INTERNATIONAL ECONOMIC & ENERGY WEEKLY 21 OCTOBER 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300150007-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 39
• Document Creation Date: December 22, 2016
• Document Release Date: January 19, 2011
• Sequence Number: 7
• Publication Date: October 21, 1983
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
DI IEEW 83-042
21 October 1983
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International
Economic & Energy
Weekly
iii Synopsis
Perspective-Fallout From the Debt Crisis: Looking Beyond the Short Run
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
13 International Financial Situation: Noncompliance with IMF Programs by
Several Major Debtors
21 Brazil: Domestic Pressures on IMF Austerity
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15 International Financial Situation: Trade Surplus Widens in Key Debt-
Troubled LDCs (u)
Jim Steenhagen, OGI
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31 Angola: Costs of Civil War and Soviet Dependency
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Comments and queries regarding this publication are welcome. They may be
directed t Directorate of Intelligent 25X1
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International
Economic & Energy
Weekly
Synopsis
Perspective-Fallout From the Debt Crisis: Looking Beyond the Short Run
In the past few months, the international financial situation has become more
tenuous. Uncertainties have grown over the future level of IMF funding,
political tension has built up in key LDCs, and some debtors seem certain to
fall short in meeting their IMF-mandated austerity programs.
International Financial Situation: Noncompliance with IMF Programs by
Several Major Debtors 25X1
This article is part of a special series of articles on the economic and political
aspects of the international financial situation. The article examines the
noncompliance with IMF programs by four key LDC debtors.
International Financial Situation: Trade Surplus Widens in Key Debt-Troubled
LDCsF___~ 25X1
This article is another of the special series on the economic and political
aspects of the international financial situation. This article examines the
trade surplus of key debt-troubled LDCs, which climbed to an estimated
$13 billion in the first half of 1983 as these countries slashed imports.F 25X1
Brazil: Domestic Pressures on IMF Austerity 25X1
Brazil's efforts to tighten the austerity screws have met with a rising tide of
protests among nearly all sectors of society. Demands for the easing of tough
economic policies and a break with the IMF are becoming increasingly
strident.
Despite soaring prices, declining real wages, rising unemployment, and
shortages of food and consumer goods, Mexican workers show few signs of
militancy, and their support has allowed President de la Madrid some
flexibility in implementing the painful measures necessary to brake the
overheated economy.
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NOFORN-NOCONTRACT-
PROPIN-ORCON
Angola: Costs of Civil War and Soviet Dependency I 25X1
The Angolan economy continues to suffer seven years after the disruptive
independence process. In the absence of Western aid, Angola is likely to seek
greater concessions in bilateral military and economic aid from the USSR.
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Perspective
International
Economic & Energy
Weekly
Fallout From the Debt Crisis:
Looking Beyond the Short Rune 25X1
In the past few months, the international financial situation has become more
tenuous. Uncertainties have grown over the future level of IMF funding,
political tension has built up in key LDCs, and some debtors seem certain to
fall short in meeting their IMF-mandated austerity programs. Moreover, the
sharp cutback in imports, while easing balance-of-payments pressures, indi-
cates that the seeds are being sown for more consumer-inspired unrest in the
future. Even unrelated external events raise the specter of greater financial
difficulties. Iran's threats to close the Strait of Hormuz is a key example.
The short-run risks of financial problems and the impact that they would have
are already the subject of considerable debate. Some observers believe the odds
of a financial collapse are great. A few argue that even using the word "debt"
is a charade, since nothing will ever be repaid. Other observers argue that
further financial crises can be avoided through sticking to the strategy already
in place. They point to the hurdles the system has already overcome to bolster
their case. Still others contend that the situation demands radical solutions
that would change the entire makeup of the international financial system.
Regardless of which view is correct, the current debt crisis will almost
certainly alter the design and texture of international politics. The only
question is the pace at which change will occur. Economic forces are already
feeding into the political arena:
? The pressure on governments through the IMF and others is toward more di-
rect government control in every facet of economic life, although greater
reliance on the marketplace would enhance the resilience of Third World
economies. How these opposing-forces feed into the political equation is
uncertain.
? The relative role of the military in Third World countries is almost certain to
change. As mandated budget cuts are made, national leaders will have to
make some hard decisions. They can pare their military spending and in so
doing risk alienating a major power center. Alternatively, they can placate
the military and possibly alienate other key political interest groups.
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The risks of major political change are underscored by a number of other
factors that the Third World countries are facing. The debt crisis comes at a
time when the high-technology revolution is just getting off the ground. The
revolution could easily leave the LDCs with an antiquated economic structure.
What will the impact be when countries discover that the linchpins of their de-
velopment strategy-such as steel plants-are outmoded? How will the
critical elements of society respond to such a change? This will occur at a time
when Third World countries are trying to cope with rapidly increasing
populations. Through the end of this decade alone, 420 million people will be
added to the working-age population in the Third World.
As all of these forces converge, the social fabric in many Third World
countries will be increasingly stretched. Moreover, internal domestic tensions
and pressures will provide a growing number of opportunities for foreign
meddling. Regardless of how events play themselves out, developments in the
Third World during the next few years will play a critical role in shaping inter-
national relations for the remainder of the century.
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Energy
Poland Regaining Poland exported 26 million metric tons of coal in the first nine months of
Western Coal Markets 1983-27 percent above the level for the same period last year-according to
press reports. Exports to Western countries to earn hard currency were up over
50 percent, with a sharp rise in shipments to France, Italy, and Denmark. The
Poles are regaining Western markets through price cuts and barter arrange-
ments and appear determined to continue their efforts. According to market
analysts, the Poles have offered coking coal at $51 per ton in negotiating 1984
contracts with European buyers, some 7 percent below recent prices and over
20 percent below prices early last year. At these prices, US suppliers will be
hard pressed to compete and could lose further sales in the European market.
25X1
Spain's New Energy Spain will submit a new national energy plan to Parliament at the end of the
Plan month containing a lower energy demand estimate and a proposed cutback in
the nuclear power program, according to press reports. The main goals of the
new 1983-92 plan are reduced reliance on oil.and energy imports through
increased conservation and use of domestic resources. The government has
reduced its energy demand forecast to a maximum 4-percent annual growth,
as compared with the 7-percent rate assumed under the previous plan. The
government wants to reduce oil's share of energy consumption from 60 percent
to 48 percent by 1992 and reduce installed nuclear generating capacity from
earlier targets of 12,500 MWe to 7,500 MWe. To offset lower oil and nuclear
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power use, the government will push for higher domestic coal and gas
production and greater use of hydropower. We believe some type of subsidy
will be needed to encourage greater use of coal in the industrial sector. The
government's goal is to raise the share of natural gas in total energy use from
3 percent currently to 5 percent by 1992. Given limited gas reserves, we doubt
this can be achieved without greater reliance on gas imports from Algeria and
Libya.
New Field Raises Industry sources report that Amoco Oil Company began production in
Gabon's Oil Production September at the West Oguendjo offshore field, considered one of the largest
discovered in Gabon .in recent years. Production from the field is expected to
peak at 30,000 b/d by late 1984, reversing the downward trend in Gabon's oil
production since 1976. Although Gabon has agreed to adhere to an OPEC
production quota of 150,000 b/d, the new field boosted output to about
160,000 b/d last month. The US Embassy reports that Gabon-OPEC's
smallest oil producer-could produce nearly 180,000 b/d next year.
Philippines Manila's agreement last Friday with its largest commercial creditors for a
Rescheduling Plans 90-day moratorium on principal payments on the foreign debt was the first in a
series of steps required to restore order to the Philippines' external finances.
The "standstill" affects the Central Bank's short-term foreign debt, the short-
term debt of private Philippine financial institutions, trade financing facilities,
and medium- and long-term payments falling due before mid-January.
Government-to-government debt and liabilities to the IMF, World Bank, and
other multilateral financial institutions are excluded. The moratorium will
defer about $230 million in medium- and long-term debt payments, freeze
short-term liabilities equal to about $7 billion, and thus halt the erosion in
Manila's access to capital. Manila and its creditors are now likely to turn their
attention to rescheduling these obligations and. possibly those payments falling
due in 1984
The "Central Bank Advisory Committee," currently comprising 10 large
private banks, this week informed over 300 other private creditors of the move.
It will also attempt to persuade foreign banks not to withdraw about $700
million in deposits in offshore branches of Philippine banks. In the months
ahead, it is likely to manage a formal rescheduling.
The agreement is a mixed blessing for President Marcos. It will provide some
financial breathing room for the Central Bank, which reportedly has run its re-
serves down to less than $1 billion, and stabilize the Philippines' currency after
the recent devaluation. Opposition groups, however, are already making
political capital out of the debt agreement by claiming that Marcos has
mismanaged the country into bankruptcy.
