(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100120003-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: January 12, 2017
• Document Release Date: June 20, 2011
• Sequence Number: 3
• Publication Date: March 25, 1983
• Content Type: REPORT

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Intelligence
Weekly
EconomiEnergy
International
DI IEEW 83-012
25 March 1983
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Internati
Economic
onal
& Energy
Weekly
iii Synopsis
1 Perspectiv
e-Implications of Lower Oil Prices for Soviet Policy
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Energy
International Trade, Technology, and Finance
National Developments
Communis
t Countries: Impact of Lower Oil Price
s
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17 French Pro
tectionism: Old Wine in New Bottlenecks
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21 Italy: Prot
ectionist Trends
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25 South Asia
: Impact From Falling Oil Prices
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
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International
Economic & Energy
Weekly F]
Synopsis
Perspective-Implications of Lower Oil Prices for Soviet Policy (u)
Lower world oil prices threaten to disrupt the USSR's efforts to shore up its
hard currency payments position, with potentially wide-ranging implications
for Soviet policy. The prospect of falling revenues is probably forcing Moscow
to consider adjustments that could hurt domestic economic performance and
complicate its realtions with East European allies and Third World clients.
Communist Countries: Impact of Lower Oil Prices L-1
At the current OPEC price of $29 per barrel, the net impact on Soviet
earnings could be minimized if, as we believe likely, Moscow increases hard
currency oil exports above last years's level. Eastern Europe probably would
benefit marginally from lower oil prices, unless its oil supplies are cut by
Moscow. The Chinese hard currency position would probably change little at
current prices and suffer only moderately from further price declines.)
French Protectionism: Old Wine in New Bottlenecks
French protectionist and mercantilist inclinations have taken on new vigor
under the Socialists. In part, this is attributable to the persistence of economic
hard times. The Socialists' predilection for planning and their support for an
active role for the state reinforce such an inclination.
Italy: Protectionist Trends
Italy, which is highly dependent on foreign trade, has contributed relatively
little to rising EC protectionist pressures. Although there is some increase in
domestic protectionissures, Rome is unlikely to change its policies
significantly
South Asia: Impact From Falling Oil Price
The largest and most immediate impact of lower oil prices on India, Pakistan,
Bangladesh, and Sri Lanka will be savings on their import bills. India stands to
be the largest gainer on this account; with imports of 350,000 b/d it was hit
with about two-thirds of the region's $7 billion oil bill. We believe that the di-
minished prospects for jobs as a result of the slowdown in economic develop-
ment in the oil-producing countries pose the greatest potential danger for
South Asia.l
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International
Economic & Energy
Weekly
Lower world oil prices threaten to disrupt the USSR's efforts to shore up its
hard currency payments position, with potentially wide-ranging implications
for Soviet policy. Since mid-December the price for Soviet crude oil on the spot
market has dropped by approximately $5 to roughly $27 per barrel. Each $1
decline in price is costing the USSR $400 million in oil revenues and could
lead to a serious drop in overall hard currency earnings. If the USSR holds the
volume of hard currency oil exports at 1982 levels, oil revenues at current
prices could fall by roughly $1.5 billion. Should prices decline by another $5-
10 per barrel, Moscow's hard currency losses could quickly double or triple.
Nonoil earnings, meanwhile, will probably not cover serious shortfalls in oil
revenues and could themselves decline. Because gas prices are tied to heavy
fuel oil prices, gas earnings will slump substantially this year. Moscow may
also consider itself lucky if combined revenues from gold and arms sales-the
other leading sources of foreign exchange-fall only slightly.
The prospect of falling revenues is probably forcing Moscow to consider
adjustments that could hurt domestic economic performance and complicate
its relations with East European allies and some Third World clients. The most
likely options include:
Perspective Implications of. Lower Oil Prices for Soviet Policy
? Increasing oil exports to the West. The USSR raised hard currency
deliveries by an estimated 200,000 b/d last year, and another increment of
similar size could prevent any significant erosion of hard currency earnings
at current oil prices. This would require reducing subsidized oil shipments to
Eastern Europe and possibly to LDC clients and diverting some oil from
domestic supplies. Moscow did this last year and probably believes that
further marginal reductions are feasible.
? Further curtailing imports from the West. Machinery and industrial materi-
als would be prime targets, as they were last year.
Such moves, however, could entail considerable political and economic costs.
Further cutbacks in oil deliveries to Eastern Europe, for example, would
undercut the region's benefits from declining prices for the oil it imports. If
deep enough, the cutbacks could aggravate economic troubles with potential
danger for Moscow's political relationship with the area and for its efforts to
push Warsaw Pact modernization.
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In the Third World, reductions in soft currency oil shipments to Cuba or other
clients could prompt economic disruptions in those LDCs. Soviet ties with
some countries in the Middle East could become more complicated. Moscow
almost certainly will continues pushing weapon sales because other hard
currency earnings are threatened. Yet key oil-exporting customers may be less
able or willing to pay in cash. Several countries probably will petition for easier
payment terms, and the Soviets will have to decide whether to maintain a
tough stance, as they often have done in the past, or to ease up to preserve cus-
tomers and political relationships. Syria, Moscow's main foothold in the
region, is likely to receive preferential treatment, but some countries may
encounter less sympathy. On the other hand, lower oil prices could benefit
hard-pressed Soviet clients that buy oil on the world market. Moreover,
Moscow may believe that key oil-producing contries will suffer economic
problems that could present the USSR with new political opportunties.
Near-term prospects for Soviet trade with the West could suffer somewhat
from the weakened oil market. West European demand for Siberian gas-
Moscow's main hope for expanded trade in coming years-could diminish in
view of cheaper oil. Moreover, West European interest in additional gas export
projects would be discouraged.
At home, diversion of more than 100,000 b/d of oil from domestic users to
Western exports could compound substantially the problem of spot shortages
of oil products. If the Soviets were forced to reduce imports of machinery and
industrial materials, modernization plans would be delayed, further complicat-
ing efforts to improve productivity. Moscow, as a result, may count more
heavily on new compensation deals-which minimize Soviet hard currency
outlays for Western goods-when it determines trade's role in the 1986-90
economic plan.
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Energy
Spot Oil Following OPEC's announcement of a $5 per barrel reduction in the price of
Market Trends the benchmark crude, spot crude oil prices remain weak. Arab Light is quoted
at $28.25 per barrel, and Bonny Light is selling at $28.45 per barrel, up only
slightly over early March levels. Spot product prices have exhibited similar
trends-after bottoming out in late February, product prices rose slightly in
early March but have now flattened out. The apparent continued decline in
consumption, destocking, and expectations of another reduction in the price of
North Sea crudes have contributed to the weakness in prices. Buyers will
probably continue to defer purchases as they await a pricin decision by the
United Kingdom and OPEC's reaction to it. 25X1
Nigerian Nigerian oil officials claim that OPEC will
Oil Price retaliate with further price cuts if the United Kingdom lowers its North Sea oil
Concerns prices by more than $0.50 a barrel and that some OPEC members have
threatened to withdraw funds from British banks if a price war ensues. At least
one major operator in Nigeria has suspended its liftings of Nigerian crude
until it sees whether the British National Oil Company responds to the recent
OPEC price cut. Nigeria's price currently is $0.50 per barrel below that of
comparable North Sea crude. Other OPEC states are more concerned with
keeping prices uniform within the cartel than in responding to cuts by the
United Kingdom or other non-OPEC producers. Lagos has been firm,
however, in insisting on keeping prices competitive with the North Sea. A25X1
move by London to substantially undercut the new OPEC pricing structure
probably would force OPEC into another difficult negotiating session, with
Nigeria pushing hardest for retaliation. 25X1
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Japanese Ban on Japanese shipowners and Japan's Seamen's Union on 11 March lifted their
Khark Rescinded eight-month ban on loading oil from Iran's Khark Island oil export terminal.
