table-access to the Korean
insurance market and protection of intellectual
property rights-by offering concessions during
bilateral trade discussions last week. Even so, we
expect concrete results in these areas, and progress
on other outstanding trade issues will be slow.
Seoul would probably find it easiest to deal with
additional US initiatives aimed at the exports of
large South Korean conglomerates-the govern-
ment already favors a policy to limit their power.
The government would likely react strongly, how-
ever, to measures targeting such politically sensi-
tive and beleaguered sectors as agriculture, textiles,
footwear, and small- and medium-sized industries.
Seoul Makes a First Step
In an effort to quickly settle US Government-
initiated 301 actions, Seoul made some concessions
on copyright and trademark protection during bi-
lateral trade negotiations last week-discussion
focused on intellectual property rights and access to
the insurance market for US firms. The order to
compromise came from the to
Despite the glimmer of hope offered by Seoul's
softer stance on these longstanding trade issues,
nettlesome problems remain, particularly in patent
and computer software protection and the fire and
life insurance areas. We believe concrete results
will come only after continued hard-nosed negotia-
tions on issues still on the docket and pressure to
implement reforms already promised. Seoul could
Section 301 of the Trade Act of 1974
Section 301 of the Trade Act of 1974 authorizes
the President to take action against foreign trade
practices that violate international trade agree-
ments or burden or restrict US commerce in an
unjustifiable, unreasonable, or discriminatory
fashion. Section 301 is intended to cover not only
trade in products (goods) but also foreign practices
affecting services, investment, and intellectual
property rights. Section 301 actions may be initiat-
ed by industries feeling the pinch of allegedly
unfair trade practices or by the President of the
United States-a so-called self-initiated 301. F-]
Under Section 301, the President has the authority
to take all appropriate and feasible actions to
obtain the elimination of unfair trade practices.
Specifically, he may impose duties, fees or restric-
tions on products and services of the foreign coun-
try involved. These restrictions do not necessarily
have to be applied to, or related to, the products
and services that are the subject of the 301 com-
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plaint. The President may also deny licenses is- 25X6
actually harming US export interests.
sued by federal regulatory agencies to foreign
service suppliers. The degree and duration of these
actions is up to the President, but he will not
retaliate against a country unless the 301 case
adequately demonstrates that these policies are
well revive its traditional stalling tactics or retract
proposals made if it believes Washington remains
dissatisfied with what it considers goodwill ges-
tures. South Korea may also calculate that US
attention to trade issues will decline once the 1986
Congressional elections are over and that delaying
tactics will enable South Korea to wait out the
furor.
Secret
DI IEEW 85-050
20 December 1985
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Moreover, Seoul's earlier efforts to foment anti-US
reaction on trade issues may have reduced its room
for further compromise. Violent student demon-
strations have increasingly featured anti-US
themes criticizing South Korean dependence on the
US economy and Washington's call for market
opening. If Chun reverses his hard stance now in
favor of compromise, radical students, and perhaps
some of his more moderate critics, will accuse him
of giving in to US pressure.
In sum, we do not rule out the possibility that Seoul
might make one or two bold gestures that could
quickly close the books on insurance and intellectu-
al property issues. We believe it is more likely,
however, that South Korean negotiators will take
an incremental approach, carefully weighing
Washington's response at each turn, in the hope of
giving up as little as possible. Senior economic
officials in Seoul apparently still believe that, be-
cause of its "special" relationship with the United
States, South Korea may be able to avoid stern US
trade actions.
Seoul's Likely Response to
Additional Trade Measures
In our view, South Korea is bracing for additional
US trade action, partly because it expects its
response on the insurance and intellectual property
rights cases may fall short of US demands. On the
basis of South Korea's track record, we judge there
is likely to be a range of reactions to new moves by
Washington. In some cases, bureaucratic realities
will shape the speed and response to selected US
trade actions. In others, political factors will weigh
more heavily.
Straining the Bureaucratic Machinery. Consensus
among Seoul's policymakers-a key to resolving
current trade difficulties-is a time-consuming
process involving entrenched opponents of market
opening and the numerically weaker, proliberaliza-
tion members of Chun's economic policy team. The
differences between these two groups would make
further, quick compromise difficult if the United
States pressed for speedy resolution of these two
cases. Chun could force acceptance of his economic
advisers' views, but such snap concessions could
later open him to attack from opponents of reform.
To be sure, the limited scope of the 301 cases on the
table restricts the number of interested parties. But
the few players involved-mainly the large con-
glomerates-have important financial stakes. The
conglomerates not only profit from the lack of
protection afforded foreign patents and copyrights
under Korean law, but are also the owners of many
of the insurance companies. Moreover, their insur-
ance operations provide a ready source of loans
with "no questions asked" for cash-strapped subsid-
iaries. Their past behavior suggests they will press
Seoul to engage in foot-dragging in response to US
demands. The government cannot afford to ignore
their problems, since it is committed to covering the
bad debts of the corporate sector to maintain the
solvency of the commercial banks.
Additional US 301 actions would also strain
Seoul's policymaking resources, as the few quali-
fied personnel divide their attention among new
challenges. Moreover, Seoul perceives its efforts to
resolve cases already on the table-no matter how
modest-as sincere gestures, and there could well
be a backlash against the United States if Wash-
ington takes additional trade actions while negotia-
tions are under way. More 301s would also rein-
force the South Korean perception of being unfairly
singled out for punishment.
Targeting Exports Could Hit Political Nerves.
Seoul probably calculates that sanctions against
specific South Korean exports to the United States
would not inflict serious economic pain.' We be-
lieve, therefore, that Seoul would shape its negoti-
ating stance largely in response to the domestic
political reaction-and consequent costs to the
government. Retaliatory measures that target vul-
nerable sectors, while capturing Seoul's attention,
injury it has suffered because of a partner's trade practices.
Calculating the loss to US interests from South Korea's closed
insurance market and lax intellectual property rights enforcement
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Secret
US-South Korean Trade, 1975-84
? US exports S US imports S US balance
15
to
5
would risk renewed sharp press reaction as well as
anti-US and anti-Chun attacks from radical stu-
dents. The sensitive sectors include:
? Agricultural products. Although agricultural
goods account for only 1.5 percent of US pur-
chases from South Korea, the rural sector re-
mains a pivotal political constituency. An appar-
ent failure by Chun to protect the interests of
"poor farmers" would open him to widespread
criticism, even from the urban population.
? Small- and medium-sized firms. South Koreans
would view actions against products of these
firms as cases of the strong picking on the weak.
A replay of the visceral South Korean response to
the large duties imposed on photo album produc-
ers-generally very small, labor-intensive
firms-would be likely. Such US moves would
also erode sympathy for Washington among pro-
liberalizers, who want to encourage small busi-
ness growth and stem industrial concentration in
the large conglomerates over the long run.
Even more difficult for Seoul to deal with would be
trade measures aimed at the textile industry. Be-
yond the importance of textiles as a key export-25
percent of South Korea's exports to the United
States last year-the industry's health could play a
crucial role in domestic political stability and in
setting the overall tone of future trade negotiations:
? Restrictions on textile goods would hit hardest in
provincial manufacturing centers that are already
economically depressed and where opposition to
Chun's economic agenda runs particularly deep.
These areas, like Seoul, have been the scene of
recent anti-US protest actions.
? Smaller textile manufacturers, who subcontract
from the dominant firms, would disproportionate-
ly shoulder the burden of cutbacks.
The depth of South Korean reaction to textile-
related US measures could grow considerably if
there was a general perception that the Jenkins
Bill-or similar bills-would become law. Accord-
ing to the US Consulate in Pusan, the passage of a
Jenkins-like bill would cut an estimated $150 mil-
lion from Pusan area textile sales and force the
firing of 10,000 to 15,000 workers.
Trade actions against these politically sensitive
industries would encourage Seoul to make good on
its threats to retaliate by switching to other sources
for major imported items. Agricultural products-
which accounted for $1.5 billion in US exports to
South Korea in 1984-would be one obvious cate-
gory; energy resources would be another. So far, we
have seen no evidence that South Korea plans to
carry through with these threats, but it could do
so-though not easily-by shifting substantial
shares of grain and coal imports to other countries,
such as Canada, Australia, and, even China.
Conglomerates-Big Bull's-Eye
We would expect more flexibility in Seoul's bar-
gaining positions and continued commitment to
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US Imports of South Korean Goods
Under GSP,a 1981-85
20
tory sanctions.
US Imports Under GSP GSP Imports as a Share
Billion US $ of Total Imports
Percent
,1 Generalized.
hData through September 1985.
implementing its reform program if action directed
at Korean goods took the form of a "surgical
strike" against selected exports of the conglomer-
ates. Since he came to power in 1980, Chun has
allowed his economic team to limit the growth and
political clout of the large firms. The current
economic slowdown, however, has forced Seoul to
partially abandon much of that policy in the hope
that feeding the conglomerates' appetite for growth
will spark a broad recovery. Chun could find it
convenient to agree to actions against the conglom-
erates as a way to show them that the favorable
treatment they now enjoy is only temporary while
saddling the United States with the blame for
reforms.
