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October 4, 1974
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25X1C10b Approved For Release 1999/09/02 : CIA-RDP79-01194A000100510001-9 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100510001-9 CPYRGHApproved For Release 1999/09/02: CIA-RDP79-01194AO00100510001-9PYRGHT Boom reverses into CPYRGHT world recession pared with 1973. by Peter Jay Economics Editor in 1973 the three strong A year ago the major prob-l lent of the world economy did not even exist. Nor was, it -foreseen. The increase in, oil prices, although it may, ,vverl1 have been inherent in, flit progress of inflation in, t11'6 industrialized countries, interacting with their ex- trame dependence on this valuable commodity, was not regarded as imminent by al-' most everyone generally con- cerned with the management of xthe world economy. this should be a sobering les6on to pundits, although it does not quite entail total agnosticism about world eco-, nomic prospects. It is not evory year that an event of comparable magnitude dis? tunbs reasonable prognoses of economic trends ; and there are not so many groups with t.114--until last winter-un- used monopoly power of the oil'. producing countries to create such extraordinaryI ch dnges. The consequences are by now well known. The oil- producing countries have be- from the beginning of the year, to move into a mas- :avg balance of payments sur- plus with the rest of the -v.orld. The OECD has esti- m aied the effect on the bal- ances of payments of its members-mainly the indus- trialized countries of the so- called West (including Japan, and Australia) at a deterior- ation of about $50,000111, in a full year. l'his has been. coming through fast ; and it Ii . by apt, means been proportion- .ulely distributed between the main oil-using countries ac- cording either to their eco- nomic size or to their capacity to handle a balance of payments deficit. The Bank of England, in its Sep- tember Quarters) Bulletin, 4ras provided a convenient. retries in terms of cur- ie ties and balance of pay- m nts were the United 'St tes, Canada and West G rmany. In addition the c< egory "all other OECD co ntries " (excluding North A erica, Japan and the four la ger members of the EEC) w re' in strong surplus in 19 3; but jointly these coun- tries enjoyed no special cur- re icy or financial strength. TI e turn-round in the joint balance of payments posi- ti ns of the United States, C nada and West Germany b ween 1973 and the second quarter of 1974 (at an annual ra e) was from a surplus of $5 000m to a surplus of $5 000nt-in other words, no ch nge at all. he turn-round of Japan, th four larger EEC countries at tr the "other OECD coun- s " was thus equal to the w ole of the deterioration in th total OECD balance, from a urplus of $2,S00m to a de icit of $40,500in. Of this to al deterioration of $4 ,300m the "other OECD co tntries " suffered $1 ,SOOm, Italy suffered $8100111, Japan suffered $6 900nt (after an even worse ex )erience in the first quar- te ),'Britain suffered $6,700m all i France $5,800in. File important 'conse- qt ences were threefold : to e. ccrbate world inflation, to trier off a world reces- si I anti to pose the world fi ancinl pontlts will go up by 23 per The Government's policy a most any cost, and the c st is already being shown i forecasts that domestic r cent this year. its September review iblished three, weeks after tit demand and supply is time it was served, and collapse of the West man mark. r Willem Duisenberg, R ister of Finance, was e ply offended at not e ng invited to the finan- i discussions in Paris a ly in September and, vi h his Belgian colleague, r mptly let it be known t he does not consider Dutch bound by anv n ncial decisions taken h (re, such as the possible e aluation of. the " green o n d ". he Dutch have tackled ~ ation radically this year. pite a rise in price of a materials of some 30 )e cent and a forecast rate eft, the eventual figure 'ill be closer to 9 per cent, h first five OECD coun- ri s withi a " low " rate of ation. Although there Next to oil, the world's most wanted commodity is gold. South Africa, which pro- duces 70 per cent of the western world's supply of the metal, has seldom, if ever, had it so good. .It is small wonder that in August, when the world's financial leaders were look- ing gloomily at forecasts of serious recession and as stock markets tumbled, Dr Nico Diederichs, the South African Finance Minister, was able to produce a budget which he modestly described as " a remarkable fiscal Approved For Release 1999/09/02 : CIA-RDP79-01194A00010 J.heres of the economy.. his has become apparent ?oui an excessive pressure demand for and the high st of finance, increasing roduction bottlenecks and the reduction of spare in- dustrial capacity, the length- ening of delivery periods, a tight labour market, a