WEEKLY SUMMARY

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Secret
Weekly Summary
State Dept. review completed.
Secret
CG WS 77-024
June 17, 1977
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Reporting Group, reports and analyzes significant
nents of the week through noon on Thursday. It fre?
ncludes material coordinated with or prepared by the
_
4gional and Political Analysis, the Office of Eco-
nomic Research, the Office of Strategic Research, the Office of
WEEKLY SUMMARY, issued every Friday morning by the
ific intelligence, the Office of Weapons Intelligence,
and the Office of Geographic and Cartographic Research.
SECRET
CONTENTS
1 Middle East
Egypt-USSR; Israel
2 Africa
Tunisia-Libya; Zaire
3 USSR
Trade with the West; New
Repression; Steel Produc-
tion
5 Eastern Europe
Romania; Poland
6 Western Hemisphere
Chile
6 Asia
Pakistan; India;
China-Political
10 China: Economic Issues Discussed
11 Mexico: Border Industry Program
13 South Africa: No Sign of Give
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parties; together these groups control 62
seats. In addition, Begin can count on the
support of one independent and Moshe
Dayan, Begin's nominee for foreign
minister, if Dayan decides not to return
his Knesset seat to the Labor Party from
which he has defected.
Begin's efforts to bring into his govern-
ment the Democratic Movement for
Change, which won 15 seats in the elec-
tion last month, failed when that party's
leadership group voted overwhelmingly
n June 14 to break off coalition talks
EGYPT-USSR f,,. r/
Little progress apparently was made
toward repairing Soviet-Egyptian
relations during Egyptian Foreign
Minister Fahmi's visit to Moscow last
week. Relations have been poor during
most of the seven years Egypt's President
Sadat has been in power and particularly
since Sadat abrogated the Soviet-Egyp-
tian Friendship Treaty last year.
There is no indication Fahmi succeeded
in resolving the two issues most important
to the Egyptians-a resumption of Soviet
arms deliveries and a rescheduling of
Egypt's massive debt to the USSR, The
Egyptians say they were able to extract a
Soviet promise to consider "concrete
measures" to improve relations, but there
is no evidence that the Soviets made any
significant tangible commitments.
There are other signs that the talks
were difficult, with the Soviets insisting
that any improvement in relations is up to
Cairo. Foreign Minister Gromyko was
particularly rough on Fahmi at a
luncheon on June 10. According to a
published version of Gromyko's remarks,
he pointedly noted that the "threads of
trust," once broken by "thoughtless" ac-
tions, are difficult to restore.
The final communique did note some
minor achievements. It indicated the
Soviets and Egyptians agree that the
Geneva conference on the Middle East
should be reconvened "not later" than
this fall. The Soviets, who have been
working hard to place themselves back in
the mainstream of Middle East diplomacy
via the Geneva conference, doubtless can
take some satisfaction in winning Egypt's
public endorsement of their role. Cairo's
primary interest probably was in making
sure that bitterness between itself and
Moscow would not impede the resump-
tion of the Geneva peace talks.
Gromyko will visit Cairo in late August
or early September for further talks
aimed at improving relations, according
to an announcement this week by the
Egyptian government. The dates for
Gromyko's visit have not yet been an-
nounced by the Soviets and may still
ISRAEL
1,12,
Menahem Begin, leader of the right-
wing Likud party, will in all likelihood be
installed as Israel's new prime minister
early next week. He has the votes to win a
vote of confidence for a narrow coalition
government that he will formally present
to the 120-member Knesset-the Israeli
parliament-on June 20.
The new ruling coalition will be com-
posed of Likud, the National Reli-
gious Party, and the orthodox Aguda
with Likud. Democratic Movement
leader Yadin said his party had concluded
that Begin was unwilling to assure it a real
voice within the cabinet on Arab-Israeli
and domestic reform issues.
Yadin and his colleagues emphasized in
particular that Begin refused to budge
from his hard-line opposition to the return
of any of the occupied West bank to the
Arabs in a peace settlement. Neither
Begin nor Yadin excluded the possibility
of resuming their coalition talks, but this
appears unlikely in the near future.
Despite its narrow majority, Begin's
coalition stands a good chance of holding
together; it will be more close-knit and
less vulnerable to internal personal and
ideological conflicts than the previous
Labor-led government. Likud and the
National Religious Party fully agree on
the need to retain permanent control of
the West Bank and to reject negotiations
with the Palestine Liberation Organiza-
tion. The Aguda groups and the National
Religious Party see eye-to-eye on the in-
terpretation of most religious questions
and seem satisfied with Begin's assurances
of support on these issues.
Begin in recent days has been more
restrained in discussing Arab-Israeli
issues, but this appears to be mainly a tac-
tical change of style designed to attract
the Democratic Movement and ease the
apprehensions of Israeli supporters in the
US. Begin's more moderate tone is
probably also intended to avoid an-
tagonizing the US government before he
comes to Washington for discussions with
1 WEEKLY SUMMARY Jun 17, 77
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TUNISIA-LIBYA
After several days of negotiations in
Tunis, Libya and Tunisia agreed last week
to seek international arbitration of their
continental shelf dispute. The agreement
may have defused the situation only tem-
porarily.