Two Japanese tankers are scheduled to call at Khark this week. The ban was
imposed last July after Iraqi planes sank two merchant ships in Iranian waters
and issued a threat to any vessel in the vicinity of Khark. The move probably
will not change Japanese purchasing practices significantly because Japanese
oil companies and traders have b ing foreign flag tankers to carry the
crude from Khark.
EC Gas Provisional data indicate that EC natural gas consumption fell by 6 percent in
Situation 1982 as compared with a 1-percent decline in 1981. The drop in demand is
largely the result of falling industrial production, fuel substitution efforts, and
mild winter weather. On the supply side, domestic production declined by
nearly 9 percent, with exports of Dutch gas dropping over 17 percent. EC
imports of natural gas from third countries declined for the first time ever last
year, falling nearly 2 percent. Imports would have been off even more had do-
mestic production not dipped as well.
Among the individual EC members, the United Kingdom experienced the
largest decline in imports. In France and Italy, imports increased because of
politically sensitive long-term contracts with Algeria. To some extent, the
increase in imports from Algeria exaggerated the decline in sales from the
Community's other main third-country gas suppliers, Norway and the USSR.
Despite their overall decline, imports as a share of total gas supplies increased
1.3 percentage points in 1982 to 29 percent and probably will rise further as
EC gas production continues to fall.
Possible Delays for Despite scheduled increases of 13 percent in electricity rates, Electricite de
French Nuclear Power France (EDF) expects to lose the equivalent of $900 million this year, bringing
Program losses for the 1981-83 operating period to nearly $3 billion. As a result, EDF is
cutting back new hiring by two-thirds and has negotiated with one of its major
suppliers to delay payment on deliveries by as much as six months. Cash flow
problems combined with reduced growth rates for electricity demand probably
will lead to construction delays for the French nuclear power program,
particularly for those reactors scheduled to come on line in the late 1980s.F_
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International Trade, Technology, and Finance
Political Compromise The ability of EC countries to forge a political compromise over the hotly
on EC Exchange Rates contested issue of how to realign their currencies bodes well for the long-term
viability of the European Monetary System (EMS). The compromise worked
out required West Germany to revalue its currency in the system; in return
France agreed to a small devaluation of the franc and will soon implement an
austerity program. West German Finance Minister Stoltenberg apparently
received President Mitterrand's assurances that the economic measures would
be speedily implemented and that French Government ministers would consult
with their West German counterparts on economic policy coordination.
EMS: Currency Realignment
French franc
2.5
3.5
Italian lira
2.5
2.5
Irish punt
3.5
Negotiations on the realignment were the most divisive since the inception of
the EMS four years ago. Despite revaluation of the West German mark, Bonn
probably is pleased with the outcome because France, the weaker currency
country, will make the domestic economic adjustments necessary to strengthen
the currency system. For the second time in less than a year, France has
moderated its economic policy rather than float the franc and adopt more
protectionist measures. French Finance Minister Delors, who during the
negotiations threatened to withdraw France from the EMS, must welcome the
results, which spared France the political embarrassment of a large devalua-
tion. He has advocated new measures to reduce inflation and cut the budget
and trade deficits, and he has argued effectively against those in the
government who urged Mitterrand to ignore external constraints such as the
EMS.
If West German and French contacts are successful and promote further
consultations, this will be a step forward in the evolution of the EMS.
Although the system was primarily designed to promote the coordination of
economic policies among EC members, little progress has been achieved. Even
if France's program and consultations with West Germany prove effective,
however, the inflation differential between the two countries probably will not
be narrowed sufficiently to prevent another realignment later
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EC Fails To Eliminate Despite continued efforts, the EC Commission has been unable to persuade
French Protectionist Paris to abolish completely trade measures requiring customs documentation
Measures to be in French and imported VTRs to clear customs at Poitiers. As part of a
compromise worked out last week, the EC Commission has dropped legal
proceedings aimed at barring France's use of the language requirement. In
return, Paris has agreed to accept import documents on goods from other EC
countries if written in an "understandable language" such as English,
German, and Italian. Paris will continue to require instruction manuals and
related material to be in French, but control will be at the point of retail sales,
not the border. France, however, has suggested that the amended language
regulation will not necessarily apply to goods from non-EC countries.)
The Commission also has been pressuring Paris to discontinue its practice of
channeling all VTR imports through the single customs clearing point of
Poitiers, but so far to no avail. As part of the recent EC-Japan trade accord,
the Commission agreed to prevail on France to remove the VTR restriction.
Paris apparently will not terminate the measure until the Commission provides
more specific guidelines on how imported VTRs will be monitored under the
accord and determines if the 200,000 VTRs currently held at Poitiers will
count against the Japanese quota for this year.F__1
Spain Lowers Tariffs Spain has agreed to lower import duties on automobiles produced in the EC
on EC Automobiles from 36.7 percent to a range of 19 to 25 percent in an effort to prevent conflict
in the negotiations over its accession to the Community. EC negotiators expect
the reduction in Spanish tariffs to raise EC automobile exports to Spain from
40,000 to 55,000 units annually. British business and labor leaders, as well as
members of Parliament, had urged the Thatcher government to try to
eliminate the unfair competitive advantage of Spanish automobile exporters.
Spanish officials feared that if they did not act, London might take retaliatory
steps, preventing Spanish manufacturers from making inroads into the British
market. Madrid's action does not affect the basic 1970 trade agreement that
permits a wide discrepancy-in Spain's favor-between Spanish and EC
import duties. The reduction of the automobile tariffs, however, is only the
first of many modifications Madrid will ultimately be forced to make in the
context of EC accession.)
Asian Drought No Boon A widespread drought will curtail Asian rice production this year by about 10
to US Rice Exporters million tons from a record 361 million tons in 1982. Indonesia and India have
been hardest hit. Dwindling rice stocks have forced Indonesia to purchase
more than 600,000 tons of rice in the last two months, almost twice the-amount
imported all of last year. The USDA now estimates 1983 Indonesian imports,
almost all from Asian neighbors, will total 1.75 million tons. India, with rice
production down about 15 percent from last year, is cutting by nearly two-
thirds its rice exports to the USSR. High-priced rice from the United States,
the world's second-largest exporter after Thailand, will find few takers among
financially strapped buyers, and US stocks probably will total a record 2
million tons.)
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National Developments
Developed Countries
French Cabinet The cabinet shakeup on Tuesday reflected President Mitterrand's desire to
Changes streamline his government before implementing a new round of politically
sensitive austerity measures. The changes will strengthen the hand of Socialist
moderates who are trying to reduce the hostility of business toward the
government and who oppose a sharp turn toward increased protectionism.