strained transport system nd a worrying deterio- ation in the country's alance of trade." I In its annual economic eport, also published after he budget but on which Dr iederichs apparently based is own review of the past. 2 months, it suggested that bile existing credit con- ols might not be tight- ned, there was little pros- ect of any easing of them. The report said: " The igh rate of increatsl in ,.ri- ate consumption expend= ure during the last two ears was facilitated to an portant extent by the extensive use made of con- sumer credit." The Governor of the 04r- q. W. de Jongh, CPYRGHTApproved F 6 1999/09/02: ,R- l~-O1194AOOO1(O6g df 9 aid: "We -. ave , now eached the stage where the cononly is_ growing at a cry high rate... while at he same time demand-pull nflation has begun to play. part again. It is there- ore certainly not necessary o stimulate further growth eliberately but rather a latter of trying to maintain relatively high rate of rowth to the extent that vailable resources permit nd without feeding infla- tion.,, There is no doubt that the South African economy is at present growing at an exceptionally rapid rate in real terms. The expected rate of increase of 7 per cent in real gross domestic product for 1974 far out- strips the average annual rate of 5.75 per cent envi- saged in the economic deve- lopment programme. But most economists feel that now that tlra cyclical upswing has brought the economy to a point where most of the previously exist- ing surplus capacity has been absorbed, it is both inevitable and desirable that the rate of real economic growth should slow down at some stage to a more main- se erely affected by the oil I l cr i B i hi d i s s ut n t s an n . of er respects there are spe-? ci l factors in the Finnish' Si uation. Most of Finland's energy i ports are obtained from t Soviet Union, with w om trade is on the basis o regular bilateral agree- m its. Before the inter- n tional price of oil was r sed so dramatically the m in n limitation on Soviet- F nnish trade was the inabi- li y of the Soviet Union to s 1 Finland enough goods tl at she really wanted. It w is political considerations ich kept this trade as h li as it was, which was 11 below a fifth of Fin- ] id's total international t de. Now Finland is hav- i g to sell more to Russia t pay for the higher price o oil and for the natural g s which began flowing f oni the Soviet Union to eland this year. This has limited Finland's c pacity to export to the rest of Europe, so that the b lateral trade agreement th the Soviet Union has o ly partly shielded Finland f om the full effects of. the o I crisis. The limiting fac- t r on the growth of Fin- sh exports has been the pacity to produce, not the capacity to sell. There is a persistent shortage of skilled manpower for the main industries, at any rate the south of Finland. In some respects this is a omforting position as the nternational economic rinds blow more harshly. he combined effects of uoyant international eniand for forest products nd Finland's need to sell tore to the waiting Soviet ar-ket should ensure con- inued high activity in the innish economy. Finland will also benefit rout the continued strength f both the Swedish and orwegian. economies. They rovide the real Scandina- ian success stories over the ast year. Both have had a elatively low rate of infla- ion by today's extravagant tandards, though inflation- ry pressures have been teadily increasing. Neither continued to dvance at the same pace as n the previous year but neither could expect. to do o in the harsher inter ational economic climate. oth had enjoyed boon con- ditions in 1973 and the first half of this . year, with the wedes having one of their best .years on record in 1973. However, of all the Scan- dinavian countries Norway has the most glowing pros- ects. The 'boom there has rcen slowing down and-may n so still more, depending. n the level (if "Cool-al ?uropean demand. The good xport performance of the- ast year has been due lat- ely, however, to the ?trength of the demand for Japer, which is unlikely to `oath-east Asia CPYRGHT A uaw?~~ y Petar Hadji-Ristic Engsand's bewilderment' over its economic plight is n marked contrast to the urrent mood in South-east sia; every country in that egion is keen to develop and the world recession is r not deflecting them from their course. Compared to a year ago short and medium- term expectations have been rapidly revised downwards, but the gloom-and-doom syn- drome we know in Europe, is not yet to be found. The fourfold increase in crude oil prices has not left the region unscathed, how- ever. The additional boost this gave to already soaring inflation and cost increases in 1973 has caused some development projects to be emporarily shelved. The export growth rate has been temporarily: educed because of the adjustment strains in indus- trial countries