NATIONAL STRATEGIES AND THE GLOBAL ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001700250011-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 20, 2016
• Document Release Date: November 15, 2007
• Sequence Number: 11
• Publication Date: March 26, 1982
• Content Type: REPORT

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Director of Secret
Central 25X1
Intelligence
National Strategies and the
Global Economy 25
Secret
N/ 82-10001
26 March 1982
ropy 0 q ~
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National Strategies and the
Director of
Central
Intelligence
Global Economy
This study has been prepared by the Directorate of
Intelligence and reviewed by the National Intelligence
Council. Comments and queries are welcome and
Secret
N! 82-10001
16 March 1981
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25X1
25X1
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Secret
Scope Note US national security and domestic prosperity are increasingly influenced
by the global economic environment. Thus an understanding of develop-
ments and forces in this environment is crucial for the United States to
achieve its national objectives. The global economic environment is shaped
by the economic strategies of key countries and regions, and by underlying
economic trends, shocks, and other unforeseen events. This report reviews
these forces and assesses their impact on US national security and
economic interests.
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National Strategies and the
Global Economy
Preface The ability of the United States to chart a successful national course will
depend in large measure on a grasp of key global economic forces-their
status, direction, and impact on the United States and other Western
countries and on their chief adversary, the Soviet Union. This paper
evaluates the central global economic forces at work today and assesses the
direction in which they are moving, along with the opportunities and
vulnerabilities they will create. After briefly evaluating the world economy
in 1982, we examine the main international trends that will affect the
structure of industrial production and trade in the 1980s. We also explore
the implications of these forces and the leverage and vulnerability that the
United States, the USSR, and other major countries may have in dealing
with them. We are concerned not with predicting events or exhaustively
surveying trends, but with identifying particular forces and conditions that
may generate new or more intense problems or opportunities for
policymakers.
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National Strategies and the
Global Economy
Key Judgments The global economy has experienced broad shifts in power during the past
decade. Not only have traditional patterns of production changed, but the
technological domination of the United States has been eroded by rapid
progress in Japan and, to a lesser extent, in Western Europe. The failure of
the Soviet economic system could spur the Kremlin to alter its strategies;
the Soviets could seek greater accommodation with the West to gain
needed equipment and technology, or they could become more confronta-
tional. The shift of economic and technological power from the United
States to countries unable or unwilling to use that power to counter Soviet
adventurism is a particularly serious threat.
Although the United States remains the most important factor in the
global economy, it is losing ground in the critical high-technology arena.
This loss will adversely affect not only its economic well-being, but its
security interests as well:
? Microelectronics. Japan has already achieved domination in key technol-
ogies that underpin the US consumer electronics industry and that have
highly specialized military applications such as satellite communications,
signal processing, and radar.
? Computers. The once overwhelming US dominance is being challenged
by Japanese and West European firms, whose governments are more
willing than the US Government to allow the transfer of military-related
equipment to the Soviet Union. At the very least the United States will
lose much of its control over access to large-scale scientific computers
used for nuclear weapons design, aerodynamic modeling, and
cryptanalysis.
? Telecommunications. There are a number of telecommunications tech-
nologies in which the United States has lost its edge or might lose its
leadership position over the next several years. Now, for example, Japan
is the world's leader in fiber optic research and applications. Fiber optics
is of interest to the military because of its advantages in bandwidth for
signal-processing applications and its immunity in high-radiation and
intense electromagnetic environments.
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? Biological Technology. Although the United States has a clear lead in
recombinant DNA (rDNA) technology, with the Europeans next in line,
the Japanese are avidly acquiring US and European technology and are
engaged in a major effort to build up their capabilities. Applications of
rDNA and advanced biological technology for military purposes include
engineering and producing biological warfare organisms, and producing
toxins and other chemical warfare agents.
? Space Technology. US dominance of civilian and military space technol-
ogy in non-Communist countries is eroding. The West Europeans could
account for a fourth or more of the 200 commercial satellite launches ex-
pected during the 1980s. Japan's efforts during the 1980s will be much
more modest, but its long-range prospects are excellent.
An especially worrisome effect of these shifts in technological leadership
is that they will render the United States increasingly dependent on other
countries for state-of--the-art defense equipment. Obviously, these coun-
tries could also become sources of'supply to the Soviet Union, either
through normal trade channels or through Soviet espionage.
Japan's high-growth economic strategy shows no sign of faltering. Contin-
ued success assures Japan the means to carry a significant security burden.
However, Japan will not willingly move in this direction for fear of
undermining its political stability and its economic objectives.
Western Europe will face increasing strains in carrying its present security
burden as unemployment rises into double-digit levels. Growing demands
for social welfare expenditures will draw resources from the defense sector.
And as the need for jobs remains paramount, Europe will remain highly re-
sistant to US policy initiatives designed to limit East-West trade.
The Soviet Union faces severe economic problems that will constrain its
ability to support continued rapid increases in military spending without
strangling the civilian sector. The need to prop up Poland and other
satellites will constitute a growing strain on Soviet resources-a strain that
would be markedly intensified if Western governments agree to restrict
access to credit, technology, and food.
Among key oil-exporting countries, falling real oil prices will force a
dramatic slowdown in economic development spending. This, in turn, will
strain the thin political fabric that holds so many of these countries
together. Since the West will remain heavily dependent on OPEC oil for
the foreseeable future, political instability among producers will make
them especially tempting targets for Soviet pressure.
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The economic success of the newly industrializing countries (NICs) enables
them to contribute to Western security objectives. In some, for instance
South Korea, this takes the form of enhanced military capabilities. In
others, such as Brazil, the contribution is a more stable political environ-
ment. In all cases, the economic success of the NICs-in particular the em-
phasis they place on the role of the private sectorprovides a development
model for Third World countries.
A growing number of Third World countries are beginning to emerge from
years of economic mismanagement. Several of these countries, including
Chile, the Philippines, and Argentina, may well achieve NIC status in this
decade. Although the "North-South Dialogue" remains an attraction for
some Third World leaders, the climate is improving for dealing with the
practical issues of development. Those concerned with Third World
development-political leaders, officials of multinational lending organiza-
tions, and so forth-are increasingly willing to admit that handouts from
rich countries can hinder the development process when used in a way that
stifles private-sector initiatives.
Despite growing Soviet military power and challenges to US technological
leadership by non-Communist countries, the United States has the capac-
ity to maintain its position in the world economy and to achieve its national
security objectives. Success depends in part on the willingness of the
United States to use the leverage it has-its markets, its capital, and its
technology-to operate in the long-run interests of the West.
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Preface
Key Judgments
Short-Term Outlook-Setting the Stage
Foreign Economic Strategies and US Security Interests 17
Potential Shocks to the Global Economy 25
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National Strategies and the
Global Economy
Economic activity in non-Communist countries should
begin to move out of the doldrums some time during
the second half of 1982. The vitality and durability of
an upturn are uncertain. US economic performance
will play a key role in this recovery since most other
countries are already straining under budget deficits
and are depending on exports to lead their recovery.
West European governments need a rapid pickup in
economic activity just to prevent further increases in
unemployment; large budget deficits are thwarting
any major use of fiscal stimulation. Most LDCs and
Communist countries face weak markets for their
exports and a rising debt service burden. Many oil-
exporting countries are being forced to slow the
growth of their imports because of the decline in
demand for oil and falling oil prices.
Recovery patterns for the United States and Western
Europe foreseen by economic forecasters range from a
sustained upturn to continued economic stagnation
into 1983. Most forecasters anticipate a "saucer
shaped" recovery pattern, with an initially vigorous
recovery being checked by rising interest rates.
This consensus is based mainly on the belief that
financial markets will remain sensitive to possible
inflationary pressures that could trigger another up-
turn in interest rates. This, forecasters argue, would
be the case even though US inflation rates will
probably continue to ease, with less pronounced de-
clines in Western Europe. With a "saucer shaped"
recovery, unemployment in both areas would remain
near its cyclical high.
Many experts argue that US tax cuts and pent-up
demand in the United States and Western Europe will
spark a rapid pickup of economic activity. Inflation-
ary pressures during this period should be held down
by the large productivity gains that normally occur in
the early phase of an economic recovery. Unemploy-
ment, however, would remain high.
Other experts believe there is a chance that the
upturn could be choked off quickly by high interest
rates which could make households and businesses
rapidly retrench. In this case, inflation would prob-
ably slow further, but unemployment could rise to
new highs.
Japan's economic growth is likely to be near 4
percent, with expansion expected to depend more on
domestic demand than on exports. Japan is certain to
run a massive trade surplus in 1982 even though
export growth will be slowing. This surplus will
intensify political reactions in the United States and
Western Europe. Neither the politically feasible
measures Japan may take in response to these pres-
sures, nor the likely appreciation of the yen, will have
much effect on the trade surplus in the short term.
Nonoil LDC growth can be expected to remain below
the pace of that of the 1970s. Many important LDCs
are already in the midst of austerity programs de-
signed to relieve foreign payments problems. In much
of Africa and Latin America, weak commodity mar-
kets and declines in earnings from primary exports are
compounding decades of economic mismanagement.
A growing number of countries in both areas will have
to reschedule their foreign debt, but most will meet
their obligations by cutting the consumer imports
needed by politically crucial urban populations.
Among the newly industrializing countries (NICs),
Brazil will have to keep the brakes on its economy to
handle an enormous debt service burden, Mexico will
have to slow its economic growth to adapt to lower
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real oil prices and pay for past policy errors, and
South Korea will have difficulty sustaining its re-
newed dynamism in the face of weak foreign markets
and protectionism.
Most oil-exporting countries will see oil revenues
falling behind planned development spending. The
less-well-off producers will have to borrow to main-
tain development plans. Only if OECD recovery is
rapid will there be some firming of the market that
could help relieve this financial and political bind.