A senior Tunisian Foreign Ministry of-
ficial has told the US embassy that the
Libyans insist the agreement must be
ratified by the legislatures of both coun-
tries before the dispute is turned over to
the International Court of Justice. The
Libyans may use this tactic to avoid any
binding arbitration.
This is the second time the two coun-
tries have agreed to take the long-standing
problem to the International Court. The
Libyans backed off from an arrangement
last August because they were unwilling
to accept Tunisia's insistence that the ar-
bitration be binding.
The dispute flared again late last month
with the appearance in the disputed
waters of a privately owned US drilling
ship hired by the Libyans. Tunisia initially
demanded that the ship be withdrawn as a
precondition to a settlement. Both
governments-and the international oil
companies-are confident that the shelf
holds commercially exploitable oil
deposits.
Tunisia has made a significant conces-
sion by allowing Libya to continue drilling
in the disputed area for the time being.
Libyan President Qadhafi in effect has
succeeded in denying Tunisia access to
offshore oil in at least part of the zone.
Qadhafi believes that Tunisia's desire
to obtain access eventually will lead it to
join in a "union" with Libya. By papering
over the quarrel concerning the continen-
tal shelf, meanwhile, Qadhafi has
protected his ability to employ Tunisian
workers, a significant factor in Libyan
development plans.
ZAIRE 1 Z1 "~~'
Some Katangan insurgents remaining
in the Shaba Region of Zaire are con-
tinuing to make harassing attacks on
military and civilian targets in the area.
Zairian officials fear that the Katangans
are beginning a guerrilla war, but the in-
surgents would face severe problems in
waging such a campaign.
Although the Moroccan-Zairian
counteroffensive last month recaptured all
the towns occupied in March and April by
the Katangan exiles from Angola, Zairian
authorities have reported this month that
Katangans:
? Raided Mungulunga and kid-
naped some 100 government railway
employees.
? Blew up an army truck and am-
bushed a patrol just west of
Mutshatsha, killing 3 soldiers and
wounding 15.
Some Zairian defense officials believe
such activities are the start of a guerrilla
war that will soon include an attack on
facilities at Kolwezi. They have increased
security measures in the Kolwezi area and
plan to go on full alert ttis weekend.
Two types of Katangans probably re-
main in Shaba: those still trying to make
their way to sanctuary in Angola or Zam-
bia, and those who have decided to fight
on as guerrillas for as long as they can.
Most of the Katangans are believed to
have withdrawn from the region after
Mobutu succeeded in getting Moroccan
military support for his counteroffensive.
A Katangan guerrilla campaign in
Shaba would be aimed at bringing down
Mobutu. The Katangans would probably
seek to cut the rail lines and stop the
production or export of copper, Zaire's
chief source of revenue; discredit the
government domestically; and tie up
Zairian armed forces, thus encouraging
antigovernment moves elsewhere in the
country.
--The Katangans face a number of disad-
vantages. Their forces are now in dis-
array, with some in Angola, some
possibly in Zambia, and some being
hunted by Mobutu's army within Shaba.
Many face food and health problems.
They were demoralized by their failure to
bring down the Mobutu government
quickly, Mobutu's success in obtaining
foreign support, and the lack of support
om Angola when their offensive
altered. Angola, their exile home, now
Zaire
Wlungulunga Mutshatsha Zambia
' ?Kolwezi
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appears preoccupied with increased
domestic problems.
The Zairian army, although lacking the
drive and effectiveness of the recently
departed Moroccan troops, has some
8,700 men in Shaba as well as equip-
ment left by the Moroccans or provided
by Western overnments since the Katan-
gan invasion
US-were a leading factor in the deficit.
The grain imports were necessary because
of the poor Soviet harvest in 1975.
Last year's record harvest is allowing
the Soviets to reduce the cost of their
grain imports this year by an estimated $2
billion. Early indications for another good
harvest this year suggest that Moscow
may be able to keep its grain imports at
minimum levels next year as well.
These imports will largely reflect the
USSR's commitment to purchase 6
million tons of grain from the US, worth
roughly $700 million, each year through
1980. A Soviet grain delegation in
Washington last month would say only
that Moscow would meet the minimum
requirement in purchasing grain from the
propaganda emphasis on the espionage
potential of contacts between foreigners
and Soviet citizens. On June 16, Toth was
finally told that he was free to leave the
USSR the next day as he had planned.
Moscow could still try to link the Toth
incident to the case of jailed human rights
dissident Anatoly Shcharansky, who may
be charged with engaging in treasonous
activities involving US diplomats and
journalists. Soviet authorities presumably
CRI&r 0 ; 1 3 3 , 3"
The USSR is planning an overall cut in
trade with the West this year and next
because of a severe trade deficit with the
US and other countries. At a recent
meeting of the joint US-USSR Commer-
cial Commission in Washington, Soviet
officials said the cuts would affect both
agricultural and nonagricultural products
and would apply to all Western trading
partners.