Most South Koreans recognize that some practices
by the major conglomerates-such as violation of
intellectual property rights-are indefensible.
Trade actions targeted only at those who are guilty
is unlikely to generate enmity toward Washing-
ton-or Chun. Finally, focusing on such exports
I I I I I I I I I I
could lessen conglomerate pressure on the govern-
ment to protect insurance markets, since the large
firms would be likely to suffer most from retalia-
Targeting higher technology, capital-intensive and
higher value-added exports that depend on the US
market for their success will probably have the best
chance of convincing conglomerates to ease pres-
sure on Seoul and endorse new regimes for insur-
ance and intellectual property rights. Pressure
points that would make the conglomerates most
likely to sign up include:
10 ? Automobiles. Hyundai will inaugurate its flow of
South Korean autos to the crucial US market in
January, when the low-priced "Pony Excel" goes
on sale. Korean auto firms are predicating their
success in the US market primarily on price
competitiveness, and any tariff that closes the
price gap would dim prospects. The threat of
automobile trade barriers would send tremors far
beyond Hyundai-Daewoo and Kia already are
preparing for the US market, and Samsung,
which has important insurance holdings, hopes to
gain government approval to produce cars as well.
? Microelectronics. Samsung, Lucky Goldstar,
Daewoo, and Hyundai have large investments in
the semiconductor and personal computer busi-
nesses. Their results have been unprofitable so
far, but they see success in the long run. These
firms have committed their prestige as well as
capital to high-technology ventures and will want
to avoid sustaining losses caused by trade friction.
Barriers to exports of less visible products produced
by the large firms-such as videocassette recorders
sold under US brand names-could also cause
them to agree to reforms. Their responsiveness will
depend on their ability to pass on the pain of
sanctions to subcontractors who supply parts or
other services.
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Secret
In general, we believe Chun and his advisers are
committed in principle to economic reform because
they are concerned about their long-term access to
US markets and technology and worried about the
danger of wholesale barriers to Korea's exports.
Legislation that would cut back exports of key
goods, such as textiles, and South Korea's possible
loss of the benefits from the Generalized System of
Preferences-the GSP renewal process now in pro-
gress-are an important part of Seoul's calcula-
tions. Withdrawal of even some GSP benefits
would seriously impair the cost competitiveness of
many South Korean export goods. It would hit
small firms hard-limiting their export growth-
although it would not sound a death knell for any
key South Korean industries.
Moreover, Chun may have difficulty containing
damage to his domestic political position if trade
issues become a rallying point for his opponents.
Further complicating his position is the likelihood
that US restrictions on Korean exports will aggra-
vate the current economic slowdown-which in
turn could produce higher unemployment and the
possibility of political instability. We expect him to
use the prospect of future harm to South Korea's
exports to strengthen his hand in pressing for
economic reforms as long as the domestic political
cost of that response to Washington remains man-
ageable
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Argentina:
Trade Policy and Prospects
Argentina's ability to export its way out of the debt
crisis has been hampered by its inconsistent trade
policies. Buenos Aires has boosted its trade surplus
sharply over the past three years but only at the
cost of restraining imports. Export growth has been
plagued by erratic policies, an overvalued currency,
and low world agricultural prices. President Alfon-
sin has announced his desire to boost trade, but has
made little progress toward stimulating exports and
reducing import restrictions. We judge that he will
continue to subordinate trade expansion to other
economic and political policy goals over the near
term. As a result, Argentina will need to borrow at
least $2 billion next year to finance its current
Argentina: Current Account Balance Billion US $
Imports, f.o.b
4.9
4.1
4.1
4.2
4.3
Service balance
-4.8
-6.1
-6.5
-5.4
-5.5
Interest
-5.3
-5.4
-5.5
-4.3
-4.4
account deficit.
Trade Policy and Performance
Since the Debt Crisis
With the advent of the debt crisis and the falloff in
bank lending in 1982, major Latin American debt-
ors attempted to improve their financial position by
increasing their merchandise trade surpluses. Ar-
gentine trade policy between 1982 and 1984 fo-
cused on import restriction. The Secretariat of
Commerce prohibited the importation of many
products considered to be luxury items or that
could be produced internally, and subjected others
to time-consuming and costly licensing procedures.
The government's efforts at export promotion suf-
fered from the lack of a permanent, predictable
trade policy. Buenos Aires erratically established,
revised, or eliminated export incentives, while fluc-
tuating export tariffs and a consistently overvalued
currency hampered exporters' ability to plan ahead
and compete. External factors-such as declining
international agricultural prices as well as EC
protectionist policies and export subsidies-also
stymied Buenos Aires's export push
Despite these difficulties, Argentina's trade surplus
improved 74 percent to $4.0 billion during 1982-84.
Most of the gain was due to import cuts, however.
Imports dropped 23 percent while exports increased
only 7 percent over the period.
In 1985, Buenos Aires began a more concerted
effort to stimulate exports by removing export
tariffs for most manufactured products, cutting the
tariff on wheat exports from 26.5 to 15 percent, and
altering the value-added tax system. Embassy re-
porting indicates, however, that the government's
commitment to export expansion has been limited.
The austral, the new currency unit adopted in June,
is consistently 10 to 20 percent overvalued, hinder-
ing exporters' ability to compete on the internation-
al market. In addition, the government has yet to
enact legislation to implement the 1984 Export
Promotion Law, which would spur exports through
tax rebates, deductions, and credits. Meanwhile, on
the import side, Buenos Aires levied a 10-percent
Secret
DI IEEW 85-050
20 December 1985
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Argentina: Prices and Volumes of
Leading Exports, 1980-85
Hard Wheat
Index: 1980=100
200
175
150
125
100
75
I i I Price
50 1980 81 82 83 84 85e
Corn
Index 1980=100
Argentina: Composition of Trade, 1984
Billion US $
Exports, f.o.b.
8.1
Grain and oilseeds
3.2
Livestock, animal products
0.4
Other agricultural products, including fats and oils
1.2
Manufactured goods and other
1.9
Minerals and chemicals
0.7
Textiles, leather
0.7
Capital goods
0.8
Consumer goods
0.2
Intermediate goods
3.5
Fuel and lubricants
0.5
Chemical products
0.9
Machinery
0.6
Metallurgical products
0.5
Plastics
0.3
Other
0.7
surcharge, and other restrictions remain in place,
despite promises to the IMF to liberalize imports.
Soybeans
Index: 1980=100
?~ US Lo.h. price Buenos Aires S per metric ton.
Forecast.
We are projecting a 5-percent drop in export
revenue this year-largely the result of declining
prices for agricultural goods. While the press re-
ports that Buenos Aires forecasts a 19-percent
increase in industrial exports during 1985, official
statistics indicate a 4-percent drop during the first
trimester; we have seen no evidence to support
more than a modest increase in manufactures
shipments since summer. Continued restrictions
should, in our view, keep import levels in rough
parity with 1984.
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Shifts in the Direction of Trade
Argentina: Direction of Trade, 1984
Latin American
Integration Association
17
The most important single importer of Argentine
goods is the Soviet Union. The USSR purchased $1.2
billion, primarily agricultural goods, from Argentina
last year, accountingfor 15 percent of Buenos Aires's
total exports. This was down from $1.8 billion, or 23
percent of the total, in 1983-in our view, because of
an improved Soviet harvest and Moscow's growing
displeasure over its lopsided trading relationship with
Argentina. The US Embassy reports that Buenos
Aires has begun to respond to Soviet pressure to
increase purchases by awarding the USSR contracts
for highway construction and railroad electrification
projects. Alfonsin, however, has spurned major con-
tracts-such as Moscow's proposals to modernize the
port of Bahia Blanca and sell arms to the Argentine
military-largely, in our view, because he fears that
such moves could enhance Moscow's political influ-
ence in Argentina and lead to dependence on Soviet
technology.
The EC is the largest group buyer of Argentine
exports, purchasing oilseeds to supply its crushing
industry. Until recently, Buenos Aires's fastest grow-
ing trading partner was Iran; it imported $430 mil-
lion worth of Argentine goods last year, up 221
percent since 1982. The press reports, however, that
Tehran's displeasure over its trade imbalance with
Buenos Aires and Argentina's plans to sell Pucara
aircraft to Iraq have prompted Iran to cancel further
grain purchases from Argentina. We believe, however,
that the cancellation is largely a bargaining ploy
which could readily be reversed should Argentina
agree to additional purchases of Iranian goods; an
exchange of trade delegations is already underway.
The United States is the single largest source of
imports for Argentina, although their dollar value-
on a c.if basis-declined 25 percent to $884 million
between 1982 and 1984. US exports consist chiefly of
chemicals, machinery and transport equipment, and
other manufactured products. Other major partners
include Brazil, West Germany, and Japan.
Trade Policy in the Future
While the Argentine economy would greatly bene-
fit from trade expansion, there are short-term
drawbacks to trade-promoting policies. Lowering
export taxes-which currently account for 20 per-
cent of government revenues-would immediately
reduce Buenos Aires's cash flow, even though in the
long run this might be offset by increased export
volume. Moreover, a market-level exchange rate
Latin American
Integration Association
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would increase inflationary pressures. Import liber-
alization would also narrow the trade surplus and
hurt inefficient local industries, thereby raising
unemployment in the short term.