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National Strategies
How the global economy emerges from its current
malaise will set the stage for economic relationships
for the rest of this decade. The implications for the
United States will depend on US policies and the
strategies adopted by other nations.
A country's performance in the global economy is
shaped by both the international environment and its
own chosen strategy. In the broadest sense, countries
can emphasize high levels of growth, high levels of
economic security, or high levels of military strength.
High-growth strategies emphasize policies designed to
foster technological innovation and the development
of new industries. Specific policies are designed to
stimulate savings and encourage risk taking. Coun-
tries pursuing high-growth strategies typically use tax
revenues to promote research and development and
new commercial ventures, while welfare expenditures
are kept low.
Economic-security strategies emphasize policies that
guarantee generous benefits for those who suffer
economic misfortunes. These typically include unem-
ployment insurance, sickness and disability insurance,
general relief for those who are deemed unemploy-
able, and a variety of "antipoverty" programs. Tax
policies are designed to transfer wealth from those
who earn money to those who do not, and government
spending as a percentage of GNP in these countries
tends to be high.
Military-strength strategies emphasize policies that
divert resources from consumption and civilian invest-
ment to the military sector. Central planning by
government is extensive, if not total.
The relative progress of countries in pursuit of their
chosen strategies is a crucial factor in shaping the
global economic environment. Changes in the global
environment arise from national differentials in key
factors including rates of technological innovation,
investment levels, product design and marketing
prowess, defense burdens, and economic incentives
and impediments.
In carrying out a viable national strategy, natural
resources are important, but they are less critical than
a country's human resources-skills, diligence, and
efficiency-and the opportunities and incentive avail-
able to them. These factors are heavily influenced by
the positioning of government in the national econom-
ic system and the policies the government adopts.
Japan's strategy is to spur economic growth by pro-
moting savings and investment, keeping government
outlays low, encouraging education and gaining an
edge in key technologies that rely heavily on a highly
educated labor force. By pursuing this strategy, the
Japanese work to gain such a competitive edge that
foreign companiesfnd it difficult to keep pace.
Target technologies for the 1980s include: microelec-
tronics, computers, robotics, biogenetics, aerospace,
and telecommunications, including fiber optics. Japan
will pursue its strategy by following the same types of
policies that brought success during the 1960s and
1970s:
? Government spending, which averaged only 19 per-
cent of GNP during the 1970s, will be kept at this
level or may be slightly lowered.
? Public borrowing, which averaged 3.5 percent dur-
ing the 1970s, now stands at 4.8 percent of GNP,
but it will probably drop to 4 percent by 1984.
? The tax structure will continue to favor savings and
facilitate the access of fast-growing companies to
funds for investment and R&D.
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? R&D will be augmented through government-spon- Western Europe
cored research associations.
? Tokyo will continue to resist foreign pressures to
improve access to the domestic market, citing deeply
rooted cultural aversion to imported goods as the
cause of foreign companies' inability to increase
sales of their products.
Western Europe is muddling through a period oJ.
double-digit unemployment largely due to structural
rigidity in its employment practices. As part of its
strategy, Europe hopes to gain an edge in selected
technologies that will provide a modern base.Jor
economic recovery.
? Tokyo will continue to encourage exports by work-
ing to provide package deals that non-Japanese
companies are unable to match, a process made
possible by Japanese antitrust laws.
? Tokyo will continue to encourage companies in
labor- and energy-intensive industries, such as tex-
tiles, to export their know-how to other countries.
In the domestic market, intense competition between
Japanese firms will continue to foster innovation and
efficiency.
Japanese industry is adept at taking full advantage of
Tokyo's policies:
? The microelectronics industry now holds 70 percent
of the world market for the 64K RAM chip, and
may well be ahead of US manufacturers in the race
for a marketable 256K RAM chip.
? Computer companies have recently won orders in
Australia, a market long dominated by the United
States. Japanese companies are also supplying main
frames to the European Community (EC).
? Biogenetics companies have developed the mass
fermentation technology vital to large-scale com-
mercial application-although the basic scientific
breakthroughs were made in the United States.
? Japanese companies have become the dominant
suppliers of machinery to the NICs of Asia.
It is reasonable to believe that Japanese companies
will win a technological edge in a growing number of
key industries or in selected production processes. (For
details see pp. 18-22.)
Europe is facing the highest level of unemployment
since the Great Depression of the 1930s. At present,
8.7 percent of the work force is unemployed. This
figure is likely to approach 11 percent by mid-1983,
with about 17 million persons out of work.
The explanation is partly demographic. Europe's post-
war baby boom came later than that of the United
States, and the resulting flood of those leaving school
to look for work in the 1980s coincides with an ebb in
the number of people reaching the end of their
working lives. The ranks of Europeans now nearing
retirement at 65 have been reduced primarily by the
effects of the two World Wars. To be sure, by mid-
decade this demographic effect will begin to wear off;
smaller contingents will be entering and larger ones
leaving the work force. But even this reversal of trends
seems unlikely to solve Europe's unemployment woes.
The unemployment problem does not stem primarily
from aging industries (textiles, shipbuilding, steel) and
declining regions (Britain's North, Belgium's Wal-
lonia) although these obviously are important factors.
Nor does it stem from a lack of mobility among
skilled workers caused by language differences.
The key problem affecting employment-and one
that seems unlikely to be solved any time soon-is the
rigid structure of labor costs. Employers are saddled
with fringe benefits-including levies for social secu-
rity, sickness, and unemployment pay-that are gen-
erally higher than in Japan or the United States. For
example, in large German companies like Krupp,
these indirect wage costs exceed the cash paid to each
worker, and, because severance costs are high, Euro-
pean employers are loath to hire new workers, and
avoid doing so until absolutely necessary. Europe's
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R&D Expenditures in Major West European
Countries
In France, the Mitterrand government wants to in-
crease total spendingfor research and development
from last year's estimated 1.8 percent of GNP to 2.5
percent by 1985. The Research and Technology Min-
istry has been directed to raise its research outlays by
17.5 percent per year in real terms; this year Paris
will spend $4.5 billion, or about half of total French
research spending. Paris's irtf~usions of capital are
aimed at providing French companies with the finan-
cial muscle to catch up in those technologies in which
they are weakest-semiconductor devices, consumer
electronics, and minicomputers. The government has
begun to work on plans for afour-year R&D project
to give selected microelectronics companies and labo-
ratories atotal of $S00 million.
In West Germany, public RcP~D expenditures are
slated to rise 25 percent over the next five years to
about $S billion. Thirty jive percent of the R&D
budget is being channeled into energy research, par-
ticularly nuclear reactor and fuel technology and
coal gasification and liquefaction. The Ministry for
Research and Technology is focusing on applications
of microelectronics and the development of informa-
tion technology components; funding for research in
this area last year was up 17 percent over the 1980
level.
In the United Kingdom, public boards have been
established to foster recovery in traditional industries
gain in total employment between 1974 and 1980 was
a mere 120,000, compared to a US increase of 12
million.
European efforts to cope with the unemployment
problem are increasing the cost of the social safety net
which had already grown sharply during the 1970s.
Largely as a result of the growth in social welfare
outlays, public spending has grown to 45 percent of
and to enhance the competitiveness of high-technol-
ogy industries, including avionics. The immediate
aims of the board responsible for traditional indus-
tries are to encourage innovation-including the ap-
plication of microprocessor technology, computer-
aided design and mana~acture, and robotics-and to
enhance the effectiveness of technology transfer. The
key aims of the mechanical and electrical engineering
board, on the other hand, are to identify market
opportunities and to support R&D for product lines in
which the results could be applied and marketed in
about~ve years. However, funding is skimpy; $144
million was allotted for the fiscal year ending this
March.
In Italy, government efforts to stimulate R&D-
centering on extension of low-cost loans and grants by
Instituto Mobiliare Italiano-continue to fall victim
to political bickering and bureaucratic complexities.
Funds remain limited. Only $1.5 billion has been
tentatively allocated to R&D programs for the next
three years, and the government will continue to
provide funds for unprofitable traditional indus-
tries-chemicals, transportation, and metallurgy-as
well as for potential high-growth sectors such as
electronics and energy technologies. Moreover, firms
wishing to take advantage of government programs
must wait an average of 38 months before receiving
funds.
GNP, up from 36 percent in 1970. (The current range
goes from 29 percent in Spain to 61 percent in
Sweden.)
At the same time, governments have been trying to
hold down unemployment by propping up and restruc-
turing traditional industries. Between 1975 and 1980,
individual governments and the EC poured $20 billion
into the steel industry. An additional $20 billion of
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subsidies is planned between now and 1985. Some
direct and indirect government support, although
aimed at industrial strengthening, will adversely af-
fect employment. For example, automakers-many of
which are state owned-will spend about $23 billion
by 1983 to modernize their plants. Renault (controlled
by the French Government) has already installed 100
robots at its Douai plant.
European governments, like the Japanese, are pinning
their hopes for future job growth on the development
of high-technology industries, with emphasis on mi-
croelectronics, computers, biogenetics, aerospace, and
energy. Indeed, despite strapped budgets, govern-
ments have begun to pump more money into R&D.
This effort, however, will need to be more successful
than similar past efforts if European economies are to
prosper in the new high-technology industries.
Private West European companies are also increasing
their emphasis on high technology. Many are trying to
acquire technologies they need by direct overseas
investment. West Germany's Siemens owns three US
companies-Litronix, Sitronix, and Microwave Semi-
conductors-and owns 20 percent of Advanced Micro
Devices. Through a series of joint ventures with
Fujitsu Fanuc, Siemens is scrambling to snare a piece
of the market for numerically controlled machine
tools. Philips, the Dutch electronics giant, relies for its
memory chips on a US subsidiary, Signetics, which is
the sixth-largest US producer of integrated circuits.