Last year, Moscow's hard-currency
trade deficit with Western contries was
$4.9 billion; trade with the US accounted
for nearly half of this amount, according
to Soviet statistics. Grain imports valued
at an estimated $3 billion-half from the
US this year.
NEW REPRESSION 5 7,,-f Q
Soviet actions against a US journalist
in Moscow over the past week were ap-
parently part of a Soviet counteroffensive
on human rights issues as the East-West
meeting began in Belgrade. The meeting,
which began on June 15, is a preparatory
session for a follow-up conference this fall
on the 1975 Helsinki accords.
The temporary detention and repeated
interrogation of Los Angeles Times
newsman Robert Toth on charges of
receiving state secrets from a Soviet
citizen points up the Soviets' recent
of concern about human rights in the
ed for a definition of what constitutes
O another in the internal affairs of
/'Vanother state, a catch-all phrase used by
the Soviets to deflect Western expressions
knew that Shcharansky had introduced
Toth to the Soviet scientist who gave Toth
a paper on parapsychology moments
before both Toth and the scientist were
apprehended. If Shcharansky is brought
to trial, Toth's involvement would be
useful to the Soviets in building their case
against the dissident.
The Shcharansky and Toth cases
evidently are parts of the Soviet effort to
keep the West from putting the USSR
and its allies on the defensive at Belgrade.
A further Soviet motive in moving against
Toth may be to inhibit foreign journalists
in the USSR from writing about human
rights matters-and to discourage their
Soviet contacts from talking to them.
Although the Soviet human rights
movement has been demoralized and
weakened in recent months by arrests, ex-
ile, harassment and emigration, members
of the dissident group set up to monitor
Soviet compliance with the Helsinki
human rights provisions apparently con-
tinue to smuggle statements to the West.
One such document, urging the West not
to back down on human rights issues,
appeared in an Austrian daily two days
before the opening of the Belgrade
meeting.
The document rejected the alternative
of a propaganda confrontation. It called
instead for an East-West agreement defin-
ing which restrictions on individual
freedoms are permissible in order to
safeguard the interests of the state. It also
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5-6,57
STEEL PRODUCTION
Stagnation in Soviet steel production
over the past year and a half and failure
markedly to improve capacity and assort-
merit have rapidly increased Soviet
dependence on imports from the West.
The USSR supplanted the US as the
world's largest steel producer in the early
1970s, but the annual rate of Soviet steel
production has slowed considerably in re-
cent years. Last year, it increased only 3.4
million tons, the smallest annual boost
since 1957. Output in the first quarter of
this year dipped below that of the same
period in 1976.
The assortment and quality of Soviet
finished products, particularly flat-rolled
stee , are inadequate to meet domestic de-
mard. As a result, the USSR has been a
net mporter of steel since 1974. The im-
ports must be paid for in hard currency,
while exports, for the most part, are sold
under ruble-clearing agreements with
Fast European countries. In 1976,
payments for steel imports totaled about
$2.5 billion, or about one-sixth of total
hare-currency imports.
Poor quality in such items as drill and
line pipe and electrical steel sheet has also
beer a problem. The Soviets have steadily
increased investment in the industry over
the past 15 years, but the amount has been
inadequate for adopting modern
techiology, improving the quality and
assortment of finished products, and up-
grading Soviet iron ore.
Construction of new capacity has
fagged badly. To compensate, the Soviets
have delayed the retirement of old facili-
ties; some have been refurbishes,
and operations intensified. Most of this
potential pas already been tapped, an:
squeezing additional output from existing
plants is becoming more difficult.
These factors, together with outlays for
polli.tion control equipment, have caused
a steady rise in capital costs not matched
by p-oduction increases.
Prospects are not favorable for expan-
sion of Soviet production of those types of
finished steel for which demand will re-
mair high. Overall growth in output of
finished steel is slated to slow to an
average annual rate of 3.6 percent in the
period 1976 to 1980. Moreover, given the
poor performance in 1976 and early 1977,
as well as the Soviet record of failure to
carry out investment plans, the USSR
will not soon be able to substitute
domestic production for imports
4 WEEKLY SUMMARY Jun 17, 77
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 wages. In the first four months of 1977,
wages increased at a 13-percent annual
rate, largely because of bonuses workers
received for additional production of bad-
ly needed commodities.
The continuing rapid growth in worker
income will probably have the effect of in-
tensifying existing shortages of meat and
other sought-for goods. Meat supplies are
expected to fall below 1976 levels this year
despite a reported halt in the decline in
estock numbers, continuing curbs on
meat exports, and plans for imports.