We believe that Alfonsin's current strategies will
inhibit aggressive trade-promoting policies. The
President's major economic and political goals, in
our view, are to keep inflation low and reduce the
fiscal deficit so that the public continues to perceive
that his austerity program-the success of which
accounted for much of his party's good showing in
recent Congressional elections-is working well.
His secondary aims include economic growth and
the repayment of interest on the foreign debt.
Given Alfonsin's emphasis on quick (one year or
less) results and his probable reluctance to court
labor unrest by tolerating large increases in jobless-
ness, we doubt that the government will take the
risky short-term steps needed to spur a long-term
export-led economic recovery. Thus, we expect
Buenos Aires to continue to overvalue the austral,
vary export taxes according to the extent of short-
falls in the federal budget, and retain numerous
import restrictions.
Alfonsin, however, is capable of bold changes in
economic policy, as evidenced by his sudden impo-
sition of the "austral plan" last June. We believe
there is roughly a 1-in-3 chance that the President
may, over the next few months, introduce some of
the structural reforms required for the Argentine
economy's long-term health. The first indication of
such a shift would probably be the replacement of
advocates of a strong public-sector role, such as
Energy Secretary Storani and Central Bank head
Concepcion, with technocrats in Finance Minister
Sourrouille's mold. Followup indicators would in-
clude greater efforts to lure private investors into
public-sector-dominated industries, such as oil and
telecommunications, sales of major state enter-
prises to the private sector, passage of enabling
legislation for the Export Promotion Law, and the
permanent lowering of export taxes.
We do not expect exports to increase appreciably
during 1986. Much of the success Argentina may
experience in expanding industrial exports next
year will, in our view, be counteracted by losses in
agricultural income. Tight credit policies combined
with the flooding of 6 million hectares of farmland
this fall will keep agricultural production under last
year's levels, and commodity prices are unlikely to
rise sufficiently to compensate for this loss. Imports
may increase by 2 percent should Alfonsin succeed
in boosting 1986 GDP.
Prospects for increased trade surpluses are some-
what more favorable over the long term. A slow but
steady increase in state and foreign investment in
the energy sector should enable Argentina to boost
its oil and natural gas production significantly over
the next five years. According to press reports,
Argentina has estimated gas reserves of 680 billion
cubic meters and is considering constructing pipe-
lines to transport its gas to Chile and Brazil. Most
other industries are operating at low-capacity utili-
zation rates, which would enable them to boost
production for export without additional capital
investment, according to a recent World Bank
study. Nonetheless, much of Argentine industry is
ill equipped to compete on the international market
without substantial restructuring.
The outlook for expanded agricultural exports is
good, although we view Buenos Aires's publicly
stated goal of boosting grain and oilseed production
to 60 million metric tons by 1990 from 41 million
tons last year as somewhat optimistic.
this goal is attain-
able if Buenos Aires modernizes its logistic network
and increases incentives and supports to farmers
growing export crops. The government has taken
some initial steps, such as accepting bids on the
Bahia Blanca port modernization project and re-
ducing export tariffs. Moreover, a US Department
of Agriculture official maintains that the likely
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passage of a land tax as a partial substitute for
export taxes will provide landowners with incen-
tives to spur production and enable Buenos Aires to
further lower the export tax. However, the erratic
nature of government policy, combined with declin-
ing terms of trade and heated competition in the
international grain market, leads us to expect a
more limited increase above current production
levels throughout the remainder of the decade
Implications for the United States
Argentina's limited commitment to export stimula-
tion will, in our view, contribute to a continuing
need for new money to service its $50 billion debt.
This will require continued involvement on the part
of the US Government and banking community to
assure that Buenos Aires does not again incur
large-scale interest arrearages. In addition, al-
though likely to make a few cosmetic changes to
satisfy IMF requirements, Buenos Aires will proba-
bly not return to a policy of liberalizing imports in
the foreseeable future. Thus, US exports to Argen-
tina are unlikely to approach pre-1982 levels over
the next two to three years. Buenos Aires will
continue to compete with the United States in
international agricultural markets, especially in
wheat and oilseeds. Finally, some of the limited
export incentives Buenos Aires gives domestic pro-
ducers-such as tax breaks for oilseed crushers-
probably will violate the GATT, thereby straining
commercial relations with the United States.
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Intra-African Smuggling:
A Pervasive Phenomenon
Smuggling is rampant in Sub-Saharan Africa '-
equaling or exceeding the value of recorded nonoil
trade, according to our estimates-and involves a
wide variety of goods. This large-scale illegal trade
is the result of overvalued exchange rates, protec-
tionist tariffs and quotas, and low government
procurement prices. Smuggling is usually viewed
by African governments as undesirable, because
the erosion of the "official" trade base reduces
foreign exchange earnings and government reve-
nue, and fosters corruption. Nonetheless, smug-
gling has benefits to the extent that it provides a
way for Sub-Saharan economies to overcome the
difficulties caused by inefficient government
policies.
Estimating Illegal Trade
Smuggling among Sub-Saharan African countries
exists on a large scale and involves a wide variety of
commodities, including livestock, coffee, cocoa,
maize, cooking oil, narcotics, and consumer prod-
ucts ranging from soap to automobiles and other
luxury items. While it is not possible to arrive at
firm estimates of the value of unrecorded trade, the
sketchy data available indicate that it is as big or
bigger than the estimated $5 billion in recorded
nonoil intra-African trade:
? Private studies estimate that smuggling from
Benin to its neighbors amounted to 10 billion
CFA francs (more than $35 million) for 1971-72,
nearly half the size of recorded exports.
? Cocoa smuggling in Ghana in 1982 amounted to
nearly three times recorded cocoa exports, ac-
cording to a private study.
total cattle exports
of Mali in 1970 were 230 percent of recorded
exports, and that actual exports from Togo to
Ghana were 14 times recorded exports.
Selected Examples of Sub-Saharan
African Smuggling
Year
Countries
Involved
Comments
1984
Senegal
An estimated 40 percent of the peanut
harvest (260,000 metric tons) was smug-
gled out of Senegal.
1983
Cameroon
and Nigeria
140,000 tons of rice were smuggled from
Cameroon to Nigeria.
1983
Niger and
Nigeria
Smuggled exports of millet totaled well
over 140,000 tons.
Early
Burkina, Mali, Cattle smuggled into Niger from Bur-
1980s and Niger kina and Mali vary from 30 to 40 per-
cent of recorded Nigerien cattle imports
depending on the smuggling route.
1980-81 Mali Illegal exports of cattle, sheep, and goats
totaled 200 to 300 percent of recorded
exports.
1975-80 Uganda Smuggled coffee exports averaged 20 to
50 percent of recorded coffee exports.
1975 Chad Unofficial cattle exports estimated at
240,000 head; 160,000 to Nigeria and
the rest to Cameroon and the Central
African Republic.
? The Central Bank of Burkina estimates that
between 1977 and 1979 smuggling totaled be-
tween 75 and 125 percent of recorded trade.
Causes of Smuggling
Most smuggling in Africa is caused by a combina-
tion of large price differentials between neighbor-
ing countries and trade barriers, such as tariffs and
import quotas. These differentials and trade barri-
ers are in turn the result of inappropriate govern-
ment policies:
? Overvalued exchange rates. In African countries
such as Nigeria and Tanzania, inflationary mone-
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tary and fiscal policies and the failure of the
authorities to adjust exchange rates have created
overvalued currencies. These overvaluations low-
er the domestic-currency price of exports and
encourage exporters to turn to smuggling to
obtain higher prices for their products. Overval-
ued exchange rates also increase the demand for
imports, requiring the imposition of exchange
controls or import quotas to prevent balance-of-
payments difficulties. Consumers or producers
who are unable to obtain scarce foreign exchange
or imported goods will turn to smuggling to
satisfy their needs.
? Inward-looking development strategies. Many
African states have adopted development
strategies that involve the creation of import-
substituting industries that are often inefficient
producers of high-cost, lower quality goods. As a
result, these industries require a high degree of
protection, raising the domestic price level, in-
creasing the demand for higher quality imports,
and creating fertile ground for smuggling.
? Poor pricing policies. Low prices paid by govern-
ment purchasing agencies to domestic produc-
ers-often part of a strategy to keep urban food
prices low to prevent unrest in major population
centers-provide an incentive to channel produc-
tion into smuggling where producers can obtain
higher prices. In Sierra Leone, rice can be sold on
the black market for over three times the official
buying price.
Although smuggling is frequently difficult to con-
trol in remote border areas of these LDCs, a
pervasive climate of official corruption-at times
even tolerated by the regime-is a contributing
Costs and Benefits of Smuggling
African governments officially disapprove of smug-
gling because it erodes the official trade base, with
the consequent loss of official foreign exchange
earnings and reductions in government revenue
from tariffs and taxes. This view, however, implies
that smuggling is simply a diversion of trade from
official to unofficial channels.' This is not always
true, since in many instances the alternative to
smuggling is not increased official exports but
decreased domestic production of export goods,
given the inefficient government policies in effect.