To help speed innovation by both public and private
enterprise, the EC Commission has begun to press for
the removal of barriers, such as national procurement
policies, that inhibit multinational joint ventures. At
the same time, the Commission continues to support
the retention of barriers to US and Japanese imports.
The Soviet Union's announced strategy is to sustain
its arms buildup in the face of marked economic
slowdown. To maintain a 4-percent real annual in-
crease in military outlay, Moscow will be forced to
continue to starve consumption, and increasingly
investment, as long as economic growth lags below 2
percent.
The Adjustment Problem
The adjustment by the mature economies to growing
international competition has taken various forms,
with varying degrees of success. On the whole, adjust-
ment has been smoother in the United States than in
Western Europe, because it began earlier and was
less constrained by government controls and other
institutional factors. The basic evolution in the ma-
ture industrial economies has been from labor-inten-
sive to knowledge-intensive industries and services.
Recent experience has shown that competitiveness
can be maintained or regained in some components of
most industrial branches, including such traditional-
ly labor-intensive branches as textiles. Various com-
binations of modern equipment, better organization of
production, product specialization, and marketing
skills can assure health in some industries for
example, in some types of textiles, in the shoe
industry, and in some others.
Ur~/ortunately there are many barriers to the adjust-
ment process, and some of these are of recent vintage.
High marginal-income tax rates and taxation of
capital gains have discouraged new, risky investments
of the type that would often be required for quick
adjustment to growing foreign competition. More-
over, high ir~lation, high interest rates, and uncer-
tainty about future conditions have raised the target
rates of return on new investment to levels that are
bound to exclude new ventures with relatively long
payoff periods.
Soviet economic growth has dropped from nearly 4
percent annually during most of the 1970s to an
average of a little over 1 percent annually since 1978.
Agricultural output has declined by more than 10
percent since 1978, due to bad weather and the
inherent inefficiencies of the Soviet system. At the
same time, industrial production-the traditional
growth leader-has slowed from an annual 6-percent
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growth rate in the early 1970s to about 3 percent since
1978. The impact of this slowdown has taken the form
of smaller growth in goods and services allocated to
consumption and investment; the increment to defense
remains unchanged. The military sector's percentage
of GNP is about 13 percent. If present trends contin-
ue, this percentage will rise to 16 percent by 1985 and
will approach 20 percent by 1990.
The Soviet Union's share of global output is falling. In
1970 the Soviet Union produced 12 percent of world
GNP; by 1981 its share was down to 11 percent.
Underlying this trend are drastic slowdowns in labor
force growth and labor productivity. It will be diffi-
cult for Moscow to reverse the slowdown in growth if
the USSR is not able to rely upon increased imports
from the West as it did in the 1970s.
Following two years of rising hard currency earn-
ings-because of oil, gold, and arms sales-Moscow
has encountered a severe hard currency bind. By early
1982 the Soviet Union had begun requesting slow-
downs in payments for Western imports.
The Polish crisis has added to Moscow's economic
troubles in several ways. For one thing, the Soviets
have had to provide about $1 billion in hard currency
loans to Warsaw to prevent a Polish economic col-
lapse. Beyond this, major reductions in Polish coal
and industrial supplies have aggravated already seri-
ous production problems in the USSR and elsewhere
in Eastern Europe. The Soviet steel industry has been
especially hard hit by Polish supply shortfalls. Trans-
portation bottlenecks made worse by the Polish crisis
have further compounded regional production prob-
lems. In addition, Polish developments have worsened
Moscow's economic problems by undercutting West-
ern willingness to lend to Bloc countries.
Newly Industrializing Countries
The NICs-Taiwan, South Korea, Singapore, Hong
Kong, Mezico, and Brazil-have moved rapidly from
underdeveloped status in the 1960s to semideveloped
status today. To reach,lully developed status, many
NICs have pursued a strategy of climbing the tech-
nology scale as rapidly as possible by seizing the lead
in industries, or segments of industries, that have
become uncompetitive in Japan and other industrial
countries.
The NICs, unlike many other LDCs, have adopted
outward-looking growth policies as a means to pro-
mote rapid industrialization. This approach has led to
a steady, and in some cases dramatic, enlargement of
export market shares in many product lines. The
NICs have also been able to attract private foreign
capital, which has accelerated the infusion of ad-
vanced technology into their manufacturing industries
(table 1).
The NICs' successes have been highlighted by impres-
sive allocations of domestic output to capital forma-
tion. The Asian NICs have been able to hold the
growth of private consumption well below that of total
output; combined with restraints on government con-
sumption, this has freed substantial resources for
investment. Some analysts key the growth of invest-
ment in the Asian NICs to a culture imbued with
values of achievement, discipline, and willingness to
postpone immediate satisfaction for future gains.
Since 1960, gross domestic capital formation as a
share of total output has risen from 12 to 39 percent
in Singapore, from 11 to 30 percent in South Korea,
and from 21 to 31 percent in Taiwan. Investment
growth in Brazil and Mexico has been less impressive,
in part because of these countries' traditions of high
levels of government consumption. Still, they compare
quite favorably with the major industrial countries.
Gross fixed capital formation as a share of output has
risen from 17 to 30 percent in Mexico and has been
consistently above 20 percent in Brazil. In the major
industrial countries as a group, this ratio has been just
over 20 percent for the past two decades; in the
United States it has been about 15 percent.
The NICs have gone heavily into debt over the past
decade to keep up the pace of their industrialization.
Largely by borrowing in Eurocurrency markets, their
debt has mushroomed from $27 billion in 1973 to
more than $150 billion currently. Over the same
period, the NICs' share of total Third World debt has
climbed from one-fourth to one-third. Brazil and
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NIC Companies on the 1980 Fortune List of 500
Largest Non-US Companies
Firm Industry Sales Rank
(Billion US $)
Ford Brazil Motor vehicles 1.1 398
Grupo Industrial
Alfa
Valores Industriales
Chrysler de Mexico
Ford Motor
Altos Hornos de
Mexico
Steel
2.0
229
Food
1.2
379
Motor vehicles
1.0
433
Motor vehicles
1.0
444
Steel
0.9
487
Ships, motor
vehicles, industrial
equipment,
5.5
72
Appliances, food
textiles
3.8
125
Textiles, industrial
2.0
237
The NICs' importance in the global economy lies
both in the impact of their expanding exports of
manufactures on employment in importing OECD
countries and in the example they provide for other
LDCs. With just 1.4 percent of the world's popula-
tion, the NICs account for 5 percent of the exports
and 7 percent of the industrial output in non-Commu-
nist countries. Manuractures constitute nearly 75
percent of NIC exports, more than 65 percent of
which go to the OECD countries. The NICs loom
larger within the Third World. With about 10 percent
of the Third World's population, the NICs account
for one fourth of its output. The NICs' average per
capita GNP of $3,700 is four times as large as that of
the Third World as a whole.
Fueled by deliberate policies of industrial and export
expansion, the NICs achieved real GNP growth over
the past decade of 7 percent annually compared to
just 3 percent in the OECD countries. Over the same
period, these six countries increased the value of their
manufactured exports to the DECD by more than 25
percent annually, against a rise of only 20 percent a
year in total OECD imports of manufactures. The
NICs' total share of world GNP rose from 3.1 percent
in 1970 to 4.4 percent in 1980.
Mexico are by far the Third World's largest debtors,
with respective totals of $62 billion and $50 billion.
Debt service costs now absorb more than 50 percent of
their export earnings. Brazil has had to impose auster-
ity measures to reduce its large international deficit
and improve its credit rating; Mexico is worrying
bankers because of its rising debt and widening
current account deficit. The other NICs have been
more prudent. South Korea spends 15 percent of its
export earnings to service a $20 billion debt, while
Taiwan pays only 6 percent of its earnings toward a
debt of some $5 billion. Debt service costs Hong Kong
and Singapore less than 2 percent of their export
earnings.
The NICs' export strategy is characterized by a
marked selectivity of both products and markets. The
NICs choose highly specific products to gain econo-
mies of scale and more intensive and efficient market-
ing. Exports are concentrated in the US market,
where protection is lowest. Indeed, the United States
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Table 2
NIC Trade With the
United States and the OECD
Apparel
Televisions
Footwear
NIC Share NIC Share
of OECD Imports of US Imports
30 68
Radios 39
Telecommunications 25
Ships 6
Electrical applicances 7
Electronics 18
receives nearly half of the NICs' manufactured ex-
ports to the OECD market and absorbs nearly 40
percent more NIC products than the Big Six (Japan,
Canada, United Kingdom, Germany, France, and
Italy) combined (table 2).
In the case of Korea and Taiwan early in their
industrialization and of Mexico now, development of
"export zones" has been an important element of
industrial strategy. These zones offer incentives to
foreign investors that include tax and tariff advan-
tages. Initially, these zones were quite isolated from
the host country economy and did little more than
hire surplus labor. Lately, however, government poli-
cies have linked the zones more closely with the
domestic economy to include the purchase of local
raw materials and investment partnerships with local
businessmen.
Hong Kong's laissez faire environment broadly aims
at reaping the benefits of a free atmosphere for
external trade. The government keeps taxes low and
stays out of the way of businessmen. Singapore
shares much of the same philosophy but has a more
structured approach. The Singapore authorities con-
tinually chart the course of industrial development
and channel resources into production as they see fit.
Singapore is now making a bold attempt to climb the
technological ladder by encouraging investment in
high-technology, capital-using production processes.
As a result, labor-intensive production is being shift-
ed to other countries in the region, such as Malaysia
and Thailand, where wage rates are lower.
