INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100130002-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: April 5, 2011
• Sequence Number: 2
• Publication Date: April 1, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
DI IEEW 83-013
1 April 1983
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International
Economic & Energy
Weekly
1 April 1983
Perspective-Troubled Debtors' Adjustment Far From Over
Briefs Energy
International Trade, Technology, and Finance
National Developments
OECD: The Economic Impact of a Reduction in Oil Prices
Hungary: Another Look at Reforms
Cuba: Hard Currency Contraints and Debt Problems
Comments and queries regarding this publication are welcome. They may be
directed toDirectorate of Intelligence, telephone
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International
Economic & Energy
Weekly
Synopsis
Perspective-Troubled Debtors'Adjustment Far From Over
There is no doubt that the rescue programs coordinated by the IMF,
commercial banks, the Bank for International Settlements, and debtor and
creditor governments have so far averted international financial collapse. Over
the longer term, however, the only sure cure for debtors' international financial
problems is a period of sustained growth among the industrial countries. While
signs of a recovery are under way, any substantial impact on debtors beyond a
measure of confidence building is still a couple of years away.
2bAl
Japanese semiconductor manufacturers have opened a substantial lead over
their US rivals in developing and bringing to market the next generation
semiconductor memory device, the 256K Dynamic Random Access Memory
(RAM). The Japanese position is so strong that we believe they could capture
OECD: The Economic Impact of a Reduction in Oil Prices
25X1
Using CIA's econometric model, we estimate that a fall in the price of crude
oil to $25 per barrel would lead to an increase in OECD GNP growth rate of 1
percentage point in 1983 and half that in each of the next two years. It also
would lead to an increase in employment of some 2.5 million people by 1985,
with most jobs created in the second and third years
25X1
Expectation of a decline in oil prices has been the main force triggering an in-
ventory liquidation in the present oil market that has pressed OPEC produc-
tion below 15 million b/d. If oil companies persist in the belief that OPEC will
be unable to prevent a further price decline, an estimated 300-400 million
barrels of inventories could be dumped on the market to add to downward
price pressures.
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Hungary: Another Look at Reforms 25X1
Hungary's economic reform program has attracted more attention than any of
the reform packages instituted in Eastern Europe in the postwar period. Some
of Budapest's CEMA partners are watching Hungary's program closely in
hopes of finding ways to solve their own economic problems. Much of the
program's appeal appears to lie in it success in appeasing workers and 25X1
consumers while maintaining firm party control.
Cuba: Hard Currency Constraints and Debt Problems 25X1
The Cuban economy is facing its most difficult period since Fidel Castro took
power in 1959. Cuba will experience little or no growth for 1983 and will fall
well short of most of its ambitious targets for 1984 and 1985
USSR: Labor Discipline Campaign) 25X1
A crackdown on workers to reduce shirking on the job has been General
Secretary Andropov's major initiative thus far to increase production and
rejuvenate Soviet economic performance. If greater worker effort is not
rewarded by an increase in consumer goods and services, however, the
discipline campaign is likely to lose momentum.
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International
Economic & Energy
Weekly
1 April 1983
Perspective Troubled Debtors'Adjustment Far From Over
There is no doubt that the rescue programs coordinated by the IMF,
commercial banks, the Bank for International Settlements, and debtor and
creditor governments have so far averted international financial collapse. More
than 40 LDCs and East European countries have, or are negotiating, IMF
standby and extended financing agreements. They include the majority of the
largest LDC debtors. These programs have enabled such countries as Mexico,
Brazil, and Yugoslavia to forestall default and obtain some breathing room
within which to make needed economic adjustments. Moreover, programs for
the major debtors have successfully tied IMF loans to commitments by banks
to maintain existing short-term credit lines, reschedule maturinLy debt, and,
most important, extend new medium-term loans. 25X1
But the adjustment process is far from over. It has become increasingly evident
that these rescue operations are only temporary solutions and are in danger of
unraveling. Brazil, Chile, and Peru all have had to seek new bridging loans
from Western governments this year. Since obtaining IMF agreements, Chile,
Peru, and Argentina have suspended principal payments on at least some parts
of their maturing debt. Mexico has fallen further behind on its private debt in-
terest payments and has yet to reschedule long-term debt and arrears. Soft oil
prices have undermined the debt servicing capability of Venezuela and Nigeria
and added them to the list of countries needing expensive rescue operations.
Venezuela, for example, has had to postpone principal payments on public debt
falling due through mid-year. 25X1
This month the major debtors will be evaluated on first-quarter performance
under their adjustment programs. We do not believe many countries will meet
their targets for the first quarter or even for the year. We base this assessment
on an analysis of the restructuring programs for 14 countries that account for
over 50 percent of LDC and East European debt. Export targets require
volume and revenue expansion we believe to be inconsistent with the pace of
economic recovery in the industrial countries, expectations for commodity
prices, and trade among financially-strapped LDCs themselves. On the import
side, the slight drop in value projected for 1983 may be difficult to realize be-
cause of the substantial import squeeze already under way in many countries
and the need for imports as inputs for export production. On balance, the trade
accounts and international reserve targets for Brazil, Mexico, Argentina, and
Chile are especially vulnerable to falling short.
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We also believe the major debtors have a less than even chance of meeting per-
formance criteria governing domestic bank credit and public sector deficits.
Government leaders will be under strong political pressure to maintain
economic growth, avoid offending labor groups with curbs on wage increases
and public sector employment, and halt further erosion of living standards by
maintaining price controls and subsidies. Protests and strikes-some violent-
against austerity measures have already beset the governments of Brazil,
Mexico, Chile, Peru, Bolivia, and Ecuador. We expect more in the next few
months
An important unknown is how the IMF and the commercial banks will react to
the failure of major debtors to meet external and internal targets. Close to 30
percent of the combined financing needs this year of Brazil, Mexico, Argenti-
na, and Yugoslavia, for example, is contingent on meeting these targets. If
performance criteria are missed by wide margins, causing disbursement of
IMF and commercial bank money to be interrupted, new large bridging loans
will be needed to avoid default until new agreements on targets can be
renegotiated. We believe the IMF has little choice but to give debtors wide lat-
itude, probably settling for agreed movement toward slightly altered goals as
sufficient to warrant continuation of programs.
A second round of debt renegotiations and additional funding will likely be
messy. Bankers' willingness to commit even more funds is highly uncertain:
? European bankers still consider this a largely "American" problem and
probably intend to focus their international efforts on their own national
export firms and on countries with whom they have traditionally close ties.
? Large US banks now are inclined to boost lending only when forced to do so
by the prospect of a Fund program or rescheduling. They will likely try to limit
foreign loans to public sector borrowers and forsake new credits to the private
sector. Bankers tell us that many will be trying to restructure their portfolios
toward trade finance and correspondent services.
? Medium-size US banks will concentrate on trade finance and overseas
business of firms in their domestic marketing area. Bankers believe it will be
very difficult to get this group into new loan syndications.
? The smaller regional banks that figured so prominently in loans to Mexico
have nearly all refocused their lending operations on domestic customers,
except when they have been forced to join restructuring programs.
? Overall, banks are coming under increasing pressure from regulatory
authorities to set limits on their exposure to risky foreign borrowers.
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Secret
If additional funds are not available, troubled debtors will have little choice
but to turn inward and intensify their efforts to adjust as best they can to a
lack of foreign exchange. In the near term, they would probably try to
maintain living standards by avoiding sharp cutbacks in public spending.