created by the energy crisis and a few ianufacturing companies have collapsed. - The general view is that this is nothing more than a temporary setback. Accord- ing to most government officials and bankers, South- east Asian nations are bet- ter placed than most deve- loping countries to survive, and even thrive on, the cur- rent economic difficulties.. Not least of the reasons for such optimism is the fact that the energy price rises' are bringing big amounts of new international invest- ment in the development of alternative energy sources in the region. The best place from which to take a first look at the financial prospects of the region is Singapore, the tiny republic on the regional crossroads. - This city-state is gambling on becoming the region's finan- cial . and technical nerve centre. That Singapore is moving fast to do just this can be seen from the Government's single-minded efforts to Scandinavia by Geoffrey Smith C PYRE One of the ironies of this year of economic gloom is that the one Scandinavian country to have joined the EEC is the one with the worst economic record, fac- ing the most daunting eco- nomic perils. This is not cause and effect; it is simply a? reminder that membership of the Corn- . munity cannot by itself set all other factors on one side. because the fundamental weakness of its position over a period of years had left it in no condition to face the sudden onset of the oil crisis. Nor does it have the compensation enjoyed by the other Scandinavians of the forest industries whose products continue to sell in a boom European market. Unemployment has been about three times higher than a year ago, with the construction industry parti- cularly badly affected. Finland's situation is the next worst. There, too, infla- tionary pressures have been .strong and the balance of payments deficit has in- creased. Finland was among those countries most Approved For elease 1999/09/02: e =; ,[ 07 a 'c af9400. I Th fast-expanding Asia dol- lar market base in the re ublic, now worth some $9 OOui, has b come a m 'or source for develop- m nt finance for _the oil so rch. he Governme it's Eco- no tic Developme it Board is now concentrating on acting into the republic foreign investment in high- technology industries, par- ticularly in metal and aero- space engineering and chemi- cals. It is not surprising that against this background of intense activity, Si gapore is Ling, perhaps a little over- ptimistically, a 10 per cent real growth rate this year. Co ernment officials in Malaysia, just across the caus gay from Singapore, are lso predicting a high rate of growth his year, prob bly about 7 per cent. In th industrial sector, into whit foreign i vestment conti ues to flow at a high rate, the growth rate should ben rly triple this. Th re is no ev dente to show so far sat this healt y growth in he indus- trial sector will be halted next year as a res t of the energy crisis. Rather, this seem to have been enco -aging the relocation of co panies from the high- cost ndustrialized countries to de eloping coun ries such as Malaysia, wh ch have lowe labour costs and a big pool of young unemployed in th urban areas. Th s process is likely to be 6',en a co siderable boos by the massive invest- ment now going into the searc for petroleum in the Malaysian offshore waters- Nine foreign oil ompanies are rospecting for oil and gas id some 120 thers are comp ting for new prospect- ing I cences. Es "mates based on exist- ing finds suggest that Mala sia should be produc- ing million barr is a day, 10 tines its preset domes- tic eeds, by 1980. Ap rt from simulating the development of the coup ry's energy resources, the oil price rises have brow ht about a revival in the ortunes, of the natural rubb r industry, for more than a generation struggling agai st competition from the heaper syn retie rub- ber ubstitute. Th price of synti etic rubber soared after the energy crisis and this has ' stimulated an expa sion in production of natu al rubber. N tural rubber is not the only commodity that has ben ited _ from th boom in corn odity prices Palm oil 005 0001-9 1 CPYRGHT Approved F&%(d?4 zMiF 1999/09/02: CIA-RDP79-01194A00010O91i OG1-M . prices have also ro ete , as well as the price of metals, such as tin, bauxite and iron ore, all of which Malaysia now produces in reasonably large quantities. Any discussion of the region's natural resources must turn to a discussion of the fabled wealth of Indone- sia, the archipelago facing Singapore and Malaysia. To a much greater extent than in Malaysia, the energy crisis has hastened the deve. lopment of Indonesia's petroleum reserves, which are estimated to equal at least 2 per cent of the total world's supply. Oil production is expected to rise substantially this year, from 489 million bar- rels to 550 million, and will rise even more spectacularly in the second half of the decade as