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The Philippines: Foreign Debt, June 1983
Total
Medium and long term
Public and publicly guaranteed
IMF
Other official sources
Multilateral a
Bilateral
Private banks
Bonds
Supplier credits
Private
Short term, owed by nonbanks
Revolving trade credits
Short term, owed by financial institutions b
Central Bank
Commercial banks
a Including World Bank.
b Reserve financing,
c Net liabilities, $5,183 million; assets, $3,100 million.
22,700
14,000
9,735
1,363
3,284
2,098
1,186
3,563
1,002
523
4,265
3,665
600
4,460
4,460
4,240
2,157
2,083
IMF/IBRD Decisions The directors of the IMF and the IBRD delayed decisions on all but one of the
and Delays major items on their agenda-at their annual meeting last month. Shelved until
next year was a proposal-endorsed by the LDCs and some industrial
countries-to move forward with an issue of Special Drawing Rights. No
progress was made in negotiations on a general replenishment of funds for the
World Bank's long-term, low-interest affiliate, the International Development
Association. Meeting attendees agreed, but took no action, on the need to
approve a selective capital increase for the World Bank in line with the IMF
quota increases authorized earlier this year. The LDCs supported the Bank's
request for a $17 billion capital increase, while the United States 25X1
___]held that $3 billion was enough to readjust the 25X1
positions of a few key countries and was all that could be reasonably expected
during this round of increases. A compromise may form later this year around
an $8 billion increase endorsed by several European nations. 25X1
The Fund did move to conserve its critically strained resources by scaling back
access ceilings. In a compromise move, the IMF adopted the United King-
dom's proposal that the IMF's current "enlarged access" policy under which a
member may borrow up to 150 percent of its quota annually be scaled back to
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102 percent. Delegates agreed, however, that, depending on the seriousness of
a member's balance-of-payments needs and the strength of its adjustment
effort, 125 percent of quota would be available to qualifying countries.
The quota access decision removes one of the stumblingblocks holding up
European Community agreement on a $3 billion BIS loan to the IMF. A
matching $3 billion Saudi loan is tied to the BIS loan. West German Finance
Minister Stoltenberg is reported in the financial press to have said that final
agreement on the loan is dependent upon hasty US ratification of its share of
the IMF quota increase and the willingness of the United States to put up sub-
stantially more credit for Brazil. Until the United States ratifies the quota
increase and the BIS steps forward with the requested $3 billion, the IMF's
ban on the approval of new credit programs will likely remain in effect.
Status of Polish Debt Warsaw earlier this month hosted a team of representatives of Western
Rescheduling government creditors and met with banks to work out the last details of the
agreement reached in August to reschedule debt due to banks this year. Polish
authorities met with a task force of the Paris Club of government creditors, the
first such meeting since the imposition of martial law. The Poles did not
present a formal request, but a Polish Finance Ministry official told the task
force that there is no further room to cut imports and that Poland will need
$6-8 billion in new credits over the next three years. He said Warsaw will not
accept a rescheduling package that does not include new credits and IMF
membership. The task force requested additional information from the Poles
and plans to give its findings to the Paris Club on 26 October. The Club is to
decide then whether to move beyond its July consensus "in principle" to open
talks.
While most Western governments want to begin negotiations soon, reschedul-
ing talks are likely to. proceed slowly. Warsaw's initial demands for debt relief,
new credits, and IMF membership are certain to be more than the creditors
will accept.. Moreover, the expected signing next month of the agreement
rescheduling bank debts for 1983-and the push for an early agreement on
debts for 1984-will further complicate efforts of the Paris Club participants
to receive payments.
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Global and Regional Developments
EC Considers New The EC is considering measures to boost EC finances and cut agricultural
Agricultural surpluses that, if implemented, could reduce US agricultural exports to the
Protectionism Community. In a special Council meeting on 10-12 October, EC Agricultural
and Foreign Ministers debated an EC Commission proposal to put a tax of
$6.50 per 100 kilograms on vegetable oils and all animal fats except butter, ef-
fective 1 January 1984. According to Commission estimates, the oils and fats
tax will raise $525 million annually, encourage consumption of domestically
produced butter, and inhibit imports of vegetable oils. In addition, the
Community is contemplating restrictions on imports of feedgrain substitutes.
The United States annually exports to the EC $4 billion in vegetable oil
products, primarily soybeans, and $700 million in feedgrain substitutes,
mainly corn gluten and citrus pellets
While EC Ministers are under growing pressure to find ways to limit
agricultural surpluses and to keep next year's spending within revenue
limitations, reaching agreement could prove difficult. The oils and fats tax has
only a slim chance of adoption; the imposition of quantitative limits on imports
of feedgrain substitutes are more likely. Both measures have the strong support
of the EC Commission and the French, Belgian, Irish, and Italian Govern-
ments but have drawn heavy criticism from the United Kingdom, Denmark,
West Germany, and the Netherlands. Opposition to the proposals grows out of
fear of US retaliation and pressure from consumer groups. The issues are
unlikely to be resolved in the coming weeks and will spill over to the December
EC Athens summit.
Big Six Sales Exports by the Big Six countries to the oil-exporting LDCs dropped below the
to Oil- $20 billion level in the second quarter of 1983, a seasonally adjusted decline of
Exporting LDCs 6 percent from the first quarter of this year. The share of total Big Six exports
Decline going to these countries has dipped from 14 percent to 12 percent over the past
18 months. Losses have been spread over all the Big Six since first-quarter
1982; West Germany and Japan suffered export declines of more than $1
billion each during the past year and a half. Japan's losses were concentrated
in the second quarter of this year accounting for most of the Big Six decline in
that period. 25X1
Falling oil revenues of the oil-exporting LDCs plus the debt problems of
several of these countries have led them to scale back ambitious development
plans. As a result, deliveries of machinery, capital equipment, and industrial
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Big Six Exports to Oil-Exporting LDCs a
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
1st Qtr
2nd Qtr
Big Six
24,395
22,827
20,769
20,750
20,743
19,418
Japan
7,146
6,835
6,389
6,576
6,787
5,955
West Germany
5,363
5,086
4,599
4,452
4,418
4,122
Italy
4,032
3,332
2,923
2,859
3,285
3,259
France
3,739
3,650
3,245
3,184
3,108
2,927
United Kingdom
3,337
3,116
2,866
2,981
2,622
2,533
Canada
778
808
746
699
523
621
supplies that account for the bulk of Big Six exports to these countries have
been hurt. Exports to war-torn Iraq have dropped the most, down $2.4 billion
over the past 18 months, followed by declines in three problem debtor
countries-Nigeria down $1.4 billion, Venezuela almost $800 million, and
Mexico over $700 million. In contrast, exports to Iran have rebounded by
$1.3 billion over the period. Continued slack oil demand in the developed
countries and economic austerity measures in some of the oil-exporting LDCs
will probably result in further Big Six export declines to these countries
through the rest of 1983, retarding Bix Six recovery.
Continuing Trade Caribbean Community (CARICOM) finance ministers met last month in yet
Squabbles in the another-and largely unsuccessful-attempt to iron out trade disputes that
Caribbean have battered their common market for nearly a year:
? A tentative agreement to devalue Jamaica's CARICOM exchange rate
reportedly fell apart when Trinidad insisted that Kingston place CARICOM
raw material imports in a different exchange rate category.
? No apparent progress was made in reviving the Multilateral Clearing
Facility, which, until major lender Barbados pulled out in April, had
facilitated trade through credits and clearinghouse accounts.
? The ministers did agree to set up a surveillance committee to investigate
breaches of common market rules of origin regulations that ostensibly caused
Trinidad to slap on import licensing requirements earlier this year.
Problems could intensify next month when agreements-including Jamaica's
special CARICOM exchange rate-reached during May's emergency heads
of government meeting are set to expire. The result of these quarrels is sharply
reduced trade within CARICOM this year.
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National Developments
Developed Countries
Israeli Economic Public doubts remain about the ability of Prime Minister Shamir's new
Pressures government to handle the country's economic problems, despite agreement on
a new finance minister. Israelis continue to purchase US dollars and other
foreign currencies, with the black-market exchange rate continuing to exceed
the official rate by at least 5 percent. The government has delayed collection of
value-added taxes because many firms have their excess cash tied up in stocks;
the Tel Aviv stock exchange has been closed for two weeks and is scheduled to
resume share trading on Sunday. The protracted haggling in the government
over the choice of the Herut Party's Yigal Cohen-Orgad as the new Finance
Minister has further undercut Shamir's political position. Members of the
Liberal Party had threatened to leave the government if he were chosen. They
probably received assurances of an additional cabinet-level or other senior
position- in exchange for their support.