Economic development is carefully planned in South
Korea and Taiwan. Still, both are essentially free
enterprise economies. In Korea, government supervi-
sion of the industrialization process is pervasive, with
a substantial network of tax incentives, subsidies,
and government-sponsored cartelization. In Taiwan,
the government's role is less specific. Officials depend
on the private sector to respond to broad policy
measures on taxes, subsidies, and exchange rates
that encourage exports.
Economic development policy in the Latin American
NICs has long been highlighted by fiscal and tax
incentives for domestic producers, along with heavy
protection against foreign competition. Import re-
strictions have tended to vary with the countries'
balance-of=payments difficulties, but they remain an
important element of economic policy. Latin Ameri-
can NICs also differfrom their Asian counterparts in
having more direct government participation in indus-
trial production. This trend is most pronounced in
Brazil, where the state produces chemicals, steel,
transport equipment, and food and beverages either
on its own or in partnership with private enterprises.
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Taiwan is the leading NIC supplier of manufactures
to the OECD market, with sales of $12.5 billion in
1980. Labor-intensive "soft"goods, such as textiles,
apparel, footwear, printed materials, and toys domi-
nate their exports currently, but Taiwan is slowly
breaking into the production ofhigh-technology man-
uJactures such as computer equipment. Almost 40
percent of the televisions im orted b the United
States are made in Taiwan.
Although displaced by Taiwan as the leading NIC
exporter, second-ranking Hong Kong still sold $11.2
billion in OECD markets in 1980. As with Taiwan,
apparel and other soft goods dominate Hong Kong's
sales. Nonetheless, Hong Kong has successfully
caught the wave of consumer demand for such items
as calculators, smoke detectors, burglar alarms, and
electronic toys and watches. Besides continuing these
lines, Hong Kong plans substantial growth in the
mantvacture of industrial electronics.
South Korea ranks third among the NICs in manu-
factures sales to the OECD. Following the same
pattern as other Asian NICs, South Korea's exports
in 1971-largely apparel and textiles, along with
footwear-were large. Unlike the other Asian NICs,
however, South Korea has emphasized development
of heavy industry and is now a supplier of iron and
steel, metal mant~actures, and ships, and is emerging
as a competitive exporter of automobiles to Third
World markets. By attracting and exploiting produc-
tion that has become less export competitive in the
industrialized countries because of high labor costs-
a pattern repeated in many NICs-South Korea has
wrested black and white television production from
Japan and the United States to become the world's
largest manufacturer.
Mexico produces a broad range of manufactures for a
large domestic market and for export. The country is
especially strong in telecommunications equipment,
chemicals, electrical goods, fabricated metal prod-
ucts, and automobiles and parts.,Bonded industries
along the US border are important producers of
automotive parts, televisions, electronic components,
and appliances. These plants are operated by major
multinational corporations, and hence product so-
phistication and quality are high. Most other Mexi-
can products, however, are not yet competitive in
OECD markets, but Brazil and India are emerging as
important Third World purchasers.
Singapore is the third-largest mant4facturer of off=
shore drilling rigs. Demand is volatile, but business is
booming now with an increase in oil exploration off
Indonesia. Singapore is also a major producer of
consumer and small-scale industrial electronic prod-
ucts and parts. About two-thirds of Singapore's $3.5
billion man~actures exports in 1980 were telecom-
munications equipment, computer parts, televisions
and radios, small appliances, and electronic
components.
Brazil ranks last as a NIC exporter of manufactures
to the OECD but is growing rapidly in importance.
Moreover, Brazilian firms have a domestic market of
more than 120 million people, which takes some
pressure off individual firms' need to export. Brazil
has made rapid inroads into US markets jor iron and
steel and into US and European markets for auto-
mobileparts and subassemblies. Brazil is now among
the world's top 10 automakers. Brazil is also emerg-
ing as a producer of reliable commuter- and trainer-
type aircrcif't for world markets and armaments for
Third World purchasers. Brazil's development plan
calls for a dramatic shv't from such items as footwear
and auto parts toward high-technology machinery
and electronic goods as the leading edge of its future
industrialization.
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Economic policies among most oil-exporting coun-
tries are designed rrst and ,foremost to ensure social
and political stability. Generally, governments aim to
raise living standards and dijJuse the benefits of
wealth throughout the population, while maintaining
traditional cultural and social values. At the same
time, they want to modernize and diversify their
economies or invest in downstream activities, espe-
cially petrochemicals, in preparation for the time
when oil runs out.
Saudi Arabia's enormous oil revenues have allowed it
to create a welfare state and to fuel rapid moderniza-
tion of the economy and the military. They have also
enabled the Saudis to provide billions of dollars in
foreign aid, mainly to other Arab and Islamic states.
With a large part of the country's infrastructure now
in place, Saudi resources are being channeled into
huge capital-intensive petrochemical and refining pro-
jects at Jubayl on the Persian Gulf and Yanbu on the
Red Sea. These sites form the core of a planned
diversification program. The projects will utilize gas
produced in association with crude oil. Up to now, the
gas has been flared. The government eventually pro-
poses to sell its shares in the petrochemical industries
to private Saudi citizens.
The government's modernization drive has provoked
an intense behind-the-scenes debate, primarily be-
tween those who favor rapid development and those
who favor a more measured approach. The latter fear
that Saudi Arabia's present pace will undermine
traditional values and increase the country's already
heavy dependence on foreigners. They have criticized
Saudi leaders for promoting wasteful programs; jeop-
ardizing the country's future oil recovery by maintain-
ing overly high production rates; caving in to US
interests on oil policy; and favoring members of the
royal family on lucrative contracts at the expense of
Saudi businessmen. However, there is little evidence
of widespread popular discontent with government
economic policy.
Policymakers in Kuwait, as in Saudi Arabia, place
high importance on ensuring social and political sta-
bility. To that end, they have focused on building one
of the most extensive social welfare systems in the
world. They have also pushed the development of
Kuwait's infrastructure and have been generous with
foreign aid to buy protection against regional extrem-
ists. The Kuwaitis have deemphasized industrializa-
tion in recent years because of a shortage of indig-
enous manpower and a desire to limit growth of the
already large foreign population.
Kuwaiti financial managers, among the best and most
experienced in the Gulf, have emphasized equity
holdings. The Kuwaitis have invested heavily in down-
stream petroleum activities, including refining and
petrochemicals. They have recently acquired the US
firm, Santa Fe Drilling, and may soon purchase Gulf
Oil's assets in Western Europe.
The United Arab Emirates (UAE) has not been able to
pursue a coherent economic strategy because of con-
tinued political rivalries among the Emirates and the
considerable degree of autonomy each state exercises
over its own budget and oil policies. Abu Dhabi,
which dominates the federation by virtue of its oil
resources, has sought to impose some order in recent
years in an effort to eliminate the duplication that
marked the UAE's headlong rush toward develop-
ment in the 1970s. Over the past decade, for example,
the Emirates built four international airports to serve
a population of slightly over 1 million. Uncontrolled
development-the fastest in the Gulf-also expanded
the foreign labor force, leaving the native population
outnumbered by 4 to 1.
Iraq's prewar economic strategy was designed to
improve living standards and to attain aself-sufficient
economy. These goals are in line with Baath Party
principles of independence and socialism-the govern-
ment has ownership or control over all agricultural
and industrial production.
The war-together with a soft oil market-has put a
crimp in Baghdad's plans. Oil production is well
below desired levels. Until recently, billions of dollars
in aid from Saudi Arabia, Kuwait, and the smaller
Gulf producers enabled Iraq to sharply boost military
spending and at the same time adhere to a near
business-as-usual approach. But Baghdad has finally
called for across-the-board cuts in government spend-
ing, postponed requests for bids on new contracts, and
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Oil Policy in Selected Persian Gulf States
Even if oil revenues should fall dramatically, the
Government of Saudi Arabia probably would opt to
draw down its enormous foreign asset holdings rather
than reverse current policy directions. The Saudis
could not easily curtail the momentum of develop-
ment without disrupting the economy and generating
popular discontent. The Saudis also would be in-
clined to meet aid commitments to those whose good
will or survival they regard as vital to their security.
The Kuwaitis recognize that oil revenues are still the
underpinnings of Kuwait's security, and they want to
make certain this resource will be preserved. With
these conservationist views widely held throughout
the nation, Kuwait has adopted a policy of holding
production well below capacity, while at the same
time seeking higher oil prices. Kuwait's substantial
holdings of official foreign assets-$62 billion in
1981-would enable it to withstand a prolonged
weak oil market. The ruling family would be very
cautious about making deep cuts in programs that
might trigger domestic unrest, especially in the large
Shia community. They would also be very hesitant to
reduce their aid commitments to the more radical
Arab regimes and the PLO.
Like other Gulf oil producers, the UAE has sought to
protect its surplus oil earnings by investing in the
United States and Western Europe. Official foreign
reduced foreign aid. Manpower requirements for the
war have also exacerbated a critical labor shortage
that already had slowed some projects.
The regime has announced that after the war ends it
will give priority to repairing war damage, especially
oil facilities and housing, before it gets its develop-
ment strategy back on track. The 1981-85 plan
emphasizes the need to eliminate infrastructure bot-
tlenecks such as inadequate transportation, power
shortages, and lack of skilled manpower.
assets grew from $7.5 billion in 1975 to about $34
billion at the end of 1981. These investments earn
about $4 billion annually. Current holdings are sc~fi-
cient to cover all imports of goods and services for
two years.
The UAE could draw down its foreign assets in the
event of sharp declines in oil prices or production.
UAE rulers would be extremely reluctant to cut
spending for fear of generating internal unrest and
antagonizing powerful external forces. Iran would
almost certainly seek to exploit such an opportunity
to stir up unrest or promote the disintegration of the
federation.