the new finds are brought into production. Big earnings will also accrue to the country from the development of natural gas resources. - Apart from the increase in petroleum exports, a big boost in the output of other primary products can also be expected later in the decade. Major mining pro- jects are now under way or in the planning stage to exploit new finds of tin, bauxite, copper and, the lar- gest of all, coal. As for industrial produc-' tion, this is expected to expand by at least 15 per' cent this year as the diffi- culties due to inadequate transportation and shipping begin to ease following big spending on infrastructure. Over the long term, the key to the continuing finan- cial stability of the region rests on regional political stability rather than the suc- cess of the world economy in adjusting to the changed economic circumstances. All indications are that the political situation in Singa- pore, Malaysia and Indone- sia is stable. With these conditions in mind, most economists in the region maintain a cau- tious optimism about the future. he prices of copper, tin;` I}vel slightly less than that effect on industrial and itf 1974 will be equal to optained by special agree. d vote more vigour and r sources to the exploitation I dia should now be extract- g annually 225 million India CPYRGHT Oil, food and raging infla- tion have dominated the economic scene in India this year, as also, in varying degrees, in Bangladesh, Cey- lon and Pakistan. The huge rise in oil prices at the end of last year, which was 'nly part of 'a whole range *mport cost increases F val cep I thir cru Ass the exh de. This prospect, cou- pled with the high prices of imported crude, has im- parted a new urgency to the need to increase indigenous production. The record to date of the Government- owned Oil and Natural Gas Commission (ONGC) has been highly erratic and in- efficient. Its performance in onshore ? development and exploration.. has shown a consistent downward trend. The ONGC's new offshore drilling programme, how- ever, presents an altogether more encouraging picture. The most promising deve. lopment was the discovery, in February, of oil in the Bombay High structure in the Arabian Sea. The oil crisis has also' severely affected food production because of the increased cost and reduced availability of petroleum- based fertilizer, of which In- dia has to import about 50 per cent of her require- ments. Plans to expand the indigenous production of coal-based fertilizer have yet to bear much fruit. The huge rise in import costs has overshadowed the one apparent success story of which India's economic planners can boast, namely the growth in exports, which rose by 22 per cent in 1972-73, by 25 per cent in 1973-74 and, reportedly, by 40 per cent in the first three months (April-June) of the current financial year. These figures, however; tend to reflect the steep rise in the unit value of many of India's traditional exports (such as coffee, cashew nuts, cotton textiles, sugar and jute) rather more than an increase in their volume. At an optimistic estimate, :he total value of India's exports in 1974-75 might amount to Rs 26,000m. The: total import bill, which is difficult to calculate because of the uncertainty about how much food will have to be bought abroad, could be anything from Rs 37,000m to Rs 40,000m; leaving an uncovered gap of between Rs 11,000m and Rs 14,000m. The next inflow of foreign aid, after debt servicing, in 1974-75 is lik- ely to be about S675nt (Rs5,400m); which will still leave a substantial gap to be filled. But the assumption of these calculations is that with the aid of drawings on the International Monetary Fund and oil credits India will scrape through. An important proviso of this assessment is not only. that export' trends continue': to be favourable but also that Congress approves the .crucial American ?contribu- ion to the International Development Association, the World Bank's soft-loan affiliate, which is scheduled to provide about $60otu of the total aid commitment of $1,400m pledged this year by the Indian Aid Consor. tium. On the domestic front; the Government has been struggling, though not so far effectively, to contain a highly inflationary situation. Fuelled by stagnant or declining industrial and agricultural production, deficit budgetary financing and the existence of a paral- lel "black" economy (mainly the product of mas- sive tax evasion), the gen- eral price level rose during the first Six months of this year at an annual rate of 30 per cent. An emergency supplemen- tary budget enacted. in July-sought to close the ..budgetary gap by._ raising extra revenue through in- creases in a wide range of taxes, levies and excise Eastern Europe CPYRGHT by Kurt Weisskopf The oil crisis of the West, rising commodity prices and inflationary price trends have affected the economies of the Comecon