Mitterrand's closest associates, including Prime Minister Mauroy, Foreign
Minister Cheysson, and Defense Minister Hernu, kept their posts. The already
strong position of Jacques Delors has been enhanced; he will take on
responsibility for the budget in addition to his duties as Economy and Finance
Minister. Jean-Pierre Chevenement has been replaced as Industry and Re-
search Minister by a moderate, Mitterrand loyalist Laurent Fabius. Chevene-
ment had drawn Mitterrand's ire by his excessive interference in the manage-
ment of nationalized firms, and his departure appears to confirm Mitterrand's
determination to preserve their market orientation. Michel Jobert, who
resigned last week as Foreign Trade Minister, has been replaced by Edith
Cresson. Cresson was a vocal and aggressive defender of the EC's Common
Agricultural Policy in her previous post as Agriculture Minister. The new
Agriculture Minister will be Michel Rocard, who has been an advocate of
economic realism within the government
Israeli Government With export receipts continuing to decline after a fall of 7 percent last year,
Under Pressure To Israeli exporters are demanding help from the government. Although the
Assist Exporters worldwide recession has contributed to the decline, the government's policy of
slowing the depreciation rate of the shekel has made Israeli products less.
competitive abroad. The Manufacturers' Association has recommended that,
in addition to changing the depreciation policy, the government subsidize
exports. The government is unlikely to change its depreciation policy any time
soon because inflation remains at near record levels, but it is moving to help
exporters. Earlier this month, Finance Ministry Director General Sadan
announced a program to pay exporters to Europe 5 percent of the value added
on their industrial goods, and Industry Ministry Director General Asheri has
called for a $100 million fund for export promotion. US Embassy reporting in-
dicates, however, that there is a considerable amount of indecision within the
government over how to help the hardest hit exporters without violating
international trade commitments.
Japan Moving To
Protect Industrial
Laser Industry
Although Japan lags the United States in the
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products.
development of industrial lasers, Japanese firms have developed commercial
models of low-power industrial lasers (up to 5 kw), based in part on technology
acquired from the United States and Western Europe. Japanese users of
industrial lasers are beginning to look to domestic rather than foreign suppliers
to meet their needs. For example, firms manufacturing laser-assisted machine
tools, which formerly used US-made lasers, are switching to Japanese
Less Developed Countries
Mexico Again Requests Mexico City last week asked its international creditors to extend the moratori-
Delay on Payment of um on principal payments from 23 March to 15 August. To gain banker
Principal support for the anticipated extension, it agreed to pay a higher rate on interest
due during the period. The new postponement became necessary when
Mexico's immediate financial- problems took longer to resolve than either
government officials or bankers anticipated and delayed discussion on a debt
rescheduling timetable. The recent agreement for a $5 billion loan from
commercial bankers calls for a 15 August deadline for completion of
discussions on rescheduling $20 billion of Mexico's public-sector debt.n
Brazilian Foreign
Exchange Losses
We believe bankers will agree to extend the moratorium, in the realization that
Mexico's available foreign exchange has barely covered public-sector interest
payments and essential imports because of lower-than-expected oil revenues
and delays in obtaining the $5 billion loan. The extension request is not likely
to hold up the initial $1.7 billion disbursement from the loan scheduled for this
week.F_~
Contraband exports and capital flight are aggravating Brazil's persistent cash-
Growing doubt about Brazil's economic prospects
resume short-term lending.
accounts. Despite the faster pace of devaluations, the illegal trade diversions
probably were a major cause of the 6-percent decline in exports through
February. Failure to stop the contraband trade will undermine Brazil's ability
to meet IMF targets and could force another major devaluation. Unless the
government stems these losses, it also will continue to encounter increasing
difficulty in meeting its daily foreign exchange obligations even if bankers
reportedly is causing investors to channel funds into overseas money market
Beirut's Financial Government customs revenues are rising sharply now that the central govern-
Picture Improves ment has closed down two lucrative "illegal ports" operated by the Christian
Lebanese Forces militia. Press reports indicate that receipts in the first half of
March jumped 93 percent over the same period last year. Beirut's recently
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approved 1983 budget projects that customs revenues in 1983 will reach about
$470 million-four times the 1982 total and enough to cover about 20 percent
of total expenditures. Despite this improvement, however, Beirut projects that
the budget deficit this year will amount to over one-third of total spending; the
actual deficit probably will be even higher. The rise in tax collections should
hearten Lebanese bankers, who are expected to finance most of the deficitF_25X1
Ecuadorean Despite Quito's 27-percent devaluation of the sucre last week and promises of
Devaluation additional adjustments, we expect Ecuador will post a $1-2 billion current
account deficit this year. The devaluation probably will lead to reduced
imports but will not halt capital flight because it has failed to close the gap be-
tween the free market value and the official exchange rate. Export gains will
be constrained by the decline in the price of crude oil, agricultural export
shortfalls caused by recent floods, and depressed world market prices for
bananas, cocoa, and coffee. F_-]
The devaluation will, however, add to President Hurtado's immediate political
problems by intensifying inflationary pressures-despite efforts to enforce a
tight monetary policy-and will make debt servicing more onerous. The move
has also sparked labor discontent. This week the Workers Unity Front, the
country's largest union, scheduled a two-day general strike with other labor 25X1
unions expected to participate.
Philippine Private- Earlier this month Manila acquired 90-percent ownership of the financially
Sector Debt Problem troubled Construction and Development Corporation of the Philippines, the
country's largest private foreign debtor. Some $400 million of CDCP's debt to
various government institutions will be converted to equity, and Manila will
assume responsibility for the firm's foreign debt service obligations-currently
about $90 million annually. CDCP has been flirting with default on its foreign
loans for over a year and is in arrears on payments to several large US banks.
On the heels of the announcement last month that the Philippines' 1982
current account deficit reached $3.3 billion, the move may further damage the
government's international credit rating, especially if private foreign bankers
perceive it as a new direction in public debt management policy. Nearly a
dozen other large firms, several heavily indebted to US banks, are in financial
positions similar to CDCP's.
India's The central government budget proposed for the year beginning 1 April
1983/84 Budget provides for tax concessions to stimulate exports and the production of basic
goods, but a new provision for a minimum tax on corporate profits may blunt
investment incentives. Total expenditures will rise only moderately, partly
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because higher government-administered prices for petroleum products will
permit most of next year's $2.8 billion spending on exploration and refining to
be financed outside the budget. Current budget plans probably will enable
New Delhi to stay within ceilings that the International Monetary Fund is
likely to impose on government borrowing later this year. In his budget speech
last month, the Finance Minister hinted that India may selectively increase
import duties to protect domestic industries.F__-]
Water Shortages More than 4.5 million residents of Madras, the largest city in southern India,
In India are experiencing unprecedented shortages of water for drinking and sewage
disposal. Reservoirs are nearly depleted following inadequate rainfall, and no
relief is expected before June, at best. Although last summer's drought
depressed agricultural and industrial production throughout much of India,
rainfall, except in the southern states, has been adequate in recent months.
National foodgrain production for the year ending in June probably will only
be 6 percent below last year's level. Government stocks have been augmented
by 4 million tons of wheat imports and are sufficient to maintain traditional
per capita grain consumption.F_~
Moroccan Protectionist Morocco is moving to limit imports in light of a mounting current account def-
Moves icit and uncertainty over IMF and Saudi financial assistance for 1983. Prior
authorization is now required for all Moroccan imports. It was previously
needed only for luxury goods and controlled items. The government is ill
prepared to process the expected volume of import requests under the new
rules. Businessmen and bankers have already voiced concern that essential
imports will be severely hindered and that economic growth will suffer. F7
Hungarian Budapest, in an attempt to improve labor efficiency, is encouraging enterprises
Economic Reform to be more profitable, is allowing greater wage differentiation, and is calling
for the elimination of excess labor. Under the new program begun in January,
wages and bonuses will depend on the profitability of an enterprise-wages
can be raised 0.12 percent for each 1-percent increase in profits, and there will
be no ceiling on bonuses paid to managers. Earlier regulations tended to
equalize wage rates and bonuses among enterprises regardless of their
profitability by progressively taxing annual wage increases and capping
bonuses. Another new measure will permit enterprises to use 30 to 60 percent
of the savings from labor reductions to boost wages. To help counter the labor
dislocations that may result, reformers have set up computer-linked labor
exchange offices in every county to relocate displaced workers.n
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The new program represents a victory for reform advocates, and those opposed
to rapid reform will be watching the results closely. Attempts in the early
1970s to promote efficiency through wage differentiation and larger bonuses
for successful managers were virtually abandoned because of worker com-
plaints. The Hungarian National Trade Union Council has agreed to accept
the new reforms only if furloughed workers can be relocated quickly
Increase in A recent metallurgical conference in China called for an increase in domestic
Chinese Alloy Steel production of alloy steel from the current level of 5 million tons to 7 million
Production tons in 1985. The state has appropriated $100 million to accelerate production
by upgrading special steel plants rather than building new facilities. Most of
the required alloying materials will come from the growing nonferrous
industry, but China may seek more advanced alloying technology abroad.
