CENTRAL INTELLIGENCE BULLETIN

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Friday 9 June 1978 CG NIDC 78/1340
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
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DIA review(s)
State Dept. review
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National Intelligence Daily Cable for Friday, 9 June 1978.
The NID Cable is for the purpose o informing
senior US o icials.
CONTENTS
DJIBOUTI-ETHIOPIA: Rail Repairs
PERU-USSR: Military Relations
POLAND - EAST GERMANY: Trade Cuts
ETHIOPIA - KENYA - US: Arms Sales
MOROCCO: New Fighter Aircraft
ITALY: National Referendums
FRANCE: New Economic Measures
CHINA: Political Conference
CHINA: Flexibility in Foreign Trade
BRIEFS:
Ethiopia
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DJIBOUTI-ETHIOPIA: Rail Repairs
at the beginning of the Somali campaign to gain control of
Ethiopia's Ogaden region. The reopening of the railway will be
a test of Somali and D,jiboutian intentions toward Ethiopia and
will probably also involve France more directly in the SomaZi-
Ethiopian dispute.
Djibouti railroad which was sabotaged a year ago by guerrillas
Ethiopia has completed repairs on the Addis Ababa -
The railway, which provides Ethiopia's only rail
within a few days. Somali guerrillas continue to operate in the
area, and an attempt by them to disrupt the railroad would pro-
voke a strong Ethiopian military response, perhaps including re-
prisals against Somali territory.
access to'the sea, will probably resume limited operations
The Djiboutian Government is caught between its
with Ethiopia. He will allow resumption of deliveries by rail
to Ethiopia--but not of military equipment.
antagonistic neighbors. President Gouled prefers strong ties
to Somalia, but he recognizes the need to stay on good terms
Although the operation of the railroad is the main-
Gouled to restrict Ethiopia's use of the railroad further.
Gouled's acquiescence in such a scheme would cause Ethiopia to
increase. efforts to subvert his government. Ethiopia will also
be sensitive to any signs of Djiboutian complicity in allowing
Somali guerrillas to threaten the railway inside Djibouti.
stay of t e Djiboutian economy, Somalia will probably press
The Ethiopians will expect the French to provide se-
French military contingent guard vulnerable sections of the
line. The main French concern is to avoid casualties among
French nationals, and a guerrilla campaign against the railroad
curity for the line inside Djibouti. Units of the 4,500-man
would force President Giscard to make some hard choices about
France's military presence in Djibouti.
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PERU-USSR: Military Relations
The USSR is apparently attempting to ensure that Peru
con tnues to depend on it for the maintenance of Peru's Soviet-
made military equipment. This could become a new source of
friction in the military relationship between the two countries.
the Soviets have ma e it i icu or e Peruvian
rmy to perform major maintenance on its T-55 tanks. They are
said to have refused to issue detailed manuals that would
enable the Peruvians to overhaul the T-55 engines; the Soviets
insist that the engines be returned to the USSR for such ser-
vice. It is standard practice to return the engines of Soviet-
made military aircraft to the USSR for periodic overhaul, but
for reasons of efficiency and economy, tank engines usually
are not.//
//Peru reportedly has reacted by looking for al-
ternative sources for a diesel engine compatible with the T-55.