countries. The impact of these trends may have varied from coun- try to country. It was less marked in East Germany, strongly felt in Hungary and Yugoslavia, the communist country outside Comecon, and less perceptible in Bul- garia. Yet none of the Euro- pean Comecon countries es- caped unscathed. Their plans to control their economies during 1976-1980 and to in- clude an element of supra- national integration are still under consideration, Com- econ sources indicated at the Leipzig Fair early this month. Some of them admit. ted that in view of the upset- ting effects' of western infla- tion, these plans are once again in the melting pot. Up to a point there has been a convergence of problems be- tween East and West. In terms of overall econo- mic growth little has changed. Growth rates still vary between 6 per cent and 8 per cent. But overall growth is a general term. More specifically, the Come- Approved For Release 1999/09/02 : CIA-RDP79-01194A000100510001-9 CPYRGHT CPYRGHT Approved For Release 1999/09/02: (1PY79-01194A000100510001-9 con countries are passing through a process of plan- ning readjustment which will -delay realization of the goal p1.ncl,1inmed at the Bucharest meeting of. the council in July, 1971-full planning in- tegration, possibly by 1980. The past 12 months, but particularly the events after the Yom Kippur war, as well as intimations by the Soviet Union that prices of Russian crude oil will be raised to world market levels while the volume of deliveries to. the Comecon countries may be limited to a maximum of perhaps 50 million tonnes annually, have forced East European states to re- appraise their own oil situa- All of them are committed to the expansion of their petrochemical industries as one of the main planks of their economic programmes. Therefore, all of them have been searching for new ,sources of oil, generally Middle Eastern and North African. This entails not only ,contracts with Middle East countries but also physical preparations that have already started. East Germany is construct- ing a major oil port at .Rostock. Poland is expanding the oil port and refining capa- cities at Gdynia. Possibly the most ambitious and expen- sive project is the new Adria oil pipeline from Omysal in Rijeka bay to the Hungarian border and Czechoslovakia, with the pos- sibility of an eventual exten- sion to Poland. Commodities have been another worry for the Conrecoil countries. But prices could now be turning downwards. This trend, coupled with a campaign for economical use of commodi- ties and fuel saving, seems to hold a chance of easing the pressure. Oil and commodities are not the only factors of con- cern to the economic and planning authorities of the Comecon countries. Planning integration as originally en- visaged under the Bucharest charter, known as the Com- plex Programme, entailed joint development of science- based industries. It was soon found that this process could be profitably accelerated by the purchase of western equipment, licences and ex- perience. As a result of western in- flation, however, such pur- chases have become more ex- pensive than was originally calculated. The time sche- dule has therefore been revised and the date envi- saged is 1990. - This delay is probably wel- rnme to Comecon planners who have realized that inte- gration,-since it involves co- operation and specialization, will have to be based on links between enterprises or in- dustrial groupings. This in turn requires the existence of enterprises with corpora. tive status in the legal sense.- It is not just Comecon internal integration which requires the establishment of enterprises with coopera- tive status in the Comecon countries. The matter is even more pressing in view of the emphasis on cooperation deals with western firms. } Such deals are seen as a means to transact business outside the monetary sphere and therefore more or less unaffected by inflation. -Generally they will involve part-production by both the Comecon and the western partner, assembly of the, product by one, and eventual - delivery of a share of the assembled product to the non-assembling partner or' joint disposal on ? third markets. In recent months all Come- con countries have expressed themselves in favour of co- operation deals, which not so long ago some viewed with reservation. Yugoslavia, not a member of Comecon, sees in cooperation rather than in conventional deals the best opportunities for foreign trade expansion. This view is shared by Romania. - Joint ventures, which were started in Yugoslavia in 1967 and in Romania in 1971, are only one step forward from cooperation, but it could be a long step. Recently Hungary has started to take an active interest in joint ventures on its territory, having taken part in them abroad for some years, and Poland is cautiously considering the possibility. . The rapid advance of the