(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807660001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 30
• Document Creation Date: January 12, 2017
• Document Release Date: March 8, 2011
• Sequence Number: 1
• Publication Date: August 23, 1985
• Content Type: REPORT

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Directorate of ~~
Intelligence
International
Economic & Energy
Weekly
23 August 1985
DI IEEW 85-034
23 August 1985
Copy 6 8 4
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Secret
International
Economic & Energy Weekl~
23 August 1985
iii Syns~is
1 /Perspective-Implications of Lower Oil Prices
nth Africa: Economic Consequences of Black Unrest
7 ~ /Chin .Putting the Brakes on Computer Imports
11 ~ ~ Weak Markets Spur Steel Industry Restructuring
15 Briefs Energy
International Finance
Global and Regional Developments
National Developments
25X1
- 25X1
25X1
25X1
25X1
Comments and queries regarding this publication are welcome. They may be
directed to Directorate c~1'Intelligence,
i Secret
DI lEEW 85-03~
13 August 1985
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-Implications of Lower Oil Prices
If oil prices fall markedly over the next few years, say to $20 a barrel, most of 25X1
the world would benefit substantially. Certain oil exporters and other coun-
tries, however, could suffer economic setbacks and political repercussions-in
some cases sufficiently serious to affect US strategic interests adversely.
3 South Africa: Economic Consequences of Black Unrest
The endemic violence in the black townships that has plagued South Africa for
the past year has had little direct economic impact on the country's white
minority. Nevertheless, black unrest and international pressure for economic
sanctions have hurt investor confidence and probably will delay South Africa's
recovery from its deep recession. 25X1
7 China: Putting the Brakes on Computer Imports0 25X1
The dramatic growth in China's imports of microcomputers since 1983 shows
signs of slowing as Beijing begins to assess the country's ability to utilize
effectively computers already acquired, and to consider the effects of massive
imports on the country's infant computer industry and foreign exchange
reserves. Nonetheless, China's minicomputer and mainframe needs will contin-
ue to be met by~ed hardware, components, and especially peripheral
equipment 25X1
11 Weak Markets Spur Steel Industry Restructurin 25X1
Recovery in the non-Communist steel industry stalled in mid-1984, and
stagnation since then has put further pressure on steel producers to reduce
prices and cut excess capacity. Weak prices and low operating rates continue
to pull most of the industr into the red-a pattern we think likely to continue
throughout the decade 25X1
Secret
DI IEEW 85-03~
23 August 1983
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Secret
Perspective
International
Economic & Energy Weekly
23 August 1985
Implications ctf Lower Oil Prices
If oil prices fall markedly over the next few years, say to $20 a barrel, most of 25X1
the world will benefit substantially. Certain oil exporters and other countries,
however, could suffer economic setbacks and political repercussions-in some
cases sufficiently serious to affect US strategic interests adversely.0 25X1
On the positive side, most developed countries and oil-importing LDCs would
receive substantial direct economic benefits and also obtain added policy
flexibility. Real growth in the OECD would be about 0.3 percentage point per
year higher over the rest of the decade, inflation would subside further, and
projected increases in unemployment in Western Europe would be somewhat
less. Even Canada and the United Kingdom would likely benefit from a
decline in oil prices, despite being net energy exporters. Although Western
governments could accentuate the growth benefits from an oil price decline by
adopting more stimulative economic policies, we believe most would simply let
the benefits go directly to consumers. Japan and, perhaps, Italy might raise en-
ergy taxes to avoid increases in oil imports and reduce government deficits.
As for the oil-importing LDCs, a reduction in oil prices to the $20 per barrel
range would reduce energy import costs and raise exports to the developed
countries. As with the developed countries, most oil-importing LDCs would
pass on the full price reduction to their domestic economies, although some, in-
cluding Brazil, may raise taxes on oil to reduce budget deficits and protect do-
mestic energy investments. A few LDCs oil importers are likely to be hurt as
the OPEC countries cut their aid flows and use of foreign labor in response to
declining income 25X1
Lower prices would create serious problems for some oil exporters. In Mexico,
Nigeria, and Egypt, lower oil prices would stall economic recovery, increase
the potential for social unrest, and bring calls for higher levels of US aid or
other types of assistance. In Iran and Iraq, the loss in revenues would increase
the burden of continuing the war while trying to meet domestic needs. Libya
also will be hit financially but probably not enough to end support of its anti-
Those oil exporters with larger reserve bases and financial assets and smaller
populations-notably Saudi Arabia, Kuwait, and the UAE-are in better
shape to cope with lower prices. Even these countries, however, would face
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strains. In Saudi Arabia, foreign liquid assets-now under $80 billion and
declining by $1.0-1.5 billion per month-are approaching
important thresholds. As a result, Riyadh is making serious a orts
o cu expenditures in ways that will be felt by the typical Saudi.
For the Soviet Union, we believe a fall in oil prices would have a net
unfavorable impact in the near term, dropping hard currency earnings by $12-
14 billion over the rest of the decade. Such declines would force Moscow to
make difficult choices: selling off assets, increasing Western borrowing,
shifting energy exports from Eastern to Western Europe, or reducing imports.
On the basis of Moscow's past conservative financial policies and the already
constrained levels of its East European energy sales, we believe a cut in hard
currency imports would be necessary if oil prices fell dramatically
Set against the largely positive economic benefits of lower oil prices, we see
four sets of possibly adverse political and strategic effects on US interests:
? If the economic problems created in oil-exporting countries, such as Mexico,
Egypt, Nigeria, and the Persian Gulf states were sufficiently great to cause
political instability, the United States could be called on to react. These
responses could range from protecting US citizens and property against
domestic unrest to attempts at moderating the effects of a deteriorated debt
situation on these countries and on the international financial system.
? A drop in oil prices could further shift Middle East power balance away
from moderate states who used oil money as a political lever, particularly
Saudi Arabia.
? If falling oil prices lower West European gas prices, as is likely, development
of West European gas resources could be discouraged over the next few
years. If so, the Soviet-supplied proportion of West European gas consump-
tion could rise sharply, perhaps to about one-third of the total by the year
2000.
? Finally, a drop in oil prices-by stimulating consumption and reducing
exploration and development and maintenance of capacity~ould increase
dependence on Persian Gulf supplies, raising the potential for an oil supply
shortfall and a runup in oil prices. Given current excess capacity, however,
we believe this problem is unlikely to occur in this decade.
A sharp fall in prices would still be generally favorable, but would bring some
added risks. There would be some danger that banks with heavy energy or
LDC loan exposure would fail as well as the potential for political backlash in
LDC oil exporters as sudden income declines forced rapid reductions in living
standards.
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Secret
South Africa: Economic Consequences
of Black Unrest
The endemic violence in the black townships that
has plagued South Africa for the past year and
resulted in over 600 deaths has had little direct
economic impact on the country's white minority.