Without the ability to finance imports, they would need to legislate even more
austere import restrictions. Such moves would slow the recovery of the United
States and other industrial nations by reducing export markets
Over the longer term, the only sure cure for debtors' international financial 25X1
problems is a period of sustained growth among the industrial countries. While
signs of a recovery are under way, any substantial impact on debtors beyond a
measure of confidence building is still a couple of years away. Until then,
debtors will continue to look to the industrial countries and the IMF for help
from one payments crisis to the next. 25X1
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Energy
Japanese Oil Japanese commercial oil stocks have dropped sharply from a record high of
Inventories Decline nearly 402 million barrels held last May. At the end of January private oil
stocks stood at 355 million barrels or 97 days of supply-the lowest level in
more than three years. While stocks probably can be reduced further, the
Japanese Government requires firms to hold stocks equal to 90 days of product
equivalent of consumption in the previous year. According to one major oil
company, some oil firms operating in Japan have already been forced to make
purchases of oil to meet the stockpiling requirements. The government-owned
stockpile continues to rise and is now up to nearly 75 million barrels.
25X1
Possible Cuts in Japanese coal buyers are pressuring Australian 25X1
Australian Coal Prices firms to sell coal at least 10 to 15 percent below last year's price (denominated
in US dollars) because of soft demand in the international coal market and,
more recently, the 10-percent devaluation of the Australian dollar. If Austra-
lian suppliers fail to concede price cuts, Japanese firms are threatening to shift
at least 30 percent of their Australian purchases to other exporters. A
Japanese steel firm has already forced both US and South African suppliers to
cut their prices by a comparable margin. One Australian coking coal producer
has agreed to an 18-percent price cut, and we believe other suppliers will
follow suit-a move that could cost Australia nearly $500 million a year in ex-
port earnings. Export prices were one of several industry problems discussed at
a government-sponsored summit meeting held this week in Canberra involving
coal industry executives, union representatives, and government officials.
25X1
Libya Proceeds With ]Libya will proceed with development of its first
Offshore Oil offshore oilfield despite the current world oil surplus. A construction contract
Development was awarded last year to the Italian company Snamprogetti for a 30-well,
150,000 b/d platform to be installed in the Bouri oilfield. The field, discovered
by Italy's AGIP, is about 120 kilometers northwest of Tripoli in about 150
meters of water and has proved reserves estimated at more than 650 million
barrels. Initial output is planned at 75,000 b/d by 1986. Four additional
platforms and a gas injection program are scheduled in later years which could
raise Bouri production to over 600,000 b/d. There are a number of other
oilfields of similar size in areas adjacent to Bouri, but there are no known
development plans for those fields. 25X1
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Possible Financial President
Support for Mitterrand plans to visit Cameroon during late May or early June and discuss
Cameroonian Kribi possible French assistance for the Kribi liquefied natural gas project.
LNG Project Cameroon's President Biya had earlier held discussions with Mitterrand in
mid-February about financial support for the project.
The
companies claim the project's prospects are poor because of the availability of
alternative gas supplies for Western Europe, marginal Cameroonian gas
reserves, and high construction costs. :::::]Mitterrand may
provide French Government guarantees for the full $3 billion construction
costs for political rather than economic reasons. If the go-ahead is given, initial
output of Kribi is expected to be about 4 billion cubic meters per year by 1990,
which could later be expanded if additional reserves and project financing is
available)
International Trade, Technology, and Finance
UK Firm Wins The Soviets in mid-February awarded a 10-year contract to the British firm
Soviet Pipeline John Brown Engineering for spare parts for the turbines on the gas export
Spare Parts Contract pipeline The USSR is
ordering far more spare parts than it needs. Although no details on the
financial arrangements have been announced,
the British Government would finance the project in an effort to
strengthen industry. The Soviets have to rely on Western equipment and
technical expertise for the pipeline until they become self-sufficient in that
technology. The announced plan to equip the 41 compressor stations along the
pipeline with Soviet-built as well as Western turbines will put a strain on the
USSR's current expertise and supplies of spare parts. Nonetheless, the plan
will allow the Soviets to evaluate the reliability of their own equipment without
risking interruption of the operation of the line.
Declining Lebanese Lebanese imports from Israel appear to have fallen sharply in recent weeks.
Imports From Israel Press and Embassy reports indicate that purchases of Israeli goods-illegal
under Lebanese law-have dropped by as much as 40 percent from last year's
peak levels. The Embassy in Beirut attributes the decline to growing percep-
tions among local merchants that the Gemayel government, now that it
controls the entire Beirut port, is better equipped to stop illegal trade. The pri-
mary reason, however, is probably recent Israeli Government decisions to
withhold permits for exports that directly compete with Lebanese goods, a
gesture of good will designed to convince Beirut to establish formal trade ties.
The strong Israeli presence in southern Lebanon precludes Lebanese control of
cross-border flows, the source of most Israeli-Lebanese trade.
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China Unlikely To US wheat experts have learned through scientific channels that TCK wheat
Purchase US Wheat smut disease exists in one and possibly two areas of China. Beijing ceased
Grown in Pacific purchases in 1981 of US wheat from the Pacific northwest because of the
Northwest presence of the TCK spore. Since then the northwestern states have attempted
to revive sales by providing evidence to Beijing that the spore would not grow
in China. We believe that CEROILFOOD, China's grain-purchasing organi-
zation, would like to reenter the market for northwest wheat because of its
lower freight costs and higher quality. It purchased one shipment last summer
to test for TCK spore levels. Officials in China's Bureau of Plant Protection,
however, are concerned about the effect of the spore on domestic wheat crops.
We believe that officials in the Bureau are, or will soon be, aware of the spore's
growth in China and will continue to prohibit imports of northwest wheat.
National Developments
Developed Countries
Portuguese Devaluation Following the recent realignment of the European Monetary System, the Bank
of Portugal devalued the escudo by 2 percent against a basket of 18 currencies.
The central bank also raised the monthly depreciation rate from 0.75 percent
to 1.0 percent. This will yield depreciation over 12 months of 12.7 percent, ap-
proximately equal to the difference between Portugal's rate of inflation and
the average of the rates prevailing in its major trading partners. Lisbon
simultaneously announced new monetary measures, including increased inter-
est rates, which are now significantly positive in real terms for the first time in
over a decade. In addition, banking authorities plan to impose external credit
ceilings on a month-by-month basis in order to slow the growth of foreign
debt-currently estimated at $13 billion or more than half of GDP. The new
measures generally reflect IMF recommendations, although for political
reasons the government kept the devaluation somewhat smaller than the IMF
wanted. The new exchange rate policy will help maintain export competitive-
ness, while higher interest rates should promote saving and attract transfer
Less Developed Countries
El Salvador Pursues President Magana has made considerable progress in recent months in
Economic Reforms carrying out major land, banking, and commodity marketing reforms intro-
duced in 1980, despite opposition from extreme rightists. In El Salvador's
important "land-to-the-tiller" program, peasant claim filings, title awards, and
compensation to former owners have accelerated since last fall. Largely as a
result of recent governmental actions, more than three-fourths of peasant
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claimants evicted from properties by former owners early last year have been
returned. In addition, the Constituent Assembly early last month extended for
10 additional months the period during which peasants may submit land
claims so that more potential beneficiaries might be drawn into the program.
In its reform of the banking system, the central bank in mid-March announced
offerings of up to 49 percent of nationalized bank equity to private investors.
Purchases will be limited to a maximum of 1 percent per owner. The
government had taken over full ownership of all banking and savings and loan
institutions in 1980 as the first step in eliminating the concentration of credit
in the hands of a few individuals or enterprises. The Constituent Assembly has
refused to endorse a campaign by major coffee growers to weaken the
production, pricing, and marketing powers of the National Coffee Institute.