Increased domestic production of alloy steel will allow China to reduce imports
of the high-priced steels required by the shipbuilding, chemical, hydropower,
oil-drilling, and military industries and may enable it to increase exports of
high-speed tool steel.n 25X1
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Communist Countries:
Impact of Lower Oil Prices
Lower world oil prices will have varying effects on
the hard currency positions of major Communist
countries. At the current OPEC price of $29 per
barrel, the net impact on Soviet earnings could be
minimized if, as we believe likely, Moscow in-
creases hard currency oil exports above last year's
level. Soviet willingness to expand oil shipments to
the West is limited, however, and a further drop in
OPEC prices could reduce hard currency earnings
by several billion dollars. Eastern Europe probably
would benefit marginally from lower oil prices,
unless its oil supplies are cut by Moscow. The
Chinese hard currency position probably would
change little at current prices and suffer only
moderately from further price declines.n
Implications for the USSR
Substantially lower oil prices could undo the
Soviets' recently improved hard currency position,
a consideration that almost certainly has prompted
Moscow's call on OPEC not to break ranks. The
current Soviet average crude and product price of
roughly $30 per barrel would create a manageable
burden, but a drop to $25 or below would threaten
a serious decline in revenue:
? At $30, Moscow could export at the 1982 level of
1.1 million b/d and still approximate 1981 oil
earnings of $12.2 billion. Alternatively, it could
raise exports by less than 200,000 b/d to sustain
1982 oil revenues of $13.6 billion.
? At $25 or below, the Soviets would have to raise
exports by at least 400,000 b/d-an unlikely
prospect-to completely offset the oil price drop.
Without such an increase, total hard currency
revenues could fall by at least $3 billion.)
USSR: Hard Currency Oil Exports
Increment in Hard Currency
Oil Exports Required to
Maintain 1982 Oil Revenues
Million b/d
0.4
0.2
.30 25 20 15
US $ per barrel
Hard Currency
Earnings From Oil if
Oil Exports Held
Constants
Billion US $
16
1982b 30 25 20 15
US $ per barrel
aAt an estimated 1982 level of 1.1 million b/d.
b Estimated.
We believe that Moscow probably will raise hard
currency oil exports this year to 1.2-1.3 million
b/d. It has already shown a willingness to avoid
revenue losses in a weakened oil market by increas-
ing deliveries 200,000 b/d last year over 1981.
Although stagnating Soviet oil production is forc-
ing Moscow to achieve such increases primarily by
cutting oil deliveries to Eastern Europe and by
diverting some oil from domestic consumption, the
Soviets probably believe that another cut in those
supplies of up to 200,000 b/d, while painful, will be
manageable in the short run. Lower oil prices
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Communist Countries: Impact of Lower Oil Prices
on Selected Hard Currency Accounts, 1983
Net Oil
Earnings
Total
Hard
Currency
Earnings
Oil Price
(US $
per barrel)
Net Oil
Exports a
(Million
b/d)
Net Oil
Earnings
Change in
Oil Earnings
From 1982
Change in
Nonoil
Earnings
From 1982
Savings in
Interest
Costs b
Total Change
in Hard
Currency
Earnings
From 1982
13.6
26.7
30
1.1
12.1
-1.5
0.7d
0.1
-0.7
25
1.1
10.0
-3.6
0.5
0.2
-2.9
20
1.1
8.0
-5.6
0.2
0.3
-5.1
15
1.1
6.0
-7.6
0.0
0.5
-7.1
-1.3
47.3
30
-1.4
-0.1
3.2
0.3
3.4
25
-1.2
0.1
3.2
0.9
4.2
20
-0.9
0.4
3.2
1.4
5.0
15
-0.7
0.6
3.2
2.0
5.8
20
0.30
2.2
-2.6
1.9
NEGL
-0.7
15
0.20
1.1
-3.7
2.4
NEGL
-1.3
a Not available for Eastern Europe.
b Savings on debt servicing. Assumes nominal interest rates decline
from 1982 base in proportion to projected drop in rate of inflation
under various oil price levels.
Estimated.
d Earnings from gold and arms sales held constant.
e Unadjusted for increased Western demand for East European
exports.
might facilitate slightly increased East European
purchases on the world market, and a warmer
Soviet winter may have freed up domestic oil for
export. F__1
Nonetheless, the USSR is unlikely to push hard
currency oil exports beyond an average 1.3 million
b/d for the entire year. Moscow has shown no
specific signs of planning to undercut world market
prices to gain a larger market share. Moreover,
Moscow is almost certainly unwilling to make
substantially larger cutbacks in supplies to domes-
tic consumers and allies:
Secret
25 March 1983
? The East European economies are already hard
pressed, and the soft currency oil deliveries to
Cuba and other Third World clients could not be
cut substantially without serious economic and
possibly political repercussions.
? Soviet users would face an absolute decline in oil
availability if more than 100,000 b/d were addi-
tionally diverted to Western sales. Utilization of
industrial capacity probably would be reduced,
even at the projected slow rate of growth of GNP.
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Secret
Impact on Other Exports
Lower oil prices should have a generally negative
effect on nonoil hard currency earnings. Although
sales of minerals and metals may increase, revenues
from gas, gold, and weapons-the major hard
currency earners-will probably stagnate or de-
cline. F7
Natural Gas. Earnings will fall because gas prices
under existing contracts with Western Europe are
tied to heavy fuel oil prices. The Soviets have
already cut 1983 prices to Italy to $3.35 per million
BTUs; Moscow had hoped to be receiving about
$4.50 per million BTUs for its gas this year, about
a 10-percent increase over the average price they
obtained last year.' With oil at roughly $30, gas
prices could decline by almost another $1 per
million BTUs, a revenue loss of up to $1.5 billion.
In the longer run, cheaper oil could weaken West
European demand for gas from the Siberian export
pipeline-currently expected to earn $4 billion or
more annually by the latter half of the decade.
Alternative West European gas projects also would
be discouraged, however, leaving Moscow in a
better position to increase exports if gas demand
picks up later in the decadeF__-]
Gold. Increased gold sales almost certainly will not
shore up a weak Soviet balance-of-payments posi-
tion. Although the USSR has ample stockpiles and
production capacity to expand exports, falling oil
prices have weakened the gold market, and large
Soviet sales would further depress prices. A drop of
$100 per ounce in gold prices reduces Soviet reve-
nues by nearly $1 billion when sales volume is in
the 300-ton rangeF7
Arms. Lower oil prices will probably constrain the
ability of some major Soviet weapons customers to
pay in cash for their purchases. Algeria, Libya, and
Iraq account for 40 percent of the estimated value
of recent Soviet arms sales, and OPEC states also
finance Syria's purchases. Because the USSR is
The $3.35 price includes transport fees. It is 15 percent below the
energy uivalent price for residual fuel oil on the Rotterdam
market
still delivering sizable amounts of weapons under
existing agreements, substantial immediate reduc-
tions in earnings are unlikely
Impact on Eastern Europe
A decline in oil prices probably will have a limited 25X1
direct effect on Eastern Europe's hard currency
balance of payments. All of the countries have
already cut their hard currency imports, particular-
ly oil, because of the decline in Western lending to
the region. Yugoslavia alone stands to gain signifi-
cantly from a softening oil market because it buys
about 80,000 b/d on the world market. We project
that the cost of its 1983 imports would decline by
about $150 million for every $5 drop in oil prices.