Nevertheless, black unrest and international pres-
sure for economic sanctions have hurt investor
confidence and probably will delay South Africa's
recovery from its deep recession. Lackluster eco-
nomic performance, in our judgment, will raise the
political costs for Pretoria of significantly improv-
ing the quality of life in black townships. As a
result, we expect the government to implement
piecemeal economic reforms to promote growth and
protect white living standards, while concentrating
any remaining available resources on upgrading
living conditions in selected black areas.
the townships. The violence that began last Sep-
tember when blacks living near Johannesburg
staged large-scale protests was sparked by rent
increases.
? Increases in bus fares between black townships
and job centers in white cities have often trig-
gered violence.
? Expenditures per white student is eight times that
for black pupils. Education ranks as a prime
concern of most urban black South Africans.
Most black high school teachers are poorly
trained, and school boycotts have become a cen-
tral feature of many riots.
? The black townships have virtually no fiscal
resources to provide services to the residents.
South Africa's black townships are tinderboxes for
racial unrest because of poverty, demographic pres-
sures, and resentment of Pretoria's racial policies.
Although the introduction last year of a new
constitution granting limited political rights to In-
dians and mixed-race Coloreds did much to height-
en black anger, economic grievances continue to be
a source of unrest:
? The economic progress by urban blacks over the
last decade has slowed in recent years due to
South Africa's erratic economic growth. Black
unemployment exceeds 25 percent, according to
academic studies, and is probably much higher
among urban youths, the major participants in
the rioting.
? US Embassy reporting indicates black frustration
is growing over the availability, cost, and location
of government-approved housing. Official statis-
tics, which probably are conservative, show a
black housing shortage of nearly 200,000 units in
Meanwhile, South Africa's black population is
growing by nearly 3 percent annually, and unem-
ployment and drought in the rural areas have
swelled some black township populations by as
much as 30 percent in the past year.
Impact of Violence on Wldtes
Most South African whites have escaped immedi-
ate economic losses because property damage-
totaling in the millions of dollars-so far has been
confined to black and Indian areas. Capital flight,
however, suggests that some whites are pessimistic
about the country's future. Private capital out-
flows-including debt service-totaling $2.2 billion
for the last quarter of 1984 and the first quarter of
1985 have more than offset a strong current ac-
count surplus of $800 million for the same period.
Secret
DI IEEW 85-03I
23 August 1983
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South African Balance of Payments, 1980-85
Current account balance
3.6
-4.6
-3.0
0.2
-0.7
1.5
Merchandise trade balance
-5.6
-9.8
-7.3
-5.1
-5.7
-3.5
Exports, f.o.b.
12.6
11.0
9.4
9.3
9.1
10.5
Imports, f.o.b.
18.2
20.8
16.6
14.4
14.8
14.0
Net gold exports
13.0
9.6
8.0
8.9
8.1
8.0 b
Net services and transfers
- 3.8
- 4.3
- 3.7
- 3.6
- 3.1
- 3.0
Long-term capital
-0.6
0.6
2.2
-0.4
1.9
Other capital a
- 2.3
2.8
0.6
1.1
-1.7
Total reserves, yearend ~
7.7
4.3
4.0
4.1
3.1
? Estimated.
b Assuming average gold price of 5345 per ounce.
Total reserves are not the sum of changes in reserves and previous
year's total reserves because of year-to-year changes in exchange
rates.
a Includes errors and omissions and supplier credits.
Pretoria is attempting to stem capital outflows by
maintaining tight credit policies imposed last year
to rebuild foreign reserves and reduce a 16-percent
inflation rate. Slow growth and tight credit, howev-
er, will reduce the purchasing power of middle-
class whites
Black boycotts of white-owned shops have cost
businessmen in affected areas up to one-third of
their usual sales. Renewed demands by business
groups to improve economic and political opportu-
nities for nonwhites have had little influence on the
government. On balance, boycotts impact directly
on only a small number of whites but are expensive
for black consumers to sustain because black shop-
owners charge hefty premiums. Nevertheless, boy-
cotts or any concerted action by blacks creates
unease in the white community.
Violence Encourages Sanctions
adopted thus far probably will have little direct
economic impact. For example, a French ban on
new investment stops short of limiting trade. The
United Kingdom, West Germany, and Switzer-
land-South Africa's key West European trading
partners-have publicly rejected the sanctions ap-
proach. Without their support, most observers be-
lieve that sanctions will not seriously hurt the
South African economy. Moreover, the country
probably could weather even a total cutoff in
foreign economic ties for several years. South Afri-
ca is self-sufficient in agriculture, has large re-
serves of coal, and has stockpiled key commodities,
such as petroleum.
While the effect of trade sanctions is limited,
growing pressures in various countries to pull out of
South Africa reinforce investor concerns about the
country's economic prospects. The recent move by
a major US bank to end most short-term loans to
private borrowers in the country triggered a brief
panic in South African financial markets. Pretoria
The black unrest and subsequent declaration of a
state of emergency have added to the international
clamor for economic sanctions, but trade measures
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has expressed concern that access to short-term
lending is one of South Africa's few sources of
economic vulnerability. Nevertheless, foreign lend-
ing is not currently a problem. Even the withdrawal
of other major US banks is unlikely to precipitate a
debt crisis as long as West German and Swiss
banks remain willing to provide long-term loans.
The flow of capital out of the country and concern
over Western sanctions probably will lead Pretoria
to maintain fairly restrictive economic policies and
consequently limit real GDP growth this year .to at
most 1 percent. Investor anxiety about the coun-
try's stability will add to the cost of foreign loans
and may prompt new episodes of panic selling on
South African financial markets in response to any
additional sanctions, withdrawal of foreign banks
and companies, or widened violence. Moreover, the
effects of the unrest on investor confidence proba-
bly will linger, even if an uneasy calm is restored.
President Botha, in our view, remains committed to
a gradualist program of limited social, political,
and economic concessions to manage the burgeon-
ing black urban population. Botha's reforms aim to
reduce black resentment of the government, boost
the supply of skilled labor, and strengthen ruling
party control. Although domestic and foreign crit-
ics dismiss the proposed reforms as superficial,
many white South Africans believe they go too far
and remain committed to purer forms of racial
separatism.
Long-Term Dilemma
Over the long haul, mediocre economic perfor-
manco--as aresult of expected stagnant gold pro-
duction-is likely to inhibit Pretoria's efforts to
improve black living standards. During the remain-
der of this decade, South Africa's average annual
rate of economic growth probably will be no more
than 3 percent, and could be lower if the gold price
falls, the world economic recovery slows sharply, or
strong Western sanctions are. applied. An annual
growth rate of S to 6 percent would be needed just
to accommodate some 2.5 million new jobseekers
each year. Only in the unlikely event of a dramatic
rise in gold prices or substantial new foreign invest-
ment would these higher growth rates be attain-
tling of racial separatism.