It will not be easy for Cohen-Orgad to get the necessary cabinet support for
badly needed austerity measures. The two-hour strike last Sunday by
70 percent of the labor force demonstrates public determination to fight
adjustments in the cost-of-living formula and lowering of living standards.F
25X1
West German West Germany's seasonally adjusted unemployment rate held steady at 9.4
Unemployment Levels percent in September-the first month since early 1980 that unemployment
Off in September failed to increase. Although the head of the West German labor office
heralded the break in the upward trend, we see this as only a temporary lull.
Given the slow pace of West German economic recovery, we believe unemploy-
ment will climb this winter by another 100,000 to a total of 2.5 million persons
and average about that level in 1984. As a result, the unemployment rate will
move above the Big Seven average next year for the first time since the post-
World War II period, according to OECD estimates. F__~ 25X1
Australian Alumina Alcoa's recent announcement to begin operating an alumina refinery that had
Capacity To Increase been mothballed since mid-1982 is part of a major expansion in Australia's
alumina smelting capacity. Most of the increased production-Australia
accounts for 22 percent of world output-will supply export markets. Current
facilities already are operating at or above capacity in response to strong world
demand, according to the US Embassy. Both Alcoa's refinery and a new plant
in Western Australia are scheduled to come into full operation by early next
year. A third plant in Queensland is currently undergoing an expansion to
boost capacity 17 percent. These projects will increase capacity by nearly
30 percent to about 9.3 million metric tons annually.
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Good Prospects for The Australian Wheat Board has increased its projection for the 1983/84
Record Australian wheat crop to a record 18-19 million metric tons, as compared with last year's
Wheat Crop drought-stricken crop of only 8.8 million tons. Although we believe this
projection may be on the high side, the crop will allow Australia to meet and
probably expand export obligations. The Australians would like to secure an
agreement with the USSR establishing minimum purchase levels of 1-3
million tons annually for the next five years./
Less Developed Countries
South Korea's New President Chun has drawn upon South Korea's pool of talented and experi-
Economic Team enced US-trained economists to form a strong new economic team in the
aftermath of the Rangoon bombing. The new team is weighted toward officials
who favor opening the economy to greater reliance on market forces. The US
Embassy in Seoul believes this liberal cast will benefit US-Korean economic
relations. The appointments also should reassure international bankers of the
continued soundness of Korean economic management. We do not expect the
new team to make any major changes in South Korea's austerity policies.F_
Former Finance Minister Kang Kyong Shik is likely to emerge as the most in-
fluential economic adviser from his new position as Secretary General in the
Blue House. He will be supported by Sakong Il, who replaces Kim Jae Ik as
Blue House Senior Secretary for Economic Affairs, and Kim Mahn Je, who
takes over as Finance Minister.)
Rains Slightly Improve Recent favorable rains in some drought-stricken areas of Mexico appear to
Mexican Agricultural have ended two years of widespread drought. Even so, we expect little overall
Outlook improvement over last year's poor harvest because of lower real farm price
guarantees, growing shortages of fertilizers, machinery, and other imported
inputs, and poor weather during the bulk of 1983. Output from large irrigated
farms producing for the domestic market is down. We expect this to be
balanced by small production increases by export-oriented commercial farms
and in some rainfed areas. Important rainfed crops, such as corn and sorghum,
will exceed last year's low level by a fair margin; they still will be 20 percent
below predrought harvests.
Nicaragua Raises In an attempt to conserve fuel and increase government revenues, Managua
Fuel Prices earlier this month announced a 40-percent hike in official prices for rationed
gasoline and boosted charges for diesel fuel by 50 percent. The government
also agreed to allocate about 4 percent of gasoline supplies for sale on the free
market at prices that Managua expects will triple the official price. Managua
announced these steps shortly before the latest round of insurgent attacks on
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petroleum facilities at the Ports of Corinto and Sandino; stiffer rationing and
further price increases probably will ensue shortly. The US Embassy believes
government measures taken so far will further depress agricultural production,
but revenues from higher fuel charges will somewhat ease the budgetary bind
caused by increased defense spending.
Burma Scales Back Burma's state-owned petroleum company has downgraded its estimate of
Natural Gas Find natural gas reserves in a field discovered last winter in the Gulf of Martaban to
less than half of the originally estimated 280 billion cubic meters. The loss of
this one bright spot in the economy has caused Burmese officials to cancel
plans to build an export-oriented liquefied natural gas plant. Instead, they plan
to produce methanol, fertilizer, and liquefied petroleum gas for domestic
consumption. Even the smaller project could run into trouble, however,
because securing foreign financing is likely to be difficult.
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International Financial Situation:
Noncompliance With IMF Programs by
Several Major Debtors (u)
This article is part of a series of special articles
zeroing in on the economic and political aspects of
the international financial situation.
LDC compliance with IMF austerity measures is
one of the critical components in the overall inter-
national debt equation. Despite the importance
compliance plays in maintaining the current level
of international lending, Argentina, Peru, and the
Philippines are or will soon be found in violation.
Brazil missed its targets last May and has not yet
qualified for a new program. For the three Latin
American debtors, failure to meet IMF targets
prevents them from borrowing hard currency from
the Fund and from drawing down commercial bank
loans that were arranged in conjunction with the
IMF programs. In the case of the Philippines,
continued noncompliance would impede negotia-
tions for future commercial bank debt relief. Until
these countries get back on track or come to an
agreement on revised IMF programs, their external
financial positions will deteriorate. If financial res-
cue programs are seen to fail or are compromised
with substantially softer conditionality, other debt-
ors may demand better terms and banks may
become even more reluctant to loan to LDCs.r_
Brazil has been the major concern to the interna-
tional financial community throughout 1983. After
Brazil missed its IMF targets on the public-sector
deficit and inflation rate in late May, the IMF and
commercial banks prevented the government from
drawing $820 million and $1.1 billion, respectively.
Although Brazil signed a new letter of intent in
mid-September, the Fund and the banks indicated
they would hold up further funding until Brazil
reduces wage indexation. (For a more detailed
discussion, see the article on Brazil in this issue.)
Failure to secure a wage restraint bill would drive
the country further away from compliance with its
IMF program and impede progress in organizing a
new credit package that commercial banks and 25X1
Western governments are trying to assemble to get
the country through 1984. 25X1
Argentina will fall out of IMF compliance by the
end of the year. A major problem is that the central
bank is failing to meet its quantitative target on net
domestic assets, which is fueling an inflation rate
more than double the rate targeted under the IMF
program. Argentina may also face noncompliance
because of principal and interest arrears, foreign
exchange restrictions, and a rising fiscal deficit.
The government was prevented from drawing $325
million from the IMF and the first tranche of a
$1.5 billion commercial bank loan in late August
because of discrimination against British firms and
Argentine bankruptcy laws. Moreover, the US
Embassy reports that any new government will be
hard pressed to enact strong austerity measures. A
Peronist president would jeopardize IMF negotia-
tions if it followed through on the party's professed
intentions to expand the economy and redistribute
income. While an administration run by the Radi-
cal party might negotiate an IMF program rapidly,
this would generate confrontation in a Congress
that is likely to be evenly divided between Peronists
and Radicals.
Peruvian Finance Minister Pastor has stated that
an IMF mission is to arrive in Lima in mid-
November to revise the economic stabilization pro-
gram. The revision comes amid reports that Peru
has failed to stick to its IMF program and will be
prevented from drawing $70 million from the Fund
and $100 million from commercial banks during
November and December. The primary difficulty is
with the government's budget deficit. An IMF
team recently calculated that the deficit would top
9 percent of GDP compared with the target of 4.1
percent. The government hopes to convince the
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IMF to discount this year's results given the coun-
try's disastrous weather, according to the US Em-
bassy. At a minimum, IMF disbursement and
commercial bank loans would be postponed until
sometime next year.
The IMF determined in September that the Philip-
pine Government failed to meet its performance
criterion on net credit to the public sector and was
therefore unable to draw $50 million under its one-
year standby program signed last February. Press
reports indicate that on 14 October Prime Minister
Virata asked representatives from 10 banks to
constitute a bank advisory committee and to rec-
ommend that other banks agree to a 90-day stand-
still in principal payments on external debt. Finan-
cial support from international banks, however,
hinges on successful negotiations with the IMF.
Although Manila has already implemented most of
the policy measures advocated by the Fund, we
believe Marcos's precarious political situation will
make it increasingly difficult for the government to
sustain the program.
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G=UI CL
International Financial Situation:
Trade Surplus Widens in
Key Debt-Troubled LDCs
This article is part of a series of special articles
zeroing in on the economic and political aspects of
the international financial situation.