The institute had been established three years ago as a cooperative by the
government to ensure equitable returns for all producers. The government's
continued progress on the three reforms represents a victory for Magana and
moderate elements in the Assembly, who have had to overcome strong
challenges by extreme rightist factions.
IMF Assistance Zimbabwe has concluded a standby agreement with the IMF for about $300
to Zimbabwe million over 18 months. Agreement was also reached on a Compensatory
Financing Facility of over $56 million. The standby funds will be used largely
to reduce the extensive short-term foreign debt Zimbabwe acquired during the
past two years to maintain its foreign exchange reserves. The agreements
follow a recent World Bank loan of $70 million for imports needed by
manufacturers. Harare has told the IMF it also will continue to seek
concessional balance-of-payments assistance from bilateral donors in an effort
to acquire funds that could be more rapidly disbursed
Although agreement with the IMF was facilitated by policy reforms already
implemented or announced late last year, Harare faces formidable obstacles in
meeting all of the IMF conditions. Previous moves included a 20-percent
devaluation, plans to cut government spending by about 10 percent, and a
freeze on minimum wages until mid-1930. Harare, which has not raised
minimum wages since January 1982, has now also agreed to limit future wage
increases to one-half the inflation rate for the previous 12 months; prices have
been rising at a 17-percent annual rate. Domestic political pressures will make
it difficult to meet the IMF's requirement to remove price controls and at the
same time cut food subsidies. A ceiling has been placed on domestic credit ex-
pansion, and additional short-term borrowing is prohibited. No further cuts in
allocations of foreign exchange to Zimbabwe's productive private sector will be
allowed, however, in the wake of cuts totaling more than 25 percent prior to
the devaluation last year. The depressed economy probably will frustrate
Harare's efforts to control the budget deficit, while a second year of severe
drought threatens to exacerbate balance-of-payments problems by reducing
agricultural exports.
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Expected Influx Thousands of peasants are moving toward Sudan to escape the drought in
of Ethiopian Refugees Ethiopia's Eritrea and Tigray Provinces and, by the peak of the dry season in
Into Sudan May and June, 250,000 refugees reportedly may cross into the Kassala and
Gedaref areas of Sudan. The US Embassy in Khartoum reports that the
drought is as severe as that of 1973-74, which killed an estimated 200,000 peo-
ple. According to the World Food Program representative in Addis Ababa, it
could affect as many as 3.5 million Ethiopians. Some 600,000 Ethiopian and
Ugandan refugees are now in Sudan. The food currently available in the
region would accommodate only 500 refugees per week, and if many thousands
of refugees arrive in May, the relief system probably will collapse. Water will
remain in extremely short supply in eastern Sudan until the rains begin in late
June. The resumption of the Ethiopian offensive to crush the Ti ra People's
Liberation Front would make the situation still worse. 25X1
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Mauritian Cabinet The resignation last week of Finance Minister Berenger and 11 allied cabinet
Resignations members could jeopardize ongoing negotiations with the IMF and the World
Jeopardize Bank and endanger the country's economic recovery efforts. The Mauritian
IMF Negotiations Government has asked the Bank for $45 million and is to meet with the IMF
soon on a standyby loan. Declining world prices for sugar-the island's
primary economic activity and revenue earner-have saddled the government
with chronic current account and budgetary deficits. Inflation is running at 20
to 25 percent, and urban unemployment is at record levels
signing of an economic and cultural agreement in Tripoli
Suriname Expands Army Commander Bouterse in recent weeks has pursued closer ties with
Ties Cuba, Grenada, and Libya, but because of their own financial difficulties,
these countries are unlikely to provide any quick infusion of funds to offset the
withdrawal of Dutch and US assistance. It is expected that the Cuban
presence in Suriname might expand to some 150 people, in part to implement
technical, economic, scientific, and cultural cooperation agreements that
reportedly will be signed soon. Grenada recently joined Cuba and Suriname in
an informal pact of mutual assistance in the event of attempts to destabilize
Bouterse. In addition, Bouterse garnered unspecified Libyan support with the
25X1
Prime Minister Jugnauth, who has actively sought aid from Libya and the
USSR while downplaying the need for Western support, now reportedly wants
to keep negotiations on track. His political will to enact necessary reforms
however, is open to auestion.
25X1
In addition, the 25X1
ocia ists, on whose support Jugnauth depends, strongly oppose austerity
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Possible Loosening According to US Embassy reporting, Islamabad may soon allow Pakistan's oil
of Controls on refineries to increase prices of petroleum products. Refinery officials claim
Pakistani Private that the present pricing arrangements are insufficient to cover cost of
Sector production, let alone provide funds for modernization or expansion of facilities.
We believe that Islamabad's hesitancy to relax controls on private-sector
businesses has been a major obstacle to private investment. If the Pakistani
Government reaches a successful agreement with refinery authorities, this
would be the first indication that Islamabad is becoming more flexible in its
attitude about the role of the private sector in economic developmen
Soviet Interest The Hungarian First Deputy Minister of Industry recently addressed a Soviet
in Hungarian Economic high-level course on economic management at the academy of the National
Practices Economy of the Council of Ministers. The audience included leading represen-
tatives of agriculture, food, light industry, trade, and transport. This reported-
ly is the first time a non-Soviet lecturer has addressed such a group. The event
highlights the seriousness with which the leadership is studying the applicabil-
ity of Hungarian economic practices. Previous indications have included
favorable references to Hungarian and other East European economic reform
measures, particularly those affecting agriculture, in the speeches of Soviet
leaders and in the media. Direct exchanges in this area with the Hungarians,
however, generally have been at a lower level. The fact that the speaker
represented Hungary's industrial sector confirms that the Soviets are interest-
ed in a broader range of Hungarian practices than agricultural techniques
alone
Romanian Problems in
Energy Dealings
With USSR
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1 April 1983
especially in view of Bucharest's lack of cooperation on CEMA energy
projects. Despite economic problems at home and deteriorating relations with
the West, Bucharest apparently does not intend to be more accommodating to
because of safety flaws-the same reason the Romanians ave for abandoning
the project in the early 1970s. the USSR is an-
noyed by Romania's request for increased oil a iveries at concessionary prices,
ucharest was withho ing approva o t e oviet esign
ideas but no money to back them up.
tc o o l B u c h a r e s t ' s he USSR coproduce the Soviet reactors for export and that the Romanians have big
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Increase in Soviet Soviet and Yugoslav negotiators meeting in Belgrade in conjunction with the
Oil Deliveries to recent visit of Premier Tikhonov reportedly agreed the USSR will supply 25X1
Yugoslavia 96,000 barrels of crude oil per day this year, 7 percent more than called for in
the trade agreement signed in January. Moreover, a new agreement is nossihie
According to the US25X1
r.moassy in e gra e, the Soviets have been seeking additional agricultural
products. The increased oil deliveries reportedly also will be offset to some 25X1
extent by a reduction in Soviet oil product deliveries.
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Despite Yugoslavia's reported commitment to provide high-quality goods in
exchange for the increased deliveries, the Soviets very likely view the
arrangement as a concession. They had been resisting Yugoslav requests for
more oil and doubtless would have preferred hard currency sales to any barter
arrangement. Their agreement to it probably reflects concern that Belgrade's
economic plight might result in increased Western influence or cause political
instability. Even with the additional Soviet oil, Yugoslavia will have shortages
of fuel.