Economic austerity measures imposed periodically
to avoid large current account deficits and fight
double-digit inflation will limit government spend-
ing for upgrading black townships and schools. By
the year 2000, the 10-15 million blacks who are
expected to join the 9 million already in urban
areas will require at least an additional 2 million
houses. The government estimates that achieving
racial parity in schooling by 1990-ignoring the
impact of inflation-would require an additional
annual education outlay of $2.7 billion, equivalent
to 18 percent of the fiscal year 1986 budget.
Pretoria will be loath to fund massive spending
programs for blacks at the expense of its white
electorate, most of whom voice more concern over
pocketbook issues than over the gradual disman-
Pretoria is likely to respond to these competing
pressures by targeting resources on the most trou-
bled townships and by undertaking selected eco-
nomic reforms that promote more rapid growth or
generate new government revenues:
? Pretoria has announced its intent to remove many
barriers to employment, small black businesses,
and low-cost housing. 25X1
? Proposed multiracial councils for urban areas
would channel additional revenues to black local
authorities.
? Pretoria has already sold astate-owned coal-to-
oil facility and may sell other state-owned corpo-
rations, such as television and radio networks, the
railroad, airline, and electric power system, and
telephone and postal services. According to an
academic study, sale of the transport services
alone could generate $5 billion in government
revenues.
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? Monetary, trade, and tax policies are being
streamlined.
Although these measures are unlikely to resolve
competing demands for economic resources and
end racial violence, we expect that most whites will
not suffer significant economic losses and that
sufficient resources will be diverted to co-opt many
urban blacks.
Secret 6
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Secret
China: Putting the Brakes on
Computer Imports
The dramatic growth in China's imports of micro-
computers since 1983 shows signs of slowing as
Beijing begins to assess the country's ability to
utilize effectively the computers already acquired,
and to consider the effects of massive imports on
the country's infant computer industry and foreign
exchange reserves. Beijing is pushing development
of its domestic computer industry through transfer
of Western technology-particularly by means of
cooperative production agreements with US firms.
Nonetheless, China will continue to rely on import-
ed components, minicomputer and mainframe
hard~nd especially peripheral equipment.
China: Computer Inventory, 1979-86?
China Catches "Computer Fever"
In September 1983, Beijing decided to concentrate
on production and use of micros instead of larger
minicomputers and mainframes. As a result,
China's imports of computers nearly tripled in 1984
to $328 million, with imports accelerating sharply
toward the end of 1984 and in early 1985. While
precise figures are not available, we judge that
China's purchases of microcomputers increased
from roughly 20,000 microcomputers in 1983 to
30,000 in 1984, and 40,000 in the first half of
1985.'
Several factors account for this dramatic increase:
? China's computer users generally prefer imports
because of concerns about quality and compati-
bility of domestic models.
? Domestically produced microcomputers are three
to 15 times more expensive than their imported
counterparts.
' Estimates of China's 1984 imports of micros range from 20,000 to
100,000 units. The latter is a Chinex figure that probably includes
? Beijing decentralized control over foreign trade in
1984, resulting in a proliferation of small, loosely
regulated trading companies eager to profit from
the demand for computers.
? A plan to increase tariffs on microcomputers in
January 1985 led to a flurry of import activity in
By the middle of 1984 Chinese leaders were grow-
ing increasingly concerned about the ineffective use
of computers and, at the same time, more aware of
the costs-in foreign exchange and in harm to the
domestic electronics industry~f the influx of im-
ports. Chinese estimates published in the People's
Daily concluded that inadequate maintenance, the
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DI IEEW 85-034
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China: Foreign Trade in Computers
Imports o[ Computers and Related US Computer Equipment Exports
Equipment to China
Million US $ Million US $
_ ~ I I I I I I
0 1979 80 81 82 83 84 85a
Computer Imports, by Country
of Origin
Percent
Hong Kong
United States
Japan
Other
absence of applications software and peripheral of domestic to foreign computers in the country's
equipment, improper training, and poor data com- inventory declined from 12:1 in 1979 to 4:1 in
munications links limited effective operation of 1980. By early 1984, imports had a dominant share
China's computers to 50 percent, at best. In addi- of the computer inventory-nearly 2:1-and the
tion, the Chinese discovered that they had imported ratio continued to worsen as the year progressed.
large numbers of obsolete, low quality, or counter-
feit computers.
Moreover, the influx of imports reawakened Chi-
nese concern that foreign manufacturers might
dominate the domestic computer market. Following
the buying spree at the end of the 1970s, the ratio
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IV I II
1985
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Taking Action
Beijing's reaction was to reorganize the oversight
agency responsible for China's computer policy,
strengthening its authority and broadening its
membership. Ranking officials from China's top
policymaking bodies and defense industrial minis-
tries serve on the new group, which will formulate
long-range plans for the telecommunications, mi-
croelectronics, software, and computer industries.
Beijing also intensified its efforts to improve the
country's ability to use imported computers effec-
tively. By creating new organizations, funding ma-
jor new initiatives, and encouraging greater Chi-
nese foreign cooperation, China sought to improve:
? Development of applications software.
? Maintenance and repair assistance.
? Computer .education.
? Availability of peripheral equipment.
? Data communications links.
? Information processing using Chinese characters.
To shore up domestic sales, Beijing cut prices on
domestically produced micros by 25 to 30 percent,
more than doubled tariffs, instituted a 40-percent
surtax on microcomputer imports, and cut the duty
on computer components imported for assembly. In
addition, Beijing strengthened its demands that
transfers of technology accompany computer im-
ports. In May 1985, the State Council formally tied
future purchases of advanced equipment in all
sectors to technology transfer. At present, approxi-
mately 100 cooperative production agreements in-
volving computers or peripherals are under negotia-
tion-many of them only recently undertaken in
response to Beijing's policy. US firms appear most
willing to transfer technology: 55 of the agreements
under negotiation involve US manufacturers, fol-
lowed by 19 from Japan, 10 from Hong Kong, and
16 from other countries. So far, most of the
ventures involve merel assembly of imported com-
ponents
Computer imports were further curtailed when
Beijing began to reimpose central controls over
foreign trade in the spring of 1985, limiting large
expenditures to essential projects already in the
state plan. China also centralized its import-licens-
ing system over 15 key commodities, including
microcomputers, and restricted new trade corpora-
tions to those that will promote Chinese exports.
Prospects for Foreign Suppliers
25X1
We believe the recent measures-particularly the
reassertion of control over trade and foreign ex-
change expenditures-will slow the growth in sales
of computers to China.
new orders have all but ceased. Deliveries
ones made before the measures were imple- 25X1
mented, however, will keep import figures for 1985
high.
The US market relative to Japan, Hong Kong, and
others will, in our judgment, show marked improve-
ment. Liberalized controls on 8- and 16-bit person-
al computers-in effect since January-now permit
exports by US firms of large quantities of lower
performance microcomputers without specifying in-
dividual Chinese users. Moreover, product perfor-
mance, the availability of applications software and
peripherals, the provision of training and service,
and a willingness to transfer technology have given
US firms an edge that Japanese firms have been
unable to offset by offering lower prices. European
suppliers are gradually being forced out by China's
attempt to limit the models it purchases to a few-
primarily US-made-brands
We believe those likely to be hardest hit by the 25X1
foreign exchange and trade controls are Hong
Kong firms. Although the measures apparently
have not had a significant effect on sales to central
trade corporations, orders placed through regional
trade companies in southern China's special eco-
nomic zones-many with Hong Kong connec-
tions-appear to have declined almost immediate-
ly. The US Consulate in Hong Kong reports that
the reexport of computers through Hong Kong to
China slowed "practically to a trickle" by March
1985. One Hong Kong computer dealer claims his
sales have dropped 80 percent since then.