On the sensitive issue of prices,
ROMANIA (2 4 1
A new three-year "program on
ideological cooperation" between the
Romanian and Soviet communist parties
is the first such agreement the Romanians
have signed with any Warsaw Pact coun-
try. The document reflects a trend toward
closer relations between the USSR and
Romania, the most independent-minded
of Moscow's Warsaw Pact allies.
The agreement capped a recent three-
day visit to Bucharest by Mikhail
Zimyanin, a Soviet party secretary. Dur-
ing his stay, Zimyanin met with Roma-
nian President Ceausescu for talks on
"diversifying" and "expanding" coopera-
tion between the two parties. The Soviet
also saw Cornel Burtica, the Romanian
party's ideological watchdog, and Stefan
Andrei, party secretary for foreign
relations. A Romanian announcement
described all these meetings in unusually
warm terms.
Romania had refused to sign
ideological accords with the other East
European states in 1972, and 1973, when
Moscow was promoting such agreements.
Although no texts of Moscow's
ideological agreements with the East
European countries have ever been
published, they presumably provide for
periodic consultations and meetings
between party leaders concerned with
ideological matters. Ceausescu evidently
had feared that such commitments would
detract from Romania's nonaligned and
independent image.
There is no indication that the new
Romanian-Soviet arrangement commits
Bucharest to "coordinate" positions on
ideological issues with Moscow. The
Romanians may well hope to keep the
arrangement as informal as possible.
POLAND
Prime Min=ister Jaroszewicz
acknowledged, in a recent review of the
Polish economy, that the country has
made little headway so far this year in
solving its pressing economic problems.
The Prime Minister warned that much of
the belt-tightening Poland must endure is
still to come.
Jaroszewicz said the government has
been unable to control excess wage in-
creases, alleviate acute meat and con-
sumer goods shortages, or reduce a
burgeoning hard-currency trade deficit
and debt. He emphasized the need for
progress in slowing the rapid rise in
Jaroszewicz reiterated that the growth in
wages, coupled with the continued freeze
on basic food prices, would force the
government to raise prices on other
goods. Nonalcoholic beverage prices
already were increased in January. An in-
crease in nonfood prices probably would
lead to some consumer grumbling, but the
reaction would almost certainly be less
than that of a year ago, when a govern-
ment announcement of sharp food price
hikes touched off serious disturbances
that forced cancellation of the increases.
Jaroszewicz described this year's
foreign trade results to date as unsatisfac-
tory. He observed that hard-currency ex-
ports were considerably below planned
levels while imports continued at high
levels, and warned Western countries that
Poland could retaliate against their ex- 25X1
ports if Western barriers to Polish
products are not lowered.
If Poland's trade picture does not begin
to improve shortly, its hard-currency
trade deficit could approach the 1976
record deficit of $3.3 billion. Such a
development would only intensify War-
saw's difficulties in obtaining credits to
finance its purchases and make debt
repayments.
Jaroszewicz' remarks may foreshadow
new administrative measures to deal with
the country's economic problems.
Discipline over industrial enterprises may
be tightened to check investment growth
and slow the rise in wages. The regime
also may take steps to curb imports and
encourage hard-currency exports through
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CHILE ! S
Gradually recovering world copper
prices and rising noncopper exports should
permit Chile some relief from the harsh
fiscal and monetary measures of recent
year,. A 24-percent increase in imports
this year planned by the ruling military
junta will spur a recovery in real gross
domestic product and should aid in reduc-
ing Chile's triple-digit inflation.
Unlike most countries of comparable
development and sophistication, Chile
had to slash imports-and thus domestic
income and employment-to cope with
the payments problems stemming from
rising oil prices and world recession. Until
recertly, its extremely weak international
credit rating practically ruled out access
to ccmmercial funds. World criticism of
the regime's human rights practices
severely limited new official economic
assistance and made foreign debt
rene?;otiation difficult at best.
The Chilean people have complained
little about the austerity because of the
threat of government repression and,
more; importantly, because many
citizens-if not most-still feel they are
better off than under the Marxist Allende
regime overthrown in 1973.
By mid-1976, the balance of payments
had improved considerably because of
booming copper production, moderate
recovery in world copper prices, rising
earnings from noncopper exports, and
short-term capital inflows attracted by
soaring interest rates. This year the
government plans to use its improved
foreign reserve position to permit an in-
crease in imports sufficient to restore real
gross domestic product to the 1974 level.
It also intends to avoid debt
renegotiations and to assert its in-
dependence of the US and other critics of
its human rights practices by sharply
reducing borrowing from governments
and international agencies.
Imports are expected to rise to about $2
billion this year. Higher domestic wheat
yields and low wheat import prices will
permit a reduction in spending for food
imports; most of the increase in imports
will consist of fuel, raw materials, and
goods for industry. Bringing total imports
to the target level will require about $175
million more than Chile now expects to
receive from trade and capital flows.
Given the recent improvement in the
country's credit rating, it probably can
raise this additional amount from private
sources.