One prospect is the UK, which has studied the feasibility of
installing Western engines in Egypt's Soviet-made tanks. It
would be some time, however, before Peru would be able to find
a suitable replacement engine.//
//The Peruvians have had many problems with their
300 T- 5s. Early last year, some 70 of the tanks were inoperable
because of engine failure at high altitudes, other equipment
weaknesses, and an inadequate supply of spare parts. The per-
centage of inoperable T-55s apparently has not diminished since
then.//
K/The success of Poland and East Germany in
reducing their hard currency trade deficits last year has raised
concern among their major Western trading partners. Poland has
cut its imports sharply, while East Germany has combined import
cuts with an abrasive export policy that has irritated some of
its Western trading partners. The cuts particularly affect im-
ports of machinery and equipment. Nonetheless, Western suppliers,
concerned about their export markets, continue to push their
exports by offering large credits to Eastern Europe.//
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billion, Poland reduced imports from the West in 1977 by about
8 percent. France was hit particularly hard. Its exports to
Poland dropped 34 percent, constituting half: of Poland's $500
million cutback in imports. West Germany and Austria each re-
ported reductions of more than 10 percent.//
problems and curb a hard currency debt that totals $12.8
//To cope with its balance-of-payments
percent of Poland's imports from the West. Further cuts in im-
ports from France are anticipated; new contracts signed with
French firms last year were about 80 percent below 1976 con-
tracts. To counteract the trend, France is pressing Poland to
use more than $2 billion in French credits.// Austria also is
dissatisfied with Poland's policies, particularly Warsaw's
failure to proceed with joint industrial projects. More than
$250 million in existing supplier credits remain unused; Vienna
has turned down a request to "untie" the unused credit.
//These three countries provide about 40
Poland's, apparently also hit France hard. East German imports
from France fell 41 percent in 1977, and a further decline is
expected this year.//
and Belgium are becoming increasingly strained as a result of
its aggressive commercial policies. East Germany's actions, like
//East Germany's trade relations with France
are willing to extend more than $500 million in credits, with
repayment over five to eight years at an 8.25-percent annual
interest rate, but the East Germans want 7.75-percent interest.//
preferential trade credits with substantially better terms
than France is willing to offer for new contracts. The French
//The East Germans are further demanding
//Heavy-handed East German efforts to reduce
its hard currency deficit are also irritating Belgium. Several
Belgian firms have balked at East Germany's insistence that its
imports from Belgium be contingent on tie-in sales, in which
payment for imports would be made partially or fully with East
German products. Although East German trade officials are con-
cerned over the reaction to their commercial policies, the
apparently are unwilling to change their tactics.//
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Ethiopia is trying hard to deter the US from supply-
ing arms to Somalia. The Ethiopians have enlisted the aid of
Kenya to get their message across.
Ethiopian Foreign Minister Feleke, in a recent con-
versation with Deputy Assistant Secretary Harrop, reaffirmed
his government's strong opposition to the US decision in
principle to sell defensive arms to Somalia. Interpreting
press reports of a $15 million arms deal as a fait accompli,
Feleke warned that the US should not be surprised if such a
deal caused a deterioration in recently improved Ethiopian-US
relations.
Bilateral relations have improved in recent months
and have been highlighted by Ethiopia's willingness to accept
a new US Ambassador and--at least until Chairman Mengistu's
speech yesterday--by a diminution in Addis Ababa's anti-US
rhetoric. In his speech, Mengistu accused the US of sending 60
advisers to aid the insurgents in Eritrea.
A senior official in the Ethiopian Ministry of Foreign
Affairs, who handles relations with the US, earlier this week
warned that Somali assurances that US arms would not be used
against Somalia's neighbors were worthless. He said that arming
Mogadiscio would be tantamount to encouraging further Somali
aggression in the Ogaden.
The official also charged that Somalia was continuing
to infiltrate regular Army forces into the Ogaden and reiterated
Mengistu's recent threat that Ethiopia will take punitive
measures against Somalia if the Somalis increase their activi-
ties on behalf of the Ogadeni insurgents.
The Ethiopians are also using the Kenyans, who they
believe have more influence on US decisionmaking than Ethiopia
does, to push their message. On Wednesday, for example, Kenya's
Ambassador to Ethiopia made an impassioned plea to the US
Charge against any US arms supply relationship with Somalia.
He replayed all the arguments Feleke used with Secretary
Harrop.