Therefore, smuggling would not result in a loss of
government revenue and foreign exchange earn-
ings, because in the absence of smuggling the
export goods may not have been produced anyway.
Moreover, we believe smuggling has beneficial
aspects, because it allows African economies to
circumvent the effects of inappropriate government
policies and function more efficiently by:
? Increasing the availability of goods, since many
imported goods are unavailable at controlled or
overvalued exchange rates.
? Stimulating the economy by encouraging in-
creased production of export goods.
? Developing parallel markets that effectively pro-
vide a de facto exchange rate devaluation.
? Improving income distribution by raising the
incomes of agricultural exporters, who are usual-
ly small-scale traders.
Smuggling therefore provides a "second-best" solu-
tion to the problems caused by inappropriate gov-
ernment policies. In addition, the ease with which
smuggling and parallel markets arise demonstrates
that markets can function at a reasonable level of
efficiency in Sub-Saharan Africa, despite the rhet-
oric of many African leaders.
In response to widespread smuggling, many coun-
tries, such as Nigeria and Tanzania, have allocated
funds to control smuggling more effectively. How-
ever, efforts to reduce smuggling are likely to have
limited success. Few African governments have the
resources of money and manpower needed to deal
For example, goods may be smuggled through unofficial channels
to avoid payment of taxes.F___1
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with smuggling. Moreover, in countries such as
Nigeria and Sierra Leone smuggling has become
ingrained in every level of society, ranging from the
farmer to government officials, and effective anti-
smuggling efforts could lead to a loss of domestic
political support.
In addition, it is possible that Sub-Saharan African
governments, facing increasing economic difficul-
ties and uncertain domestic support, could view a
combination of modest economic reforms and a
more tolerant attitude toward smuggling as an
alternative to adopting radical measures and risk-
ing a surge in domestic unrest. This type of "benev-
olent connivance" would increase economic effi-
ciency without the need to cope with the political,
economic, and social problems that would result
from an all-out campaign to control smuggling or
from the elimination of the inefficient government
policies that lead to smuggling.
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V
Jamaica:
Accelerating Economic Slide
Unless Jamaica substantially improves its track
record with the IMF and steps up diversification,
its economy-hobbled largely by sagging bauxite/
alumina production-probably will continue to de-
teriorate over the next few years. With real per
capita income lower than when he took office in
1980, Prime Minister Seaga fears-correctly, in
our view-renewed social unrest should he comply
with existing IMF stipulations to raise consumer
prices on key imports or allow the Jamaican dollar
to depreciate further. The IMF apparently will
meet in January to consider a waiver to permit
Jamaica to resume drawing on its $118 million
standby program. Even if the Fund approves a
waiver, Seaga's stated unwillingness to implement
needed austerity measures would impede the coun-
try's ability to retain IMF funding in the coming
months. Meanwhile, Jamaica's continuing econom-
ic decline will further erode Prime Minister Seaga's
already weak popular support and boost the elector-
al chances of former Prime Minister Manley and
his leftist People's National Party (PNP).
Seaga's Accumulating Problems
To rebuild the flagging economy he inherited from
Manley, Seaga endorsed new policies designed to
dismantle Manley's state-managed economic sys-
tem and rejuvenate the private sector. Foreign
funding by the IMF and Western donors in 1981
sparked the first real growth in Jamaica in eight
years. This spurt, however, quickly fizzled in 1982
due to the deepening world recession and backslid-
ing on Seaga's original promises to deregulate the
economy. By yearend 1983, the island's ailing
economy and Seaga's unwillingness to address the
country's overvalued currency helped to derail the
IMF program. After taking such steps as unifying
the exchange rate and phasing out subsidies, Ja-
maica qualified in June 1984 for a one-year, $143
million standby agreement, but within six months
noncompliance with IMF spending targets required
a waiver to retain the Fund program. Economic
output fell 1 percent in 1984. Inflation in this
import-dependent economy reached 28 percent and
unemployment hit about 30 percent-roughly the
rate inherited from the Manley administration.
According to the World Bank, the Jamaican econo-
my will contract 4 percent this year due to poor
performances in key economic sectors. As a result,
overall output in 1985 will barely match the de-
pressed level in 1980:
? Virtually all domestic crops showed sizable de-
clines during the first half of 1985. In addition,
hurricane Kate in November reportedly de-
stroyed several million dollars in crops, primarily
fruits and vegetables destined for the US market.
? Kingston expects construction and manufacturing
activities to drop more than 20 percent and 8
percent, respectively, compared with last year's
already reduced level, largely because of high
domestic interest rates, local credit restrictions,
and shortages of raw materials, machinery, and
spare parts.
? The tourist industry, buffeted by bad publicity
from widespread demonstrations against oil price
hikes last January and increasing crime, is ex-
pected to decline by $80-100 million; tourist
arrivals fell 5 percent during the first eight
months of this year, compared to the same period
in 1984. In contrast, tourism in the Caribbean as
a whole is up 6 percent this year.
Perhaps most important, however, is the continuing
decline in the production of bauxite/alumina-
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Jamaica: Economic Indicators, 1981-85
-4 1981 82 83 84 85d
?~ pnd of period.
period overage.
Based on 1980 prices.
Projected.
Foreign Exchange Reserves a Exchange Rates b
Weeks of imports US cents per Jamaican dollar
after tourism, Jamaica's largest foreign exchange Jamaica: Alumina and Bauxite
earner. Press reports indicate that bauxite and Production, 1981-85
l
i
f
a
um
na output
ell 42 percent and 14 percent,
respectively, during the first six months of 1985.
This slump resulted largely from the temporary
closure of the ALCOA alumina refinery in Febru- 1-2
ary and weak world demand, which lowered pro-
duction at other facilities. Moreover, the subse-
quent reopening of ALCOA in mid-1985 under a
government lease arrangement was offset by the
July shutdown of the ALPART refinery. Accord-
ing to government estimates, bauxite production in
1985 will be only 40 percent of the peak 1974 level.
Developments on the foreign payments front are
equally bleak. Based on Embassy
__]we believe the financial gap will total $50
million this year despite recent commercial bank
and Paris Club debt reschedulings. During the first
eight months of 1985 exports of bauxite, alumina,
and sugar-which account for more than half of
20
10
Trade-price
adjusted e
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Jamaica: Balance of Payments, 1981-85
Interest payments/ investment income
-201
Other
-47
-54
-71
-94
-110
Transfers (net)
124
150
102
127
140
Capital account
317
424
330
340
415
Public (net)
240
451
284
528
230
Private (net) b
1
20
-326
96
145
Short term (net)
76
-47
371
-284
40
Change in gross reserves
- 20
24
- 46
34
- 50
External debt, yearend c
1,811
2,197
2,350
2,550
2,610
a Projected.
b Including errors and omissions.
c Guaranteed and nonguaranteed medium- and long-term
obligations.
total exports-fell by 60, 28, and 30 percent,
respectively, compared to the same period in 1984.
We predict that the net foreign exchange loss in
bauxite/alumina alone will be at least $150 million
this year. Exports from other sectors-particularly
light manufacturing and nontraditional agricul-
ture-have increased sharply this year because of
the depreciation of the Jamaican dollar, but still
account for a relatively small share of the total.
Foot-dragging on limiting imports has compounded
Jamaica's payments difficulties. In October, the
Bank of Jamaica began supplying unusually large
quantities of US dollars in local foreign exchange
auctions to prop up the Jamaican dollar-which
had slipped 30 percent since the end of 1984-and
cap the rise in import prices. Moreover, Seaga,
worried about a repetition of last January's wide-
spread protests, refused to further reduce food and
petroleum subsidies. As a result, local currency
prices of foreign purchases have risen, but not
sufficiently to reduce imports of food and gaso-
line-which together account for over half of total
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Jamaica's foreign payments problems worsened in
September when the island failed to meet perfor-
mance criteria-on net international reserves, do-
mestic assets, and foreign debt arrears-under a
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$118 million, 22-month standby agreement that
had won IMF approval only two months previously.
Seaga attributed the failure to the delayed arrival
of $19 million in USAID funds. The IMF, howev-
er, believes that Jamaica would have missed the
performance targets anyway. In an effort to salvage
the standby program, Seaga has petitioned the
IMF for a technical waiver. Moreover, in hopes of
softening IMF terms, Seaga has requested that a
joint IMF, USAID, and World Bank team visit
Jamaica soon to analyze the economy with "fresh
eyes."
Political Impact
Jamaica's mounting economic woes have reduced
the already low standard of living for most Jamai-
cans. We expect real per capita GDP by the end of
this year to fall to only 88 percent of the 1979 level,
Manley's last full year in office. Despite the main-
tenance of subsidies, consumer prices rose 19 per-
cent during the first eight months of this year. In
addition, although Kingston claims the unemploy-
ment rate is 25.4 percent, we believe-based on
Embassy and press reporting-that the actual rate
remains closer to 30 percent; job losses in the
bauxite and public sectors alone total at least 4,200
in 1985. This summer, following weeks of labor
unrest, a three-day strike by public-sector workers
protesting low government wage offers and in-
creased layoffs nearly paralyzed the nation. F__1
The country's deepening economic problems are
spilling over into the political arena. A recent
domestic public opinion survey indicates that Sea-
ga's popularity has fallen to a record low and is
little higher than that recorded by Manley in 1980.