Although the government is still pur-
suing a strong anti-inflation policy, it in-
tends to ease austerity. Real wages are to
be increased about 5 percent. The junta
PAKISTAN 67-~,
t~
The latest round of negotiations
between Prime Minister Bhutto and
leaders of the opposition ended this week
after making some progress but without
reaching a definitive agreement on the
resolution of Pakistan's political crisis.
Despite an announcement that an accord
was reached on the basic issues, at least
one important matter apparently remains
undecided-the establishment of
guarantees that the new elections Bhutto
has promised are conducted honestly.
Bhutto made several concessions during
the meetings. Most important was his
agreement to hold new National
Assembly and provincial elections. He
also agreed to release opposition leaders
and thousands of their followers from jail
and to end martial law, imposed in
Pakistan's three largest cities in April.
The opposition dropped its demand
that Bhutto resign, and he was able to
avoid the formation of a coalition govern-
ment in which the opposition would have
considerable power. The negotiations also
bought time for Bhutto. The country has
began a slight relaxation of its restrictive
monetary policy in the first quarter, and
last month it announced a moderate
program of tax reductions, increased
social spending, and wage increases for
government workers.
Both the government deficit and growth
in the money supply are expected to
decline this year; as a result, inflation
appears likely to fall to 130 percent or
less, down from about 180 percent last
year.
With somewhat stronger demand, real
gross domestic product should grow 6.5 to
7 percent this year. Employment will rise
some 4.5 percent, but the unemploy-
ment rate will decline only slightly,
to 12.2 percent
been relatively quiet since the talks began
in early June, and there is no sign that the
opposition is planning to resume
demonstrations soon.
Bhutto is under pressure from the army
and the Saudis, however, and may have to
make new concessions in talks that one of
his closest advisers, Finance Minister Pir-
zada, will now hold with opposition
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Prime Minister Desai's Janata Party
has won most of the 10 state assembly
elections held in India from June 10 to 14.
The results indicate that the Janata group,
although it is a loose alliance that has
been in existence less than six months,
has maintained its popularity since de-
feating Indira Gandhi and the Congress
Party in the national election three
months ago.
The eight states in which the Janata
Party appears to have won are all in
northern India. These were the states
where the party made its strongest show-
ing in March, prompting Desai to dissolve
their legislatures and call new elections.
An independent Marxist party ap-
parently will dominate the state assembly
in West Bengal, and a local party has won
in Tamil Nadu, a southern state that went
to the polls because an election had
already been slated there. Elections were
not called in India's other 12 states.
The Congress Party's poor showing in
the state elections reflects the continuing
stigma of former prime minister Gandhi's
emergency rule. The results also mean
that when a new president is elected this
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\ Bengnl 4
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t. ( brissa
Tamil
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a 400
Kilometers
summer, the Desai government may be
able to put its nominee in office in place of
the current incumbent, a Congress Party
member. State legislators cast half the
votes in Indian presidential elections;
members of the national parliament cast
the rest. The post is essentially
ceremonial, but the president does have
some power to delay implementation of
government policy.
China: Political Aspects of Military Modernization
A recent editorial in China's army
newspaper, Liberation Army Daily, reaf-
firms party control over the military and
argues that further political work in the
army is required in order to accelerate
military modernization.
Highlighting the editorial are two
handwritten statements by party leader
Hua Kuo-feng and Defense Minister Yeh
Chien-ying dealing with political aspects
of the modernization question. They
appear to put the army on notice that the
acquisition of more advanced weapons
systems depends on its demonstration of
proper political attitudes and perform-
ance, including strict obedience to party
leadership.
In reference to defense spending, the
editorial argues that "army building"
must proceed "at the same time" as
economic development, but avoids the dif-
ficult translation of this general directive
into specific budgetary decisions.
The army is exhorted to learn from the
"Hard-Boned Sixth" Company, a unit
widely praised not only for its excellent
combat training, loyalty, and toughness,
but also for its sffo4ts to its ranks
politically pure. An emulation campaign,
which began in low key earlier this year
and seemed aimed at weeding out
followers of the discredited leftists, is now
being pushed more actively-implying
dissatisfaction in Peking over the way
some military units are carrying out their
work.
The editorial clearly sets priorities for
army work: "Our principle is putting
revolutionization in charge of modern-
ization." Revolutionization is defined as
doing proper ideological work, obeying
party instructions and, most important,
"purifying" army leadership groups.
This approach seems to serve two pur-
poses. It clearly reaffirms the principle of
army subordination to party leadership,
which may have come under question in
the wake of the purge of the four leftists.
It also provides a sound political justifica-
tion for resisting the argument that
military modernization should receive top
priority-an argument that Peking may
be forced to reject for purely economic
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Two politically sensitive issues-wage reform and defense
spending-were recently discussed but not resolved at a major
economic conference in Peking.