The trade surplus of the key debt-troubled LDCs '
climbed above $12 billion in the first half of
1983-compared with $7.7 billion in all of 1982-
as these countries further slashed purchases from
abroad. Export earnings in first-half 1983 fell $2.6
billion from year-earlier levels, preventing the trade
balance from rising even more. The aggregate
trade balance of these countries probably will not
grow much more in the near term because we
expect slower-than-normal recovery in OECD pur-
chases from the Third World and because imports
have probably been pared as much as is politically
feasible in these debt-troubled LDCs.
Imports Plunge
Imports of the 15 key debt-troubled countries have
fallen dramatically over the last year and a half.
Total imports fell $23 billion-17 percent-in
1982. In the first six months of 1983 imports were
down an estimated $17 billion, or 28 percent from
the first half of last year. Among the key debt-
troubled countries, the size of the import reduction
varied widely. Total foreign purchases in the first
half by the oil-exporting debtors-Mexico, Ecua-
dor, Indonesia, Nigeria, and Venezuela-registered
the sharpest drop, falling by one-third. On the
other hand, the imports of Costa Rica and the
Philippines showed little change. While reporting
an overall first-half decline, Argentine and Mexi-
can imports were up in the second quarter, indicat-
' Fifteen countries are classified key debt-troubled LDCs on the
basis of their relative debt and debt service positions and their
importance to US policymakers. The 15 debt-troubled LDCs we
examine are Argentina, Brazil, Chile, Costa Rica, Ecuador, Indo-
nesia, Ivory Coast, Kenya, Mexico, Morocco, Nigeria, Peru, the
Debt-Troubled LDCs: Recent
Trade Trends'
Imports (c.i.f.)
20
5
I I I
0
1980 81 82 83
aQuarterly data, seasonally adjusted.
ing their import declines may have finally bottomed
out.
The decline in import volume, although steep, was
probably less than the fall in dollar terms. Dollar
import prices have been falling because of lower oil
prices and the appreciation of the US dollar. Dollar
export prices for the industrial nations-which
account for 60 to 80 percent of LDC imports-fell
4 percent in the first half of 1983. Oil export prices
were 11 percent lower in January-June of this year
than in the first half of 1982.
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Exports
134,620
120,050
30,410
29,070
30,330
30,130
28,090 b
28,740 b
Imports
134,880
112,310
32,230
29,320
25,780
25,030
22,880 b
21,480 b
Balance
-260
7,740
-1,820
-250
4,550
5,100
5,210 b
7,260 b
Argentina
Exports
9,140
7,620
2,200
2,080
1,490
1,850
1,960
1,860
Imports
9,430
5,340
1,610
1,360
1,210
1,200
1,070
1,220
Balance
-290
2,280
590
720
280
650
890
640
Brazil
Exports
23,290
20,180
5,410
4,980
5,070
4,750
5,190
5,780
Imports
24,080
21,070
5,500
5,410
5,200
4,980
4,370
3,840
Balance
-790
-890
-90
-430
-130
-230
820
1,940
Exports
3,910
3,820
970
990
960
890
910
1,060
Imports
6,360
3,530
1,050
1,090
730
690
700
680
Balance
-2,450
290
-80
-100
230
200
210
380?
Costa Rica
960
870
230
230
210
200
190
200
1,210
870
210
220
220
200
220
250
-250
0
20
10
-10
0
-30
-50
Exports
2,540
2,140
590
550
560
450
590
540 b
Imports
2,250
1,990
570
510
520
380
390
380
Balance
290
150
- 20
40
40
70
200
160 b
Indonesia
Exports
22,260
18,940
5,320
4,560
4,890
4,200
4,600 b
4,130 b
Imports
13,270
16,850
4,260
3,990
3,800
4,680
5,500 b
4,700 b
Balance
8,990
2,090
1,060
570
1,090
-480
-900 b
-570 b
Exports
2,540
2,300
740
570
440
560
640
500 b
Imports
2,380
2,180
660
540
500
490
550
450-b
Balance
160
120
80
30
-60
70
90
50b
Kenya
Exports
1,180
1,050
290
260
250
230
280 b
270 b
Imports
2,130
1,640
540
420
320
340
300 b
260 b
Balance
-950
-590
-250
-160
-70
-110
-20b
10b
Mexico
Exports
19,380
21,580
4,360,
5,000
6,190
6,130
4,970
5,110
Imports
24,070
14,560
5,550
4,140
3,080
1,840
1,630
2,130
Balance
-4,690
7,020
-1,190
860
3,110
4,290
3,340
2,980
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accrct
Trade Trends in Key Debt-Troubled Countries a (continued) Million US.$
Exports
2,390
2,060
500
490
530
550
510
490b
Imports
4,400
4,310
1,070
1,070
1,160
1,030
920
820 b
Balance
-2,010
-2,250
-570
-580
-630
-480
-410
-330b
Nigeria
Exports b
17,370
14,280
3,780
3,260
3,470
3,780
1,730
3,000
Imports b
19,600
15,120
4,820
4,190
2,790
3,330
2,390
2,340
Balanceb
-2,230
-840
-1,040
-930
680
450
-660
660
Exports
3,250
3,230
780
870
780
790
650
750
Imports
3,450
3,600
1,020
880
890
820
640
610
Balance
-200
-370
-240
-10
-110
-30
10
140
Exports
5,650
4,970
1,270
1,290
1,190
1,210
1,170
1,200 b
Imports
8,470
8,270
2,160
2,100
1,960
2,070
2,070
2,180 b
Balance
-2,820
-3,300
-890
-810
-770
-860
-900
-980 b
Venezuela
Exports
20,100
16,440
3,790
3,790
4,180
4,420
4,500
3,600 b
Imports
13,110
12,500
3,070
3,260 .
3,280
2,890
2,010
1,500 b
Balance
6,990
3,940
720
530
900
1,530
2,490
2,100 b
Zaire
Exports
660
570
180
150
120
120
200b
250b
Imports
670
480
140
140
120
90
120 b
120 b
Balance
-10
90
40
10
0
30
80b
130b
a Exports f.o.b. and imports c.i.f. are based on IMF International
Financial Statistics. Quarterly data are seasonally adjusted and
may not add to annual totals.
b Estimated.
Continued Export Slump
Exports of the debt-troubled LDCs remained stag-
nant during the first half of this year after dropping
,nearly $15 billion, or I 1 percent, .in 1982. The oil-
exporting countries saw their first-half 1983 for-
eign sales plummet to $33 billion, the lowest level
since 1979. There were signs of recovery in the
export earnings of the nonoil debtors. Exports of
this group have been rising slowly since third-
quarter 1982 and have nearly recovered to the level
of the first half of last year. The exceptions are
Peru and Costa Rica where exports fell 15 percent
or more in the first half of this year. Exports for the
15 countries were down an estimated 4 percent
from year-earlier levels.
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The sluggish export performance of the debt-
troubled LDCs occurred despite vigorous attempts
by many to promote foreign sales through export
incentive programs. Various measures included
preferred access to foreign exchange, lower interest
rates on export loans, and tax benefits. Nearly all
of the debt-troubled LDCs devalued or accelerated
the depreciation of their currencies.
Net Effect: Trade Balances Improve
The general slowing of export declines combined
with the sharp fall in imports led to a huge first-
half trade surplus for the 15 key debt-troubled
LDCs. The aggregate trade balance, which went
from a slight deficit in 1981 to a $7.7 billion
surplus last year, amounted to an estimated $12
billion surplus, seasonally adjusted, in the first six
months of this year. The five oil-exporting coun-
tries saw their trade surplus rise to an estimated
$10 billion in January-June. Nonoil debtors also
ran a surplus in the first half, their first positive
Many key debtors appear well on their way to
meeting their IMF trade targets. Argentina's first-
half seasonally adjusted surplus of $1.5 billion puts
it well within reach of its $3 billion target, particu-
larly if it can take advantage of this year's record
wheat crop. Brazil ran a $2.8 billion surplus in
January-June, nearly assuring Brasilia that it
would attain its IMF target. Mexico will probably
far exceed its trade performance target; its $6.3
billion first-half trade surplus nearly equaled the
target for the entire year
In our judgment the aggregate trade balance of the
15 key debt-troubled LDCs probably will not in-
crease much more in the short run. The export
earnings of these countries are unlikely to rebound
very quickly because OECD imports from the
Third World are expected to recover more slowly
during the current economic upturn than during
previous ones. A potentially positive factor is that
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21 October 1983
Commodity Prices
All commodites
Food
Metals
nonoil commodity prices in dollar terms have begun
to rebound. The IMF commodity price index for
August, for example, was up 15 percent in dollar
terms from a year earlier.
Although the fall in imports is expected to level off
soon, a number of factors will keep imports from
increasing rapidly. Import barriers and foreign
exchange controls are unlikely to be dismantled in
most countries in the near term. In addition to the
continued slow growth in foreign exchange earn-
ings, a shortage of trade financing may limit the
ability of many countries to import. Foreign suppli-
ers, concerned that short-term credits may turn
into long-term loans as a result of debt reschedul-
ing, are requiring collateral, eliminating open ac-
counts, and demanding prepayment for shipments.