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OECD: The Economic Impact of a
Reduction in Oil Prices '
To estimate the effects of an oil price fall on the
OECD, we simulated several scenarios with the
CIA's econometric model 2 and tempered those
results with judgments by our country economists.
We estimate that a fall in the price of crude oil to
$25 per barrel would lead to:
? An increase in the OECD GNP growth rate of
1 percentage point in the first year and half that
in each of the next two years.
? An increase in employment of some 2.5 million
people by 1985, with most jobs created in the
second and third years. By 1985, unemployment
rates would be below 9 percent for all the major
OECD countries, except Canada and the United
Kingdom.
? A fall in the average inflation rate of about 1.5
percentage points the first year, with gains dissi-
pating rapidly thereafter.
? An initial slowdown in OECD exports that would
quickly reverse as new import demand by oil
importers overcomes the decline in sales to oil
exporters.
With oil priced at $15 or $20 per barrel, we assume
that OPEC countries reduce imports sufficiently to
' This article summarizes a forthcoming intelligence assessment of
the same title.
Z Out analysis relies heavily on simulations using the CIA's Linked
Policy Impact Model (LPIM) of the world economy. We believe
that this model provides a good measure of the change in key
macroeconomic variables such as real GNP and inflation. The
model is also useful in highlighting differences among the OECD
countries and in estimating the importance of different assumptions
about policy responses. The model does not, however, contain
enough detail to examine certain areas of interest such as the
detailed budgetary impact of an oil-price decline, or the impact of
the decline on the various sectors of each economy.
prevent their current account deficits from exceed-
ing those in the $25 per barrel case. (Import
cutbacks of this magnitude could well be economi-
cally and socially disruptive for many oil exporters,
sparking a new sense of unity in OPEC sufficient to
make markedly lower oil prices short lived.) With
OPEC imports constrained, overall growth rates for
the OECD with $15 or $20 oil would be only
slightly higher than under the $25 per barrel
scenario in the first year but substantially larger in
the second and third years as the rate of domestic
spending increases. The slowdown in OECD infla-
tion in the first year would be much more pro-
nounced in both the $20 and $15 cases.
Major foreign governments would not uniformly
pass through the oil price decline to consumers. The
West German government would be inclined to
pass most or all the benefits along to help curb
inflationary pressures and increase growth. Japan
would probably allow its utilities to increase profits
while selectively cutting prices to benefit energy-
intensive industries. For the United Kingdom, the
prospect of lost revenues would make reducing
prices to the consumer an especially difficult deci-
sion, but the Thatcher government probably would
do so to stimulate growth and influence public
opinion for the next election. The deeper the oil
price cut, the more likely are the governments of oil
importers to increase energy taxes to reduce budget
deficits and preserve conservation gains.
We estimate that if crude oil prices fall 25 percent
from their 1 January 1983 level, to an average $25
a barrel for the year, and remain at that price
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Major Assumptions
Oil Prices
To set a baseline, we assumed that prices would
remain at the 1 January 1983 level of $33.50 a barrel
through 1985. In our alternative scenarios, we as-
sumed that prices would fall to an average $25 a
barrel, $20 a barrel, or $15 a barrel, and would
remain at those levels through 1985. All prices are in
nominal terms
reducing interest rates
Government Policies
We assumed that governments in the baseline case
would target the nominal money supply, the nominal
central bank discount rate, and nominal government
expenditures. We assumed that the governments
would not change those targets as a result of the oil
price decline. In alternative scenarios, we relaxed the
assumptions for government monetary and expendi-
ture policies. We assumed, for example, that the
discount rate would fall with the inflation rate, thus
Exchange Rates
In our baseline case, we assumed exchange rates
would vary with the differences in inflation rates
between countries. In the alternative scenarios, we
assumed that exchange rates would remain the same
as in the baseline case)
OPEC Imports
In the baseline case of $33.50 oil, we estimated that
the OPEC current account deficit would have been
$2.5 billion in 1983. In the $25 oil-price case we
assumed that OPEC would reduce its imports of
goods and services sufficiently to prevent its current
account deficit from increasing by more than $30
billion above the baseline case. Because of OPEC s
presumed inability to finance higher deficits, we
assumed, in the $20 and $15 scenarios, that OPEC
would cut its imports so that its current account
balance would be the same as with $25 oil.
through 1985, OECD economic growth would be
boosted a full percentage point this year and anoth-
er half percentage point in each of the next two
years. The biggest stimulus to OECD growth would
be the increase in real purchasing power in the oil-
importing countries. A further stimulus to growth
would result from the lagged effect of spending
adjustments. For example, government spending
plans are made in nominal terms; assuming those
plans are not quickly adjusted downward, more real
goods probably will be purchased with the same
budgetary expenditures. Similarly, wage increases
based on anticipated inflation rates will yield more
spending in real terms than was expected when
contracts were signed. Japan and Italy would enjoy
the greatest stimulus because they are the largest
energy importers relative to their GNP; even net
energy exporters such as Canada and the United
Kingdom would enjoy some increased growth as
world trade recovers.
OECD inflation rates would slow by about 1.5
percentage points this year. We estimate that the
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1 April 1983
rate would average about 6 percent, with the
United States, West Germany, Japan, and the
United Kingdom all below 5 percent. The inflation
bonus would dissipate quickly, however, as the one-
time price cut effect is absorbed and other growth
pressures begin to mount.
Unemployment would not fall significantly in 1983
as-a result of an oil price decrease. After three
years, however, it would be down throughout the
OECD by some 2.5 million people-slightly more
than 1 percent of the labor force-from what it
otherwise would have been. By 1985, unemploy-
ment rates would be below 9 percent for all the
major OECD countries except Canada and the
United Kingdom.
The current account balance of the OECD as a
group would improve by some $30 billion in the
first year, but the gain would fall off rapidly in
1984-85. In the first year, the saving on oil imports
for the OECD would be greater than the decline in
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Secret
OECD Countries: Impact of Reduction in
World Oil Prices to $25 per Barrel
Unemployment
Rate
I I If I I I I I I I I If I I I I I
-2.01983 84 85 1983 84 85 1983 84 85 1983 84 85 1983 84 85 1983 84 85 1983 84 85
exports to the oil-producing countries. Moreover,
greater economic growth elsewhere in the world
would lead to almost a $15 billion improvement in
OECD exports-offsetting about three-fourths of
the loss in exports to the oil producers. By 1985 the
OECD current account balance would be about the
same as in the baseline case of $33.50 per barrel oil
because of the continued decline in OPEC imports
and the growth-induced climb in OECD import
demand. Japan's surplus would increase more and
remain higher through 1985 because the change in
Japan's imports is a much smaller share of the
increase in GNP than for other major countries.
For other major OECD countries, increasing eco-
nomic growth in the second and third years would
lead to a runup in imports that would largely offset
the trade improvement from lower oil prices. We
assume that exchange rates do not shift because of
changes in oil prices. If exchange rates adjust to the
large increase in Japan's current account surplus
relative to the other OECD countries, Japan's
To test the incremental impact of further oil price
drops, we ran scenarios of average oil prices at $20
surplus after three years would be considerably
lower and the balances of the other OECD coun-
tries would be considerably better off.
Government budget deficits would be smaller with
an oil price decrease because faster growth would
generate more revenues. Unless nominal govern-
ment expenditure targets are lowered in line with
the declining rates of inflation, the improvement in
budget deficits would be marginal. An additional
improvement in budget deficits would depend on
political decisions about taxing windfall savings.
Taxing savings would reduce deficits but would rob
the economies of some stimulative benefits from the
price cuts. Some of the negative growth effects of
reducing deficits also may be countered if interest
rates move downward and private investment rises.