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Outlook for the Domestic Industry
China's computer industry should be able to meet
demand for 8- and 16-bit micros with computers
assembled from imported kits in several years. Kit
assembly, however, may initially delay progress in
developing indigenous computer models. Chinese
users clearly prefer Western models, and several
large factories have already discontinued produc-
tion of domestic models to assemble IBM PCs and
IBM- and Apple-compatible microcomputers. In
time, however, even technology transfers limited to
kit assembly arrangements will enhance China's
domestic capabilities. Beijing will no doubt press
companies to transfer the technology to produce
components, including integrated circuits, as the
second stage of an assembly agreement
For the time being, we do not believe China's
minicomputer and mainframe needs can be met
domestically. The Chinese want to assemble larger
Western computers and will probably press vendors
to transfer this technology as well. One major US-
Chinese joint venture agreement has already been
signed providing for mainframe assembly in China,
and half a dozen are under discussion. As with
microcomputers, advances in the country's ability
to produce electronic components will eventually
enable China to produce better minicomputers,
mainframes, and even supercomputers in-
digenously.
China will likely be dependent on Western peri-
pherals for several more years as Beijing continues
to give insufficient emphasis to the development of
disk drives, printers, and other peripheral equip-
ment. Moreover, there have been very few coopera-
tive ventures in this area. As a result, inadequate
software, peripherals, and data communications
links will continue to restrict computer utilization
for some time to come.
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Secret
Weak Markets Spur Steel
Industry Restructuring' rj
Recovery in the non-Communist steel industry
stalled in mid-1984, and stagnation since then has
put further pressure on steel producers to reduce
prices and cut excess capacity. Although financial
performance improved during the recovery, weak
prices and low operating rates continue to pull most
of the industry into the red-a pattern we think
likely to continue throughout the decade. We be-
lieve that this financial weakness will force the
industry to continue restructuring by closing old
steel mills and cutting operating costs in the re-
maining plants. Combined with a possible moderate
recovery in demand, these factors give the industry
a fair chance to regain stability by the early 1990s.
Stagnation Replaces Recovery
Most steel analysts expect output this year to
remain at about the 19841evel. Non-Communist
steel production during the first half fell slightly
from the same period last year, and industry ex-
perts expect only a moderate improvement during
the rest of 1985. The economies of Western Europe
remain sluggish, while growth has slowed in the
United States and Japan. At the same time, large
steel inventories in a number of countries, the end
of a spurt in shipbuilding, and the long-term shift
of economic activity to less steel-intensive sectors
continue to depress demand.
We believe the financial performance of this indus-
try will remain poor. While the income statements
of most companies improved sharply last year,
losses remain the rule. Efforts to boost income are
being frustrated by low operating rates, higher raw
material prices, and stiff market resistance to steel
price increases. Prices on the world market may
even decline later in the year as the US import
restraint program takes hold. Moreover, the weak-
ening dollar could further reduce local currency
export earnings. Q 25X1
Weakness at this stage of an economic recovery is
alarming many industry experts because it is tradi-
tionally the time when the steel industry reaps most
of its profit. Given the outlook for 1985, we believe
that most steelmakers will go into the next business
downturn before recovering from the bloodletting
of the last. The EC steel industry, currently losing
$1-2 billion annually, will remain in the red
throughout this cyclical peak, despite a few profit-
able firms in West Germany, the Netherlands, and
Luxembourg. At best, the US industry will recover
only a fraction of the $6 billion it lost during 1982-
84. In Japan, however, steelmakers made up their
1983 losses in 1984, and we believe they will
continue to make money this year. But, even in
Japan, the industry's published data and the fore-
casts of some analysts indicate that profits will
remain well below those of the past.
Cuts in Capacity
Heavy losses are forcing the major firms to scrap
excess capacity. In the developed countries, 55
million metric tons of capacity have been eliminat-
ed since 1980, primarily in the EC and the United25X1
States. Because some of these cuts have been offset
by mill construction in the Third World, we esti-
mate anet decline of 35 million tons, only about 20
percent of estimated excess capacity
Capacity will continue to decline throughout the
rest of the 1980s because of the industry's financial
weakness. More important than the outright scrap-
ping of capacity, however, will be the continuing
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DI IEEW 85-034
23 August 1985
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Non-Communist Crude Steel
Production, 1979-85
a Projected.
b Includes Yugoslavia and Turkey.
Canada, Australia, New Zealand, and South Africa.
deterioration of the plants in operation. The
industry's financial problems have sharply cur-
tailed its ability to maintain plants and equipment.
Measured in constant prices, for example, invest-
ment per ton of capacity in the EC, Japan, and the
United States is currently half the level of 10 years
ago. Consequently, many parts of the industry are
being pushed beyond their normal life.
The problem is particularly acute in the case of EC
and US coke plants, half of which are past their
useful life of 25 years. Moreover, little investment
is being put into the coking sector because of cost
and environmental concerns. On the basis of these
trends and statements by high steel industry offi-
cials, we believe that coking capacity will increas-
ingly become the steel industry's most critical
limitation.
Cost Cutting: Focus on Labor
For several years, the major steel companies have
been fighting hard to reduce operating costs enough
to achieve some profitability. While progress has
been made on several fronts, the greatest savings
have been achieved in labor costs through work rule
changes and cuts in the labor force. While still
producing the same amount of steel, the EC steel
industry has cut one-fifth of its work force since
early 1982, and US steelmakers have done even
better. In contrast, Japanese productivity gains
have been small because the base was already high
and because of employment policies. Nevertheless,
Japanese efforts to cut labor costs continue
Things Will Get Worse Before They Get Better
Prospects vary from lackluster to grim for non-
communist steel producers through the rest of the
decade. The mill closings in recent years have not
been sufficient to offset declining demand; thus
excess capacity is still increasing. Prices will re-
main weak for some years, particularly during the
next business downturn. The conflict over EC steel
policy will continue to fester. The stronger West
German industry demands an end to steel subsi-
dies, while the weaker French and Italian indus-
tries will need financial support for some years. The
Japanese industry will make money, in most years,
but we believe profits will remain low, and the
major steel companies will continue to diversify
into nonsteel activities. The US industry probably
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Secret
Non-Communist Steelmaking
Capacity
Mt!lt
on met
ric tons
1970
1975
1980
1985?