Moreover, most of the countries examined here are
under or are negotiating IMF stabilization pro-
grams where restrictive monetary and fiscal
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Secret
policies will continue to hold down domestic growth
and, in turn, import demand..
Although the sizable surplus being generated this
year will help ease foreign exchange problems for
many of the key debt-troubled LDCs, the underly-
ing import cuts of these countries have had adverse
effects both externally and internally. The reduc-
tion in imports has dampened the export perform-
ance of other LDCs and has hurt exporters in the
United States and other developed countries. In-
creasingly, the debt-troubled LDCs have been turn-
ing to alternative trading arrangements such as
barter and bilateral trade agreements to avoid
having to spend scarce hard currency-reversing
the past trend toward multilateral free trade. Do-
mestically, LDC import cuts have created short-
ages of consumer goods and needed inputs for
manufacturing and thus have contributed to declin-
ing industrial production, rising unemployment,
falling standards of living, and, in some cases,
growing unrest.
As the debt-troubled LDCs continue to seek ways
to limit imports while simultaneously boosting ex- 25X1
ports, some are likely to set up new trade barriers.
If these countries cannot expand exports to other
LDCs, they may turn to the Western industrial
countries to sell their goods. Intense pressure to 25X1
increase sales to the developed world could gener-
ate North-South strains and possibly intensify pro-
tectionist pressures in industrial countries.
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Secret
Brazil: Domestic Pressures
on IMF Austerity
Brazil's efforts to tighten the austerity screws have
met with a rising tide of protests among nearly all
sectors of society, especially private business, the
middle class, and labor. Demands for the easing of
tough economic policies and a break with the IMF
are becoming increasingly strident. On Wednesday
a rebellious Brazilian Congress-responding to
growing constituent discontent-overturned the
most recent wage restraint decree law, a key
element of the government's austerity pledge to the
IMF. The Figueiredo government is attempting to
negotiate a compromise, but this will take time.
While we believe the government is likely to suc-
ceed, the further delays in loan disbursements will
cause arrearages to mount. In the coming weeks we
foresee continuing difficulties in balancing finan-
cial imperatives against political pressures; at worst
there is a risk the Figueiredo government will break
off negotiations with the IMF, sending shockwaves
through the international financial system.
Tougher Austerity and Its Effects
Unhappy with Brazil's poor performance in reduc-
ing inflation and the public-sector deficit early in
1983, the IMF insisted that Brasilia undertake
stronger measures to receive further financial sup-
port. In response to these demands, President
Figueiredo, beginning in June, announced piece-
meal a series of tough, politically unpopular new
steps including:
? Sharply reduced subsidies for agricultural and
petroleum products and for some exports.
? Substantial new cuts in state-owned company
budgets.
? A lowering of wage adjustments to 80 percent of
the consumer price index.
In addition, Brasilia imposed further restrictions on
domestic credit, some tax increases, and tighter
foreign exchange and price controls.
The stabilization program has boosted inflation by
eliminating subsidies and has weakened growth.
According to the US Embassy, economic activity in
the public sector has slumped because of curtailed
capital investment. Meanwhile, private business
failures have accelerated because of reduced
public-sector purchases, slumping consumer sales,
tight credit, restricted imports, and price controls.
In the first half of 1983, the Brazilian press
reported nearly 400 Brazilian firms were granted
bankruptcy decrees and about 300 more sought
judicial protection from creditors, a major increase
over a year earlier.
The middle- and lower-income classes are not only
seeing a substantial erosion of their real wages, but
increasing numbers are joining the unemployed. In
Sao Paulo about 13,000 industrial workers have
been laid off monthly this year, reducing the
number of jobs in the city to near the 1970 level. 25X1
The middle class, many of whom are losing
their jobs or are being forced to accept less pres-
tigious positions, are curtailing spending even on
The Mounting Political Backlash
Since early this year, dissatisfaction with the gov-
ernment's economic management has spread
throughout Brazilian society. Special interest
groups have opposed the IMF-mandated austerity
program through public criticism, private lobbying,
and street demonstrations. As a result the political
opposition movement is becoming a significant
Private businessmen are highly critical of Brasilia's
economic management. They blame excessive defi-
cits and bloated state enterprise budgets for most of
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Brazil's current economic problems. According to
press and Embassy reports, businessmen charge
that the government, instead of attacking the econ-
omy's fundamental structural deficiencies, has
moved from one stopgap measure to another. As a
result, business groups are turning to political
action. They are lobbying hard for policy changes,
even though they lack a consensus on alternatives.
Moderate businesses press for easing the austerity
program, while hardline nationalists are calling for
a complete break with the IMF. More significantly,
business elites have begun to seek political alterna-
tives to the ruling party.
Rising unemployment and declining real wages are
arousing considerable labor discontent with the
austerity program. Although disunity and wide-
spread concern over job security have hampered
collective action, labor's political activity has been
on the rise. Following a poorly organized nation-
wide workers' strike in July, the US Embassy and
the press reported that one of the major wings of
the labor movement-including the country's most
militant unions-met in August. The conference
organized a new national labor confederation and
called for a late October strike to protest the wage
restraint law.
In Congress, four opposition parties claiming to
represent labor, joined by ruling party dissidents,
are pressuring the administration on labor-related
issues. Congress recently voted against the govern-
ment's economic strategy by approving a resolution
calling for a debt moratorium and by repealing the
wage decree.
Growing economic frustration among Brazil's pub-
lic employees-prominent among the traditional
middle-class backers of the military government
and its political party-is undermining support for
Brasilia's economic policies. The IMF's insistence
that the government drastically slash public spend-
ing has threatened their jobs and prompted pro-
tests. In May and June more than 100,000 civil
servants struck for higher pay and job security.
Secret
21 October 1983
Economic Management Under Fire
The diminished credibility of Brasilia's economic
team, especially Planning Minister Delfim Netto,
is compounding the difficulty of reconciling differ-
ences between the IMF and domestic groups.
According to the US Embassy, thousands of state-
enterprise employees-mostly well paid and well
organized-demonstrated against budget cuts. Re-
cently public employees have joined other middle-
class elements in denouncing the wage law-which
applies to all workers-and in lobbying congress-
men for its repeal.
Keeping the Program on Track
Despite this growing political resistance, the
Figueiredo administration has maintained momen-
tum in its negotiations with the international finan-
cial community only through domestic economic
concessions and political maneuvering. The
administration:
? Agreed in May to a modest easing of wage
controls, to a shorter workweek, and to increased
job security.
? Pledged to public employees in late June to
absorb fiscal spending cuts through curtailed
investment rather than reduced salaries or
employment.
? Moved in August to relax controls on commercial
loans and to ease foreign exchange restrictions on
small businesses.
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secret
On the other hand, government party leaders have
warned. that congressional obstruction of austerity
measures could endanger political liberalization;
civil liberties were suspended in Brasilia on
Wednesday.for 60 days. The administration's re-
sort to carrot-and-stick political levers to protect its
economic program, however, has become increas-
ingly ineffective as social pressures such as the
recent food riots mount.
Hurdling, the Wage Negotiations
A letter of intent to revise the IMF stabilization
program was signed in September, but it was
contingent upon Brasilia's pledge to enact wage
restraints. Foreign commercial banks and official
Real GNP Growth Current Account Deficit
Percent Billion US $
creditors subsequently agreed to provide financing. -10
Neither the IMF nor the banks will resume loan Consumer inflation
payments, however, until they are assured that Percent
Brasilia can meet its IMF. commitments. Such
assurance will be contingent on legislative passage, 150
of new measures to replace the wage decree voted 140
down by the Brazilian Congress.
- 130
The hostility with which the Congress views the
administration's austerity pledge to the IMF has
focused on wage restraint. The most recent defeat
has spurred government party leaders in Congress
to attempt to negotiate a broader compromise
measure that would survive congressional review
while preserving wage restraint. This proposal,
according to the US Embassy, would shift more of
the burden of austerity to higher-income groups by
allowing full cost-of-living hikes for low-paid work-
ers and by taxing capital gains. Additional price
controls, tax reform, and a phasein of collective
bargaining to replace government wage regulations
are being considered to win support for the mea-
sure.
Government Deficitb
Percent of GDP
12
Debt Service"
Billion US $
Unemployment
Percent
We believe the Figueiredo administration's new z
tactic of combining a broader compromise with the
use of political muscle will ultimately gain accep- 0 1980 81 sz sae
tance for an austerity package in line with the IMF
ainterest payments and long-term principal repayments.
accord, but protracted negotiations may be neces- b Federal public sector deficit.
sary. The US Embassy reports the complexity of c Estimated.
the ruling party's proposal makes its passage un-
likely before December. In the interim, foreign 25X1
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creditors will remain uncertain about the govern-
ment's ability to obtain backing for the legislation
and are likely to delay further their scheduled loan
disbursements.