We expect that Romania and East Germany will
continue to import feedstocks for their extensive
refining industries and therefore could benefit from
appreciable declines in their hard currency import
bills. To the extent that product prices follow crude
price declines, however, import savings will be
offset by diminished product earnings. In 1981
East Germany earned over $1 billion from sales of
petroleum products (18 percent of hard currency
export earnings), and Romania earned nearly $2 25X1
billion (28 percent of hard currency earnings). 25X1
Eastern Europe could be seriously affected if the
Soviets reduce subsidized oil deliveries in order to
expand oil sales to the West. Excluding Romania
and Yugoslavia, the region depends on Soviet deliv-
eries at below-market prices for 90 percent of its
crude oil imports. Cutbacks in deliveries on top of
those made last year to Czechoslovakia, East Ger-
many, and Hungary would deny the East Europe- 25X1
ans any growth stimulus or cost savings from lower
oil prices. If the level of Soviet oil deliveries in 1982
is maintained, we project that the 1983 growth rate
of East European GNP would average about 1
percent. A further cutback of 100,000 b/d would
lead to stagnation, and a cut of 200,000 bLd would
cause regional GNP to fall by 1 percent.
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Economic recovery in the West, sparked by falling
oil prices, might enable the East Europeans to
increase export earnings. A fall in interest rates
induced by lower inflation would reduce debt ser-
vicing costs. Although the coal market is only
loosely tied to the oil market, the Poles already
have expressed concern that declining oil prices
might depress the price of coal, which accounts for
20 percent of their hard currency earnings.n
Implications for China
Lower oil prices will reduce China's hard currency
earnings, but Beijing's strong balance-of-payments
position should enable it to avoid major difficulties.
Regardless of developments in world prices, Beijing
will probably reduce oil exports somewhat-per-
haps 10 percent per year-because oil output is
stagnating while domestic demand for oil is expect-
ed to increase. Beijing may well decide to cut
volume more rapidly than planned should prices
decline well below $25 and keep the oil either in
reserve or for more important domestic uses.
Aside from prompting Beijing to scale back its
ambitious import program, lower oil prices could
affect China's economic development program by
complicating its search for offshore oil. Declining
oil prices are causing the Western oil firms to drive
a harder bargain. Beijing is currently evaluating
bids from 32 firms and is reportedly displeased with
the profit share that the companies have requested
and the heavy concentration of bids in the most
promising blocks. Although reports from a number
of the firms indicate that the companies are still
interested in the project, the threat of a major price
decline has reduced their willingness to compromise
on both issues and is forcing Beijing to reconsider
its bargaining position.
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25 March 1983
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French Protectionism:
Old Wine in New Bottlenecks
The Mitterrand government's current aggressive-
ness on trade issues-which is unlikely to change
significantly following the cabinet shuffle on Tues-
day-and the apparent ease with which Paris opts
for protectionist solutions offer additional evidence,
if such were needed, that the French are not
committed free traders. The protectionist flurry
demonstrates that they are still trying to reconcile
an old hankering for autarky and controlled mar-
kets with new obligations they accepted with some-
thing less than full conviction. Their protectionist
bent is strengthened by a feeling that the odds are
stacked against them in international competition.
Mercantilist and Protectionist Tradition
The French are inclined by tradition and experi-
ence to view trade through mercantilist and protec-
tionist lenses. Until the postwar era, the national
economy was substantially closed. Imports of man-
ufactures, discouraged by quotas and high customs
duties, were relatively insignificant. Exports were
directed as much toward captive markets in the
colonies and other less developed areas as toward
the industrialized countries. Within the country
and in the colonial trade, French business enjoyed
comfortable arrangements whereby markets were
shared and competitive risks minimized.
The mercantilist tradition continues to influence
the formation of trade policy. In addition to the
"normal" tendency of a French government to
want to direct events, several other factors are at
work:
? National pride-a French presence on the indus-
trial heights is seen as essential to French politi-
cal stature.. This has been one of the impulses
behind state support for highly visible projects
such as the Concorde, the Airbus, the nuclear
industry, and various attempts to promote a fully
competitive electronics industry. The state has
assisted both development and external market-
ing efforts, providing capital, procurement prefer-
ences, operating grants, the underwriting of re-
search and development costs, subsidized export
credits, and Treasury loans at concessional rates
to accompany commercial financing arrange-
ments.
? Uncertainty-the French remain unsure about
their ability to compete in international markets.
French leaders believe that French exporters are
handicapped by being relative latecomers to in-
ternational trade. They are concerned, for exam-
ple, by their exporters' lack of adequate distribu-
tion networks and service followthrough in
industrialized markets. Thus, policymakers in-
volved in these projects justify the government's
role by contrasting its ability to take a longer
view and greater risks with a private sector they
still find shy of venture capital and an entrepre-
neurial spirit
Government officials on both left and right see
other dangers in open competition. For them, com-
plete acceptance of an "international division of
labor" could leave France caught in a vise, with
more powerful competitors-such as the United
States, Japan, and West Germany-in command of
high-technology markets and the newly industrial-
izing countries, with lower labor costs and newer
facilities, in control of basic industries such as steel
and textiles. The French fear that the result could
be to relegate France to the position of a "subcon-
tractor" unable to control its trading destiny.
Growing inroads in the domestic market by a broad
spectrum of foreign goods have served to reinforce
this concern.
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France:
Selected Trade Deficits
(Billion US $,
customs basis)
West Germany
2.6
4.0
4.2 5.8
Netherlands
1.2
1.9
2.5 2.1
Other OECD
3.2
4.6
5.3 6.6
Of which:
The mercantilist inclinations of French policy have
become stronger since the energy crisis of 1974.
Faced with a persistent deficit in energy trade,
French governments have not been willing to put
their confidence in market forces. Confronted also
by the lack of competitiveness of French goods,
reflected in an increasing trade deficit with OECD
countries, Paris has sought government-to-govern-
ment deals with oil producers that assured quanti-
ties of oil for French refiners in return for exports
of aircraft, armaments, and nuclear technology
from state-supported industries. Paris has also pur-
sued large government-sponsored public works con-
tracts and turnkey projects in the oil-producing
countries and the Soviet Bloc. Paris has comple-
mented its selling effort by monitoring bilateral
trade flows and, when confronted by a deficit,
arguing loudly that the seller must take measures
to redress
For political and economic reasons, French govern-
ments have become increasingly reluctant to permit
mounting job losses in industries such as textiles,
Secret
25 March 1983
steel, and shipbuilding to run their course. Meas-
ures designed to preserve jobs have included loans
at preferential rates and direct financial participa-
tion to assist in restructuring as well as subsidies to
induce viable industries to relocate and replace
firms that could not be saved. By the late 1970s, for
example, the government's stake in the steel indus-
try became so significant as to amount to de facto
nationalization.
The protectionist efforts of French governments
have encountered little serious political opposition.