Total
493
600
66S
630
OECD countries
455
544
575
520
Unitod States
143
139
140
122
European Community
160
191
207
172
Japan
103
150
155
156
Otherb
49
64
73
70
Third World
38
56
90
110
^ Estimated.
b Non-EC Western Europe, Canada, Australia, and New Zealand.
will face further heavy losses during the next
business slump and one or more major bankruptcies
could result. In all the major countries, capacity
reduction will go on and perhaps accelerate.
As the next recovery begins, we believe that a
leaner, more efficient steel industry in the devel-
oped countries will emerge. We expect demand to
bottom out in the next few years and probably to
begin a very slow recovery. The factors-including
the drawdown of steel inventories, the downsizing
of automobiles, and the neglect of infrastructure
investment-that have depressed demand in the
developed countries are reaching their natural lim-
its. Steel consumption in the Third World also will
pick up if, as many forecasters expect, LDC eco-
nomic performance improves.
We believe this combination of forces could return
non-Communist steel production to about its 1979
peak during the next business upswing. At this
output level, capacity utilization probably will im-
prove, and prices should finally rise. Historically,
prices begin to show real strength only when pro-
duction approaches 90 percent of capacity. Because
of the industry's deteriorating state, we agree with
Non-Communist Steel Industry: Rated
Capacity, Estimated Effective Capacity,
and Production, 1971-85
500 ~1
Rated capacity
Estimated
effective
capacitya
Production
IIII~IIII~IIII~
a Since the steel market boom of 1973-74, effective capacity estimates have
been subject to increasing margins of error because demand has not been
strong enough to test the industry's true limits.
b Estimated.
those analysts who believe that prices in the future
may show strength at substantially lower operating
rates. If improved prices occur at the same time
cost-cutting programs are lowering the industry's
break-even point, the industry may achieve its long-
sought return to profitability 25X1
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Secret
mestic demand. The talks were preliminary, and Luxembourg has indicated it
will not make a decision until after discussions with other suppliers-the
Netherlands and Norway-the EC, and the IEA. The government is aware of
US concerns about West European overdependence on Soviet gas, and for 25X1
political reasons would prefer to deal with either the Dutch or Norwegians.
Nonetheless, Luxembourg's prime consideration will be price, and it probably
would deal with the Soviet Union if the terms were advantageous. Moreover,
the government could argue that such an agreement would not lead to
excessive dependence on Soviet gas because the Netherlands currently covers
all of its gas needs. A decision is not likely to be made for at least a year,~~
Briefs
Energy
Lycfembourg Shows Luxembourg Energy Minister Schlechter recently visited Moscow to discuss
terest in Soviet Gases possible imports of Soviet gas by the end of the decade to meet increasing do-
Argentina Attempts To In an effort to boost stagnating bil production, Argentina has recently revisedv
Rejuvenate Oil Sector its petroleum regulations to encourage more foreign investment. Under the
ria Rationing
Electricity
new decree, the oil operators will have increased control over the mix of high-
and low-risk exploration tracts they may bid on and this will probably lower
somewhat their investment risk. Nonetheless, substantial disincentives persist,
and oil companies may remain reluctant to invest. The National Oil Company
(YPF) will only pay 70 to 80 percent of the world price for the foreign oil com25X1
pany's share of oil output-slightly up from 60 percent under the previous
regulations. Moreover, government supervision of oil company activities will
remain pervasive and YPF retains the option to buy into promising finds,
thereby reducing the potential return on an operator's investment. Companies
had requested that buy-ins be paid in crude oil to assure payment from YPF
that currently owes an estimated $6 billion to foreign oil operators. Payment
however, will still be primarily in dollars and local currency.
25X1
rationing may continue until yearend 1986.
Electricity rationing began in Damascus in late July, according to the US
Embassy. Daily interruptions of service are averaging three to five hours, but
sometimes last up to 10 hours. Subsidized rates to low-income users and state25X1
enterprises have helped push electricity consumption growth to 20 percent per
year, while construction of generating capacity has lagged. Unlike past years,
low water in the Euphrates River is only a minor part of the problem. The pri-
mary causes are poor government planning and slow contracting for new
generating projects. Although Syrian officials hope to accelerate some
projects-those being built by Western contractors-they still anticipate that
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`\ Irfberia's IM/F\Review
The IMF will review Liberia's financial situation next week and could suspend
its membership if there is no significant reduction in the $41 million in arrears
owed to the Fund. The IMF suspended the December 1984 standby arrange-
ment earlier this year because Liberia failed to meet its debt obligations to the
Fund and exceeded certain performance targets. Liberia remains mired in a
25X1 severe foreign payments crisis with total external arrears expected to rise from
$27 million at the end of last year to $117 by yearend
Global and Regional Developments
\ EC Support .for Special The US Mission in Geneva reports that eight of the 10 EC members, plus
GATT Meeting Spain and Portugal, support the US request for a special GATT meeting early
EC Proposes Aid to
Soviet Clients
Secret
23 August 1985
next month to discuss holding a new trade round. Although France and Italy
have not yet responded, they probably will agree
to the meeting. With some 18 votes still needed, the United States and other
OECD countries are urging Caribbean and African states to agree. The
September meeting, which will focus on general agenda issues and obtaining
the support of developing countries should cause little disagreement between
the United States and the EC. Beyond September, however, there are potential
problems. For example, the French may again try to link monetary and trade
problems. Moreover, the Community is also certain to deflect proposals that
could affect its Common Agricultural Policy, and some members-particular-
ly France-are wary of how a new round might affect the high-technology
area.
The EC Commission has proposed expanding Stabex-its system for compen-
sating participating Third World exporters when expected foreign exchange
earnings from exports to the EC fall short because of a drop in prices. New
participants would include Afghanistan, South Yemen, North Yemen, Laos,
Bangladesh, Bhutan, Haiti, the Maldives, and Nepal. It also has suggested
appeals to the United States and Japan to make a parallel effort to help these
countries. The proposal honors a promise the EC made at a UN conference in
1981. This expansion, expected by the Commission to cost the EC $88 million
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Secret
over five years, would have a negligible economic impact on the recipients. The
Commission believes, however, the move could be a significant political gesture
toward the Third World before the next UN conference in October on the least
developed countries. The EC members-who will review the proposal in
September-are divided on whether to pursue this initiative without similar
efforts from other industrialized countries. The inclusion of Afghanistan,
South Yemen, and Laos may induce the members to postpone a decision.
panese and South
Korean Automakers
Step Up Cooperation
one imported car in 1985.