Oil policy in the UAE varies among the states. Abu
Dhabi, for example, usually follows the lead of Saudi
Arabia on international issues and OPEC price delib-
erations. Dubai has pursued a more independent
course, seeking to maximize prices and production.
In an attempt to conserve oil and to avoid the
problems associated with too rapid spending, Iraq
has generally favored holding crude output to levels
dictated by long-term revenue needs. Although Iraq
hopes to increase production to make up lost ground
following the war, a continuing soft world oil market
will make it difficult to sell much additional oil.
Economic and political stability in Nigeria hinge on a
continuing flow of revenues from oil sales. Despite
attempts since the mid-1970s to lessen its dependence
on oil, Lagos relies on petroleum for 25 percent of
GNP, 95 percent of export earnings, and 80 percent of
government revenues. Oil revenues are also the basis
for Nigeria's ambitious industrialization program and
a rapidly expanding demand for consumer imports.
Without oil, Lagos would earn enough foreign ex-
change annually to cover only three weeks' worth of
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In Saudi Arabia education and health care are free;
government subsidies cover basic consumer needs for
food, utilities, and housing; and government payrolls
are padded with unskilled as well as skilled Saudis.
Indeed, more Saudis are employed in government
than in the private sector.
Various incentives are offered to ensure that Saudi
private citizens have a stake in the development
process. Large, interest free loans are readily avail-
ablefor business ventures, real estate development,
and agriculture. Saudi companies are favored in the
awarding of building and service contracts as well as
local purchases of materials and commodities. More-
over, foreigners seeking government contracts must
have a Saudi agent, and joint ventures in private
industry must have a Saudi partner. The government
allows private industry almost free rein.
Most of the problems encountered in the initial stages
of economic development, such as transportation
bottlenecks and housing shortages, have been allevi-
ated. Irdlation has been brought under control. Over
the past six years, real GDP growth has averaged 10
percent; in the nonoil sectors, growth has averaged 15
percent. Although the Third Five-Year Plan (FY
1981-85J calls for a drastic slowdown in growth, no
deceleration of spending is evident yet. Meanwhile,
Saudi foreign official assets continue to mount and
now stand at $ISO billion.
In general, each shaykhdom in the UAE has concen-
trated on infrastructure and industrialization, leaving
to the federal government the task of funding the
UAE's social welfare and foreign aid programs. De-
fense spending still falls partly under the control of
the individual shaykhdoms.
To maintain popular support while the war with Iran
drags on, Iraq has attempted to ensure adequate
consumer goods and services. The regime has allocat-
ed additional funds for consumer good imports and
established price controls. It also is pushing housing
construction. Baghdad hopes to eventually provide
medicine, health care, education, electricity, and
water free to the public.
Iraq's development plans focus on agriculture and
industry as the keys to self-sustaining growth. Al-
though independence is a goal, Baghdad is relying on
imports of equipment, material, and technology. It
has eagerly sought foreign contractors, favoring turn-
key projects that conserve its own scarce labor
supply.
In the agricultural sector, Baghdad plans to boost
agricultural productivity and to eliminate most food
imports. Vast irrigation and drainage projects are
under way, which will eventually reclaim 80 percent
of the potentially arable land. The government also is
importing a wide array ojfarm equipment. In keeping
with its socialist ideals and in hopes of greater
efjiciency, the regime has also begun to collectivize
the agricultural sector.
In industry, Baghdad has awarded contracts for
petrochemical, fertilizer, and cement factories that
can use Iraqi's natural gas, sulfur, and phosphate
resources. The $1 billion Basrah petrochemical com-
plex, for example, will depend on associated natural
gas, as will the planned expansion of Iraq's steel-
making capacity. Other major projects include agas-
gathering system (most gas is currently jlaredJ, crude
oil refineries, and paper mills. Baghdad has also
invited several foreign contractors to assist in oil
exploration programs.
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imports. Altogether then, Nigeria has failed to use its
oil wealth to broaden its economic base.
Although Nigeria has constructed more ports, roads,
airports, and schools, establishment of an industrial
base is not much further along than in 1975. Services
for the most part are even more chaotic, and agricul-
ture continues to falter. With the 1983 elections
looming closer, any sudden deterioration in the coun-
try's financial position-especially if it impacts on
urban living standards-will be cited by the opposi-
tion as a sign of President Shagari's incompetence. A
prolonged revenue shortfall could prompt Lagos to
ask Washington to assist by purchasing oil for the
Strategic Petroleum Reserve and providing conces-
sional food imports.
Venezuela has used its oil revenues to finance massive
infrastructure and industrial investments along with
consumer imports. Essentially then, Caracas has em-
ployed oil earnings to seed the economy. Specific
objectives include developing import substitution in-
dustries and nontraditional exports such as aluminum,
as well as boosting agricultural production. Progress
on all scores, however, has been slow. In these circum-
stances oil continues to play a critical role in Venezu-
ela's economy and financial planning. It accounts for
23 percent of GDP, 66 percent of the government's
revenue, and 95 percent of its export earnings. In
addition, the industry makes extensive use of private
contractors, stimulates the development of other sec-
tors of the economy, and contributes to social develop-
ment programs thoughout the country. Moreover,
foreign lenders follow Venezuelan oil earnings closely
as an indicator of ability to take on and repay debt.
The economic growth prospects and strategies of the
more than 120 Third World countries vary consider-
ably. Even after excluding the NICs and oil-export-
ing countries, the variations are striking. For exam-
ple, the remaining group can be subdivided as
follows:
? Countries that have been able to sustain rapid
economic growth and that now have sufficient eco-
nomic momentum to become NICs within a decade.
This group includes Malaysia, Thailand, and the
Philippines.
? Countries that have been unable to sustain rapid
economic growth mainly because of ill-advised po-
litical and economic policies, but have the potential
to become NICs within a decade. They include
Argentina, Chile, and Zimbabwe.
? Countries that lack the critical mass of entrepre-
neurial talents, skilled workers, and modern institu-
tions needed to sustain rapid economic growth.
Even in this last group, there are major differences.
Many of these countries have abundant natural re-
sources but lack the ability to harness them (Zaire,
Angola, and so on). Others lack both natural and
skilled human resources and thereby have essentially
become dependent on outside assistance to maintain
even their meager standard of living (the countries of
the Sahel). More than 40 Third World countries have
a population of less than a million, a factor that
prevents them from developing all but a very few
competitive industries and services (mainly tourism).
At the other extreme is India, with a population that
is more than four times that of the second-largest
LDC (Indonesia). India has pockets of economic so-
phistication matching that of the NICs and has areas
where the population is as destitute as the most
impoverished Third World country.
Differences in economic strategy also vary consider-
ably. Some countries, such as the Ivory Coast or
Malaysia, have a free market orientation; others, such
as Ethiopia and Angola, have aMarxist-Leninist
orientation. Many Third World states are governed
by leaders who, educated in the West, follow socialist
tradition. Such leaders-Julius Nyerere of Tanzania
is a prime example--combine a naive faith in social-
ist-collectivist policies with a contempt for Western
democratic norms.
One other important distinction that should be made
in gauging the economic progress of Third World
countries is the difference between growth and devel-
opment. Some countries-Nigeria, Algeria, and Lib-
ya-have enjoyed rapid economic growth because
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To date, the North-South dialogue has (not surpris-
ingly) borne little fruit. There has been a huge gap
between the rhetoric of discussants and pragmatic
efforts to confront problems. Both developed and less
developed countries have indulged in the articulation
of sweeping demands and responses, rarely getting
down to brass tacks. There has also been an emphasis
on process rather than substance, with enormous
expenditures of time and effort wasted in debating
how to debate issues and in discussing how best to
organize and facilitate discussions of issues.
More specifically, the global exchange has failed to
discuss the enormous and growing differences in
economic prospects among developing countries, and
has paid little attention to the important bilateral
economic links that have evolved between the devel-
oped and less developed world. Instead the discussion
has focused mainly on ways to boost the.flow of
resources from the developed to less developed world,
even though recent experience has shown that this
approach does little to spur sustained economic
growth and in some cases even hinders progress.
There are several reasons that rhetoric and general-
ization have not given way to realism:
? The most vociferous supporters of the 'global "
effort, in both the Third World and the West, are
captives of strong ideological predispositions which
emphasize socialist utopias rather than freedom
and free enterprise.
? Western beliefs in the free market, and in unfet-
tered trade and investment, are incompatible with
the socialist and collectivist beliefs of many Third
World leaders.
? The profound economic and political differences
among the countries of the Third World have been
papered over by rhetoric and generalization.
? There are significant differences in the perceptions
and economic interests of the developed countries
themselves.
? With a few exceptions, LDCs are neither politically
nor economically critical to the West.
The European socialists and their allies see the LDCs
as the international equivalent of the "underclass"
within their own societies. Thus, they seek to harmo-
nize their international attitudes with their domestic
policies of economic and social reform. Despite these
oft-stated beliefs, the countries of Western Europe
and Japan have relatively little to offer the LDCs. In
varying degrees, all of them have acute budgetary
and other economic problems at home that preclude
bold new initiatives in the North-South arena. Then,
too, they are constrained by an array of domestic
interests that would resist such initiatives. For exam-
ple, even though Japan, Canada, and most countries
of Western Europe have supported a reduction in
trade barriers against LDC mant4facturers, their
markets have remained relatively more closed to
such LDC goods than the United States. Indeed, the
EC has recently called for a further tightening of
textile imports from LDCs to protect domestic
industries.
The changing political-economic environment pro-
vides an opportunity to move away from the polemics
of the North-South global debate toward a more
constructive approach to Third World development.