China: Economic Issues Discussed
China's new leadership has recently
concluded its first major industrial con-
fererce, the "learn from Taching" con-
fererce that went on in Peking for more
than a month. Keynote speakers Hua
Kuo-feng, the party chairman, and party
vice chairman and defense minister Yeh
Chien-ying described the "excellent
situation" in the economy, and called for
a new "leap forward" that would push the
economy closer to the goal set by Mao
Tse-lung in 1956--to overtake and sur-
pass the US economically by the end of
The Chinese media have responded
with a torrent of statistics to portray an
economic surge during the first quarter of
1977. In fact, however, these figures are
more important for what they reveal
about the sharp fall-off in production last
year, when political infighting severely dis-
rupted the economy, than they are for ac-
complishments in 1977. Still, it seems
clear that the economic situation as a
whole has greatly improved over last year.
Industrial output in April reportedly was
up 7.9 percent over March of this year,
and 10.8 percent over April 1976.
Improvements in managerial efficiency
and a stricter accountability of labor for
its actions have evidently contributed to
the improved situation. The Chinese
leaders recently issued instructions to
withhold wages from workers who have
been absent from their jobs without valid
excuses. The same directive indicated that
workers who put in extra hours would be
allowed to accumulate those hours as part
of their leave time. This approach appears
to have helped to promote greater worker
productivity. Increases in loading and un-
loading rail freight and shorter turn-
around times have already been reported.
Prospects for Further Growth
In contrast to the favorable economic
situation portrayed in the press, a recent
series of central directives has been more
critical. In these directives, Peking drew
attention to numerous problems that have
been noted before, such as structural im-
balances in the coal and iron and steel in-
dustries, fuel shortages, and transporta-
tion difficulties. The important thing,
however, is that the new leadership now
appears ready to deal with these
problems.
Defense Spending
The course and pace of Ch25X1
affected by the resolution of the
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sensitive issues of defense spending and
wage reform.
At the Taching conference, Yeh Chien-
ying recited a graphic Mao quote: "We
have two fists and one rump. One fist is
agriculture, the other defense industries.
If we want the fists to pack a wallop, our
rump must be firm-the rump being the
basic industries." The quote underlines
the overriding importance of civilian in-
dustrial development as a basis for
defense modernization, and the fact that it
came from the defense minister suggests
the military has accepted some short-term
belt tightening.
As economic recovery proceeds,
however, the advocates of a more
aggressive military modernization
program may argue more forcefully for a
greater share of the fruits of recovery.
Interservice haggling over how defense
modernization should proceed and
resources should be allocated will, in the
long run, determine the overall cost of
military modernization.
Wage Reform
The announcement at the industrial
conference by the head of the State Plan-
ning Commission that a separate con-
ference will be held to discuss "the
problems involved in employment and
wage rates" underscores the complexity
of wage reform and the difficulty of
satisfying worker wage demands. Chinese
workers have not had an across-the-board
increase in industrial wages since the late
1950s, and increases in the cost of living
have in many cases outpaced wage in-
creases during the intervening years.
The leadership at first relied on bonuses
of 6 to 8 percent to help supplement the
low and unchanging wages of the in-
dustrial worker. Such bonuses, however,
were eliminated in the later years of the
Cultural Revolution; the lack of bonuses
contributed to the increase in strikes,
absenteeism, and other so-called acts of
"sabotage" that have been occurring since
that time.
Following the purge of the leading left-
ists last fall, the government gave strong
indications to labor that wage reform will
be undertaken sometime this year. In re-
cent weeks, a bonus system tied to worker
productivity was introduced on a trial
basis in selected factories in Peking and
Canton. Under this system, a monthly
award of 20 yuan-the average monthly
wage is about 60 yuan-will be made to
workers fulfilling 130 percent of their
quotas, and scaled-down bonuses to
others who fulfill at least 120 percent of
their quotas.
In addition to bonuses, the Chinese
leaders apparently also are considering
wage increases. Senior managers in a shoe
factory in Canton informed workers that
in the second half of 1977 those workers
with 10 years of service will be eligible for
a pay raise that will be based on their
political attitude and work performance.
Similarly, an official of a Shenyang fac-
tory in mid-May indicated that at the end
of the year there would be selective wage
increases based on worker attitude,
technical level, and productivity.
Although labor in general has respond-
ed favorably to reports of pending wage
raises, there is evidence that workers' ex-
pectations may exceed the
willingness-and perhaps the ability-of
the government to pay higher wages.
Workers in a Canton factory recently
complained that wage increases of only 3
to 4 yuan per month would not be enough.
The government may be temporizing,
hoping to buy time to allow the economy
to recover and to promote other incentive
schemes, such as the emulation cam-
paigns that have increased in the past few
months. The new leadership may be reluc-
tant to risk debate over an approach that
some might construe as a retreat from
socialist commitment. On the other hand,
if wage increases or production bonuses
are not forthcoming, planned increases in
productivity and future growth prospects
Mexico's border industry program, in which factories
operating under special tariff concessions assemble products
largely for export to the US, is expanding again after two years
in the doldrums.