Japanese automakers are expanding their ties to South Korea's rapidly
growing auto firms. Mitsubishi Motors is increasing its equity in Hyundai to
15 percent, and joint production of Mitsubishi's midsize Debonair model will
begin next summer. Hyundai will produce the Debonair bodies-half for sale
to the Korean market, and the rest for final assembly and sale in Japan. This is
the first time a Japanese automaker has gone abroad to acquire major 25X1
components for one of its cars. Meanwhile, Mazda and a major US automaker
plan a joint venture with South Korea's Kia Industries to produce small
passenger cars starting in 1987 with the US partner marketing a large part of
the output in the United States and Canada. The Japanese believe Korea will
become a major supplier of cars to the world market-especially for subcom-
pacts. After only one year in the Canadian market, for example, Hyundai's
new Pony model has surpassed all Japanese competitors to become the number
J
Japan hooses The Japanese space agency plans to purchase European components for its
Eur can Components new H-2 launch vehicle because development and manufacture in Japan would
l Space Launch / be more expensive. The H-2 is scheduled to become operational in 1992. We
Vehicle believe West European suppliers were chosen over US firms because the
25X1
Japanese want to avoid US restrictions on commercialization of the H-2-
restrictions that were put on previous US-licensed space launchers. If Japan
and Western Europe move on joint development of these components, we
believe hardware costs will be reduced, making both Western Europe and
Japan more competitive with US launch services.
oviets Eye Japanese
Auto Engine
Technology ~'
crystallize
According to Japanese press reports, the USSR is seeking sophisticated
manufacturing technology from both Toyota and Nissan for production of
1,500 to 1,600 cc engines. They want capabilities in the assembly and
production of all engine parts, not merely the assembly of engines using
imported components. Production is expected to run between 100,000 to
200,000 engines annually. This size engine is used in the Moscvich-about
200,000 were produced in 1982. Toyota is reluctant because production of
engine parts requires high-level technologies. Nissan is still studying the
inquiry. In view of the Soviet market potential, however, we believe that the
Japanese auto makers may meet some of the USSR's demands. Moscow
apparently turned to the Japanese when a joint venture with Renault failed to
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the French firms CIT-Alcatel and Thomson CSF, the Dutc firm
Philips, and a major US telecommunications manufacturer signed a joint
venture agreement on 27 June. French Government approval is expected in the
near future. Among its terms, the agreement calls for the US/Dutch
partnership to manufacture digital switches in France and market them in
France and abroad, and a joint venture between the US/Dutch partnership
and Compagnie Generale D'Electricite in the digital microwave market. This
agreement illustrates the changing structure of the telecommunications indus-
try as full-line manufacturers seek global corporate alliances rather than
continuing independent competition. Technical and economic pressures are
forcing governments to yield control of this strategically important industry
implicitly accepting future dependence on foreign technology. This is being
brought about by the high R&D costs in the new digital technologies, and the
incursion of nontelecommunications firms into low-end customer equipment
markets. The agreement-President Mitterrand reportedly has been actively
involved-also tacitly acknowledges the failure of the French telecommunica-
tions strategy of the past decade. This strategy of expanding the French
market through the purchase of modern equipment by the government postal,
telephone, and telegraph monopoly was to provide the stimulus for French
manufacturers to develop competitive products and move into strong export
positions thus providing jobs and prestige for French industry
National Developments
Developed Countries
Tokyo established ahigh-level committee early this month to study measures
Economic Stimulus to boost imports by expanding domestic demand. Areas under consideration
include encouraging the private sector to construct public works, reducing the
regulatory burden on private businesses, making public lands available for
construction, and accelerating the introduction of the five-day workweek. A
full report is due to the Cabinet by 10 October. In our view, the short deadline
as well as Finance Ministry opposition to increases in government expenditure
make it unlikely Tokyo will adopt any expansionary policy in the near term.
The resignation last week of State Minister Komoto, moreover, removed from
the Cabinet one of the few supporters of economic stimulus
25X1
25X1
I Japanese Steamship
Company Fails
Secret
23 August 1985
apan Debating
With debts totaling approximately $2.2 billion, Sanko Steamship Company-
one of the world's largest ocean shipping companies-filed for protection from
creditors last week, and early this week a Japanese court froze its assets.
Sanko's collapse-the result of mismanagement and more than a decade of
depression in the industry-is affecting the political fortunes of Sanko owner
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Secret
kyo Narrowly
Targeting Advanced
Materials
and Liberal Democratic Party faction leader Toshio Komoto. Komoto has
already resigned from the Cabinet. Although his small faction of 35 is holding
together for now, it will probably dissolve eventually, affecting alignments in
the party. Sanko's bankruptcy-the largest in Japanese corporate history-
could have some impact on Sanko's creditors, according to the Finance
Minister. The Transportation Ministry has deleted all funding for Sanko from
its 1986 budget proposal and the firm's major creditor banks in Japan refused
additional financing despite requests by the Transportation Minister. Al- 25X1
though we believe serious disruption to Japanese banking is unlikely, the
Finance Ministry and the Bank of Japan are monitoring the situation.)
The Japanese recently have begun narrowly targeting development of ad- 25X1
vanced materials Since 1981, MITI has
targeted broad classes of advanced materials, such as fine ceramics and
composites, in its "Next-Generation Industries Basic Technologies R&D 25X1
Program." In 1985 Tokyo has begun augmenting general R&D tax credits
with an additional 7-percent credit for certain aspects of advanced materials
development in fine ceramics, rapidly solidified materials, and nondestructive
testing techniques. Meanwhile, subsidized loans to support R&D on advanced
materials are available from the Japan Development Bank's "Industrial
Technology Development Loan System" and the Smaller Business Finance
Corporation's "New Technology Commercialization Loan System" at interest
rates ranging from 7.1 to 7.9 percent. MITI's leverage on advanced materials
R&D has an effect well beyond the value of the subsidies themselves, as
Japanese firms generally respond by allocating substantial corporate funds to
r~avalne~msn4 n{~ 4o.s4va ...n~e..:nln n...~ .......,. C....a.. ~. ~.- __,..._..___ 25X1
tii'est Germany Eases In an effort to boost domestic demand, the Bundesbank last week cut its
Monetary Policy Lombard and discount lending rates by 0.5 percentage point to 5.5 and 25X1
but will raise output by about 0.1 percentage point in both 1986 and 1987.
4.0 percent, respectively. Bundesbank President Poehl is publicly urging
commercial banks to pass on the rate cuts to their customers quickly to speed
up the stimulative effects of the move. The Bundesbank last lowered its
lending rates in March 1983 but subsequently raised rates several times to
strengthen the mark. The recent appreciation of the mark-now at about DM
2.8 against the US dollar compared to a low of DM 3.5 in February-has en-
abled the central bank to loosen credit. Although the Kohl government has
been criticized for maintaining tight fiscal policies despite the growth in
unemployment, the financial authorities emphasize that continued shrinkage
in the federal deficit will also induce easier credit. The lending rate cuts
probably will have a negligible impact on this year's 2.5-percent GDP growth,
25X1
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humiliating defeat for Prime Minister Hawke. The compromise plan-which
lowered income taxes, extended coverage of the wholesale tax, and imposed
taxes on capital gains and fringe benefits-was hurriedly drafted after
Hawke's conclave of key interest groups in July failed to reach a consensus.