An increasing number of Third World leaders are
.following more pragmatic policies, spurred by the
hard economic times of recent years and by recent
policy initiatives of the US Government. This tenden-
cy has also been encouraged by the increased aware-
ness among LDC leaders of the success that the NICs
have had in utilizing the private sector to encourage
economic expansion. For example, Argentina, Chile,
Jamaica, and Sri Lanka have adopted policies that
are closer to those followed by the NICs. Finally,
many LDC governments are keenly aware that
concessional aid increases will be small because the
industrial countries are coping with fiscal constraints
and most OPEC members are facing shrinking oil
revenues.
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they are blessed with enormous reserves of petroleum.
Despite the large amounts they have spent on internal
projects, they still have not developed the wherewithal
to sustain rapid growth in economic activity or in
exports other than oil.
Some of the poorer Third World countries also have
made significant economic progress, even though it
will be decades before they will have the critical mass
needed for broad-based economic development. Ke-
nya and Malawi are in this category. In these cases,
the important factors, besides political stability, that
have spurred growth include:
? The encouragement of asmall-scale, cash-oriented
farm sector through market incentives, co-ops, and
technical support.
? The encouragement of traditional manufactures-
textiles, crafts, and so on.
? The encouragement of foreign private investment
needed to support the above two endeavors.
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Secret
Foreign Economic Strategies and US
Security Interests
The interaction of foreign economic strategies not
only will affect economic conditions in the United
States but also will impact on US national security.
The competition among non-Communist countries for
technological leadership is accelerating the general
rate oJthe transfer and absorption of innovation.
This changing technology picture will complicate the
ability of the United States to pursue its national
security objectives in the 1980s. The United States
could be affected in three ways:
? Increased foreign competition could reduce the
funds US firms have available for R&D and erode
the productive base needed to produce some military
items.
? The United States could become dependent on
foreign production to meet a significant portion of
some basic goods needed in military production-
for example, electronic parts.
? Denial of high technology to the Soviets will became
more difficult as a consequence of the rapid and
broad diffusion of sophisticated know-how.
In all these cases it will be important to recognize the
specific linkages between military production and the
general economic base. (For details see pp. 18-22.)
West European unemployment problems will impinge
on the ability and willingness of West European
governments to support US policy initiatives, particu-
larly on East-West issues.
The need for jobs in hard-hit industries has made it
more difficult for West Europeans to reduce economic
ties with the East. Western Europe's rising unemploy-
ment levels are likely to intensify debates over defense
spending. In essence, Europe during the coming years
will be gripped by aguns-versus-butter debate-in
which those supporting enhanced defense may lose.
Size of
Labor Force
(millions)
Net Budgetary
Impact of a
1-Percent Change
in Unemployment
(billion US $)
United States
104.76
25.0
France
22.43
5.3
West Germany
26.68
5.5
United Kingdom
24.20
5.5
Italy
20.81
0.6
Netherlands
5.32
0.5
Belgium
4.10
0.9
West European pacifists will certainly take advantage
of rising unemployment rates to further their own
aims. Should pacifist leaders be able to take advan-
tage of the political discontent associated with unem-
ployment to forge stronger links to the middle class,
the resulting coalition could take an exceptionally
anti-US position-for example, that defense spending,
taxes, and inflation are high because the United
States cannot get along with the Soviet Union. If the
West European unemployment rate hits 11 percent,
the budgetary impact in those countries will total
about $45 billion. This would intensify public pres-
sures to pare defense spending, which now totals
about $80 billion (table 3).
Rising unemployment in Europe will also intensify
protectionist pressures. Japan would be the immediate
target, with the United States a somewhat distant
second. To the extent that West European markets
are closed to Japan, Tokyo would attempt to direct
affected exports to the United States and to the Third
World. Any increase in Japan's share of these mar-
kets would come largely at the expense of the United
States and Western Europe.
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Japan has achieved world dominance in the key
semiconductor memory sector and is also making
significant advances in complex logic circuitry. Con-
tinued Japanese dominance of the memory sector will
deny US firms profits and valuable processing exper-
ience required for manufacturing other semiconduc-
tor components. As a result, a major restructuring of
the US semiconductor industry could be required
over the next several years. Restructuring in the
United States may also be driven by the vertical
integration within Japanese companies. Some US
electronics firms, for example, are already dependent
upon Japanese suppliers for advanced semiconductor
components. These dependencies are likely to result
in a situation in which many US firms find them-
selves increasingly competing in the systems market
with the same Japanese firms they depend upon for
components.
The semiconductor industry worldwide is in a phase
of transition to a new generation of sophisticated and
expensive production equipment that will quickly
become obsolete. Because of the industry structure
and government support in Japan, the Japanese will
probably be in a better position than the United
States to meet the capital requirements of this new
generation of equipment. Japanese manufacturers,
with government support in key areas, are pursuing
several high-risk programs in advanced semiconduc-
tor technologies. The only government-sponsored ej_
fort under way in the United States focusing on this
area is the DoD-sponsored VHSIC program that
attempts to push US civil technology for military
applications. Japanese technical levels already meet
or exceed some of the goalslor this R&D program,
but the Japanese appear to be reluctant to make any
of this technology available to the United States.
Japanese integrated circuit mant~acturers probably
are the world s leaders in the development and
application of complementary metal-oxide semicon-
ductor (CMOs) technology. This technology is of
great interest to the military because it offers density
and power consumption advantages over other semi-
conductor technologies. Military applications for this
technology include onboard computers, intelligence
sensors, and digital communications equipment. This
technology may also be more readily radiation har-
dened than other metal-oxide semiconductor technol-
ogies. Japan is also likely to become the world's
leader in a related CMOS technology, silicon on
sapphire. Today, this technology offers performance
advantages over CMOS and would be useful in high-
performance airborne or spaceborne processors. In
other device technology areas, Japan may emerge as
the world leader in magnetic-bubble technology. Re-
cently, many US firms have discontinued the produc-
tion of magnetic bubbles, citing their nonprofitability,
while Japanese firms have continued development
and expanded sales. Magnetic bubbles are ideal for
ruggedized, nonvolatile mass-memory applications
such as spaceborne and ground-based remote sensing.
In semiconductor production technologies, Japan
leads the world in automated assembly techniques
including wafer dicing and die and wire bonding.
These technologies are extremely important in the
fabrication of high-reliability packaging of all mili-
tary electronics components.
Japan is also pursuing some very advanced semicon-
ductor technologies that have yet to be proved over
conventional silicon-based technologies. The Japa-
nese are probably the world s leader in the develop-
ment of gallium arsenide semiconductor devices that
potentially can offer tremendous speed advantages
over silicon devices. This technology would be ex-
tremely useful in satellite communications compo-
nents, high-speed signal processing, and radar and
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receiver integrated circuits. Gallium arsenide also
offers the capability for integrated optics for optical
signal and data processors having many times the
speed of today's systems. In contrast to the Japanese
efforts, the US VHSIC program is not sponsoring any
gallium arsenide research.
In other "exotic" technology areas, the Japanese are
investing considerable manpower and funding in de-
veloping Josephson junction technology for digital
applications. Although they are not now the world
leader in this technology, the magnitude of their
effort in a new, unproven technology and the strategic
consequences (for the semiconductor industry, should
the effort succeed) make their effort noteworthy and
may result in eventual Japanese leadership if the US
effort is diminished. Japanese semiconductor manu-
facturers, with government support, are also explor-
ing exotic variants of today's silicon integrated cir-
cuits that offer the possibility of constructing
three-dimensional integrated circuits and new sensors
mirroring the human senses. Their developments of
charged coupled devices for imaging are at the lead-
ing edge. These devices could have application in a
large number ojmilitary and intelligence systems.
The Japanese are also exploring the use of organic
semiconductors that could offer improvements in
density and performance.
Japan has emerged as the major rival to the United
States in the world computer industry, and could
garner a signV'icant share of the world market over
this decade. Japan has been able to match the United
States in many important areas of computer hard-
ware technology; however, the Japanese still trail the
United States in software and systems integration
capabilities. In an effort to close the remaining
technological gaps, Tokyo is sponsoring advanced
research and development programs in software, ad-
vanced components, high-speed scientific computers,
peripherals, and an ambitious 10 year program to
define and develop a.fcrth-generation computer that if
successful could enable Japan to leapfrog the United
States.
The Japanese Government and industry have also
been the world s leaders in anticipating the linkages
between the telecommunications and computer indus-
tries. Because of the structure of their industry, they
will be in an excellent position to develop technol-
ogies that fuse and promote increased use of comput-
ers and telecommunications. Until recently, the Japa-
nese strategy has been to attack the low- and
medium-range systems market. Soon they can be
expected to compete across all sectors, from personal
computers to high-speed scientific processors. The
competitiveness of the Japanese computer mani.~Jac-
turers is enhanced because of their captive integrated
circuit production. Such vertical integration will be a
key component in the competitiveness of US and West
European computer mant~Jacturers and may force
major restructuring of both the computer and micro-
electronics industries in the United States. The posi-
tion of Western Europe will become increasingly
tenuous over the next several years, and it is likely to
become more dependent on US and Japanese compo-
nents and systems technologies.
Because of the tremendous innovation and strength of
the US computer industry, there are very few areas in
which foreign levels exceed those of the United
States. One area in which the Japanese most likely
have a lead over the United States is voice input/out-
put technology. Research has been under way in
Japan since the early 1970s in this area and it is
continuing to receive government funding in the.r4fth-
generation computer program. Voice input/output
will be useful in military environments to simplify
man-machine interaction in complex situations such
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as tactical air support and interdiction. Japan could
also be a potential world leader in character and
pattern recognition. Handwritten character recogni-
tion, shaded pattern recognition, object recognition,
as well as the voice pattern research mentioned
above, were part of the Pattern Ir~/ormation Process-
ing System sponsored by the Japanese Government.
