ECONOMIC PROSPECTS IN THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001002490001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 20, 2016
• Document Release Date: September 21, 2007
• Sequence Number: 1
• Publication Date: January 27, 1982
• Content Type: REPORT

Approved For Release 2007/09/21: CIA-RDP84B00049RO0100249000
TRANSMITTAL SLIP DATE
29 Jan 82
TO:
ROOM NO.
7D60
BUILDING
Hqs.
REMARKS:
FROM: Harry Rowen, C/NIC
ROOM~E62 JBUILDIGqs .
Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
 Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
Notional Intelligence Council
27 Jan 82
Here is the text of my supplemental
statement on economic prospects for Europe
and East Asia that you asked to see.
Henry S. Rowen
Chairman
Attachment
Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
 Approved For Release 2007/09/21: CIA-RDP84B00049R001002490001-0
Economic Prospects in the West
Economic prospects in the West can be summarized as follo:wrs:
growth prospects for the market economies with
large socialized sectors are generally poor
those for the more purely market economies are
good on the whole, but even here there are some
problems
In contrast:
growth prospects for the centrally planned
economies are dismal
Much of the Western industrial world has suffered from several
ailments over the past-decade including higher oil prices, high
inflation, reduced investment in plant and equipment, and government tax
And regulatory policies which have discouraged risk-taking and hard
work. In addition, the United States and Western Europe have come under--
increasing foreign competitive pressures. Only Japan among the
industralized countries has managed to retain a high level of dynamism.
Growth prospects for Western Europe in general have been impeded by
extremely high tax rates (now nearly one-half of GNP versus only one-
third ten years ago), high levels of social security payments and
unemployment. compensation, trade union rigidities, agricultural
CONFIDENTIAL
Approved For Release 2007/09/21: CIA-RDP84B00049R001002490001-0
 pro Approved For Release 2007/09/21: CIA-RDP84B00049R001002490001-0 roC-+
Germany have dimmed along with the rest of Europe and unemployment has
risen sharply, its record on the inflation and trade fronts remains the
best among the industralized world. Bonn nevertheless must face the
longer term problem of revitalizinq its manufacturing sector, especially
in the face of increasing competition from the newly industralizing
countries (NICs), if any progress is to be made in lowering its
unemployment rate. The new Socialist government in France has
.undertaken the most reflationary program among the European states in
hopes of curbing its unemployment rate -- the highest among the Big-
Four. In the coming years, Mitterrand's economic policies are virtually
certain to backfire, given accelerating inflation rates and various
perverse disincentives. In Britain, the jury is still out on
Mrs. Thatcher's policies. Although some encouraging signs have been
seen, fundamental social attitudes may still prevent a long-term
turnaround. It is unlikely that the Italian government will be able to
fashion a coherent economic program any time in the forseeable future
and will continue to muddle along.
In Japan, in sharp contrast to Western Europe, there are no signs
of the fading of Japan's dynamism although growing resistance in other
industrial countries to its export-oriented economic behavior may
increasingly constrain it in the 1980s. In the future, Japan may even
be able to fall back on its domestic market more so than in *the past in
order to maintain its remarkable pace of economic rrowth.
Moreover, the increased integration of the non-Communist world
economies poses new adjustment strains. The European, and also
Japanese, steel industry is undergoing traumatic adjustme-t. Non-
CONFIDENTIAL
Approved For Release 2007/09/21 : CIA-RDP84B00049R001002490001-0
 Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
ferrous refining is moving upstream to the LDCs. A substantial amount
of oil refining and petrochemical capacity is moving to the oil
exporting countries. Competition in automobiles will be corning from
South Korea and Brazil as well as Japan. And of course Japan is moving
on to higher technology areas in electronics, telecorrmunicatiors, and
robotics among others.
The ability of the Europeans to cope with these external challenges
and internal rigidities will strongly affect their ability and
willingness to pay for defense in the 1980s, political cohesiveness in
Europe and within the Atlantic community, and their attitude toward
perceived economic opportunities in the Soviet Union and Eastern Europe.
Future trade relations with the Soviet Bloc will have little
overall impact on the prospects for West European economic recovery.
Although sales to the Bloc are relatively important for several
industries, including steel, chemicals, and machinery, sales to the
region account for only 5% of total exports. While the West Europeans
do not consider the East a boom market -- its share of total West
European exports was about the same in 1981 as in 1961 -- the market is
too large to ignore. At this point there is only limited basis for
optimism about the Europeans' ability to change.
The stellar performers in the 1980s, as in the 1970s, will be the
newly industralizing countries, the NICs, especially those in East Asia,
Hong Kong,Taiwan, South Korea, Singapore; in the '70s, they grew 7%
annually compared with 3% in the OECD countries. Moreover, their
technological sophistication is growing; for instance, they are becoming
increasingly important in our imports of electronics. Their success is
due to outward-looking growth policies and the avoidance of government
Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
 Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
measures which have stultified gro.rth in so many of the industrialized
countries.
In contrast, GNP growth of the LOCs, excluding the NICs, has
remained low, less than 2.5% per year for the past four years and there
is no near-term prospect of a significant improvement in their
condition.
The trends I have described are going to continue to generate new
challenges -- and opportunities -- to the US. As the Japanese, and
Europeans, move progressively to the production of,higher technology
goods, the competitive US sectors will be increasingly challenged. And
close on their heels will be the NICs roving in with competitive, only
somewhat lower technology goods.
This outlook for the market economies could be upset by several
developments. One is a major and extended oil interruption, which could
happen given the high dependence of the non-Communist world on Persian
Gulf oil and the proximity of Soviet military power to the Gulf. A
second is a systemic crisis in the international financial system. This
appears very unlikely but there has been a very large growth in foreign
indebtedness and exposure which needs watching. A third is creeping
protectionism in the West which could have damaging economic and
political consequences.
With all of these current and potential problems there is little-
doubt that the prospects for the market economies are brighter for the
centrally planned ones. Indeed, the future ability of the Soviet Union
(and Eastern European) economies to grow and even to avoid decline may
depend crucially on their ability to acquire more Western goods and
technology. The Soviet Union's ability to acquire Western goods through
CONFIDENTIAL
Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
 Approved For Release 2007/09/21: CIA-RDP84B00049RO01002490001-0
its traditional method of exporting raw materials looks unaromising
given the prospect of low raw material prices. Only if the Europeans
and other Western nations are prepared to provide generous credit to the
Soviet Union is it likely to be able-to gain needed access to Western
goods.
rnNFTnFNTTAL
Approved For Release 2007/09/21 : CIA-RDP84B00049RO01002490001-0