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The Kenyans also are fearful of Somali irredentism
and doubtless need little prodding from Addis Ababa to plead
the Ethiopian case. The Kenyan Ambassador probably was accu-
rately reflecting the views of his government, although Kenya's
unhappiness with the US has been tempered by its own arms sup-
ply relationship with the US.
MOROCCO: New Fighter Aircraft
Morocco has received the first six of 50 Mirage F-1
fighter aircraft on order from France, according to the US de-
fense attache in Rabat. The Moroccan Air Force, however, is
short of qualified pilots, and it will remain at a disadvantage
against its much larger Algerian adversary.
The F-1s, ordered in 1975 for $600 million, are the
modernization steps include the acquisition of Western surface-
to-air missiles, an air defense radar system, additional trans-
ports, trainers, and helicopters, as well as plans nearly to
double the Air Force's size over the next five years.
major feature of the Air Force's modernization program. Other
The delivery schedule for the F-ls slipped several
will be based and a shortage of Moroccan pilots qualified for
training on the aircraft. Work at the base apparently is still
not complete, and the fighters will be stationed temporarily at
another field.
times because of construction delays at the airfield where they
Pilot shortages loom as a larger and longer lasting
Morocco's frontline fighter--which will continue in service after
F-1 deliveries are completed. This will offset recent gains the
Air Force has made in its F-5 pilot-to-aircraft ratio.
problem for the Moroccans. The French reportedly had difficulty
selecting six qualified trainees from among Morocco's most ca-
pable fighter pilots. The F-1 program, moreover, is drawing
from the pool of pilots trained on the US-built F-5--currently
The US Embassy in Rabat estimates that Morocco is un-
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likely to have a fully operational F-1 squadron until next year,
necessary.
although some aircraft could be pressed into service sooner if
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Two national referendums set for Sunday and Monday
in Italy could produce results politically embarrassing to the
country's major parties, particularly the Communists. The elec-
torate will be deciding whether to retain or repeal two contro-
versial laws, one providing tougher law-and-order measures and
the other providing for public financing of political parties.
Nearly all the parties--including the Communists--favor reten-
tion of both Laws, and a vote favoring repeal is unlikely. The
Communists opposed the security legislation in parliament three
years ago, and if they receive Less backing than expected in
the referendum, many Italians will conclude the Communists have
been unable to persuade all of their followers to accept the
party's tougher stance on law and order.
The referendums result from signature campaigns spear-
headed by the small Radical Party; a national referendum can be
held on certain types of legislation in Italy if 500,000 voters
petition for repeal.
The Radicals, who have long championed civil rights
causes, argue that the public order legislation not only is re-
pressive but also has failed to reduce crime and violence; the
law significantly broadened police powers of search and arrest
and increased the penalties for many crimes.
Parliament authorized public funding for political
parties in 1974 after an investigation of oil company political
payoffs proved embarrassing to some of the governing parties.
Most of the $72 million annual appropriation is divided among
the parties according to their relative strengths in parliament.
The Radicals and some other small parties urging repeal argue
that the law gives unfair advantage to existing large parties.
Because parties representing about 90 percent of the
electorate have endorsed the laws and a simple majority is re-
quired to uphold them, it is generally taken for granted that
the voters will retain them. Interest centers mainly on the
size of the expected endorsements. A sizable negative vote will
be seen as a slap at the political establishment generally.
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The Radicals would consider such a vote a moral vic-
tory, because it would. suggest that the major parties do not
have a tight hold on their voters and are not responsive to
their views.
I//The Communists are particularly worried about
the vote on the public order law. Most supporters of the cen-
trist and conservative parties will probably oppose repealing
the law. Even if waverers such as supporters of the Socialist
Party vote against it, the law should still be endorsed by about
80 percent of the voters.//
//If a. substantially smaller percentage of
voters--say 70 percent.--backs the law, the result would be in-
terpreted as evidence that the Communists, who voted against
the law in 1975 but now endorse it, have been unable to convert
political violence.//
NSA-
The French Government is supplementing its two-year-
old stabilization program with a set of controversial steps
aimed at enhancing the efficiency of the economy. These actions
initially will have an adverse impact on inflation and employ-
ment. Criticism in the coming months, particularly from the
labor unions and the Socialist and Communist Parties, is likely.