Financial Imperatives Versus Political Constraints
The expected delay surrounding this new economic
package will stretch the limits of Brazil's already
tenuous foreign exchan a osition.
many international
bankers wi not consider resumption of lending
until an IMF accord is in place. This would impair
not only Brasilia's ability to line up the $16.5
billion in financial commitments needed to meet
the foreign financing gap through 1984, but also
critically needed bridge loans. Without imminent
restoration of foreign credits, imports will be
squeezed harder, hobbling agricultural and indus-
trial production. Brasilia will be forced to allow its
foreign payments arrears to rise considerably be-
yond the current $2.5 to $3.0 billion, a level
previously thought intolerable by foreign bankers.
We believe numerous outstanding US bank loans
may have to be placed in a nonperforming status at
the end of this year causing Brazil to be declared in
default.
Even presuming Brasilia successfully hurdles the
wage negotiations, we foresee continuing difficul-
ties in implementing necessary austerity. The
Figueiredo government is increasingly obliged un-
der the ongoing political liberalization to heed
public opinion and share decisionmaking with Con-
gress. At the same time, it is faced with the need to
implement essential economic retrenchment. Ac-
cordingly, while Brasilia will strive to keep the IMF
austerity program on track and maintain workable
relations with foreign creditors, it will be hard
pressed to withstand building domestic pressures
for modifications to these policies.
Secret
21 October 1983
Adherence to the IMF accord will cause substan-
tial sacrifices and hardships among the Brazilian
people over the next year or two and social pres-
sures could again derail the agreement. The ex-
tremely tight fiscal and monetary policies required
by the IMF will debilitate economic activity
through at least the end of next year. Moreover, a
continuing decline in economic activity risks higher
unemployment.
Spreading disorder and growing political opposition
from the middle class and labor will spur Brazilian
policymakers to consider declaring a moratorium
on foreign debt payments. Initially, Brasilia might
contemplate a temporary moratorium-perhaps 90
days-aimed at pressuring foreign banks to accept
a long-term restructuring of Brazil's debt. Such a
moratorium, however, would be a gamble for the
government and could stalemate negotiations. In
this event, trade credits probably would contract
and economic activity plummet further. Even with
the risks implied by this nationalist option, Brasilia
might see it as a means of deflecting public resent-
ment and creating a new political consensus to
shore up the government's legitimacy.
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Mexico: The Course of
Labor-Government Relations
Despite soaring prices, declining real wages, rising
unemployment, and shortages of food and consum-
er goods, Mexican workers show few signs of
militancy, and their support has allowed President
de la Madrid some flexibility in implementing the
painful measures necessary to brake the overheated
economy. The continued loyalty of organized la-
bor-the largest and best organized sector of the
tripartite ruling party-is essential for the success
of the austerity program and for short-term politi-
cal stability. Union leaders, nevertheless, foresee
growing demands for redress that they can ill
afford to ignore.
We believe the de la Madrid government will be
able to build on the early success it has had in
meeting challenges and that the chances are better
than even that. labor-government relations will re-
main on an even keel. Although the fluidity of the
situation makes for significant downside risks, the
political institutions in which labor plays an impor-
tant part will continue to serve Mexican stability to
a degree that is unmatched elsewhere in Latin
America.
Unions During the Economic Slide
Organized labor's willingness to accept harsh aus-
terity measures during the past 10 months is a solid
indicator that the give and take that has long
characterized labor-government relations is work-
ing even under the strains imposed by the severe
economic downturn. Recognizing the seriousness of
the country's economic plight and the potential for
instability, Fidel Velazquez-a charter member of
the Institutional Revolutionary Party (PRI) and
longtime head of the nation's largest union organi-
zation, the Confederation of Mexican Workers
(CTM)-has lent his substantial political weight to
the side of moderation. His declarations of support
for the government, calls for broader labor-govern-
ment cooperation, and rejection of a Communist-
proposed alliance helped smooth the troubled tran-
sition from Lopez Portillo to de la Madrid and have
reduced tensions. Labor's backing for de la Madrid
provided him the room to launch a recovery pro-
gram, build his image as an effective leader, and
persuade international financiers of his commit-
ment to austerity. Painful IMF strictures have not
drawn much fire, and criticism of austerity has
been tempered with effusive declarations of loyalty.
No major strikes by progovernment unions have
occurred.
Labor moderation, however, is not unconditional,
and union strategists have worked to defend the
economic interests of their rank and file. Job
preservation remains the top priority-unionists
repeatedly have told US Embassy officials they
would forgo major wage increases to avoid closing
firms and boosting unemployment. Businessmen, in
part hemmed in by regulations requiring large
severance payments and other benefits for full-time
workers who are laid off, have responded with such
moves as cutting hours and splitting jobs to keep
employment up. Simultaneously, the federal work
force has been expanded. Even though unemploy-
ment is rising nationally and probably exceeds 20
percent, among unionized workers it is probably
less than 10 percent.
Curbing inflation has also been a major goal, and
labor leaders have linked accepting small wage
hikes with government and business efforts to keep
prices down. While inflation this year will be near
triple-digit levels, rates in August and September
show some moderation and suggest success in
easing upward pressures. Although many federal
subsidies have been slashed and price controls lifted
on most goods, dietary mainstays such as beans,
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Mexico: Leading Progovernment Union
Organizations, 1983 a
Confederation of Mexican Workers Fidel Velazquez
(CTM)
Federation of Government Work- Manuel German Parra Prado
ers Unions (FSTSE)
Regional Confederation of Mexi- Antonio J. Hernandez
can Workers (CROM)
Revolutionary Confederation of Alberto Juarez Blancas
Workers and Peasants (CROC)
General Confederation of Workers Lorenzo Veldepenas Machuca
(CGT)
Membership Geographic Areas
of Strength
1.5-2 million workers. Includes avi- Mexico City, Mexico
ation, cement, construction, electri- State, Sonora, Pueb-
cal, farm, hotel, paper, printing, la, Guadalajara,
and sugar workers. Queretaro
1.5-2 million workers, including Mexico City, state
most bureaucrats and secondary capitals
school teachers.
150,000 members. Includes textile, Veracruz, Mexico
shoe, garment, and maritime and City
port workers.
500,000 members. Includes food Mexico City
and beverage, textile, transporta-
tion, and hospital workers.
a A number of large national unions affiliated with the ruling party
remain outside the organizations listed. The most important include
railroad (STFRM), petroleum (STPRM), mining-metallurgical
(SITMMSRM), and electrical (SME) workers. All are members of
the PRI-sponsored Congress of Labor.
rice, and tortillas are still affordable. Government
grain purchases for state-owned stores and PRI
distribution networks are keeping supplies adequate
in urban areas.
Nonestablishment unions and their opposition par-
ty allies have been a thorn in the side of the
President, but they have not displayed the strength
to force changes in government policy. Their sharp
vocal criticism of belt-tightening measures, the
formation of antiausterity front groups, and strikes
by Communist-dominated teachers unions in Mexi-
co City and the southern states of Guerrero and
Oaxaca, however, have embarrassed the ruling
party. Government responses, described by the
Embassy as the strongest against nonestablishment
unions in years, included threatening to void the
contract of the striking Communist union at the
We see numerous dangers to the existing labor-
government relationship, but no single factor that
would provoke an immediate severing of the ties.
We believe the severity and duration of the coun-
try's economic decline are straining labor-govern-
ment bonds. De la Madrid could soon face labor
pressures to backtrack on economic reforms even
though most union leaders accept the need for
retrenching. While the personalistic nature of deci-
sionmaking in Mexico might temporarily mask
developing intraparty tensions, manifestations of an
eroding labor-government relationship-wide-
spread strikes, demonstrations, and public rejection
of administration policies-would surface quickly.
Political missteps by de la Madrid, his inability to
National Univeristy and closing the parastatal
company another leftist union was picketing.
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Organized labor in Mexico is primarily an appara-
tus for political leverage. Integrated into the post-
Revolutionary corporatist structure by an elabo-
rate network of rewards and control mechanisms,
union leaders channel government instructions to
members and mount progovernment demonstra-
tions. They also keep party strategists up on grass-
roots concerns and supply the votes necessary to
justify ruling party claims that it represents the
majority of Mexicans. Strikes are rare.
Union functionaries, anxious to hold on to their
jobs and improve their chances for advancement,
generally cooperate with the government and
restrain rank-and-file demands when their aspira-
tions are considered detrimental to ruling party-
government interests. Recalcitrant workers are ex-
pelled from their locals and because of union shop
requirements lose their jobs. Dissident victories in
shop elections are voided.