To the contrary, they have often been criticized for
not doing enough. For example, the US Embassy in
Paris reported before crucial legislative elections in
1978 that the Giscard-Barre government was under
pressure by its Gaullist allies to adopt more aggres-
sive export promotion programs and more effective
protectionist measures. Similarly, the influential
Employers Association (CNPF) called for the "re-
conquest of the domestic market" in an open letter
to Giscard in early 1980. The CNPF urged that
France "adopt an attitude closer to that of our
large partners who, generally speaking, know better
than we how to defend their national markets
beyond appeals to the regulations." In particular,
the CNPF recommended that French firms give
preference to French goods and asked Giscard to
give his personal attention to the purchasing prac-
tices of government agencies. In fact, the govern-
ment has never hesitated to accord preferences to
French suppliers in important sectors such as elec-
tronics and telecommunications
The Socialists Take Up the Cudgel
French protectionist and mercantilist inclinations
have taken on new vigor under the Socialists. In
part, this is attributable to the persistence of eco-
nomic hard times. The Socialists' predilection for
planning and their support for an active role for the
state reinforce such inclinations.
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Speaking of Protectionism ...
"France cannot allow international competition to
develop under conditions that would throw its
economic structure into confusion, bring about the
sudden collapse of whole sections of its industry or
agriculture, put thousands of workers out of work,
and jeopardize its independence by eliminating
essential activities. "
Raymond Barre
Prime Minister under Giscard
"I cannot accept that France should suffer from
insidious protectionism practiced throughout the
world, especially in the EC. Protectionism will be
met with protectionism and a half. "
Francois Mitterrand
"There are no outmoded industries, only outmod-
ed technologies. "
Jean-Pierre Chevenement
Mitterrand 's former Industry
Minister
"We have to create a generation of exporters in
France. That's why I propose the creation of a
'Superior School of Exportation.' That's the way
we do things in France. When we needed engineers,
we created the Polytechnic. Later on, to modernize
and strengthen public administration, we created
the Superior School for Administration. If the
conquest of foreign markets becomes-as I believe
it must-an absolute priority, then we must give
ourselves the tools. "
Laurent Fabius
Mitterrand 's new Industry
Minister
`Beware of those who set up or consolidate com-
mercial fiefdoms in the name of free trade. Does
the massive subsidization of agricultural exports,
such as practiced by the United States, really come
from free trade convictions? It's easy to be an
evangelist when one has a position of strength. "
Michel Jobert
Mitterrand 's former
Foreign Trade Minister
On the export side, the Mitterrand government is
continuing to try to identify markets, especially in
high-technology areas, in which an effective French
presence may be secured. Going beyond their pred-
ecessors, the Socialists are using the expanded
nationalized industrial and banking sectors and
substantially increased levels of government fund-
ing to achieve success. Government funding of
R&D, a preferential procurement policy, subsidized
credits, and the use of the state's good offices are
all seen as essential tools in the struggle for export
marketsF___1
On the protectionist side, the Socialists have em-
braced the earlier proposals to "reconquer" the
domestic market. For the Socialists, previous gov-
ernments erred in being too halfhearted. They
reason that French basic industries-vital for na-
tional security and jobs-can be saved if the task of
reorganizing and modernizing is carried out sys-
tematically and thoroughly. Plans have already
been developed to rescue a number of sectors-
among them machine tools, shoes, textiles, and
toys-and others are on the drawing board. These
feature, in varying combinations, government as-
sistance for investment through grants and loans at
preferred rates, partial assumption of labor costs by
the government, agreements to favor domestic sup-
pliers, and preferential marketing arrangements.
The Socialists, no less than their predecessors, are
mindful that the French market is too small to
permit the development of a fully efficient and
competitive manufacturing sector, and they empha-
size that their plans for the "reconquest" must
necessarily be taken within the context of the
European Community. They have attempted to
carry out this strategy both by encouraging major
French firms to make offers for cooperation with,
or the purchase of, competitors in other countries
and by taking a more aggressive line in Community
councils on trade policy vis-a-vis outsiders. Paris
has complained for years about the reluctance of
the EC Commission, backed by Bonn, to retaliate
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against those who take advantage of the Communi-
ty's "openness." Whatever the rhetoric, however,
French prospects for implementing French plans at
the Community level are uncertain. Other EC
governments may be skeptical about takeovers by
French nationalized firms and do not fully support
French views on dealing with third countries.
A Question of Timing
Socialist plans for strengthening French export
capabilities and for reducing import penetration
depend on investment, retooling, and the develop-
ment of new top-of-the-line products through in-
creased R&D spending and, if required, purchasing
foreign technology. This will take time, and more
than one official has concluded that the gap be-
tween the anticipated result and France's current
weak trading position will have to be bridged by
greater recourse to protectionist tactics. The wors-
ening trade deficit, brought about by an ill-advised
stimulus package in 1981 and by the burden of
mounting wage and social insurance costs on busi-
ness, probably only had the effect of accelerating
the implementation of protectionist measures.
In line with this approach and in keeping with their
insistence on looking at bilateral balances, the
French have recently made highly visible gestures
against Japan and the USSR. Japanese products
were the target of a ruling that video tape recorders
would have to clear customs at Poitiers, a city in
west-central France with only a small customs post.
Last fall, French imports of Soviet petroleum prod-
ucts were temporarily halted in advance of a major
bilateral meeting between trade officials of the two
countries. These gestures were intended to serve, as
the irascible former Foreign Trade Minister,
Michel Jobert, put it, as "shots across the bow."
Somewhat more ominously, the French recently
circulated a memorandum detailing the protection-
ist devices used by other EC members.
Secret
25 March 1983
The French will continue to prod the Community to
take steps to limit outside access to the Common
Market. For industrial products, the targets are
principally Japan, the newly industrializing coun-
tries, and the East Europeans. For agricultural
products, it is primarily the United States. If
necessary, Paris will simply block Commission
measures aimed at liberalization, but France's po-
litical weight and the threat that Paris might resort
to unilateral measures, will put pressure on the
Commission. It is probable also that other EC
members, beset with economic problems of their
own, will find it convenient to let the French take
the lead in advocating more restrictive trade meas-
ures, as they sometimes have in the past
The French are most unlikely to abandon either
their penchant for viewing trade in mercantilist
terms or their willingness to resort to protectionism
if circumstances dictate. The French course toward
making good on their commitment to more open
trade is likely to be erratic, with periods of height-
ened protectionism-as now-alternating with pe-
riods when relative success in international mar-
kets-as before 1974-makes a more liberal
approach possible.
A reversion to the autarkic patterns of the past,
however, is out of the question. Very few, other
than the Communists, any longer seriously argue
that France should try to go it alone. This is
attributable in part to the country's inescapable
dependence on energy and raw materials imports
and in part to awareness of the limitations of
relying solely on the national market. The possibili-
ty of retaliation against French exports thus acts as
a brake on excesses of protectionist zeal.
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Italy: Protectionist Trends
Italy, which is highly dependent on foreign trade,
has contributed relatively little to rising EC protec-
tionist pressures. Rome does, however, make use of
nontariff barriers, including quotas and import
surveillance schemes, directed-in large part-
against Japan. Industrial support policies also tend
to inhibit imports, although claims of anticompeti-
tive effects are probably exaggerated. Although
there is some increase in domestic protectionist
pressures, Rome is unlikely to change its policies
significantly. US exports are likely to remain little
affected by Italian trade policy. F_~
Free Trade Advocacy
Both industry and government generally consider
relatively free world trade essential to the develop-
ment of the Italian economy. The General Confed-
eration of Italian Industries-the organization that
represents most private industrial concerns-is a
strong supporter of free trade. All the major politi-
cal parties-the Christian Democrats, the Social-
ists, and the Communists-maintain an antiprotec-
tionist posture. In the preparatory documents for
this month's Communist Party Congress, for exam-
ple, the Communists called for "surmounting pro-
tectionist temptations and national egoism." Only
an insignificant segment of the Socialist left looks
favorably on protectionism
Import Barriers
Under the umbrella of EC restrictions, Italy has
developed a moderate number of import restraints
directed, in large part, at complementing Commu-
nity protection. Italy's own contribution to rising
protectionist sentiments within the EC has been
modest. Aside from initiatives on chemical fibers,
Rome has not actively sponsored protective EC
policies. Indeed, more often than not it has sided
with West Germany in resisting stronger protec-
tionist proposals. At last year's GATT Ministerial,
Rome took an antiprotectionist stance= 25X1
As a member of the EC, Italy subscribes to the
Common Customs Tariff and the Common Agri-
cultural Policy (CAP). As a result of the last MTN
tariff-cutting exercise, Italy's average tariff will
drop from about 18 percent in the early 1960s to
about 5 percent at the end of 1987.F - - - I
With declines in tariffs, nontariff barriers-includ-
ing quotas, import surveillance schemes, voluntary
export restraints, import deposit programs, and
border tax adjustments-have become more impor-
tant. Quotas on products such as chemicals, tex-
tiles, clothing, machinery, and transportation
equipment are aimed mostly at Japan and the
Communist Bloc countries. Japan alone has 38
products subject to quotas, including passenger
cars, motorcycles, and mopeds.