All of these developments could be of high value in
military applications such as advanced sensors, ter-
minal guidance, and image processing. In other areas,
Japanese display technology is likely to set world
standards; this technology would be useful in photo
interpretation and command and control systems.
A number of other Japanese developments could have
sign cant military implications. For example, the
Japanese Government and industry are engaged in a
number of programs to develop large-scale scientific
computers more advanced than those they now pur-
chasefrom the United States. Although it is unlikely
that the Japanese will dominate this sector in the
near future, they are pursuing a number of advanced
technologies, such as Josephson junction and gallium
arsenide integrated circuits, that could be the basis
for improvements in computer performance. At the
very least, the United States will undoubtedly lose
much of its control over supplying large-scale
scientific computers when the Japanese complete
development of their scient~c processors. Such com-
puters have important applications in military re-
search and development, including nuclear weapons
design, aerodynamic and hydrodynamic modeling,
cryptanalysis, signal processing, analysis of complex
systems, and strategic battle management.
Besides development of large-scale scientific comput-
ers, Japanese success in the general purpose computer
sector could have important repercussions for the
development of US military computers. If.fewer US
firms compete, the technical irt/rastructure in both
the hardware and software sectors would be ur:der-
mined, and corporations might belorced to discontin-
ue development of military systems that typically
have not been revenue or profit earners for the
industry.
The telecommunications industry is undergoing one
of the most rapid and extensive periods of change in
its history. The drivingforce behind this change is the
evolution of microelectronics technology, which offers
pricelperformance improvements. Microelectronics
has fueled the trend from analog voice equipment to a
fully integrated digital network that optimizes the
interactions of all network components and that has
the potential to provide a vast array of new irtforma-
tion services. Old electromechanical switching sys-
tems, the most expensive and complex equipment in
the network, are being upgraded with all-digital,
stored program control systems.
The United States has traditionally been the leader
in this technology, but the Japanese are now challeng-
ing the US position, in part aided by technology
exchange agreements between the Nippon Telephone
and Telegraph Corporation and US firms. Comple-
menting the use of new switching systems, new trans-
mission systems-such as fiber optic and satellite-
based systems-will be used in the future. Finally,
telecommunications terminals, ranging from residen-
tial telephones to advanced office work stations, will
probably be the most dynamic area of technological
change over the next decade. The Japanese will be
strong competitors in this sector because of their
excellence in the mass production of advanced con-
sumer electronics and also because of their willing-
ness to bring high technology to the marketplace.
They are already developing small Earth stations to
receive signals directly broadcast from satellites.
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Many improvements in civil telecommunications
technologies have the potential to enhance military
command, control, and communications systems.
There are a number of specJ'ic telecommunications
technologies in which the United States has lost its
technological edge or might lose its leadership posi-
tion over the next several years. At this time, for
example, Japan is the world's leader in fiber optic
research and applications. Fiber optics is of interest
to the military because of its advantages in band-
width for signal processing applications and its im-
munity in high-radiation and intense electromagnetic
environments. Fiber optics also might provide more
secure communications than conventional systems.
The Japanese also may lead in the development of
high-speed facsimile, which will have application in
future command, control, and communications sys-
tems. The United States may also find itself in a
secondary position in high power traveling-wave
tubes, which have application in broadcast and wide-
band data transmission satellites as well as in elec-
tronic countermeasures. Both France and West Ger-
many have strong positions in this area. The
Japanese will probably develop a lead over the United
States in power field-effect transistors, and in very
small Earth stations that might be adapted for
general military and intelligence satellite-based com-
munications systems. Japan and Italy are developing
high-frequency (20-30 GHzJ satellite systems that
may allow for more options in secure
communications.
Recombinant DNA and Advanced Biological
Technology
The United States has a clear lead in recombinant
DNA (rDNAJ technology, with the Europeans next in
line. The Japanese currently lag behind, but are
avidly acquiring US and European technology and
are engaged in a major effort to build up domestic
capabilities. They could be among the world leaders
by the mid-1980s. In the more general field of
advanced biological technology, the United States
and Western Europe generally share the lead, though
the Japanese dominate in a few areas-for example,
fermentation technology in general (which is critical
to some rDNA production processes) and fixed-en-
zyme amino acid production. The Japanese are press-
ing ahead in areas such as bioreactors and mass cell
culture, are active in bionics, mimetics, and biosensor
research, and are funding some research being done
in the United States on biochips, a proposed alterna-
tive to Josephson junction integrated circuits for su-
per-high-speed computers. The state of the art in
these technologies is still in the gestation stage, and
the prospects for new players to dominate pieces of
the action are almost unlimited. A shortage of quali-
fied R&D personnel ctfjlicts all countries, and all are
looking at means of addressing this problem.
Obvious applications of rDNA and advanced biologi-
cal technology for military purposes include engineer-
ing and production of biological warfare organisms,
production of toxins and other chemical warfare
agents, production of vaccines and prophylactic or
therapeutic agents to maintain the general health of
soldiers in a stressful or unhealthy environment, and
use of engineered organisms to extract strategic
materials from ores or feedstocks that cannot now be
effectively exploited. Mimetics-machines that incor-
porate or mimic the behavior or function of orga-
nisms-and bionics might find application in a vari-
ety of sophisticated weapons systems or be
incorporated in and improve the efficiency of manu-
facturing systems making defense hardware. Biosen-
sors conceivably could vastly improve capabilities in
irE1rared and ultraviolet light-sensing systems as well
as provide capabilities to detect and identify biologi-
cal and chemical warfare agents, aromatic effluents
such as sweat, exhaust gas, or combustion products
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Non-Communist Competition in Key Technologies (Continued)
Jrom gunpowder, or efjluentslrom submarines deep
in the ocean. jJ'feasible, biochips that operate at
Josephson junction speeds at room rather than cryo-
genic temperatures would be a revolutionary develop-
ment which would add enormously to computer
capabilities. In addition, advanced biological technol-
ogy may be applied to production olfuels, foods, and
chemicals that a modern military force requires in
great quantities.
US dominance of space technology within the non-
communist countries is eroding. The West European
Ariane program could account for perhaps one fourth
or more of the 200 commercial satellite launches
likely during the 1980s. Japanese efforts during the
1980s will be much more modest, but their long-
range prospects are better, especially ~ Tokyo sup-
ports the sector.
West European space technology generally is not
superior to US technology, but the United States'
near-exclusive dependence on the high-cost shuttle
appears to make the Ariane expendable launch vehi-
cle an economically attractive alternative. Much the
same can be said for the Japanese HI launch vehicle
to be developed by the latter half of the 1980s.
Although the Hl second stage uses liquid hydrogen/
liquid oxygen propellant, this stage will be state of
the art for its class (the United States has dropped
plans to build a similar stage). This stage could be
used to carry a payload that had been placed in low
Earth orbit into geostationary orbit. The HI could
also be incorporated as a stage in the Ariane, so a
sales potential does exist. A liquid hydrogen/liquid
oxygen third stage is being considered for the HI, and
iJ'it is developed it would likely also represent a step
ahead in the state of the art for that application.
Japan is considering a minispace shuttle for the mid-
1990s, but it is doubtful that work has gone beyond
the preparatory stage.
Civil applications of space technology, particularly
telecommunications and remote sensing, are driving
both the West European and Japanese efforts. There
are no major problems, however, that would prevent
conversion of these civil satellite systems to military
use. Conversion of the Ariane and Japan's HI booster
vehicles for military use would be less than optimal,
however, as they use liquid propellant. These vehicles
would require several hours to prepare forging
unless one is to pay heavy risk and cost penalties and
keep the propellant tanks fully- loaded at all times.
The Japanese do have smaller solid fuel rockets
(M series) that could be convertible to IRBMs, al-
though further development work on a better guid-
ance system would be required.
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The Soviet Union's economic strategy is./ailing. of economic relations will moderate Soviet behavior.
They do not believe that the denial of Western goods
Economic problems in the 1980s will make the further would substantially alter Soviet policy.
expansion of Soviet military power and political influ-
ence increasingly difficult and painful. Moscow will The Soviet Union's economic leverage on Western
try to continue to increase its military expenditures countries is small and diminishing. Soviet Bloc mar-
rapidly, sustain its empire, and finance influence in kets will constitute a diminishing share of Western
the Third World in spite of slow economic growth. country exports. Apart from Soviet natural gas, the
availability of which can lower the price of gas in
The crucial question is how long the Soviets can go Western Europe, and platinum, there are ample and
on-especially if access to trade and credits from the cheap sources outside the Soviet Bloc. Only an ex-
West is curtailed. Beijing has openly recognized the ceedingly unlikely set of circumstances could lead to
failings of central planning, but it is by no means clear Soviet control of enough of the world supply of any
that China can move far enough away from central critical material to allow Moscow to gouge the West
planning to get decent economic performance without or disrupt markets on a significant scale.
risking political turmoil. The leaders in Moscow have
not been prepared even to take the gamble.