The high wages and benefits for unionized workers
are important to guaranteeing labor quiescence.
Members constitute an economic elite and their
standard of living is largely unmatched by most
Mexicans. They reap the lion's share of extensive
pull Mexico out of its economic tailspin, and poten-
tial disarray in the labor movement's hierarchy
have the highest potential for disruption.
With the President the paramount player in Mexi-
co's authoritarian political structure, his skill in
juggling the conflicting demands of powerful inter-
est groups will shape the course of labor-govern-
ment relations. Should de la Madrid blunder or
appear indecisive, this would spell a loss of public
confidence. A technocrat by training and consid-
ered a political neophyte at the time of his nomina-
tion, de la Madrid has so far been skillful in
government social programs and union-sponsored
facilities.
Although labor is subordinate to the state, the
behind-the-scenes influence of union leaders can
affect government policy. According to US Embas-
sy officers, Fidel Velazquez consults frequently
with the President.
La-
boor receives numerous elective and appointive posts
as well.
Most Mexican laborers, reflecting the importance
of agriculture and high underemployment, do not
belong to unions. Just 20 to 25 percent of Mexico's
total work force of some 21 million is unionized
and new enlistees probably do not match the
increase in the labor force. Among full-time work-
ers, however, 60 to 70 percent belong to unions and
those in essential industries petroleum, electri-
cal, transportation, steel, and mining-are well
organized. In addition, over 90 percent of plants
employing more than 25 workers are unionized.
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enforcing austerity. His program has diffused is-
sues around which antigovernment forces might
have coalesced, and he has proved adept at exploit- 25X1
ing the ruling party's ability to simultaneously
move in apparently opposite directions to reduce
strains.
The President's handling of labor has been particu-
larly impressive. He has provided progovernment
unionists with enough "victories" to keep their
followers in line, while avoiding giving hard-hit
businessmen the impression that he is totally in the
union camp. Nonestablishment organizations have
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Mexico: Leading Nonestablishment Union
Organizations, 1983
Geographic Area Ideology
of Strength
National Federation of Independent 70,000 members Monterrey Center-right, close to CTM
Unions (FNSI) philosophy
Authentic Labor Front (FAT) Unknown. Controls a hand- Puebla, Queretaro Christian-Democrat, militant,
ful of locals associated with opposition left-
ist parties
Independent Workers Union (UOI) 20,000 members. Member- Mexico City Nonideological
ship is declining. Strongest
in automobile and airline in-
dustries
University Workers Union
(SUNTU)
Single National Union of Nuclear 3,500 members
Workers (SUTIN) a
a SUTIN is, however, a member of the progovernment Congress of
Labor.
Federal District, state Dominated by Unified Socialist
capitals Party
Federal District Close ties with Unified Socialist
Party
been forced to toe the line. Success in keeping
wages down has earned applause from business and
international bankers.
Although we believe that maintaining labor's sup-
port is de la Madrid's major political objective and
that he has favored its interests just enough to keep
its allegiance, he is keenly aware that the inner
balance of the ruling party would be jeopardized by
excessive organizational rewards to a single group.
Just how far de la Madrid can go in keeping labor
on board without meeting unacceptable opposition
from within the ruling party is unclear. We believe
he views other pillars of the party-especially the
middle class-as organizationally weak, unpre-
pared to mount serious challenges, and susceptible
to preemptive political reforms. Indeed, these other
segments of the party remain quiet, and the Presi-
dent probably believes that he can continue squeez-
ing them without unleashing unmanageable reac-
tions.
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21 October 1983
The Economy
The outlook for Mexico's economy is grim. Even
under the best circumstances, which include a
strong US recovery and continued foreign lender
confidence, we see little chance for the beginning of
recovery until mid-1984. Thus, although price
hikes next year may be cut in half, economic
activity will remain stagnant. Although it is diffi-
cult to determine the point at which worker pa-
tience would be breached, indefinite sacrifice is
unlikely. Job preservation may no longer suffice,
and we believe calls for more worker militancy will
grow. Indications are that the rank and file strongly
oppose food price increases and will press their
leaders to push for changes in relevant government
policies. Strikes by unions affiliated with the ruling
party would be a sign that the difficulties plaguing
the political system were too complex to handle in
traditional, behind-the-scenes negotiations.
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Labor Discipline
Disorganization within labor's hierarchy would
magnify existing low-level tensions over how to
respond to the economic crisis. Up to now the
masterful manipulation of 83-year-old Fidel Velaz-
quez has held workers together, and labor contin-
ues to speak with one voice. Because he has no heir
apparent, however, and because those who might
take his place lack his influence and contacts,
Velazquez's death or incapacitation would cause a
vacuum at the top that could complicate continued
cooperation with the government. Established insti-
tutional controls should provide de la Madrid with
enough leeway to choose Velazquez's successor
without precipitating an immediate crisis.
Even if he lives out the remainder of de la Madrid's
term, Velazquez's success in maintaining labor
discipline is not guaranteed. Some union leaders in
the PRI disapprove of his handling of wage negoti-
ations, and the CTM's increased share of labor's
growing congressional representation has weakened
cooperation. Indeed, praise for several small labor
organizations by the labor minister coupled with a
decision by insurance industry workers to terminate
their affiliation with the CTM sparked speculation
that Velazquez's star is dimming. Moreover, the
powerful petroleum workers union is wary of ad-
ministration attacks on corruption and could break
ranks and challenge the government.
Outlook for 1984
De la Madrid's adherence to next year's IMF
program will require more politically risky cuts in
public spending and possibly in employment. Con-
tinuing restraint will cause new bankruptcies and
additional unemployed workers. We believe the
program will continue to limit consumption, and as
a result real wages will once again fall, although
the loss will be less dramatic than in 1983.
Although disruptive incidents could occur and
sharp rhetoric issue from both labor and govern-
ment, we believe that well-established lines of
communication, a perceived need for cooperation,
and the demonstrated flexibility of labor and gov-
ernment leaders will forestall serious confrontation.
Some strikes seem bound to occur, but PRI-affiliat-
ed trade unions are likely to moderate demands on
business while continuing to stress job preservation.
The President may need to employ selective use of
force to maintain order, but his success early in his
term in establishing authority and in reducing the
atmosphere of anxiety suggests he will remain in
control of events.
Friction between labor and government seems most
likely to develop as economic growth picks up.
Union members are likely to demand economic
benefits or structural reforms in the PRI to en-
hance their status in exchange for previous sacri-
fices. As long as the system appears to reward labor
and the traditional hierarchical structure is seen as
the avenue for advancement, increases in labor
agitation will remain within established norms. At
this juncture, breakup of the system that has served
labor so well seems unlikely. Indeed, as long as
unions focus on bread-and-butter issues, even a
sharp upswing in the number of strikes would not
be regime threatening.
A political crisis causing the personal links tying
the system together to fray and the government to
appear rudderless would-at any time-disrupt 25X1
labor-government relations. In such circumstances,
Mexico City might fluctuate between the pressures
of competing interest groups. Labor, as a result,
would take an increasingly independent course,
guided more by economic self-interest than a
broader national commitment. Nonestablishment
unions would have a new appeal. Demands for
higher wages and work stoppages would skyrocket
as labor-business accommodation dissolved. Under
these circumstances, the government might discard
austerity to boost economic activity, inviting a new
financial crisis.
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Prolonged economic stagnation, while causing in-
creased labor militancy, would on balance be less
disruptive than fissures in the Mexican political
system. If, however, oil prices drop sharply or a
global financial crisis occurs, union reaction to the
resulting plant shutdowns and massive layoffs
would be rapid and highly nationalistic. Calls for
unilateral debt repudiation and increased protec-
tionism would be followed by demands for the
nationalization of foreign-owned firms. To main-
tain its legitimacy and to hold labor's allegiance,
the administration would feel compelled to respond
favorably. After the euphoria of debt repudiation
and nationalizations evaporated, however, labor-
government relations would soon begin to deterio-
rate as competition for shares of a reduced econom-
ic pie began anew.
A leadership vacuum within the labor movement
poses the greatest unknown. Continued strong per-
formance by the President would alleviate most
immediate problems. Maintenance of the status
quo would be aided by the lack of political activism
among the majority of workers. Over the longer
term, jockeying for power among CTM leaders or
the inability of Velazquez's successors to restrain
labor demands could touch off a restructuring of
the movement and its relations with the govern-
ment
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21 October 1983
Vulnerability of US Firms
In our opinion, US and multinational firms are
likely to face increased problems from labor, espe-
cially when the economy picks up. Union leaders
probably discount the harmful effects of currency
depreciation and negative economic growth on for-
eign-owned companies and see them as better
prepared than domestic firms to make concessions.