idea of cooperation deals and the serious preoccupation: with joint ventures in recent, months is part of. the Comecon reaction to western inflationary trends. It is this approach, the economic. authorities of the Comecon countries appear to hope, -that will enable them to mini-. mize the effects of imported inflation and to proceed eventually with their integra tion plans. The main feature of the economic policies of East European countries in the past 12 months has been the definite reappraisal of - the - time-scale of integration. They received an object les- son demonstrating that they are dependent on coopera- tion with the western world, and that one social system's crisis is by no means:'th'e other system's boom. . The lessons, it seems,' have been learnt and, if political utterances in the press of the Comecon countries, with, high propaganda content for.. home consumption, are dis- regardgd, the language of economic policy and action in the recent past is fairly clear and points to a long period of willingness to co- Latin CPYRGHT America by John Rettie editor, Latin America Chileans . have been variously told that their cost of living went up during the, past 12 months by 550 per. cent or, from another statistical source, nearly 700 per cent. To the average man in the street, the odd 150 per cent makes little or no difference. Although Chile, flounder- ing in the chaos of- the Allende and post-Allende governments, is by far the worst case in Latin America this year, not a single country has escaped the scourge of inflation. Even the best managed and luckiest governments in the region can expect inflation of 25-40 per cent in 1974. Perhaps the most striking feature is the shift in the balance of economic power in the continent. Until this time last year Brazil, with a opuration over 100 million, ias the unquestioned eco- omic giant, forging ahead A its Spanish-speaking ivals Argentina and Mex- co, as well. as the six-nation ndean group formed by olivia, Chile, - Colombia, cuador, Peru and, -bela- edly, Venezuela. - Oil has changed all hat. Brazil, of, course, is till a giant; its economy is oo dynamic to come sud- only to a halt. But power . s now in the hands.of Ven-- zuela, with an oil income hich has suddenly jumped rom about $3,000m to - omething like $10,000m a ear. This is a lot of money y anybody's standards, and ertainly far too much for enezuela to absorb at once. The Government has ierefore set up develop. ent funds under which bout half this income will e used at home, and the est reserved for aid and vestment in other develop. g countries. Naturally rough, priority will be iven to Latin America and, i particular, the Andean gm p G: ;! 11 he effect o this, at a .time when the i dustrialized nat ens are drawing in their ho s as a result of the oil cri is, may well be to make Ve ezuela replac the United Sta es as the major sup- pli r of capital and credit . to atin Ameri a, and eer. tai ly to the Spanish-speak. innations. This will have pro ound impli ations for economic relation s, not only 'within Latin America but, also between Latin America and the rest of the world. It was the of crisis that brought concern about the Brazilian miracle to a head; but nagging doubts had exts ed for some time. D spite a massive inflow' of bout $3,000 the first half of 1974 saw balance of payments deficit of $190m. Inflation, 'artifi iajly held dow to 151 per cent by the out Ding Medici Govern. men last year, is likely to be 0-40 per cent in 1974. A I this is clearly serious; but not yet catastrophic. Som corrective measures hay been taken by General Ern sto Geisel, the newPresi- dent The state oil concern, Petr bras is stepping up its expl ration programme, and mom- attention is to be paid to griculture, whose pro- 'duct seem to have the best exp rt prospects at a time of imminent wort industrial rece sion. Clearly, however, the razilian miracle will be' pro ematical fo the next few ears. w at is renal) worrying.. abo. Mexico is he political situation. After 0 years of political 'stabilit and 20 year at low rats of infla- tion, serious social tensions have been created by the - very uneven distribution of weal h, and exacerbated by an nprecedented rise in the ost of livin . The prime. +vate sector has poor rela. tion with both the Govern- men and labour, and in :.spit of initial good inten-. ;lion President Luis Eche=? :very has so fa been un- able to adapt and modernize eithe the politial system or t e country's social and econ mic struct ire. This will certainly be the main task [f his successor in two Po itics, too, a e the big- gest cloud over Argentina's econ my. Things have ini- prov d out of all recogni- tion since the return of` Pero 16 mo the ago, than s to the irp-entinian CPYRGHT Approved For Release 1999/09/02 : CIA-RDP79-01194AO00100510001cYRGHT version of the "social' con- tract." he was ahl