According to the survey, less than 25 percent of the
polling sample support the ruling Jamaica Labor
Party and most Jamaicans favor a change of
government. Manley's political fortunes have risen
accordingly; the poll indicated he and the PNP
could win 61 percent of the vote-roughly Seaga's
share in 1980-if a general election were held now.
We believe that any recovery in the next few years
hinges on Jamaica's ability to retain its IMF
program, a prerequisite for stimulating investor
interest, tapping foreign capital markets, and ob-
taining critical debt rescheduling agreements.
Seaga, however, faces a serious dilemma because
the Fund is likely to insist that the Jamaican dollar
float freely and that the government phase out
subsidies on food and petroleum. We believe these
actions would lead quickly to significant price
increases and probably new social turmoil that
would further erode Seaga's already slipping politi-
cal support
Even if Jamaica can retain the Fund program, any
turnaround still depends heavily on economic
diversification:
? In the unlikely event that world aluminum de-
mand picks up significantly, US producers would
continue to supply the bulk of their needs from
lower cost operations, particularly in Australia,
Brazil, and Guinea.
? The sugar industry-as in many Caribbean coun-
tries-will have to streamline production and
processing to be viable in the long run.
? Rejuvenated growth in the tourist industry will
turn on the strength of the US economy and
Kingston's ability to curb the recent upsurge in
domestic crime, violence, and harassment of tour-
ists by drug peddlers. Equipment shortages and
growing morale problems in Jamaica's security
forces stemming from recent budget cuts, as well
as the increasingly entrenched drug network,
work against much, if any, improvement on this
front.
We believe that the best prospects for rapid gains
are in nontraditional agriculture-particularly in
high-value winter vegetables, spices, and cut flow-
ers-and light manufacturing. The exports of both
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sectors are eligible for preferential entry under the
Caribbean Basin Initiative and other US trade
arrangements. In addition, if the Jamaican dollar
continues to weaken-as it probably would if al-
lowed to float freely-these exports would become
even more price competitive.
These overall trends provide little hope that the
Jamaican economy will stem its decline before
1987 at the earliest. Nor is Seaga likely to make
any real headway in slashing unemployment or
inflation. As a result, Kingston almost certainly
will seek with an increasingly urgent tone, addition-
al US aid, especially if-as we expect-the existing
Fund program is scuttled. We believe Seaga will
request help in such forms as additional bauxite
purchases, support for the country's security forces,
and highly concessional loans. We also judge that,
despite steady US pressure, continued economic
distress will further weaken Seaga's commitment to
drug enforcement. Many Jamaican farmers will
continue to view marijuana as a far more lucrative
alternative to domestic crops.
Seaga's term of office lasts until 1988, but if he is
forced to call early elections-a distinct possibili-
ty-Manley would stand a reasonable chance of
winning. We would expect a Manley government to
depart from Seaga's economic policies in several
key respects. Based partly on statements made at a
recent PNP convention, we believe Manley's eco-
nomic program would include a return to a fixed
exchange rate and import licensing. The PNP also
would not advocate divestitures of state-owned
enterprises and cuts in government payrolls. Al-
though PNP leaders have not ruled out pursuit of
IMF support, enactment of these nonmarket poli-
cies probably would preclude a Fund program. The
chances of Jamaica declaring a moratorium on its
external debt-of which $700 million, or more than
one-fourth, is owed to the United States-would
increase.
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Areas Rich in Mineral Reserves
- Province-level boundary
Railroad
Road
0 500 Kilometers
0 500 Miles
Boundary representation is
not necessarily authoritative
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3ecrei
China Nonferrous Metals Trade:
From Imports to Exports?
China's drive for industrialization has created seri-
ous domestic metals shortages, especially in copper
and aluminum, despite the country's vast untapped
mineral resources. Beijing aims to double non-
ferrous metals production during its Seventh Five-
Year Plan (1986-90), but inadequate infrastructure
and a shortage of capital and technology are major
stumblingblocks. As a result, China has had to
substantially increase its imports of these metals in
recent years. We thus expect the growth of metals
imports to continue until new projects come on
stream in the 1990s. As China's minerals industry
develops, however, we believe that it could become
an important new supplier of strategic minerals in
the next decade.'
The Drive for Modernization
and Supplies of Metals
China plans to quadruple its industrial output by
the year 2000. This drive for industrialization
requires large supplies of raw materials such as
metals, but the country's current output remains
far short of domestic demand
China has a rich base of metal resources, but their
development has been slow-due in part to a lack
of necessary capital and technology-and in many
cases has been confined to exploration by the
provinces. The chief problem that will continue to
limit mineral development is inadequate infrastruc-
ture. China's insufficient rail and road network
prevents easy movement of equipment and supplies
to remote regions, as well as transport of output to
consumers or ports for export. In Xinjiang, for
example, many minerals that are in short supply to
the domestic economy have difficulty reaching the
industrialized eastern regions. As a result, ports are
congested, railways are overtaxed, and factories are
Two key strategic minerals-chromium and cobalt-are not
found in large quantities.1
Antimony
1st
1st
1st
Copper
4th
Not in top 10
Not in top 10
Manganese
7th
5th
Not in top 10
Molybdenum 2nd
7th
In top l0 a
Nickel
2nd
10th
Not in top 10
Rare earths
1st
3rd
In top l0 a
Tantalum
1st
Not in top 10
Not in top 10
Tin
7th
7th
9th
Titanium
1st
5th
Tungsten
1st
1st
Vanadium
4th
3rd
forced to shut down at times because of shortages
of delivered raw materials and energy. Moreover,
until the infrastructure is improved, many mining
projects will remain unattractive to foreign inves-
tors.
To meet industrial demand, imports of several
metals-largely copper and aluminum-have
reached alltime highs. While major production
capacity expansion is under way, imports will con-
tinue to increase through the 1980s and much of
the 1990s. After a marked decline in 1984, imports
Secret
DI IEEW 85-050
20 December 1985
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During its Seventh Five-Year Plan (1986-90),
China aims to double nonferrous metal production,
while consumption of nonferrous metals is expected
to increase by 50 percent. The plan gives priority to
aluminum, copper, lead, and zinc. To meet this goal,
incentives are being instituted to attract foreign in-
vestment in this sector. China has already ap-
proached several Western countries-Japan, the
United Kingdom, and the United States-on coopera-
tive efforts such as countertrade, joint ventures, plant
codesign, and projects financed solely by foreign
of copper, for example, have risen sharply in the
first half of 1985. To help ease the copper shortage,
Beijing is negotiating a deal with Codelco that will
provide China with copper concentrate from Chile.
Aluminum import needs are equally severe. Plan-
ners are under pressure to find guaranteed alumina
sources overseas. by
yearend China may sign long-term contracts with
several Australian alumina refineries for the pur-
chase of approximately 150,000 metric tons of
alumina in 1986, with the total expanded to
300,000 tons per year beginning in 1987. These
contracts are expected to run for five to 10 years
while China gears up domestic aluminum produc-
In contrast to the large imports of aluminum and
copper, China is a major force in some metals
export markets-particularly tungsten, tin, molyb-
denum, antimony, and rare earths:
? China's exports of tungsten, for example, account
for one-third of total world tungsten trade and
will continue to dominate this market.
? China's tin exports have been a factor in the
inability of the International Tin Council to
control the tin market.
? Smaller quantities of vanadium, manganese, and
titanium are also exported.
Outlook and Implications
We expect the general import and export trends of
the last few years to continue into the 1990s.
Although Beijing hopes that by 1990 some current-
ly net imported metals such as aluminum, lead, and
zinc will be available for export, we believe these
hopes may be somewhat optimistic. On the other
hand, China has the potential to become an even
greater factor as a supplier of certain strategic
China's efforts to gain a greater share of certain
strategic metals markets will likely cause increas-
ing friction with other LDC and even Western
competitors. China has come under increasing criti-
cism in UNCTAD and other international forums,
particularly the Primary Tungsten Association, for
its high level of tungsten exports in the current
depressed market. For example, at the Internation-
al Tungsten Symposium in March, speakers from
both producing and consuming countries identified
Chinese exports as the major disruptive influence in
the world market. The market for ammonium
paratungstate (APT)-an upgraded tungsten prod-
uct-is another area in which the United States
and other producers claim increased exports have
been disruptive. In the tin market, members of the
International Tin Council, to which China does not
belong, have accused Beijing of trying to undo the
agreement through increased exports of tin. Final-
ly, increased Chinese exports of tungsten and tin to
Japan have angered traditional suppliers in the
region, such as Australia, Malaysia, and Indonesia.