Rome has frequently resorted to slowing import
entry as a means of protectionism. National sur-
veillance programs, in addition to EC-wide
schemes, are one such tool. Products subject to
import surveillance tend to be the same as those
under quota, and Japan is once again most affect-
ed. The primary purpose of monitoring schemes is
to send a warning to exporting countries. In addi-
tion, products under surveillance can be delayed by
the graduated application of time-consuming ad-
ministrative requirements for documentation. In
the sensitive textile sector, for example, required
documentation has ranged from a simple import
declaration to a license application accompanied by
technical information and product samples.
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Rome has also made use of import deposit schemes
to correct trade and balance-of-payments deficits.
The most recent program was introduced in May
1981 and phased out in February 1982. It required
a mandatory 90-day, noninterest-bearing deposit or
bank guarantee equal to 30 percent of the value of
the import order. Future trade and balance-of-
payments problems could result in a new program
despite EC opposition.
In addition, Italy sometimes has tried to slow
imports by limiting ports of entry. This has been
the case for steel and textiles. In 1978, for example,
steel entry points were cut from 29 to four while
those for textiles were cut from 12 to six. Contrived
disagreements over local content ratios and country
of origin, as in the case of passenger cars and color
televisions, also have been used to delay entry of
EC products.
Italy has recently come under attack for its govern-
ment procurement practices. Some exporters, in-
cluding US firms, have charged Rome with favor-
ing local suppliers over foreign competitors.
Foreign complaints about this type of discrimina-
tion, however, are probably exaggerated. "Domes-
tic suppliers" are defined by Rome to include
foreign subsidiaries and fore' n merchandise dis-
tributed by domestic firms
Industrial Support
Italy's relative moderation in resorting to trade
barriers has been offset by a strong bent toward
industrial support policies. The aid, which consists
mainly of interest subsidies and direct financial
support, rose sharply in the mid-1970s, from an
estimated $1.5 billion in 1974 to $5.7 billion in
1978. As a percentage of GNP, funding increased
from 0.9 percent to 2.2 percent. The programs have
been directed largely at the industrialization of
Italy's underdeveloped southern regions, in support
of failing firms, or at state-owned or -controlled
enterprises.F_~
Secret
25 March 1983
A major share of government transfers to industry
has gone to finance the three main state industrial
holding companies-IRI (heavy industry), ENI (en-
ergy), and EFIM (light industry). Rome has provid-
ed billions of dollars to operate the firms, which are
a maze of about 1,000 companies employing over
700,000 people. Last year IRI, whose profit posi-
tion has deteriorated since 1974, received about
$3 billion from Rome.F___1
Rome also provides aid to revitalize firms through
the Industrial Participations and Management
Company (GEPI), an autonomous state agency
created in 1971. GEPI was established to take over
ailing but basically sound private companies, turn
them into profit makers, and resell them to private
owners. Through the end of 1981 GEPI had cost
the Italian taxpayer nearly $1.6 billion. The agency
has reorganized and disposed of about 80 firms and
now has nearly 80 operating firms completely
under its control. Another 100 are being operated
as joint ventures with private sector firms
In addition to direct capital infusion, Rome also
provides interest subsidies, amounting to about $1
billion in 1980. Other investment incentives include
tax exemptions and deductions, local infrastructure
cost exemptions, and temporary suspensions of
mandatory pension contributions. Most of the in-
vestment incentives are designed to stimulate eco-
nomic growth in the Mezzogiorno, Italy's poor
southern region.F_~
The impact on trade of Italian industrial aid is
difficult to measure. Complaints that government
funding provides Italian firms with an unfair com-
petitive edge are, however, probably exaggerated
because Rome's policies are generally not very
effective:
? State firms frequently retain redundant labor for
political reasons, and management is riddled with
patronage and featherbedding.
? Bailouts are frequently economically irrational
and are based on political considerations.
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? Budgeted funds are frequently not disbursed. For
example, a much publicized industrial recon-
struction and reconversion plan was budgeted at
about $2 billion for 1980-82, but no funds were
ever distributed.
In short, Italian Government policies contribute
little to rationalization and focus more on manag-
ing crises rather than solving them. At the same
time, however, Rome has been fairly successful in
avoiding alliances between labor and management
in support of increased protection against imports.
(C NF)
Moreover, Rome's present intent is to reduce the
dimensions of industrial aid programs, partly in
response to concern over an expanding budget
deficit:
? GEPI has come under increased parliamentary
pressure to divest itself more rapidly of financial-
ly sound firms.
? Some government funds, such as a fund for
promoting investment and employment, have
been given tougher disbursement guidelines.
Rome is also considering slashing the funds'
resources by about $1.4 billion during the latest
round of budget cutting.
No substantial changes in Italian trade policy are
likely in the near future, even though some domes-
tic pressures for protectionism are increasing. In-
dustries such as textiles, autos, footwear, and major
household appliances have begun to clamor for
more protection as competition from East Europe-
an and Third World countries has increased. Rome
has thus far dealt with the complaints without
expanding protectionist policies. Complaints from
the automobile industry, for example, have been
handled by maintaining, rather than tightenin ,
existing quotas on Japanese automobiles
US exports to Italy, about 2 percent of total US
exports, have thus far been little affected by Italian
policies. Any further government concessions to
domestic pressure groups are likely to have little
impact on US exports. Italy may, however, support
measures within the EC that could have a more
important impact, but we do not expect Rome to
take the lead in sponsoring more protectionist
moves within the EC.I
Secret
25 March 1983
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I
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South Asia:
Impact From Falling Oil Prices
The largest and most immediate impact of lower oil
prices on India, Pakistan, Bangladesh, and Sri
Lanka will be savings on their import bills. The net
oil imports of these four countries were just under
600,000 b/d in 1982. India stands to be the largest
gainer on this account; with net imports of 350,000
b/d, it was hit with about two-thirds of the region's
$7 billion oil bill. Bangladesh will also see its
current account pressures sharply reduced-net oil
import costs take more than 60 percent of its total
merchandise export earnings. F-1
Exports Only Slightly Affected
We believe that South Asia will be little affected
by cutbacks in imports by oil producers. Merchan-
dise exports to the oil producers amount to only
$1.8 billion or 14 percent of total South Asian
exports:
? India, whose exports of construction materials
and equipment for development projects make up
about 30 percent of its exports to the Middle
East, is likely to suffer the greatest loss.
? Pakistan, with 25 percent of its total exports
going to the oil producers, has the largest stake in
the Middle East-South Asian trade relationship,
but, because its exports comprise mostly food-
stuffs and textiles, they are less likely to be
reduced.