Cheaper Oil
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OECD: Changes Associated With a Fall in the Price
of Oil to $25.00 per Barrel From $33.50
Change in the growth rate of real GNP a
(percentage points)
Change in inflation rates
(percentage points)
Change in unemployment rates
(percentage points)
1983
-0.4
-0.3
-0.1
1984
-1.0
-0.5
-0.2
1985
-1.5
-0.4
-0.4
Change in current account balances
(billion US $)
1983
2.1
3.6
-3.4
1984
-0.3
1.6
-3.7
1985
-1.0
0.8
-3.9
a The incremental changes reflected in these growth rates are from
the previous year's level. The absolute benefits resulting from the oil
price decline would be measured by the accumulation of the changes.
For example, while Italy's GNP growth in 1984 as a result of the oil
-1.8
-1.9
-0.8
-1.6
-0.7
-0.2
-0.4
-0.7
-0.1
0.3
-0.2
-0.2
-0.2
-0.2
-0.2
-0.1
-0.1
-0.3
-0.5
-0.4
-0.2
-0.4
-0.7
-0.6
1.9
11.7
-0.3
29.5
0.9
10.4
0
12.9
-0.1
9.8
0.3
1.0
price decline in 1983 would be negative, the overall level of the
Italian GNP in 1984 would still be 1.3 percent above what it would
have been without the oil price reduction.
and $15 per barrel through 1985. For those cases,
however, we assumed that the financially con-
strained oil exporters could not increase their cur-
rent account deficits further. As a result, we held
the OPEC current account deficit in both cases to
no more than that in the $25 oil case. This
constraint would impose a reduction in OPEC
imports of some $50 billion in the first year for $20
oil and $80 billion for $15 oil.
Assuming no worsening in OPEC current account
balances beyond the $25 case, with oil priced at
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1 April 1983
$20, OECD growth in the first year would be 1.2
percentage points higher than in the $33.50 case
and a mere 0.2 percentage point higher than with
$25 oil. Among the foreign countries, a few-
notably West Germany and the smaller countries-
would actually lose more from falling OPEC im-
ports than they would gain from the additional
stimulation from lower oil prices. The boost in
trade generated by faster economic growth in the
United States and other major countries would
stimulate growth across the board in the second
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Secret
OECD Countries: Change in Current
Account Balance Resulting From Reduction
in Oil Price to $25 per Barrel
OECD Countries: Change in
Growth Rate of Real GNP Under
Various Oil Price Assumptions
0 1982 83 84 85
a OPEC current account deficit constrained to level of the $25 oil case.
and third years. By the third year, the level of total
OECD GNP with oil at $20 would be 1 percent
higher than under the $25 case and 3 percent
higher than the $33.50 case.
Unemployment and inflation would come down
faster. The unemployment rate would be about the
same in the first year and decline in the next two
years, whereas inflation would fall more in the first
year than later. The overall OECD current account
balance would be only slightly changed from the
$25 oil case. Japan's current account surplus would
improve sharply and remain high because of more
exports to the United States and cheaper oil prices.
For most of the other foreign OECD countries the
loss of sales to OPEC would roughly offset savings
on oil imports; thus there would be only a slight
difference in their current accounts between the
$25 and the $20 cases.
25X1
There would be a similar pattern in moving to $15
oil. Growth would be up the first year while
inflation and unemployment rates would decline
even more than under previous cases. Current
account balances would remain little changed from
the $25 case because the continued fall in OPEC
imports would counter the savings on oil imports.
The improvement in Japan's surplus would increase
more sharply than the others; as a result, additional
pressures would surely mount on the yen exchange
rate.
Policy Reactions
Major foreign governments are likely to react
differently to lower oil prices. If the price of oil fell
f/
N
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$15 per barrel'
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OECD: Changes Associated With a Fall in the Price
of Oil to $20.00 per Barrel From $33.50 a
West France United
Germany Kingdom
Change in the growth rates of real GNP b
(percentage points)
1983 -3.2 -1.7
1984 -1.5 -1.0
1985 -0.5 -1.4
Change in unemployment rates
(percentage points)
1983 -0.3 -0.3
1984 -1.2 -0.5
1985 -2.2 -0.7
Change in current account balances
(billion US $)
1983 0.9
1984 -1.1
1985 -2.1
4.5
2.3
0.7
-2.2
-3.0
-2.9
-1.3
-2.6
-1.0
-1.0
-0.5
-0.7
-1.1
-1.0
-0.2
0.4
-0.4
-0.3
-0.1
-0.2
-0.2
-0.2
-0.1
-0.3
-0.1
-0.5
-0.6
-0.5
-0.6
-0.2
-0.7
-1.2
-1.0
-6.8
2.3
16.2
-1.0
31.3
-6.5
1.2
15.7
-0.2
13.3
-6.6
-0.2
15.3
0.5
-3.3
a These estimates assume that OPEC would reduce its imports
sufficiently to ensure that its current account deficit would be no
larger than in the $25 scenario.
b The incremental changes reflected in these growth rates are from
the previous year's level. The absolute benefits resulting from the oil
price decline would be measured by the accumulation of the changes.
to $25, we believe the major OECD countries
would respond in the following manner.
? The West German Government would not impose
tax increases if oil prices were to stabilize. West
Germany, in its longest economic slump since
World War II and with record unemployment,
would not want to limit potential improvement in
employment or inflation. Bonn also would not
want to disadvantage its industry vis-a-vis its
OECD competitors. The government worries that
a fall in oil prices would jeopardize domestic
energy conservation, but we believe Bonn would
not counteract lower prices until they reached
$20.
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1 April 1983
? The French Government probably would not fully
pass through an oil-price decline. The tough
economic austerity program announced last week
included an energy tax, which will offset the
recent price cut. Although the government has
not released full details of the program, press
reports indicate that Paris will increase the tax on
gasoline to keep pump prices at their current
levels and may tax other refined products. In
addition, the tax will protect the French oil
conservation program and ease the trade deficit
by curbing consumer spending on imports. The
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secret
OECD: Changes Associated With a Fall in the
Price of Oil to $15.00 per Barrel From $33.50 a
West France United
Germany Kingdom
Japan Canada Total
OECD
Change in growth rates of real GNP b
(percentage points)
1983 0.6 1.2
0.4
2.6
2.1
0.6
1.4
1984 2.6 0.8
1.0
-0.3
2.2
1.6
1.8
1985 1.9 0.7
0.8
0.5
1.1
1.2
1.2
Change in inflation rates
(percentage points)
1983 -4.4 -2.2
-3.0
-4.2
-3.9
-1.9
-3.8
1984 -2.0 -1.3
-1.3
-1.2
-0.6
-1.0
-1.5
1985 -0.6 -1.4
-1.2
0
0.6
-0.5
-0.2
Change in unemployment rates
(percentage points)
1983 -0.2 -0.3
-0.1
-0.2
-0.3
-0.2
-0.2
1984 -1.4 -0.6
-0.4
-0.2
-0.6
-0.8
-0.6
1985 -2.8 -0.9
-0.7
-0.2
-0.9
-1.7
-1.4
Change in current account balances
(billion US $)
1983
-0.4 5.4
-10.1
2.7
20.8
-1.6
33.4
1984
-2.2 2.9
-9.1
1.4
20.5
-0.3
12.2
1985
-2.7 1.4
-8.4
-0.3
20.5
0.8
-3.9
a These estimates assume that OPEC would reduce its imports
sufficiently to ensure that its current account deficit would be no
larger than in the $25 scenario.
b The incremental changes reflected in these growth rates are from
the previous year's level. The absolute benefits resulting from the oil
price decline would be measured by the accumulation of the changes.
extent to which Paris would pass through addi-
tional oil price declines would depend on its
success in curbing the budget deficit and infla-
tion by other means.