Keating called the compromise ill conceived and unworkable-adding US
$210 million to this year's estimated $4.3 billion budget deficit, riddling the
economy with tax anomalies, and benefiting low-income groups less than his
original reform proposals. Keating, however, may be clearing the deck to
introduce a new slate of tax reforms when Parliament opens next week-with
the budget its first item of business. To obtain any tax reform, Hawke must
convince the Labor Party caucus-which remains divided on the tax issue-
that he still controls the policy agenda. Hawke is likely to argue that failure on
this issue would be politically damaging to the party, not just to himself.
Less Developed Countries
New Greek Austerity Prime Minister Papandreou is weighing plans for limited austerity measures
i~Measures Likely aimed at reversing the continuing deterioration in the foreign payments
/ ,~ position. In the first four months of 1985, the current account deficit reached
$1.4 billion, up 32 percent over the same period last year. Reportedly,
Papandreou is considering import restrictions, reforming the automatic index-
ing of wages, and reducing state subsidies to the public enterprises. We believe
it is likely that Papandreou will go ahead with these measures, since he has
made the economy-which he has described as grim-the top priority of his
second term. In an attempt to revive private investment, Papandreou also will
try to lessen the confrontational atmosphere between his government and the
business community. The measures under consideration, however, fall short of
the liberalization program called for by business leaders, who favor lifting
price controls and easing restrictions on reducing the work force to improve
profits
Australia Starting Treasurer Keating last week scrapped the Labor government's "compromise"
Over on Tax Re,Torm tax reform plan in a move widely interpreted by the domestic press as a
I/
Secret
23 August 1985
Proponents of free market policies are solidifying their hold over the economic
team, portending more coherence in implementing policy. The new Minister of
Economy, Delano Ortuzar, supports market solutions and advocates export
promotion and new foreign investment to strengthen the economy. The US
Embassy reports he will work to limit the size of the public sector-and
improve its efficiency and profitability-to lower inflation and interest rates.
Delano indicates he will relinquish the role of overall coordinator of the
economic team, strengthening the influence of Finance Minister Buchi. Since
his appointment earlier this year, Buchi has implemented economic adjust-
ments and market reforms necessary to bolster creditor confidence and lay the
foundations for future economic improvement.
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Secret
'Guatemalan Economic Chief of State Mejia continues to face strong opposition in his attempts to sta-
Pressures Build bilize the economy prior to the presidential election scheduled for November.
ya Expels
Foreign Workers
underscores the seriousness of the country's foreign exchange problems.
Mejia's recent threat to nationalize exports and close foreign exchange houses,
and promise of legislation to end free trading of foreign currencies provoked
objections from the private sector. Mejia hopes these moves will stem the sharp
depreciation of the quetzal-which has declined by more than 50 percent
against the US dollar this year-and bolster government control over foreign
exchange receipts. We believe a major nationalization is unlikely, but the fact
that Mejia is willing to risk alienating the influential business community
Since early August over 23,000 Tunisians and as many as 9,000 Egyptians, Al-
gerians, Syrians, Maligns, and Mauritanians have been deported and the flow
shows no sign of abating. Libyan leader Qadhafi almost certainly regards the
nearly 400,000 foreign workers in the country as potential supporters of exiled 25X1
Libyan dissidents. This threat, as well as the inability of Libyan security forces
to suppress recurrent outbreaks of antiregime activities, may be prompting the
expulsions on security grounds. Expelling the workers without identity papers
gives Qadhafi an excellent opportunity to infiltrate Libyan agents into such
target countries as Tunisia, Egypt, and Algeria. While dwindling oil income
provides a motive for reducing the foreign population, Tripoli needs foreign
expertise to keep its small, modern economy running. In addition, Qadhafi
hinted in a recent press interview that consumer goods left behind by departing
workers may be used to ease domestic discontent over shortages. 25X1
Moroccan Grain Supply Morocco's grain harvest totaled only 3.7 million metric tons, according to the
Nip and Tuck
US agricultural attache in Rabat. Adverse weather was the culprit, cutting
wheat production by 30 percent and barley production by 20 percent from 25X1
their 10-year averages. Based on attache projections, Morocco probably has
sufficient foodgrains in the pipeline to meet domestic requirements through
1985, but little more to add to already depleted stocks. The US Embassy
estimates yearend wheat reserves at 45,000 to 130,000 tons-less than one
month of consumption. Credits have yet to be arranged to meet expected
cereal import needs beyond this year, except for the possible resumption of US
CCC credits. Even this option is unavailable until Morocco repays its arrears
to the United States. Moreover, there is no indication that France will once
again supply 1 million tons of concessional grain. This need for food aid will
put even more pressure on Morocco to negotiate a new IMF program.
+ / Tunisian Labor Tunisia's powerful labor union may take a more militant stand against
Problems Heat Up government intransigence on wages over the next several months. Negotiations
with the government in July failed to win new concessions, prompting calls for
strikes in key sectors in the near future. A general transportation strike on 5 25X1
August garnered only limited support from transport workers in Tunis, but
local police were needed to man buses to prevent disruption of service. Rumors
are spreading that transport workers will launch a countrywide, three-day
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strike in September and similar actions are proposed by several other unions.
Strikes may backfire, however, because the government stand on linking wage
hikes to improvements in productivity is gaining popular support, according to
the US Embassy. Nevertheless, union leaders are under increasing pressure
from radical union elements and probably will have to adopt more get tough
measures to maintain union solidarity and a viable opposition to the govern-
ments's wage policies.
Initial Shipments of Khartoum has given extensive press coverage to the first segment of the
~ibyan Aid to Sudan
promised 1,000-truck Libyan aid convoy to reach western Sudan. According to
the US Embassy in Khartoum, the 43-truck relief shipment included tractors
and several hundred tons of food. In addition, 50,000 tons of the long-delayed
Libyan oil grant is now en route. The US Embassy reports that the aid convoy
was led by members of the Libyan-supported and -trained Sudanese Revolu-
tionary Committees, who may also be bringing in arms. Tripoli probably will
use offers of additional aid to expand its influence in Khartoum. Libyan leader
Qadhafi wants apro-Libyan regime as a lever against Egypt and to preclude
US military use of Sudanese territory.
~'udanese Insecticide a West German-led syndicate of West
Purchase European banks has offered Sudan nearly US $40 million in financing. The
only restriction is that none of the money may be used to purchase aldicarb, a
US insecticide used in cotton production. Citing environmental concerns, the
West Germans have offered alternative chemicals-most of German manufac-
ture. Prior to the European offer, Sudan had placed a US $5.7 million order
for aldicarb. The West Germans indicated future funding would be affected by
any plan to finance the US purchase separately. The environmental concerns
are largely unfounded, and the objective is probably to undercut the US
market. We believe the Sudanese will accept the European terms, however.
One Sudanese official has already been removed for stating a preference for
the US insecticide. Cotton yields may decline slightly as growers adjust to new
chemicals, but there should not be any long-term reduction.
25X1
25X1
25X1
Secret 22
23 August 1985
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Jordan's
Protectionist
Measures
Jordan's Cabinet last Saturday approved a variety of measures aimed at
protecting local industries. Customs duties on luxury goods were increased and
restrictions imposed on the importation of many items produced domestically.