His hand strengthened by the March election, Presi-
dent Giscard is moving to prune drastically government inter-
vention in the economy. Before the end of the year he will:
Eliminate all price controls on industrial products.
Reduce subsidies to state enterprises, to be made up
by higher prices for their products.
Encourage individuals to channel savings into produc-
tive investment.
Implement tougher guidelines for aiding troubled firms.
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Giscard clearly is taking a considerable gamble be-
cause the negative effects of the new policy are likely to show
up long before any benefits become apparent. In particular,
price decontrol could cause inflation to increase this year.
The rate of inflation last year was 9 percent, and it is likely
to rise to at least 11 percent, according to the latest govern-
At the same time, the tougher policy concerning ail-
ing firms probably will force a number of them to cut back or
close and thus add to an already worsening unemployment problem.
According to Labor Minister Boulin, the number of unemployed
could rise by about 200,000 in 1978, to 1.2 million.
The new measures, however, are shrewdly timed. Gis-
card does not face reelection until 1981, and a new legislative
election need not be called for five years. If the program proves
successful, voters will have ample time to forget early negative
effects of the policy shift.
In the meantime, Giscard and Prime Minister Barre
will have to weather a stormy transition period that could
easily last more than a year. Workers already are unhappy about
the slow growth in real wages they attribute to Barre and could
protest vigorously the layoffs that result from any plant
closings. If an inflationary surge develops, organized labor
will fight for large pay increases that would upset the govern-
ment's strategy.
CHINA: Political Conference
jor addresses by China's top three leaders to a
~la
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military conference in Peking have revealed important differ-
ences in ideology, political approach, and work style. While
these differences reflect in part different roles, and perhaps
constituencies, the combative speech by Vice Chairman Teng
Hsiao-ping, his strongest defense to date of his own pragmatic
philosophy, set him clearly apart from the other two leaders
and suggests he may be willing to heighten tensions in the
leadership and incur personal criticism to achieve progress
toward his goals.
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The "All-Army Conference on Political Work" has been
in session since at least early last month, and has been a
forum for discussions of how to maintain the "'correct" ideo-
logical and political orientation in the armed forces during
a period of increased internal pressures for modernization and
professionalization. Party and Military Commission Chairman
Hua 1uo-feng and Vice Chairman and ex - Defense Minister Yeh
Chien-ying addressed the meeting on 29 May, while vice Chair-
man Teng spoke on 2 June. Both sessions were attended by most
of the Peking-based members of the Politburo and the military's
top leaders.
Hua's and Yeh's speeches contained little new infor-
mation or insights except to make clear that the problems of
professionalism and the proper role of political commissars--
which have plagued the military since the Korean War--are still
serious. Hua reflected concern that party control over the Army
might be weakened in the press for military modernization.
Yeh stressed the need to return to practices the
party followed before it came to power to solve the problems
caused by the "gang of four" and by the "new historical con-
ditions" such as the drive to achieve the comprehensive mod-
ernization of society.
In sharp contrast, Teng's remarks were pointed, con-
troversies , assertive, and directed less at the specific prob-
lems of military political work than at reemphasizing and le-
gitimizing Teng's own brand of political pragmatism. He called
for a more flexible and realistic approach to new problems and
less mechanical recitation of Maoist phrases or application of
old methods.
He attacked those who have apparently criticized him
on doctrinal grounds by asserting that the pragmatic method he
espouses is the "fundamental point" of Mao's ideology and
that those who talk about "Mao Tse-tung Thought every day,"
but oppose Teng, are actually opposed to Mao.