The Mexican border industry program,
in which US-owned firms play a major
role, has begun to expand once more after
languishing for two years under the
weight of soaring labor costs, the US
recession, and political uncertainty. A
/e~ ~; - / e ;,
Mexico: Border Industry Program
sharp drop in labor costs because of peso
depreciation, increased US consumer de-
mand, and firmer support from the new
Lopez Portillo administration have
boosted border industry activity. Real
output and employment in these in-
dustries probably will increase between 15
Page
and 25 percent this year.
The program consists largely of
US-owned, labor-intensive manufac-
turing plants operating in border areas of
Mexico under special US and Mexican
tariff concessions. Participating factories
assemble articles from US-made com-
WEEKLY SUMMARY Jun 17, 77
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ponent;. The goods produced, 70 percent
of which are electric and electronic equip-
ment and 10 percent wearing apparel, are
sold mainly in the US. The program takes
advantage of a part of the US Tariff
Structure that limits US tariffs to the
value z:dded abroad for reimports of US
goods exported for assembly or further
processing.
Initiated in mid-1966 by the Mexican
government, the border industry program
is designed to reduce the serious un-
employment problem in the area, which
was a;;gravated by termination of the
bracer(; (contract farm labor) program at
the end of 1964. This program, which
allowed Mexicans to cross the border for
seasonal farm work, employed as many as
170,000 workers in the early 1960s.
Following the lead of several Southeast
Asian -ountries, the Mexican government
granted incentives to stimulate develop-
ment of industries producing consumer
goods for the US. Border firms were ex-
empted from Mexican import duties on
materials and equipment, and from re-
quirements for partial Mexican input and
ownership. In addition, the
firms--regardless of ownership-were ac-
corded all privileges normally granted
Mexican-owned companies.
Early growth of the program was im-
pressive, with the real value of border in-
dustry exports increasing at an average
rate of more than 65 percent per year
through 1974. Although factories initially
were -estricted to a 20-kilometer-wide
zone along the US border, since late 1972
"border" firms have been allowed to
locate in the interior of Mexico. Though
still dominated by firms located on the
border, the program is now officially
termed the "in-bond" industry program.
Depressed Activity in 1975-76
The in-bond program was hard hit in
1975 and 1976. Real output and employ-
ment fell about 10 percent in 1975 as the
US recession cut demand and sharply
higher Mexican wages raised operating
costs. Although the US recovery spurred
output during the first half of 1976, uncer-
tainties associated with the last months of
the Echeverria administration stifled
growth in the second half; for the year%s
whole, real output and employment
remained 5 percent below 1974 levels.
Mexican costs calculated in US dollars
rose almost 50 percent faster than cor-
responding US labor costs between 1973
and August 1976, when the peso was
devalued. As relative wage increases in
Mexico accelerated, several US firms dis-
continued foreign in-bond operations or
shifted to lower cost countries elsewhere
in Latin America.
Haiti and El Salvador, which have cut
labor costs relative to those of the US
during the last 10 years, increased exports
under the reduced duty portion of the US
Tariff Structure from $33 million in 1973
to $134 million in 1976. Their in-bond ex-
ports as a percent of Mexican in-bond ex-
ports rose from 5 to 12 percent.
Ten other Central American and Carib-
bean countries as well as Brazil and
Colombia have increased in-bond
operations in recent years--although thus
far on a smaller scale thar. Haiti and El
Salvador. Since labor costs in most
Southeast Asian counu._s have kept pace
with Mexican rates, in-bond production in
those countries has not expanded relative
to that of Mexico.
Outlook for 19'17
This year, sharply lower relative wages,
increased US consumer demand, and
greater political certainty will boost in-
bond real output and employment in
Mexico by about 20 percent. Exports of
in-bond assembled goods are likely to
reach $1.5 billion this year, and employ-
ment should reach 85,000.
The 45-percent depreciation in the peso
since last fall has largely recaptured the
relative advantage of low Mexican wages
for the in-bond industry. Since wage
demands also have been greatly restrained
this year, relative Mexican labor costs are
likely to be 25 percent less than in 1.976.
Demand for in-bond products willjiump
Ocause of expected strong growth of the
'(US economy. Japan's recent agreement
40
er-
les to the US b
i
n
G t
t t
l
i
p
y
ev
o cu
e
s
o
sa
cent starting next month will further in-
rease demand for sets and components
parts assembled in Mexico. Thirty percent
of all Mexican in-bond output is directly
associated with assembly of television sets
and components.
In contrast to former president
Echeverria, who periodically expressed
serious reservations about in-bond exemp-
tions from regulations requiring Mexican
control of firms operating in the country,
President Lopez Portillo firmly supports
expansion of the program. With the threat
of economic restrictions greatly
mitigated, US manufacturers are again
increasing their investments.
Value added by the in-bond industry
should grow from $536 million last year
to an estimated $647 million, contributing
significantly to Mexican foreign exchange
earnings. During the first quarter of 1977,
in-bond exports were up almost 7 percent
from the first quarter 1974 peak.