? The British Government would probably pass on
most of the savings to consumers. The govern-
ment has already reduced taxes on oil companies
and would probably further reduce them to pre-
vent a collapse of offshore exploration and devel-
opment that would result in future supply con-
straints. As a result, budgetary pressures would
probably grow, in which case the government
could be forced to relax monetary policies to help
finance a larger-than-expected deficit.
? The Italian Government probably would not fully
pass through a cut in energy prices to domestic
customers. The extent to which Rome would
allow the passthrough would be hotly debated
within the governing coalition. Christian Demo-
cratic Treasury Minister Goria probably would
press to keep oil product prices high through
energy taxes and to apply the receipts to the
burgeoning deficit. The Socialists, on the other
hand, would probably press for passing some part
of the price break to the consumers.
? The Japanese Government and energy industry
would not permit a complete passthrough of a fall
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in oil prices. Japanese oil refiners and retailers,
who have incurred heavy losses in recent years,
would take advantage of falling oil prices to
improve their own rather than their customers'
financial position. At the same time, the Ministry
of International Trade and Industry would proba-
bly push for selective price cuts in electricity to
benefit only ailing energy-intensive industries and
would instruct the electric utilities to earmark
part of their windfall profits for investment in
nuclear facilities.
? The Canadian Government probably would allow
domestic oil prices to remain steady as world oil
prices fell. Prime Minister Trudeau, thus, would
forgo his 1980 election promise to keep domestic
oil prices well below world levels. A 25-percent
drop in the world price would require a cut in the
domestic price from the current $24.10 to about
$18.75, costing the Canadian federal government
$8 billion in lost energy tax revenues over the
next three years. Ottawa can ill afford more than
the $25 billion deficit already forecast for
1983/84 on the basis of current oil prices.
Governments in all the major oil-importing coun-
tries probably would prevent domestic oil prices
from falling much below the $20 level. Most would
tax gains to curb deficits and to prevent a reversal
in energy conservation. The oil exporters would
have different problems. The Canadians probably
would reduce domestic prices as they fell below $25
per barrel in order to keep them at or below world
levels. If so, other taxes-most likely on industry-
would have to be increased to offset lost revenues.
In the United Kingdom a drop in oil prices to $20
per barrel would threaten the profitability of North
Sea production in existing wells and would end
exploration and development activity.
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Secret
The Role of Inventories
in the Oil Market
Expectation of a decline in oil prices has been the
main force triggering a sizable inventory liquida-
tion in the present oil market that has pressed
OPEC production below 15 million b/d. If oil
companies persist in the belief that OPEC will be
unable to prevent a further price decline, an esti-
mated 300-400 million barrels of inventories could
be dumped on the market to add to downward price
pressures. At some point, however, inventory deple-
tion will be halted either because stocks will be
approaching minimum levels or companies perceive
that the price decline is over. This will cause a
sharp reversal in oil demand and, combined with
some effort to rebuild inventories for the seasonal
rise in consumption, could raise demand for OPEC
oil to about 20 million b/d.
Anatomy of Inventories
Oil consumers hold stocks for two primary reasons:
(1) to meet operating requirements including the
need to balance seasonal fluctuations in consump-
tion, and (2) for speculative purposes such as insur-
ing against unexpected delivery shortfalls or surges
Inventories are categorized as primary stocks held
by major companies and refiners and secondary
and tertiary stocks held by wholesalers, distribu-
tors, and end users. Government-owned stocks are
also included in primary stocks although they are
outside the normal commercial channels.
nearly-70
percent of primary stocks represent minimum oper-
ating stocks needed to ensure smooth functioning of
the distribution system. An additional 5 to 10
percent of primary stocks are compulsory stocks
held by companies at the direction of foreign
governments. Minimum operating stocks, gov-
ernment-owned stocks, and compulsory stocks
combined represent about 85 to 90 percent of total
primary stocks and would normally not be available
for commercial use
We estimate primary stocks totaled about 4.9
billion barrels as of 1 January 1983 including 600
million barrels at sea, 500 million barrels of gov-
ernment-owned strategic stocks, and 400-500 mil-
lion barrels of compulsory stocks. Nearly 250 mil-
lion barrels of primary stocks represented seasonal
demand for inventories to meet high winter con- 25X1
sumption requirements. Based on these estimates
and minimum operating requirements, an addition-
al 300 to 400 million barrels could be considered
available for drawdown, allowing companies to
defer crude liftin s in anticipation of a price reduc-
tion 25X1
Reliable estimates of secondary and tertiary stocks
are not available. Based on one industry estimate,
storage capacity for these stocks is about 3-4 billion
barrels. Assuming a 50-percent capacity utilization
rate, secondary and tertiary stocks probably total 25X1
Market Impact
Declining oil consumption, high interest rates, and
surplus productive capacity combined to provide 25X1
incentives for oil companies to reduce inventory
levels last year. Companies managed to trim stocks25X1
at the rate of 1 million b/d during 1982, but
because estimated levels of consumption exceeded
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Estimated Free World
Oil Stocks, January 1983
Billion barrels
Land
4.3
Afloat
0.6
Total primary
4.9
Minimum operating
0.5
0.2
1.5 to 2.0
actual consumption in the fourth quarter, compa-
nies wound up with stocks in excess of their needs.
As a result, there is still a substantial leeway to
reduce inventories.
An anticipated decline in oil prices has intensified
pressures to unload stocks in recent weeks. Compa-
nies are now attempting to reduce stocks at a rapid
rate to avoid the large accounting losses that would
occur with a price drop. Moreover, continued de-
clines in oil use are reducing the level of stock
requirements and adding to surplus productive
capacity in the system. Based on recent estimates
of production and consumption, we believe that
companies are now depleting primary inventories at
the rate of about 4 million b/d compared with a
normal seasonal rate of about 3 million b/d. Given
this rate, companies could still sustain a net draw-
down rate of 3 million b/d during the second
quarter, implying that demand for OPEC crude oil
would remain at about 16-17 million b/d. We
believe there is also ample incentive for secondary
and tertiary stockholders to reduce inventories al-
though individually they do not have as much
flexibility as primary stockholders. Beyond mid-
year, however, we believe all inventory holders will
have to begin rebuilding stocks for the winter.
The exact level of usable stocks held by companies
is less a function of their intentions than it is a
result of miscalculations in balancing supply and
demand. Beyond minimum operating levels, com-
pulsory stocks, and government-owned stocks, in-
ventory levels are a residual that cannot easily be
fine tuned to match a companies' financial objec-
tives. Factors influencing future stock decisions
include:
? Expectations about future supply availability,
particularly stability in certain key oil-producing
nations.
? Estimates of future consumption levels including
the strength of economic recovery.
? The level of interest rates.
? Expectations about future price movements.
Oil Inventories in Major
Producing Countries
From a market standpoint, the implications of the
producer-held stocks are small. Venezuela gains an
advantage because of its ability to draw upon stocks
to keep exports substantially higher than its OPEC-
mandated production ceiling would otherwise al-
low, but none of the other producers enjoys this
position. In practicality, inventories in producing
countries are no more important to the market than
surplus capacity in producing oilfields except that
stocks provide some measure of flexibility in raising
exports for a short period of time
OPEC nations and Mexico have a combined crude
oil storage capacity of some 300 million barrels.