Access to Persian GuIJ'oil will remain crucial to
The Soviet economy is stagnating; no improvement is allied economic and military power.
likely in the 1980s. Chances are slim that the Soviet
leadership can counter this trend. Soviet workers The United States and its allies continue to have this
believe that the rewards for their work are not access, although it must be considered threatened
commensurate with their effort. In principle no policy with the revolution in Iran and the Soviet move into
path can be excluded in the post-Brezhnev Soviet Afghanistan. Although the West is slowly becoming
Union, ranging from liberalization to the reimposition less dependent in this source of energy (that is, the
of Stalinist terror. Perhaps most likely is some "fine Middle East provides 13 percent of the non-Commu-
tuning" of the present system. This might entail nist world energy compared to 22 percent a decade
concessions to workers/consumers to encourage more ago), it will remain vitally important at least through
output; marginally less emphasis on heavy industry; the 1980s.
and perhaps even slower growth in military spending
(as long as the primacy of the military sector is not put The principal reason for the Middle East's enduring
in question). importance is that this region is the world's cheapest
source of energy. With adequate oil stockpiles and
A central element of such muddling through would be other resources, the West could survive its denial with
increased efforts to acquire Western goods and tech- grave but not unmanageable economic dislocations.
nology. The preferred way may be heavy borrowing in However, effective control of this region by the Soviet
the West as in the case of Poland and Romania. The Union could reverse present economic trends in the
use of political blackmail to acquire needed resources USSR. In 1980, for example, the Persian Gulf coun-
on favorable terms from Western Europe or from the tries earned around $200 billion. A modest fraction of
oil-rich countries of the Middle East cannot be ruled that sum at the disposition of Moscow would dwarf
out. Nor can bold military action if Moscow decides expected earnings from the Yamal pipeline. It could
the future of its regime depends on it. be the solution to the Soviets' hard currency problem
and its problem with the satellite economies.
For Western governments, the relevant economic
policy instruments are restricting access to their tech- Aside from direct military measures, the Soviets could
nology and reducing trade and credits that enable gain some control in the Gulf by internal subversion
Moscow to buy Western goods. Most Western govern- and coups. At a minimum they might try intimidation
menu, however, cling to the 1970s' hopes that a web to get favorable price or currency arrangements.
23 Secret
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As the United States becomes increasingly pressed in
various theaters, Japan will be pushed to assume a
greater military role to match its growing economic
power.
The United States has been pressing the Japanese to
spend more on defense for many years. There is room
for debate about which responsibilities Japan should
assume. Ideally, the Japanese could help provide a
counterweight to the Soviet Union in Northeast Asia.
A Japanese military buildup would require a substan-
tial reallocation of Japanese resources away from the
private sector. What this could mean for high technol-
ogy is unclear; an enhanced military program would
provide another outlet for high-technology industries.
Although in the short run this could reduce pressure
on US and other markets, over the longer term it
would give Japan another leg up in selected higher
technology areas.
Divergent trends in the Third World will also affect
US security interests.
Continued economic growth in the Asian NICs will
increase the resources available for their military
security programs. This is particularly true for South
Korea and Taiwan. In both cases their defense capa-
bilities are already substantial and provide some
counterbalance against Communist threats in the
area. Military relations between the ASEAN coun-
tries also have the potential for considerable payoff.
The poorer LDCs, by contrast, pose security risks.
Worsening economic and social conditions in many of
these countries threaten political stability. This leaves
them vulnerable to exploitation by interests inimical
to the United States. The situation in Central Amer-
ica underscores these risks. Economic erosion makes it
increasingly easy for the Soviets and their surrogates
to exploit the potential for instability at low cost to
themselves.
The rising level of world trade, by increasing global
interdependence, has created opportunities and vul-
nerabilities in the use of leverage.
As the volume of trade expands, so too does the ability
of countries to affect each other's economic strategies.
For instance, as the percentage of a country's work
force engaged in export production rises, the threat of
protectionist policies against that country's products
becomes more potent. At the same time, the use of
economic leverage can more easily backfire as the
level of interdependence rises. For instance, efforts by
an industrial country to block Third World competi-
tion could not only lower the industrial country's
exports, but also impair the ability of Third World
countries to pay the debts they owe to banks head-
quartered in the industrial country itself. This finan-
cial situation has given countries like Mexico and
Brazil implicit bargaining leverage with the industrial
countries.
Since the United States is the world's largest econo-
my, its economic strength could provide a measure of
leverage. In this context, it is important to distinguish
those countries for which access to the US market is
crucial, those which are heavily reliant on US exports,
and those whose trade with the United States is
relatively unimportant. In aggregate terms, the Unit-
ed States has substantial leverage over Japan; 24.4
percent of Japan's exports come to the United States
while just 9.4 percent of US exports go to Japan. The
European Community, on the other hand, accounted
for one-fourth of US exports, while the United States
takes only 6 percent of Europe's exports. The United
States is particularly vulnerable to EC policies on
agricultural items. Although the West Europeans
have not used economic leverage in their dealings with
the United States and have been unresponsive to US
attempts to leverage them, they have responded to
leverage from third parties. Their sensitivity to depen-
dence on Persian Gulf oil supplies, for example, has
had a pronounced impact on their policies regarding
the Arab-Israeli peace process.
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Potential Shocks to the Global
Economy
The economic troubles of this past decade have made
the public and policymakers much more aware of the
vulnerabilities of the global economy to sudden
shocks. Unexpected events can greatly alter the effec-
tiveness of national strategies, thus affecting not only
underlying economic trends but also security interests.
The types of problems that can jolt the global econo-
my include:
? Large-scale commodity supply interruptions-oil,
other raw materials, and grain.
? Collapse of the international financial system.
? Rampant protectionism.
Supply Interruptions
Oil. The painful transition toward a global economy
less profligate in the use of oil is clearly under way.
Driven by two oil price shocks, a conservation move-
ment has taken hold, and the shift away from oil to
other energy sources is well along. The chances now
seem low that some oil shortfall will trigger a devas-
tating price runup through the mid-1980s. Although
oil stocks have fallen from their record high levels of
mid-1981, excess production capacity this year will
remain rather large, even if the Iran-Iraq war contin-
ues. Even though demand for OPEC oil may slowly
increase in subsequent years, the probable return of
substantially larger Iranian and Iraqi exports, once
the war ends, makes it likely that there will be
sufficient OPEC oil to meet demand for several years.
It would take a major and prolonged political upheav-
al in Saudi Arabia or a closure of the Strait of
Hormuz to create another oil shock.
In deciding how much should now be spent on
reducing the risk of an oil price explosion in the mid-
1980s and beyond, policymakers face tough decisions.
The problem is that experts differ widely on oil
market trends. Although many analysts expect the oil
market to tighten in the mid-to-late 1980s, others hold
different views-that demand for OPEC oil will
continue to decline and unused oil production capacity
will remain large. If the first view is correct, it is easy
to justify building strategic reserves and keeping
domestic oil prices high to stimulate energy produc-
tion and conservation. On the other hand, if a long
period of low prices and low risk is expected, the
advantages of these policies become less clear, and
their costs become more burdensome.
Other Raw Materials. The potential problems associ-
ated with dependence on imported raw materials are
less severe than in the case of oil. It would take a
widespread commodity shortage, as in 1950-51 and
1973-74, to seriously disrupt global economic activity.
It is unlikely that LDC exporters or Communist
countries, individually or in groups, will create short-
ages by withholding production for political ends:
? For most key commodities, the sources of supply are
well diversified with such developed countries as
Canada, Australia, and South Africa providing the
bulk of Western imports.
?Non-oil-exporting LDCs lack the economic and
financial capacity to sustain an embargo of their
mineral exports; they need to sell more than their
customers need to buy.
? LDC producers of commodities rarely have common
political goals powerful enough to initiate large cuts
in exports.
? The Soviets, in particular, face a hard currency bind
that makes the withholding of commodities or pre-
emptive buying very costly.
One remote possibility is an embargo by black Afri-
can nations against industrial countries for supporting
South Africa. In this case, the United States would be
deprived of the bulk of its cobalt supplies and about
40 percent of its manganese needs. In addition to
these two metals, the Europeans and Japanese would
be affected by more limited supplies of copper, baux-
ite, and iron ore.
A more serious and enduring potential danger is a
prolonged period of racial strife in South Africa,
which would disrupt supplies of platinum, chromium,
some minor strategic metals, and gold. To have a
serious global impact, such a supply interruption
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would have to exceed a few months and/or would
have to coincide with a sharp increase in demand.
This risk could be significantly lessened through
strategic reserves or private inventories.
Platinum is the only strategic metal for which indus-
trial countries depend heavily on the Soviets. Nearly
half of non-Communist platinum consumption is su~o-
plied by the USSR. Users could obtain sufficient
amounts to meet crucial needs (mainly in petroleum
refining and chemical processing) for at least several
years through increased output of other major produc-
ers (mainly South Africa), available stocks, and the
ability to substitute or to do without.
Grain. In the case of grain, the international market
has become less prone to price fluctuations even
though the US Government no longer holds huge
grain stocks that can be used to smooth out prices. In
recent years, for example, a price runup was averted
despite three consecutive poor Soviet harvests, a ma-
jor US corn belt drought (1980), and relatively low
stocks. A major reason is that the significant increase
in grain-fed herds worldwide has provided a buffer
against fluctuation in supplies. Because of this the
impact of a grain shortfall has been shifted from
dramatic price fluctuations to major variations in
herd size, often leading to distress slaughtering.
Since the early 1970s the international financial
system has proved resilient to shocks. Nevertheless it
remains susceptible. One reason is that differences
between domestic and international systems have
been greatly clouded, thereby reducing the effective-
ness of each country's ability to regulate financial
transactions. Moreover, market participants have be-
come less prudent in handling deposits and making
loans. The heavy lending to Poland that continued
long after problems emerged is a case in point.
Although free trade is still the dominant characteris-
tic of the global economic system, it is becoming
increasingly difficult to keep the genie of rampant
protectionism in its bottle. Japan's continuing refusal
to open its market has already encouraged that
country's trading partners to seek protectionist relief.
In Western Europe especially, high unemployment
will encourage the inclination to use protectionist
measures against Japan to save jobs. In coming years,
the NICs are likely to be increasingly targeted by
European protectionists as the NICs continue to
increase their marketing prowess. One risk in all of
this is that the United States could increasingly be
regarded as a market of last resort-a development
that would play into the hands of US protectionist
forces.
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