The increase in in-bond production will
create approximately 12,000 new jobs.
With an expected 800,000 new entrants to
the Mexican labor force this year and
combined national unemployment and
underemployment approaching 50 per-
cent, however, expansion of the in-bond
program may attract more labor to the
border areas than can be absorbed. Thus,
while economic conditions on the border
will improve for some, the expected influx
of laborers to the area may increase illegal
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Prime Minister Vorster is responding to Western pressure
for more rapid change in South Africa by indicating that no
basic change in South Africa's policy of separate development
for its ethnic groups is contemplated and that only minor
changes will be made in discriminatory racial laws and prac-
tices.
South Africa: No Sign of Give
South African government officials
have been talking tough in recent weeks in
a determined effort to reassure their
domestic white constituents that the
Vorster government will protect their way
of life and resist all pressure for change
from both West and East as well as from
the black nations to the north.
Specifically, since mid-May Prime
WARANXIOVIIIIIII
Minister Vorster's lieutenants have:
? Reassured white South Africans
that no basic change in the government
is contemplated, even as plans are
revealed for accelerating the pace of
separate development and reducing
discriminatory practices.
? Emphasized for the benefit of
Western audiences the dangers of com-
munist control of South Africa's
Foreign Minister Botha addressing the UN
resources and of the strategic sea lanes
around the Cape of Good Hope.
? Appealed to segments of the
American population to try to modify
official US pressure for more rapid
change in South Africa.
Both Foreign Minister Botha and State
President Diederichs are protesting that
South Africa is not prepared to commit
racial suicide by adopting the norms and
standards of the US political system, es-
pecially the one-man, one-vote concept.
Botha, in particular, has concentrated
his fire on the one-man, one-vote theme.
A hard-line speech he gave on June 4 to
the Cape Town press club drew strong
applause from a mostly English-speaking
group that represents the more liberal
segments of the white population.
He played on fears of the "black peril"
by pointing out that the birth rate for
blacks is 3 percent a year, while their part
of the gross national product only goes up
I percent a year; he questioned whether
the whites should be governed by a people
who, he said, would not reach a Western
standard of living for 300 years; and he
threw barbs at the US. Botha concluded,
"There is one thing we cannot do: we can
never buy one-man, one-vote in one
political entity."
Rhetoric such as this falls on receptive
ears throughout white South Africa, in-
cluding the so-called enlightened whites
who count Botha among their number.
Top South African officials are also
making much of the new Soviet threat in
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Africa and are maintaining that the US
has long underestimated this threat.
Moscow, they say, is aiming at a world
monopoly of raw materials. Botha public-
ly criticizes the US for not being able to
stop the Soviets in Africa and claims
Washington is currying favor with
African radicals as a way to prevent
further Soviet inroads.
Many Afrikaners sincerely believe the
US needs their help in halting the USSR.
A theme frequently repeated in speeches
on Republic Day on May 31 was that
Afrikaners are prepared to stop the
Soviets themselves if necessary.
The Limits of Flexibility
Some officials have attempted to give
the impression that the government is
flexible on future political arrangements
to give nonwhites a share of power, and
new codewords for old concepts are being
developed. One cabinet official on May 24
talked about "cultural pluralism" and
"pli.ral democracy"-apparently an ex-
tension of the concept of "separate
development," which is, in turn, a
codeword for apartheid.
While apartheid means racial
separateness in general and was the cen-
tral concept of the National Party's
philosophy when it came to power in
1948, "separate development" has come
to mean giving over to the blacks-70 per-
cent of the population-some 13 percent
of tl-e land scattered in "bantustans," or
tribal homelands, throughout the country.
Plural democracy seems to imply that
there will be some sort of confederation of
whites, coloreds, and Asians.
In addition to adding new vaguely
defined terms to the South African lex-
icon, the government has eased some of
the strictures on blacks in ways that
change the power equation little, but for
which there has been considerable agita-
tion. Blacks, for example, are now per-
mitted to compete against whites in some
sporting events and to own businesses in
areas where they do not live.
In the face of increased international
pressure, the South African leadership
seems to be telling domestic audiences
that it will not be stampeded into suicidal
action. It is also saying that it is not in-
transigent, but is going about change in its
own way and at its own pace.
At the same time, the South Africans
are telling foreign audiences that
recommendations from abroad are not
suitable for South Africa and that the
South African government is moving
away from racial discrimination, which is
the goal the West is pressing.
It is evident that Pretoria, in the face of
new pressures, has virtually written off
political emancipation for blacks outside
of the homeland program. It appears also
that the government does not intend to go
beyond lifting some discriminatory prac-
tices against blacks who live and work in
white-dominated South Africa. It is even
possible that new Western pressure for
more rapid accommodation with the
blacks and for a settlement in Namibia
will produce a siege mentality among
South Africa's officials that would rule
out peaceful change.
14 WEEKLY SUMMARY Jun 17, 77
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