In addition, US firms could face
pressure from the government to restrain wage
settlements and thus avoid interunion tensions.
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Angola: Costs of Civil War and
Soviet Dependency
USSR.
The Angolan economy continues to suffer seven
years after the disruptive independence process.
The exodus of almost all of the 400,000 Portuguese
left an inexperienced government to cope with
massive economic and security problems. These
difficulties have intensified during the 1980s be-
cause of falling world prices for Angola's exports
and the deteriorating security situation caused by
the South African-assisted UNITA insurgency.
The economy will worsen as Angola faces balance-
of-payments problems at least until 1985 when
some improvement could occur owing to large oil
production increases. In the absence of Western
aid, Angola is likely to seek greater concessions in
bilateral military and economic aid from the
Setbacks in 1981. A sharp decline in the Angolan
economy in 1981 was triggered by the fall in
petroleum earnings, on which the government had
become almost totally dependent. There were other
setbacks as well:
? A plunge in the prices of Angola's other major
exports-coffee and diamonds-further de-
pressed earnings.
? Two successive years of drought forced Luanda
to increase imports of food.
? The government boosted defense expenditures in
the face of stepped-up South African and
UNITA attacks.
? The return of Angolan refugees from Zaire and
Zambia and the migration of farmers to urban
areas to escape the drought and the chaos caused
by UNITA placed added pressure on the govern-
ment's resources.
The result of these factors was the start of a
financial crisis. The trade balance deteriorated
from a $471 million surplus in 1980 to a $5 million
deficit in 1981 as export revenues fell and the
government stepped up imports by 15 percent.
Although previously a cautious borrower, Luanda
substantially increased its foreign debt exposure
during 1981 in an effort to meet its foreign curren-
cy needs. External public debt doubled from $1.1
billion at the start of 1981 to $2.2 billion by
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yearend. For the first time, Angola entered the
Eurocurrency market to meet short-term borrowing
needs and began requesting extended trade credits
Angola: Commodity Prices and
Production Trends
in lieu of cash payments for imports.
Domestic spending pressures caused the govern-
ment's budget deficit to soar. Public expenditure
jumped by 25 percent from $2.8 billion in 1980 to
$3.5 billion in 1981.
Production
Thousand metric tons
Meanwhile, the
gap between revenues and expenditures widened to
about $1 billion because of the drop in petroleum
revenues. To cover the deficit, the government
resorted to expanding the money supply and caused
inflation to rise to almost 50 percent.
Nosedive in 1982-83. We believe President dos
Santos decided in early 1982 to scale down eco-
nomic growth targets because of the growing bud-
getary pressures and the deteriorating foreign fi-
nancial position. Setting a ceiling of $72 million for
the 1982 budget deficit, the government cut subsi-
dies, terminated all investment in new development
projects, and for the first time since independence
in 1976 began collecting income taxes from private
individuals. In late 1982, the Central Committee of
the ruling party granted dos Santos special powers
to deal with the deteriorating security situation and
to enact emergency measures giving priority to the
production of food and key industrial goods and to
raising exports.
Efforts to boost output of Angola's major exports
largely failed. Petroleum production and prices
both fell. Official diamond output fell 15 percent,
probably because of pervasive corruption by gov-
ernment officials. Coffee volume remained stag-
nant because of government procurement problems
and the poor security situation in coffee growing
regions; in many areas farmers pulled up coffee
bushes and planted subsistence food crops.
The government is failing in its efforts to rein in
public spending in 1983. Luanda hoped to cut
military expenditures
The upsurge in UNITA activity
Secret
21 October 1983
Production
Thousand carats
2,000
1,250
1,000
750
500
250
0
Pricesa
US $ per carat
300
50
175
150
125
100
75
Prices
US $ per pound
1 1 I 1 1 1 1 1
5
~I I
0 1974 75 80 83c
a Data reflect average prices for South African diamonds.
b Pegged to official Nigerian sales prices.
c Estimated. .
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during the first nine months of the year, however,
will in all likelihood drive defense expenditures in
1983 above last year's level.
The performance of individual sectors of the
economy this year gives Luanda little cause for
optimism. Despite the return of normal rainfall,
agriculture-which employs about 80 percent of
the Angolan population-has recovered only mar-
ginally. According to press reports, sabotage by
UNITA in central Angola has destroyed almost all
of the modern farms in what was once the country's
breadbasket. Most rural Angolans now rely on
subsistance agriculture to satisfy immediate family
needs, and Luanda must import food for urban
consumers.
Most factories in Angola are working at only
20 percent of capacity and have an average absen-
tee rate of 40 percent with some as high as 70
percent
Many ur an workers do not report for duty because
they spend most of their day foraging for food. In
addition, raw material shortages and a lack of
spare parts have brought some production units to a
The only bright spot in 1983 has been the oil sector.
We expect oil earnings to increase by $215 million.
Petroleum production rose 30 percent by the end of
the first half of 1983 to about 160,000 b/d, owing
to initial production from the offshore Takula
oilfields and increased onshore production. The
hike in export volume was partially offset by falling
prices as Luanda scrambled to sell in a buyers'
market.
For the year, we expect Angola's current account
position to improve because of the higher oil earn-
ings and tight controls on imports of food, raw and
intermediate goods, and capital equipment. Luan-
da's increased wartime needs took precedence over
civilian imports as purchases of military equipment
doubled. Moreover, on the basis of our analysis of
data on Angolan trade with the West, we estimate
that a growing share of imported consumer goods is
used to satisfy the MPLA elite and the Soviet,
Cuban, and European personnel in Angola.
Foreign Debt Crunch. Burgeoning investment costs
in the petroleum and diamond sectors and a heavy
debt service obligation to the USSR and Cuba for
military supplies and technicians have worsened
Angola's foreign payments position. Investment
costs in the petroleum sector doubled in 1982 to
about $260 million as the country began investing
in new oilfield development, according to an official
document of the Angolan central bank. Meanwhile,
overdue payments to the Soviet Bloc and Cuba for
military purchases and services started piling up in
1982, and the government resorted to commercial
credits to finance food and other basic imports. By 25X1
mid-April 1982, the country had fallen behind in
payments and was being pressed by creditors.\ 25X1
By midyear, the country was almost six months
behind in payments to many Western creditors,
We believe Luanda's pleas this year for official
financial assistance have fallen on deaf ears. Simi-
larly, appeals to foreign bankers and investors have
had few results. In addition to the deteriorating
economic and security conditions, Western bankers
are troubled by the lags in repaying trade credits
and the lack of accurate financial data provided by
Angolan banking officials.
1984 and Beyond
If the security situation deteriorates further next
year, which we believe likely, we expect foreign
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21 October 1983
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investors and domestic producers will avoid com-
mitting further resources to Angola. Farmers will
continue to flock to the cities or resort to subsis-
tence agriculture. The few remaining expatriate
farmers probably will emigrate rather than face
UNITA harassment. Although some foreign busi-
nessmen may sign new investment contracts, few
will actually commit funds until the security situa-
tion improves. The Angolan elite probably will
continue to send its money out of the country. F_
Continuing balance-of-payments problems will pre-
vent Luanda from slowing the downward economic
slide next year. Although export revenues are offi-
cially projected to rise about 25 percent to about
$2.0 billion as new oil production comes onstream,
much of this increase has already been mortgaged
to cover investment costs. The positive impact of
increased oil revenues also will be eroded by in-
creased military costs and pressures from creditors
to stem the burgeoning backlog of short-term debt.
Accordingly, we doubt that dos Santos will be able
to substantially increase vital food imports. fI
Luanda probably will look to official Western
foreign assistance for relief. Almost all potential
Western donors-including France, Brazil, Portu-
gal, Italy, and Spain-have indicated that their
support to Angola will be limited to government-
guaranteed trade credits, a few small investment
loans, and some food aid.
The dearth of aid from the West will probably lead
Luanda to turn to Moscow for greater concessions
in its bilateral military and economic relationship.
The USSR probably will not offer much economic
aid over the coming year. We expect the Soviets to
continue to refuse any rescheduling of commercial
debt or any trade financing. Funds from the Soviet-
Angolan economic agreement of 1982 probably will
remain reserved for large infrastructure projects
that take time to implement; examples are the
Kapanda dam and a new oil refinery.
Dos Santos will have little choice but to sacrifice
economic growth. We predict GDP will drop at
least 5 percent next year as a result of an inability
to increase imports of productive goods and the
steady drop in economic activity as UNITA sabo-
tage teams move farther north.
Luanda's financial situation may improve in 1985
as oil revenues increase because of rising produc-
tion. If the regime is able to keep the austerity lid
on as export revenues climb, Luanda by late 1985
may be able to pay off much of its overdue debt and
thus gain renewed access to international markets.
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