More positively, China's need for advanced tech-
nology and equipment will open opportunities for
suppliers such as Japan, the United States, Finland,
West Germany, and the USSR. Development of its
strategic minerals resources would make China an
important additional supplier of these key materi-
als. This would ease the risk of a supply cutoff for
the United States, Japan, and Western Europe,
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Secret
China: Apparent Trade in Nonferrous Metals, a 1979-84
Total 147 224 317 233 164 173
Aluminum 29 78 131 103 62 60
Chromium 0 NEGL I NEGL NEGL 0
Copper 5 9 16 20 17 18
Lead NEGL 1 3 2 1 NEGL
Manganese 3 2 1 1 1 1
Nickel 0 0 NEGL 0 0 0
Platinum 0 1 2 3 4 2
Silver 0 11 4 1 6 9
Tin 34 43 52 60 46 46
Tungsten 59 56 77 28 18 25
Zinc 5 7 12 8 3 1
Others 12 16 17 6 6 11
., Reporting countries: Australia, Austria, Belgium, Canada, Cy-
prus, Denmark, Finland, France, Greece, Hong Kong, Iceland,
Indonesia, Ireland, Italy, Japan, Netherlands, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, Thailand, United States,
United Kingdom, and West Germany.
n Australia, Hong Kong, Iceland, Spain, and Thailand have not
reported for 1984.
Includes beryllium, columbium, magnesium, molybdenum, tanta-
lum, titanium, vanadium, and zirconium.
197
200
96
354
584
512
119
123
73
210
139
97
0
0
0
0
0
0
29
47
6
67
306
162
23
17
13
6
3
1
0
0
0
0
0
0
1
1
1
2
7
2
10
1
1
1 NEGL
2
0
0
NEGL NEGL
18
112
6
1
1
1
0
0
0
0
1
0
NEGL
NEGL
I
68
103
130
8
9
0
0
8
6
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China: Metals Imports and Exports,
1974-84a
I I I I I I
0 1979 80 81 82 83 84
" Reporting countries include Australia, Austria, Belgium, Canada, Cyprus,
Denmark, Finland, France, Greece, Hong Kong, Iceland, Indonesia, Ireland,
Italy, Japan, Netherlands, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, Thailand, United States, United Kingdom, and West Germany.
especially for platinum, titanium, columbium, and
manganese, but could over the long run generate a
dependency on China for some of these metals.
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secret
1985 OPEC Production OPEC crude oil output is averaging 18.6 million b/d in December, a 1-million-
Wrap-up b/d increase from November levels. Saudi Arabia captured most of the
seasonal demand upswing, with output-based on current reporting-likely to
average 5 million b/d in December. Total OPEC production for 1985 averaged
16.2 million b/d, slightly above the group's 16.0-million-b/d quota.
1985, Quarter Quarter a November December
1-Ill IV
Algeria 0.7 0.7 0.8 0.8 0_8
Iraq 1.4 1.3 1.7 1.7 __ 1.7
Less share of 0.8 0.8 0.8 0.8 0.8
Neutral Zone
Libya 1.1 1.0 1.2 1.2 1.2
Nigeria 1.5 1.4 1.8 1.8 1_8
Qatar 0.3 0.3 0.3 0.3 0.3
Less share of 3.3 3.0 4.3 4.1 4.9
Neutral Zone
Venezuela 1.5 1.5 1.5 1.5 1.6
a Estimated.
b Neutral Zone has no production quota; output is divided between
Saudi Arabia and Kuwait and included in their country quotas.
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DI JEEW 85-050
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S of Oil Price
evelopments
n46nesia Pushes Oil
PItoduction to the Limit
Nuclear Sale to China nuclear power station in Guangdong Province. China is to sign a letter of
Prices for several key crudes have leveled off or rebounded slightly after
plummeting early last week in reaction to OPEC's decision to defend a "fair
share" of the world oil market. The prices of North Sea Brent and West Texas
Intermediate, which fell by between $2 to $3 per barrel in two days of trading
following the 8 December OPEC meeting, have rebounded $1 to $2 and now
average $26 to $27 per barrel. Prices for these crudes are still as much as $4
per barrel below mid-November levels and close to their 1985 lows. Although
most analysts expect further price declines, the extent of market weakness will
depend on how aggressively OPEC moves to increase market share.
contractually set at 15 percent, has dropped to below 10 percent.
Pertamina President Abdul Ramly has ordered foreign oil companies to boost
crude oil production following OPEC's decision last week to recapture its share
of the world oil market. According to US Embassy reporting, the directive
could boost production from its current level of 1.25 million b/d to 1.5 million
b/d, although limits on equipment and operating budgets could delay full
production for up to 18 months. Indonesia's ability to sustain such a level over
the longer term is uncertain. Although the country's crude oil and condensate
production capacity will peak at about 1.6 million b/d by 1987, it will fall off
rapidly to 1.2 million b/d by 1990 as a result of reduced exploration in recent
years, according to a UK-based energy consulting group. The reduction in
exploration reflects inadequate incentives for foreign oil companies, which
have long complained that they are overtaxed and that their production share,
Commercial oil production from Colombia's Cano-Limon oilfield began earlier
this month-at a rate of 30,000 b/d. The first segment of the 770-kilometer
pipeline system has been completed and will carry the oil northwest to Rio
Zulia, near the Venezuelan border. Existing pipelines will then transport the
crude to the port of Covenas until a new pipeline network is completed. Initial
capacity of the Cano-Limon to Covenas pipeline will be 100,000 b/d-if field
conditions warrant, it can be expanded up to 200,000 to 250,000 b/d.
Although terrorist activity continues to plague pipeline engineering and
construction firms, construction of the remaining portion is proceeding on
time. Upon completion, total output will likely surpass 250,000 b/d boosting
exports to about 100,000 b/d. Colombian crude exports will set back OPEC's
attempts to encourage production restraint by non-OPEC producers.
'rogress on French ,J France announced last Sunday an agreement in principle to construct a
intent by 1 March. The 1,800-megawatt plant will use French reactors and
British generators. The plant will be operated by a Chinese-Hong Kong joint
venture and sell a share of the electricity to Hong Kong to help pay the costs.
Equipment costs are estimated to be roughly $1.3 billion. Completion is
scheduled sometime after 1991, but further delays are likely. The agreement
followed the direct intervention of Vice-Premier Li Peng, China's energy czar.
Secret 34
20 December 1985
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~ecrei
Li is probably anxious to commit China to at least one imported nuclear plant
during the 1986-90 Five-Year Plan in the face of pressure to reduce overall
capital construction and "big ticket" items in favor of shorter-term energy
projects to relieve already pressing shortages.
Nigerian President President Babangida's decision last week to stop negotiations with the IMF
Rejects IMF probably ends serious efforts at economic reform by his government. Baban-
gida announced that the public debate he began after seizing power in August
also said that Nigeria will honor debt obligations to the best of its ability. Ba-
bangida probably has concluded that he does not have the political support for
broad economic reforms. Despite the increase in oil production since Septem-
ber, the expected decline in world oil prices may slice export revenues by more
than one-fourth next year. Lagos already cannot service its debts, and
Babangida is likely to request a rescheduling of medium- and long-term
commercial debt. 25X1
irooke Amendment Unless the Sudanese Government acts promptly, its inability or unwillingness
Cutoff for to pay about $2.5 million in debt obligations will trigger a 31 December
Sudan Nears Brooke Amendment cutoff of all US assistance. Khartoum had, according to
US Embassy reporting, hoped to postpone repayment pending a Paris Club
rescheduling. No rescheduling agreement is likely, however, before the 31
December cutoff date, or even by 11 February when another $5.5 million in
US debt becomes one year overdue. Khartoum may be testing US resolve to
actually enforce a cutoff. Meanwhile, disagreement within the civilian Cabinet
has thus far precluded approval of a much watered-down economic reform
program that had received tentative acceptance from the IMF.
Secret
20 December 1985
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orocco Misses
London Club
Payment
Morocco failed to make its first payment due under the London Club
rescheduling agreement signed last October with Western banks. According to
Ministry of Finance officials, Rabat missed the 6 December deadline because
of inadequate foreign loans. Moroccan reserves currently
total under $50 million, less than half the September level. The rescheduling
apparently allows Morocco 30 days' grace, however, before Rabat is technical-
ly in default. Senior officials claim that financial resources of state enter-
prises-such as the phosphate company-will be tapped if necessary to meet
the 6 January deadline. In the meantime, Rabat is trying to convince a US
bank to convert $10 million in debt now due into longer-term paper, which
would reduce the January payment to about $73 million. Largely because of
problems in marketing phosphates, Morocco may well encounter similar
payments problems in coming months.
Global and Regional Developments
E- CEMA Dialogue The EC continues to withhold a response to CEMA's September proposal to
loves Slowly open formal ties between the two organizations. The Community is concerned
D tch-Libvan Trade
greenient
Secret
O /)ecemher 1985
that the proposal does not sufficiently guarantee the status of potential
bilateral commercial agreements between the EC and individual East Europe-
an states. Previous talks broke down in 1981 partly because of CEMA's lack of
a common commercial policy. In October the EC Commissioner for External
Relations publicly suggested that EC-CEMA cooperation might be possible in
some limited areas: the environment, economic forecasts, statistics, and
industrial norms. Despite some advantages for East-West relations, EC-
member states are wary of the Soviet Union exploiting a framework agreement
for political purposes. Recent US Embassy reporting indicates the EC may
seek improved bilateral links with each CEMA-member state by early next
year, with no reference to formal EC-CEMA ties. The EC has already agreed
with Romania to expand their bilateral commercial agreement, the only one
with a CEMA member. Negotiations for an agreement with Hungary stalled
late in 1984, but Czechoslovakia reportedly wants to begin talks.