Most of this capacity is located in tank farms
feeding tanker loading facilities or export pipelines,
primarily to accommodate fluctuations in export
operations. In general, stocks are maintained at
about half of capacity to provide maximum flexibil-
ity. Iran and Iraq have been keeping lower inven-
tories because of reduced production and export
levels and the threat of war damage. In anticipation
25X1
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Secret
Oil Inventories of Million barrels
Major Producing Countries
Crude Oil
Storage
Capacity a
Current Estimate of
Crude Inventories
Total
297.4
167.9
Mexico
27.0 b
20.0 b
OPEC
270.4
147.9
Venezuela
45.0
35.0 c
Saudi Arabia
57.0
24.0
Nigeria
23.9
18.0
Libya
24.4
15.0
Iran
24.5 d
9.0
18.8-
8.5
UAE
16.8
8.5
Algeria
16.0
8.0
Ecuador
4.9 f
5.5 f
Indonesia
13.0 g
5.5
10.4
4.4
Neutral Zone
10.1
4.0
Qatar
5.6
2.5
Gabon
a In most cases storage capacity represents capacity of the export
system and does not include stocks held within the domestic
distribution network.
b Includes about 9 million barrels in floating storage.
e Excludes approximately 43 million barrels of refined products in
storage as of mid-March.
d Excludes damaged tanks at Khark Island.
e Includes 7 million barrels storage at Ceyhan, Turkey, the export
terminal for the Iraq-Turkey crude oil pipeline; excludes 9 million
barrels of prewar capacity at the Persian Gulf outlet at Al-Fao.
f Includes 1 million barrels in floating storage.
g Estimated.
of production restrictions imposed by the OPEC
agreement, Venezuela has been accumulating
stocks of crude and products, possibly to avoid a cut
in exports. Storage capacity in Nigeria and Mexico
is reported nearly full because of recent reduced
sales. In the aggregate, we believe that crude
inventories in OPEC and Mexico approximate 167
million barrels-equivalent to about two weeks of
exports at February's level. Because some inven-
tories are working stocks and others are used for
domestic purposes, however, not all of this oil is
available for export. (S NF NC)
Saudi Arabia's crude oil inventories are near nor-
mal levels just under half of total capacity of
about 55-60 million barrels. Based on total capaci-
ty, we believe the three Saudi export terminals have
about 20 million barrels in storage.
Venezuela has an estimated 35 million barrels of 25X1
crude oil and 43 million barrels of refined products
distributed among 21 export terminals. With its
new production ceiling of 1.675 million b/d, Cara-
cas is left with an implied export level of 1.3 million
b/d after accounting for domestic consumption.
This is 300,000 b/d under its goal for 1983. The
shortfall could be made up, however, through a
combination of natural gas liquids (NGL) sales and
stock drawdowns. Exports of 60,000 b/d of NGL
and 240,000 b/d from inventories would allow
Venezuela to meet its export target and still leave
over 8 million barrels in storage at yearend. This
allows Caracas the option of meeting the letter of
the new OPEC agreement, while putting it in a
position to "dump" 200,000 to 300,000 b/d of
More than 80 percent of Iran's crude oil storage is 25X1
at Khark Island, which despite war-inflicted dam-
age to several tanks still has over 20 million barrels
of storage capacity. Stocks are being maintained at
about 30 to 40 percent of capacity. Crude is also
stored at Lavan Island at the southern end of the
Persian Gulf. Iran has recovered its large product 25X1
storage areas near Abadan, but their proximity to
Iraq and continued inactivity at the refinery makes
it doubtful they are being used. Iraq has several
large storage areas in the northern part of the
country, as well as use of a 7-million-barrel tank
farm at Ceyhan, Turkey-its sole export outlet.
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Iraq's estimated capacity of nearly 19 million
barrels excludes its largest, war-damaged storage
facility at Al-Fao on the Persian Gulf.
Nigeria's crude oil storage capacity is nearly 25
million barrels, stored principally at the port city of
Bonny and inland at the Forcados terminal
The
bulk of current production of about 900,000 b/d is
reportedly being stored as buyers await a response
by North Sea producers to the recent OPEC price
cut.
Mexico normally builds its crude stocks during the
winter because seasonal storms disrupt tanker load-
ing operations in the Bay of Campeche. Pemex-.
the state oil company-rents additional storage in
Curacao and charters tankers to build inventories
for export later in the year. This winter, buyer
resistance to prices was primarily responsible for
depressed sales, reportedly forcing Mexico to fill its
available storage facilities near capacity. Accord-
ing to a source reporting to the US Embassy, as of
mid-March Pemex-rented storage facilities in Cu-
racao-amounting to 5.5 million barrels-are full,
as are onshore facilities providing another 12.5
million barrels in capacity. Pemex has also char-
tered about six tankers providing storage capacity
of about 9 million barrels.
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Secret
Hungary: Another Look at Reforms
Hungary's economic reform, the New Economic
Mechanism (NEM), has attracted more attention
than any of the reform packages instituted in
Eastern Europe in the postwar period. Some of
Budapest's CEMA partners are watching the
NEM closely in hopes of finding ways to solve their
own economic problems. Much of the NEM's
appeal appears to be its success in appeasing work-
ers and consumers and in easing central planning
rigidities while maintaining firm party control and
at least the outward semblance of the Soviet-style
economic model.
By the mid-1960s, all the East European regimes
were trying to cope with growing economic prob-
lems resulting from central planning: physical out-
put targets with little attention to quality, central
allocation of inputs, and centrally administered
prices that did not reflect real costs and relative
scarcities. Diminishing availability of new human
and natural resources precluded relying on exten-
sive economic growth to solve these problems.
Hungary, as a small, resource-poor, and heavily
trade-dependent country, felt particularly hurt by
the autarkic features of central planning and, con-
sequently, felt a strong need to rationalize its ties to
world markets.
Budapest's response was the NEM, a reform pack-
age implemented in 1968 that went far beyond
anything previously attempted in the Warsaw Pact.
The NEM's key feature was its decentralization of
decisionmaking, with enterprise managers and
farmers gaining freer rein over important output
and investment decisions. Enterprises were expect-
ed to aim for maximum profits and to be guided in
this effort largely by mechanisms such as exchange
rates, prices, interest rates, and taxes rather than
by detailed plan directives. Planning and allocation
of inputs were replaced, except for a few key
commodities, by a relatively free trade system
among enterprises. Wholesale and retail prices
were drastically overhauled-and some freed-in
order to bring them more in line with prices on the
world market. Moreover, a system of foreign trade
multipliers-one for trade with Communist coun-
tries and another for trade with the West-was
created to bridge the gap between domestic and
foreign trade prices.
In making these changes, the Hungarians had no
intention of developing a market economy. Rather,
they wanted to inject some market forces into a
controlled, planned system. The state retained suf-
ficient power to adjust overall output in the direc-
tion of national priorities established by the plan.
The government also maintained its monopoly over
foreign trade and kept extensive controls-far be-
yond those of a market economy-over investment,
credit, wages, and distribution of profits. In effect,
detailed planning was relaxed, but detailed eco-
nomic regulation was not.
The government also wanted to prevent severe
external shocks that might cause unemployment,
rapid inflation, or unmanageable trade deficits,
particularly in the transition to the reformed sys-
tem. Consequently, the Hungarians installed an
additional layer of controls-subsidies, price con-
trols, and administrative guidance-to provide
more insulation for the economy. The government
recognized that these controls would block or ob-
scure the effects of market forces but hoped the
controls could be reduced sharply or eliminated
within a few years.