? Exports of foodstuffs, tea, and textiles by Sri
Lanka and Bangladesh to the oil producers also
are not likely to face sharp cutsn_1
Demand for Military Personnel Could Grow
We believe that falling oil prices and reduced oil
production might increase Middle Eastern demand
for military personnel from Pakistan and Bangla-25X1
desh. The potential for greater political instability
could prompt the Gulf states to bolster their securi-
ty with apolitical military forces from outside the
region. There already are 25X1
military assistance personnel from Pakistan in the
Middle East and North Africa, including0 25X1
combat troops in Saudi Arabia. These 25X1
countries could well seek additional South Asian
troops. 25X1
Job Prospects in the Middle East Threatened
We believe the diminished prospect for jobs as a
result of the slowdown in economic development in
the oil-producing countries poses the greatest po-
tential danger for South Asia. The presence of
South Asian workers in the Middle East has grown
dramatically since 1975. Using official South
Asian government data, we calculate that some 2.1
million Pakistanis, Indians, Bangladeshis, and Sri
Lankans work in the nine major labor-importing
countries in the Middle East, five times the number
estimated to be in these countries in 1975 by
researchers at the International Labor Organiza-
tion and the World Bank.'
The rapid growth in numbers of South Asian
workers has been paralleled by the dramatic
' The nine labor-importing countries are Kuwait, Bahrain the
UAE, Qatar, Oman, Saudi Arabia, Iraq, Libya, and Iran
Secret
DI IEEW 83-012
25 March 1983
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2oA]
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South Asian Labor in the Middle East, 19828
Labor Importing
Legend Countries 0 50
(] Pakistan
100 150 200 300 400 500 600 700 800
1 1 1 1 1 1 1
Saudi Arabia
UAE
Kuwait
Oman
Qatar
Libya
Iraq
Bahrain
Iran
growth in their remittances. A cutback in economic
growth in the oil-producing states would affect
remittances in at least two ways:
? Fewer new job opportunities would open up.
? Greater competition in the job market would
dampen wage hikes for existing workers)
Although oil prices started falling over a year ago,
government data show an increase in remittances
since then. We believe that this increase will not
continue:
? There generally is a long leadtime before develop-
ment projects can be scaled back to the extent
that there is a major impact on employment.
? The lag from when a worker receives his wages
and the arrival of his savings at home can be
several months.
? The current surge in remittances and savings
might be prompted by workers who anticipate
losing their jobs or impending instability in their
place of employment.fl
Secret
25 March 1983
A leveling or decline in remittances has important
implications for hard currency earnings in South
Asia. On the basis of official government statistics,
we estimate that remittances from the Middle East
to South Asia totaled $3-3.5 billion last year and
constituted 60 to 70 percent of the total earnings
from remittances. Remittances equaled 85 percent
of Pakistan's export earnings in FY 1982. In Sri
Lanka, remittances rival tea exports as the largest
source of foreign exchange.)
Remittances for New Delhi peaked at about $2.7
billion in FY 1981 and have since shown a sharp
decline to about $1.6 billion. India was hit particu-
larly hard by the loss of jobs and remittances
caused by the Islamic revolution in Iran and by the
war between Iran and Iraq.n
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South Asia: Foreign Exchange
Earnings From Worker
Remittances'
1978 79 80 81 82 83
Fiscal year
South Asia, primarily Pakistan and Bangladesh,
has been a key non-Arab recipient of aid from
Middle Eastern oil producers. The region received
about $600 million from the oil producers in 1981:
? Pakistan has received more financial aid than any
non-Arab state. During 1974-80 Middle Eastern
oil producers provided about $1.6 billion in bilat-
eral economic assistance and nearly $1.3 billion
in financing for military needs. Pakistan has been
trying to line up an additional $0.8 million to $1.5
billion from the Gulf states for military pur-
chases. Thus far, we are aware of a current
military commitment of only $550-600 million
from Saudi Arabia. Most of it is being used to
pay the 1982 and 1983 cash installments for F-16
fighters and other US military equipment pur-
chased in 1981.
? Foreign assistance, essential to the economy of
Bangladesh, is nearly equal in value to total
exports. In FY 1981 OPEC, Islamic institutions,
and individual oil-producing countries provided
about $180 million in project assistance. The
Middle East provides about 10 percent of total
aid.
? Sri Lanka has been less dependent on Middle
Eastern aid. In FY 1981 it received about $15
million from the oil-producing states, only 4 per-
cent of total aid.
? For India, aid from the oil producers, averaging
about $70 million annually, has accounted for
On balance we expect the South Asia region will I
benefit from the soft oil market for the next two
years or so. On a strictly financial basis, we 25X1
estimate that the net benefits for the region for this
period will average about $1 billion annually. Low-
er oil prices will provide immediate relief on import
bills. The need for South Asian workers is not likely
less than 5 percent of total aid
to decline in the short run, and aid donations are
likely to be maintained near current levels in the
near term.F-7
India
375
-431
-3,073
-3,500
-3,400
Pakistan
-1,126
-1,145
-991
-1,424
-1,345
Bangladesh
-806
-1,472
-1,397
-1,440
-1,755
Sri Lanka
-413
-805
-654
-868
-890
a Fiscal year ending 31 March in India; 30 June in Pakistan and
Bangladesh, and 31 December in Sri Lanka.
b Estimated.
Secret
25 March 1983
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We expect India to be the big winner. Lower oil
prices will have an immediate positive effect on the
current account deficit, and New Delhi is probably
better equipped than other South Asian states to
withstand a pot slowdown in development in
the Middle East
We believe Pakistan faces the largest problems
because it has tied its political, economic, and
military development to the Islamic countries in the
Middle East. A loss of willingness or ability in
these countries to provide Pakistan with job oppor-
tunities and financial assistance could seriously
hinder its economic development and military mod-
ernization.)
Long-Term Outlook
If the soft oil market persists beyond the middle of
the decade, diminished opportunities for working
abroad will mean that emigration will serve less
effectively as a safety valve for the continuing rapid
growth of the South Asian labor force. We expect
the leveling off in remittances and aid will have an
adverse impact on economic growth, especially for
Pakistan, and, to a lesser extent, for Bangladesh.
Borrowing to compensate for lost remittances and
aid would force these countries to contend with
guidelines set by commercial banks or international
financial institutions.n
In the unlikely event of a sudden expulsion of
several hundred thousand South Asian workers
from the Middle East, their home countries, with
the possible exception of India, would be hard
pressed, we believe, to absorb their return. A sharp
decline in hard currency from remittances and a
complete cutoff in aid would force at least the three
smaller countries to adopt austerity measures and
press the IMF, Western donors, or Arab sources for
additional financial support. If the governments fail
to meet the economic and social expectations of
returning workers, a likely event under such a
scenario, we expect that forces in opposition to the
government would pick up additional political sup-
port.
Secret
25 March 1983
Implications for the United States
Short of a complete collapse of the market for
foreign labor and consequent political unrest by the
returning workers, we believe the major concern
facing the United States will be coping with greater
demands for financial assistance. With reduced
prospects for increased aid from the oil-exporting
states and worker remittances, the South Asian
nations will look increasingly to the United States
and Western financial institutions for support to
cover the projected growth in foreign exchange
deficits.
The United States faces a related financial and
political problem with Pakistan on financing future
military purchases. If Islamabad fails to secure
additional funding for its military modernization
program from the Islamic oil producers, Saudi
Arabia in particular, we expect it will look to the
United States for support as a test of our commit-
ment to the region. If the United States makes
large sums of military financing available to Paki-
stan, it could jeopardize the recent thaw in US-
Indian relations.
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