The US Embassy in The Hague reports the Netherlands and Libya probably
will sign trade and investment accords early next year-the latest in a series of
Dutch initiatives to normalize relations with Arab states since the 1973 oil
embargo. On the basis of data for the first nine months of this year, Libya's
trade surplus with the Netherlands could be $400 million for 1985. The Dutch
now export $160 million annually to Libya, and Dutch companies also receive
a fee for processing Libya's oil. They may be interested in selling Dutch
aircraft to Tripoli, and probably want to use the trade agreement to persuade
Libyan leader Qadhafi to scale down his activities in Suriname. Qadhafi would
point to any agreement as another vindication of his regime's legitimacy and as
proof of the ineffectiveness of US efforts to engineer a Western economic
embargo against Libya.
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Tu sian- VLibyan In a unanimous decision the World Court has ruled against Tunisia for the
M ritime Dispute second time in its dispute with Libya over rights to continental shelf areas
eviewe /
d thought to contain oil. The Court's decision lets stand the equidistant
demarcation line determined in 1982. The line gives Tunisia 40 percent of the
disputed territory, but precludes access to the most promising oil concessions.
The decision also covers fishing rights in the Gulf of Gabes. Tunis has delayed
plans to exploit the disputed territory since 1978, but probably was looking to
offshore oil as an engine of growth in the next decade. While the Court's
decision encourages bilateral negotiations to refine the boundary demarcation,
tense relations with Qadhafi probably preclude any favorable adjustment in
Tunisia's share
Proposed Air Route North Korea recently proposed to the International Civil Aviation Organiza-
Across Korean tion (ICAO) a Beijing-P'yongyang-Tokyo air route for which it claims air
Peninsula traffic controllers are already trained. A Korean peninsula route cutting 550
kilometers off the present Tokyo-Shanghai-Beijing route would probably
interest Japanese, Chinese, Iranian, Pakistani, and US airlines. An ICAO
proposal for both this route and a Beijing-Seoul-Tokyo route have been under
discussion since early 1981 but has been repeatedly rejected by P'yongyang on
the grounds that dual routes would perpetuate the division of Korea. We
believe it highly unlikely that one route would open without the other or that
North Korea would acquiesce to a service that could provide support to the
1988 Olympic games in Seoul. Moreover, both routes are close to the
demilitarized zone where aircraft identification is a sensitive issue, and each
provides opportunities for reconnaissance of industrial and military installa-
tions.
Developed Countries
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Japan Shelves Tax The tax study councils of both the government and the ruling Liberal
Reform for Another Democratic Party recommended this week that Tokyo delay a major overhaul
Year - of its tax system until FY 1987. Both councils opposed revising the present tax-
exempt savings program or implementing a major personal income tax cut in
FY 1986 which begins in April. The Finance Ministry is likely to heed these
recommendations in its current budget compilations, even though Prime
Minister Nakasone favors sweeping tax changes to help ease trade frictions by
expanding domestic demand. Tokyo's commitment to budget austerity,
strengthened by the projected tax revenue shortfall resulting from the impact
of the stronger yen on corporate profits, leaves the government little room to 25X1
maneuver on tax reform in FY 1986. Tokyo is instead likely to adopt a small
income tax cut and minor tax incentives for housing, offset by a larger rise in
corporate taxes. The prospects for substantial tax reform in 1987-including
the adoption of a national indirect tax to offset revenue losses from a personal
income tax cut, will depend in large part on the support of Nakasone's
successor-his term expires next fall. 25X1
37 Secret
20 December 1985
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Tokyo
Continues Opening
Telecommunications
Market
In an apparent reversal of its hard-line stance, Tokyo has decided to allot
frequencies for portable data terminal services, according to the US Embassy.
Restrictions on radio wave equipment imports are the last stumbling block in
this round of bilateral telecommunications market-opening negotiations, and
their removal allows US manufacturers to sell portable data terminals in
Japan with only minor technical modifications. Industry sources told the
Embassy US sales in Japan would probably total only about $2 million in
1986, but the total market is expected to reach $100 million in five years and
could easily expand to $150 million. Quick liberalization of the market is
essential. Although US firms will be unchallenged in the short term, a
competitive Japanese product will probably be introduced in 1987 or 1988. We
believe this is part of a serious attempt by Tokyo to reach a successful
conclusion to telecommunications negotiations, and suggests other bilateral
trade talks will probably not be seriously affected by recent US actions
involving Japanese semiconductors and leather restrictions.
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20 December / 985
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French Economic The conservative opposition, which seems likely to win control of the govern-
Policy Dispute ment in elections next March, is bracing for a struggle with President
Mitterrand over control of France's international economic policy.
he conservatives
expect the new prime minister to insist on accompanying Mitterrand and to try
to dictate the French position, especially on the issue of preparations for the
Infighting may lead to a temporary paralysis of policy while Paris
sorts out how to share power between a Socialist president and a conservative
government. Mitterrand, in an effort to avoid embarrassing domestic squab-
bles, probably will keep a low profile at Tokyo. If pressed hard by the Cabinet,
however, he may play the spoiler, especially on trade issues, where the
conservatives favor a tough line for France.
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Progress on The Bundesbank will soon allow banks to issue certificates of deposit and
West German Financial similar short-term instruments, according to the US Embassy. These new
Liberalization instruments should be especially attractive to foreign investors and will
complement last May's liberalization of the foreign bond market. The
Bundesbank has historically discouraged foreign investment in domestic
capital markets, fearing that intensified capital flows would weaken monetary
policy. The Bundesbank may still be cautious about an increase in the mark's
limited role as a reserve currency, but feels that West Germany must keep
pace with liberalization elsewhere or be eclipsed as a financial center. The
nation's largest bank, for instance, recently transferred its capital operations 25X1
from Frankfurt to London because of that city's more liberal trading
environment. West Germany's new capital markets will require time to
develop, and we do not anticipate that increased liberalization will significant-
ly affect the volatility of the mark. 25X1
West Germany's labor unions have vowed to strike if pending legislation
restricting unemployment benefits is approved. The bill would deny unemploy-
ment benefits to nonstriking workers who are laid off or locked out because of
strike activity, but who stand to benefit if the strike succeeds. Last year, for ex-
ample, some unions launched "focus" strikes by small numbers of key
personnel in an attempt to force a 35-hour workweek, while conserving strike
funds. The Free Democrats, Kohl's coalition partners, and conservative
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members of Kohl's own party have pressured the Chancellor to end what they
contend is government subsidization of strike activity. If government and labor
are unable to avoid a confrontation over the issue, West Germany's once
enviable record of labor relations will be sullied further. The dispute could
even sour next year's negotiating round, which will focus on wage demands.
Belgian Government
To Continue Austerity
Program
The economic program of the newly formed Martens VI coalition of Social
Christians and Liberals will continue the four-year austerity program begun
under the previous coalition. The government intends to reduce the budget
deficit from about 11 percent of GNP this year to 8 percent by 1987 and 7 per-
cent by 1989. Because the partners have rejected tax increases or new taxes,
Brussels is likely to attack the deficit with cuts in business subsidies,
unemployment compensation, and civil service personnel costs. Many of the
cuts are in politically sensitive programs, and the government will find it
difficult to trim the approximately $770 million needed to meet its 1986 goal.
Moreover, a shortfall in revenues is expected because of slower than projected
growth and preelection pledges of a 2.5-percent cut in personal income taxes
over the next three years.
Registered unemployment rose in October for the second straight month
following five consecutive months of decline. The October rate of 20.1 percent
is up 0.8 percentage point since August and is only 0.1 percentage point below
the record set in March. Most of the recent increase is due to a rise in the
number of young people entering the job market and a decline in activity in the
tourist and agricultural sectors. Although the number of unemployed grew by
only 64,000 in the first 10 months of 1985-in contrast to an increase of
235,000 a year earlier-structural problems continue to prevent any substan-
tial improvement in the unemployment rate. More jobs are likely to be lost as
the Gonzalez government pursues industrial restructuring and when Spain
joins the EC next month and is forced to open its markets to its West European
ortugal Eases Prime Minister Cavaco Silva's new center-right government has announced a
conomic Policy series of measures aimed at promoting economic development and reducing
Secret
20 December 1985
state control over the economy. The new program-which effectively reverses
the austerity policies of former Socialist Prime Minister Soares-includes a
four-point cut in domestic interest rates, a revision of rigid labor laws and a se-
ries of tax cuts for 1986. The stimulatory measures, however, are likely to be
short lived because the resulting increase in domestic demand, coupled with
the liberalization of import barriers required when Portugal enters the EC next
month, could lead to a 1986 current account deficit as large as $1 billion. This
may force Lisbon to seek EC or IMF financial support-support that almost
certainly would be contingent on a return to more restrictive economic policies.