In a related move, tax exemptions were increased for export-oriented indus-
tries. These are the first economic measures introduced in several months and
may reflect renewed concerns about Jordan's financial position. The Jordanian
Government has temporarily stemmed the steep drop in foreign exchange 25X1
reserves by securing installments of aid previously promised by some Arab
states. Official foreign exchange holdings just $366 million at the end of
June-remain low, however, equaling about half the level held last June and
less than two months worth of imports. 25X1
India Suspends Auto I /In an unexpected move, New Delhi has decided to suspend further foreign
I Joint Ventures 1/ collaborations with Indian auto firms. Over the past few years, joint ventures
between Indian companies and foreign car manufacturers-mostly Japanese-
have grown rapidly in response to the easing of government regulations that
has encouraged increased competition and production in the domestic market.
The new ruling will delay recent agreements, including the large Tata-Honda
deal, until atop-level government committee examines the state of the 25X1
domestic auto industry and future Indian demand for passenger cars. The
Gandhi administration is concerned that rapid, unregulated growth will lead to
the transfer of outdated technololgy to India, the production of too many cars
for India's needs, and a serious drain of scarce foreign exchange when foreign
payment strains are expected. The abrupt suspension indicates both that
Gandhi's new economic policy is still evolving and that India's external
financial position is likely to be a major factor determining the pace of
liberalization in industries that require substantial imports or payments for
~~ Afghan Refugees a Refugee migration to urban areas in Pakistan-combined with the substantial
% Pakistani Headache sums of money some refu ees brin -is causin sharp increases in urban rent
~ and land prices
25X1
Althou
h mi
ti
h
,
g
gra
on
as
alleviated local a or s iortages in the past, it is now creating labor surpluses
that depress wages in some areas. Refugees are opening numerous small
businesses, and in Baluchistan they already dominate industries such as 25X1
trucking and shoe manufacturing. Relations between local residents and
refugees are good, but may deteriorate if the economy declines. The press and
government officials are already blaming Afghan refugees for 70 percent of all
crime in Baluchistan. In addition, Afghans are being held responsible for
declines in wages in some areas and are likely to be blamed, for example, for
the increased unemployment caused in part by Pakistanis returning from the
/Singapore Recommends Reacting to the 1.4-percent decline in second-quarter economic performance,
Wage Freeze
Pnme Minister Lee early this week reversed the nation's six-year-old high-
wage policy. He called for a voluntary two-year freeze on wages to allow
Singapore to regain export competitiveness. Lee also encouraged businesses to
25X1
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will rebound.
slash capacity in traditional industries with bleak futures-such as ship-
building and oil refining-and intensify the search for high-tech growth
industries-such as biotechnology, specialty chemicals, telecommunications
equipment. Barring world recession and with business cooperation, Lee claims
that such measures should restore economic growth to traditional levels-
about 8 to 9 percent annually-by 1987. Lee, however, has dashed business
hopes for reductions in mandatory contributions to the national retirement
fund-40 percent of labor costs-and is probably underestimating the serious-
ness of Singapore's economic problems and overestimating how quickly growth
SSR-Ita~n According to the US Embassy in Rome, Moscow has reached agreement with
1 Agreement on Purchase the Italian firm Italimpianti for a turnkey steel plant to be built at the
ctJ'Steel Pipe Plant Volzhskiy pipe works near Volgograd. The plant, which reportedly will cost
$970 million, will produce over 700,000 tons of seamless drill pipe for use in oil
and gas production. The contract is to be signed in late August or early
September and construction is expected to take three years. High-quality pipe
is important to the Soviet oil and gas industry, and the Italians are considered
to have some of the best pipe production equipment. Italimpiante beat out
German and Japanese competition to win the contract. This purchase may
help reduce Italy's trade gap with the USSR, which was about $2.3 billion in
1984.
Fu her Expansion of The Soviets have announced a major expansion of the experiment in industrial
~ t e Soviet Industrial management that was launched in five All-Union and republic level ministries
xperiment in January 1984 and extended this year to 20 additional ministries. The
ildi
hi
b
d
i
ng
ne-
u
er mac
ses un
experiment is extended to all production enterpr
and consumer related ministries for 1986, and to all remaining industrial
enterprises by 1987. The extension increases enterprises' rights to use their
own funds and bank credits for retooling without ministerial approval, provides
for higher prices on top quality output and increases penalties for delayed or
incomplete deliveries and for substandard goods. Although previous efforts to
decentralize investment and provide effective incentives and penalties have
been unsuccessful, Soviet officials have expressed some satisfaction with the
experiment thus far. Whether such satisfaction continues will depend on the
ability of the larger number of enterprises now involved to find enough
investment goods available to purchase.
lish Economy The Polish economy is having trouble rebounding from the severe winter and
tagnatin seems unlikely to attain growth targets this year. Industrial production
stagnated during the first six months of 1985 compared with a year earlier;
in the fuel
tio
d
d
t
7
f
112
,
n
pro
uc
percen
an
e
.
output in the key mining sector
chemical, and construction material industries also dropped. Although food
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Secret
/ Problems in Chinese New policies that allow market forces to set prices have resulted in a serious
dealings between peasants and state grain companies. Once signed the 25X1
contracts could be marketed to third parties, although no central clearinghouse
will be available to facilitate trading.. The development of futures is a logical
extension of recent measures designed to make all state purchases through
contracts rather than procurement quotas. Futures trading, however, will
undoubtedly be attacked by opponents of economic reform because it encour-
ages speculation by both individual producers and state grain companies.
China currently has no provisions for bankruptcy, and speculation is illegal.
25X1
25 Secret
23 August 1985
J Meat Production
earnings needed to meet obligations under rescheduling agreements.
supplies were generally adequate, smaller quantities of fish, sugar, flour, milk,
and eggs were available. Residential construction was depressed with 14
percent fewer apartments completed. Moreover, Poland's trade surplus with
the West declined $189 million during the first six months of 1985 compared
with the same period last year; hard currency imports increased 9.5 percent
while exports grew only 0.5 percent. The severe winter caused coal consump-
tion to rise, contributing to a 17-percent drop in sales to the West-an
estimated hard currency loss of $100 million. Unless production of export 25X1
goods begins to improve, Warsaw will fall at least $500 million short in
shortage of warehouse space in China's major meat-producing areas. Rising
meat prices-up about 14 percent in the first quarter of this year-encouraged
peasants to increase production but hurt retail demand. A shortage of cold 25X1
storage facilities and poor transportation complicate the problem by limiting
the transfer of meat to areas in shorter supply. Last year China produced
373,000 metric tons of beef and was the world's largest pork producer with
output reaching 14.4 million tons, up 1 million tons from 1983. ~~ 25X1
China Initiates An official Chinese economic journal has announced that futures contracts for
\ Domestic Grain ~/ grain will be allowed this year in major producing areas. Contracts may be
Futures Contracts signed for a delivery date of up to five years, and are apparently designed for
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Q
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Secret
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