In contrast to Hua's and Yeh's conciliatory approach
to problems within the military, Teng called for a reopening
of the investigation of the Lin Piao affair, which could in-
volve a wider purge of senior officers, and for a more rigorous
selection of leading cadres to facilitate policy implementation.
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Teng seems to have been deliberately controversial
in an attempt to shake up his audience and to free them from
the "mental shackles" that prevent them from seeking creative
solutions to problems. His emphasis on problem-solving will no
doubt be popular within the bureaucracy. While he revealed no
major differences with Hua and Yeh over policy objectives, his
approach to political problems and the speed at which he wants
to see them solved are in such marked contrast to their more
conservative views that the implementation of policy may be
adversely affected.
Teng's unorthodox position--defying his critics and
making statements that could be construed as criticism of his
party superiors--is evidence of his confidence in his politi-
cal status, and of his resilience, because the views he voiced
are some of the "errors" for which he was criticized in 1975
and 1976. His decision to push his philosophy, even if it
creates fissures in the top leadership, indicates the great
urgency he feels for rapid progress toward solving deep-seated
problems, and a sense of frustration over delays caused by
fear and ideological footdragging.
CHINA: Flexibility in Foreign Trade
//China has become increasingly willing to liberal-
ize its trade and finance policies in order to promote economic
development by boosting the use of import financing for pur-
chases of technology.//
//Chinese officials have been considering trade
and financing arrangements that they previously would not even
have discussed, including:
-- Using long-term credits and financing capital imports
through foreign bank deposits with the Bank of China.
-- Arranging barter and compensation deals for plant pur-
chases.
-- Importing materials to be reprocessed for export.
-- Designating certain plants to produce goods specifically
for the Japanese market.
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-- Complying more fully with international standards on
patents, trademarks, and copyrights.//
//A recent New China News Agency article highlighted
the "flexible practices" used at the spring Canton Fair to pro-
mote exports. These included supplying goods under consumer
trademarks and brand names, producing goods using customer-
supplied designs and raw materials, bartering for some commodi-
ties, and showing flexibility in setting export prices and con- 25X1
tract currencies.//
//Peking continues to insist that its basic policy
of self-reliance is unchanged and that loans, joint ventures,
and foreign investment in China are still unacceptable. Ideo-
logical constraints on more venturesome trade practices have
loosened since the suppression of the radical faction, however,
giving Vice Premier Teng Hsiao-ping and other economic prag-
matists a freer hand to pursue an active trade policy.//
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//Liberalized approaches to trade and finance will
further China's goal of expanding imports of foreign equipment
and technology and of producing the exports to pay for them.
Financing will be necessary for large amounts of "modernizing"
imports--perhaps $30 billion over the next five years.//
//In view of China's excellent credit rating and
healthy financial position, sizable short- and long-term credits
are available from the West. In certain cases, barter and com-
pensation deals would appeal to Peking because export markets
for Chinese products could be nailed down when the plant con-
tract is signed. Ultimately, it will be necessary to export more
in order to pay for the expanded imports and to improve the
marketability of Chinese goods.//
//Limited export potential is the major problem.
Markets for petroleum exports are limited by high prices,
transport costs, and undesirable refining characteristics of
Chinese oil. Moreover, estimates suggest China's exportable
surplus of crude oil will level off by the mid-1980s. Sales of
other goods face problems of either inadequate supply or limited
al
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c
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foreign demand. In addition, China's small reserve of tec
and scientific expertise will impede the absorption and adapta-
tion of imported technology.
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Ethiopia
In a belligerent speech yesterday, Ethiopian Chairman
Mengistu once again denounced Eritrean secessionist guerrillas
and voiced his determination to seek a military solution to the
conflict unless the insurgents agree to negotiate on Ethiopian
terms. Some press reports misinterpreted his remarks as con-
ciliatory, but even his offer of "amnesty" was a blatant attempt
to encourage guerrilla desertions rather than a general pardon.
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