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Exchange House operation-set up last spring by the Sandinistas to undercut black-market
Operations activities-has greatly reduced currency transactions through legal channels.
Less Developed Countries
icaragua Controlling Increasing government control over Managua's private currency exchange
Salvador's
/ Economic Policy
Initiatives
The exchange's rates-fixed by the government-are less than three-fourths
the street value. As a result, the exchange has had to limit dollar sales by re-
quiring customers to apply a week in advance and present a visa and airline
ticket to obtain up to $500, according to US Embassy reports. The exchange
operation is also trying to establish a relationship with an international
financial institution to facilitate transfers of dollars from the United States to
Nicaraguan residents. While the new currency transfers would relieve finan-
cial pressures on some individuals, they are unlikely to be enough to strengthen
the cordoba. Managua probably will have to remove exchange rate restrictions
if its currency operation is to stay in business.
The stabilization package President Duarte is preparing could end 18 months
of economic policy drift but is unlikely by itself to restore business confidence
in the near term. The program-scheduled to be announced early next
month-includes major initiatives to increase taxes and limit domestic credit.
It also effectively devalues the colon by about 20 percent. To offset the social
costs, Duarte is promising new fuel subsidies and a wage hike. Few sweeteners,
however, have been offered to the private sector, which Duarte continues to de-
nounce for its lavish consumption. While this program gives no direct
production incentives, Salvadoran policymakers note that an export promotion
law is likely to be passed soon by the Assembly and a new foreign investment
code is under study. In addition to business opposition, Embassy reports
indicate that some of the leftist-dominated labor unions already are planning
strikes to protest the increased austerity. 25X1
Trinidad and Tobago Recently enacted legislation supported by influential labor groups will further
Discouraging discourage investment in labor-intensive industries at a time when Trinidad
Labor-Intensive and Tobago's unemployment rate-now 25 percent-is rising. The new law
Investment requires employers to make lump-sum payments-based on length of service-
to laid-off workers and gives such payments a priority claim on the assets of a
liquidated firm. Such preference will discourage banks from making business
loans. Moreover, fearing a sizable financial burden from future layoffs,
existing firms will hesitate to expand payrolls, while new investors-foreign
and domestic-will be reluctant to commit funds to operations requiring
substantial labor input. Labor-intensive investment in Trinidad has long been
deterred by high labor costs, which have been amplified by the government's
previous unwillingness to devalue the Trinidadian dollar.
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Sty iname Seeking
onomic Support
onor Response to
Mauritanian Reforms
Secret
20 December 1985
ing trade relations.
Suriname's worsening economic plight is prompting the Bouterse regime to
court virtually any country offering hope of financial support or expanded
trade:
? Despite Libya's failure to deliver a promised economic package reportedly
worth as much as $100 million, Suriname appears to be expanding ties to
Tripoli; a Libyan delegation recently visited Suriname to discuss increased
economic cooperation.
? Taiwan has provided a $40 million credit line.
? Brazil has opened a $20 million credit line and agreed to purchase more
Surinamese alumina.
? Colombia has agreed to a $10 million credit line.
? China has made a $7 million, interest-free loan to finance construction of an
indoor stadium.
? Venezuela has provided a $3 million credit line and agreed to help develop
Suriname's fishing industry.
? Czechoslovakia apparently has agreed to supply capital goods in return for
bauxite and related derivatives.
? Iranian representatives reportedly have visited Suriname to explore expand-
Largely in hopes of attracting Western assistance-particularly a resumption
of $600 million in Dutch aid suspended in 1982-Head of Government
Bouterse last month gave leaders of three previously banned political parties a
limited voice in his policymaking council and pledged to return Suriname to
democracy by April 1987. Nevertheless, Bouterse's recent steps toward
democracy are unlikely to prompt the Netherlands to release its blocked aid.
Unless Suriname's economic situation improves dramatically-an unlikely
prospect-the regime probably will continue to make at least token steps
toward democratization to attract Western donors and boost its low domestic
popularity
During the inaugural donors' meeting for Mauritania in Paris last month,
Nouakchott's Western creditors applauded the government's recent austerity
measures. The donors pledged about $60 million to underwrite additional
adjustments during 1986-88 promising more funds as needed. The IMF also
indicated Mauritania's solid performance would permit negotiations to begin
soon for a second 12-month standby. Nouakchott still faces severe economic
difficulties, however, as continued weak prices for iron ore preclude any
improvement in an already unacceptably high unemployment level and double-
digit inflation. Neither is there any prospect for a turnaround in the country's
chronic food shortage. Moreover, harsher austerity will complicate the govern-
ment's efforts to establish a sufficient degree of stability to justify a return to
civilian rule. The Taya government will have to carefully allocate aid monies
to avoid charges leveled against previous regimes of rampant corruption and
favoritism of Arabs over Black Africans.
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Secret
Botswanan Drought
Persists
Botswana's agricultural prospects appear dismal as the country enters its fifth
consecutive year of drought. Seasonal rainfall in most areas is 50 to 75 percent
below normal. The cattle industry, the country's second-largest source of
foreign earnings, will very likely suffer additional losses due to worsening
grazing conditions. Total crop production, normally 25 percent of national
requirements, is expected to drop to 10 percent. In addition to boosting
commercial imports, Gaborone will likely seek food aid from the United States
and other foreign donors to make up the deficit.
loomy Budget for Sri Lanka's budget for 1986 underscores growing strains in the economy. Debt
Sri Lanka service will take one quarter of total outlays and is continuing to grow. Defense
spending officially is scheduled to decline slightly, but only because supple-
mental appropriations in 1985 increased defense expenditures by some 80
will eat u
din
d
f
h
l
p
g
ense spen
ess,
e
e
percent from the original projection. Nonet
about 9 percent of the budget, compared to 3 percent in 1982. The government
shows no willingness to cut welfare spending or subsidies for public enterprises;
development projects, already hit, are likely to face additional cuts. Colombo is
not proposing any significant structural revisions in the tax system but is
relying on increases in excise taxes and other fees to bring in additional
revenue. Nevertheless, the budget deficit is likely to exceed 40 percent of total
spending. The tax increase, plus the high level of government borrowing
necessary to cover the deficit, will add significantly to inflationary pressures.
25X1
25X1
donesian Bankers The Chairman of the Private National Banks Association of Indonesia last
t Press for Spending week publicly urged the government to rapidly disburse unspent development
\ Increases funds, claiming that monetary expansion alone is insufficient to reverse the
Agreements Argentina. The Soviets, at a minimum, will buy 25 million metric tons of
Canadian grain over the period of August 1986 to July 1991 and 4 million tons
economic slump. We estimate real economic growth this year of only 3.1 to 3.5
percent. According to US Embassy reporting, the bankers believe that easier
monetary policy and increased commercial bank credit will do little because
businesses-particularly the textile and electronics industries-are seriously
handicapped by weak demand. They also argue that Indonesia's relatively low
savings rate and the lack of an efficient long-term capital market is a major
disincentive to private investment. In our view, however, it is unlikely that
President Soeharto will retreat soon from austerity measures already in place.
Increased government spending in the face of declining petroleum revenues
would undoubtedly aggravate federal budget and current account deficits-
thereby rapidly expanding the country's yearend 1985 foreign debt of $37
billion.
of Argentine corn and sorghum annually. The Argentine pact reportedly also
Secret
20 December 1985
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includes 500,000 tons of soybeans. These agreements, along with the existing
long-term agreement with the United States, commit the Soviets for the next
several years to annual grain imports averaging 17 million tons-at a cost of
about $2 billion per year at 1985 prices. The renewal of the long-term
agreements suggests that Moscow considers the USSR's grain production
goal-a 70-million-ton increase over the 1981-85 average by 1990-risky at
A Soviet official has told the US Embassy that a reorganization of the
Ministry of Foreign Trade is likely early next year. The proposal now in favor
would reduce the number of foreign trade organizations responsible for
negotiating contracts from 47 to about 10 by forming trading groups for each
broad commodity group. The plan would also bring the trade organizations
that are outside of the Ministry under its jurisdiction and reduce by half the
number of deputy ministers. General Secretary Gorbachev probably hopes to
import machinery and equipment more efficiently. The proposed plan would
also remove those officials who are likely to block further changes in the
foreign trade system. It does not appear to address the key problem of
unresponsiveness by foreign trade organizations to the needs of end users.
JH ghway Construction
China's New
Five Year Plan
Secret
20 December 1985
China's stated emphasis on highway construction for the Seventh Five-Year
Plan (1986-90) will not eliminate transport bottelnecks in the 940,000-
kilometer road network. Because of increases in domestic production, foreign
trade, and vehicle availability, traffic volume is growing faster than road
capacity. About 60,000 kilometers of roads were built in the past five years
and the new five-year plan will add only another 70,000 kilometers. Little of
the new construction will be directed toward developing a national highway
system. Beijing needs to concentrate on developing limited access highways for
long-distance truck traffic between ports and interior points-only 200
kilometers of such highway was built during the last five-year plan. Currently,
port access roads are clogged with slow-moving traffic including everything
from wheelbarrows, animal drawn carts, and bicycles to modern cars, buses,
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Secret
Secret
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