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Eastern Europe: Growth of GNP Per Capita and
Industrial Production
Hungary
Poland
Romania
Bulgaria
German
Democratic
Republic
Reform Experience
In
Hungary
Romania
Poland
Bulgaria
Czechoslovakia
German
Democratic
Republic
In the late 1970s, the government shifted its chief
goal from economic growth to external equilibrium.
Budapest cut investment, slowed improvements in
living standards, and pushed exports. The govern-
ment also revived the reform program by unifying
the exchange rate, devaluing the forint, and liberal-
izing regulations for small private firms, craftsmen,
and cooperative farmers. Cautious steps have been
taken to reduce the size and powers of branch
ministries, pare some subsidies, and ease some price
restrictions.
These hopes have not been realized. In fact, the
regime began a period of retreat from the reform in
1971, when soaring imports to support overinvest-
ment by enterprises led to balance-of-payments
difficulties. Additional problems arose a few years
later due to growing social strains over widening
wage differentials. The NEM then suffered the
double blow in the mid-1970s of escalating energy
and raw material prices and the world recession.
Budapest responded to these problems by increas-
ing subsidies to consumers and unprofitable firms,
tightening price controls, and hiking wages across
the board. The government also assumed tighter
control over investment. While providing short-
term remedies, these subsidies shielded enterprises
and consumers from pressures to adjust to real
costs and scarcities. Along with a progrowth strate-
gy by the regime, the subsidies contributed to
serious external payments problems in 1975-78 by
encouraging imports and discouraging exports.
Secret
I April 1983
Early successes in improving Hungary's financial
position faltered in 1981/82 due to recession and
high interest rates in the West and to the cutback
in bank lending to Eastern Europe. The need to
reduce the current account deficit to regain the
confidence of Western creditors has led to a debate
over the pace of reform. Some Hungarian officials
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Secret
Hungary: Hard Currency
Trade Balance With Socialist
and Non-Socialist Countries
Trade with non-
-474
-291
-265
0
Socialist countries
Trade with
307
570
708
750
Socialist countries
argue that reform momentum should be subordi-
nated to finding solutions to more pressing external
financing requirements. Others contend that rapid
reform is necessary to help overcome economic
problems, many of which they trace to the lack of
followthrough on the reform's original program.
The NEM and Economic Performance
The NEM clearly sets the Hungarian economic
system apart from the other CEMA countries, but
there is little evidence that the reforms have im-
proved economic performance substantially. The
Hungarians themselves are relatively pleased with
the NEM, claiming that overall economic growth
and improvements in living standards have been
greater after the reform than in the early 1960s.
This, however, is true throughout Eastern Europe,
where economic growth picked up from the late
1960s through the mid-1970s. Indeed, economic
growth in Hungary has been outpaced by growth in
most of Eastern Europe since the introduction of
the NEM. After the revival of the reform in 1978,
the growth of GNP per capita and industrial
production in Hungary-although not the first
priority of the reform in recent years-has exceed-
ed only that of Poland and Czechoslovakia.
The reform also has failed to boost. Hungarian
export competitiveness in Western markets and
thus shield Hungary from the external financing
problems that have afflicted much of Eastern Eu-
rope. By the middle of last year, Hungary was
dangerously close to insolvency. Budapest has been
able to improve its hard currency trade balance in
recent years largely by increasing its hard currency
trade surplus with socialist countries-mainly the
USSR-rather than by large export increases to
the West. Moreover, Hungary achieved a balance
in trade with the West in 1982 only by cutting
imports sharply.
Agricultural Success Story
Although the reform has fallen short in some areas,
there are sectors of the economy that are prosper-
ing. Hungarian agriculture is the showcase of
Eastern Europe. Grain yields have doubled since
the imposition of the NEM and are the highest in
Eastern Europe. Similarly, per capita meat produc-
tion has either kept pace with or exceeded that of
the rest of the countries in the region and currently
equals that of East Germany. Agricultural exports
also are strong: one-third of output is sold abroad,
and agricultural exports account for one-fourth of
total exports. Hungary is the only major net export-
er of grain in Eastern Europe and is the region's
largest net exporter of meat.
The improvements in agriculture are, in part, at-
tributable to the NEM. The reforms ended the
practice of compulsory deliveries at set prices to
predetermined distribution centers, a system com-
mon in Eastern Europe. Greater managerial free-
dom in investment, planting, and harvesting deci-
sions, wide-ranging rights for cooperative farms to
set up agriculture-related businesses, and increased
support for private plots all have improved efficien-
cy. Small-scale industries and cooperative farms
have greater flexibility to make production choices,
leading to a marked improvement in ancillary
services and equipment for small farms. This has
helped improve productivity and living standards
and thus has kept many able-bodied workers on the
farm.
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Eastern Europe:
Agricultural Growth Trends
Annual Hungary Bulgaria
Averages
1968-77 3.4 3.0
1978-80 4.4 3.6
Net imports of grain 1960-67 -417 4
1968-77 -640 -73
1978-80 -734 432
1968-77 82 54
1978-80 93 70
1968-77 59 48
1978-80 72 62
1968-77 -135.7 -48.4
1978-80 -230.1 -73.3
a Figures may be slightly understated due to lack of poultry data for
1961-63.
Not all of agriculture's success is due to the NEM,
however. Hungary has unusually fertile land and a
long and proud agricultural tradition that predates
the reforms. In addition, agriculture was not affect-
ed significantly by the forced collectivization of the
1950s nor has the regime neglected the sector to
the extent evident in much of Eastern Europe.
Finally, much of the productivity gains have result-
ed from significant boosts in use of fertilizers,
pesticides, herbicides, and tractors-all steps that
could have been taken without the reforms.
The Hungarian economy's greatest success has
perhaps been its ability to improve the lot of
consumers and to keep discontent at a relatively
low level. The growth in the consumption of food
and consumer durables has been good, often keep-
ing pace with Czechoslovakia and East Germany-
the region's two most prosperous countries. Beyond
Secret
1 April 1983
Czecho-
slovakia
GDR
2.3
2.7
3.3
3.4
3.8
3.8
1,805
1,647
1,412
2,718
1,297
3,084
43
44
65
69
74
94
47
518
63
68
76
83
75.9
96.2
49.2
-17.0
6.8
-189.7
Poland Romania
1.8
2.4
2.4
2,603
3,747
7,402
43 NA
63 NA
85 NA
38 NA
59
80 NA
-164.6 NA
-137.3 NA
-152.9 NA
the statistics, Budapest has a lifestyle not far
removed from almost any West European city.
Long lines for food are absent. Not only are
domestic foodstuffs readily available but so, too,
are imports of fruits and coffee. Department stores
carry a variety of Western goods-including de-
signer jeans, Japanese cameras and stereos, and
Parisian fashions-that can be purchased in for-
ints, not dollars.
The NEM deserves some credit for the improve-
ment, in large part because it has allowed the
country's underground economy to thrive. One
important feature of the NEM is its legalization or
official toleration of many activities-such as
moonlighting-that are performed on the sly in
most centrally planned economies. Budapest has
recognized that the underground economy is instru-
mental in easing consumer demands and channel-
ing excess entrepreneurial energy to productive
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Secret
Eastern Europe:
Stocks of Consumer Durables a
Bulgaria
Czechoslo-
vakia
GDR
Poland
Romania
1965
25
14
91
94
16
54
1980
296
233
305
423
269
156
1965
114
63
200
101
72
46
1980
300
217
411
328
253
102
1965
82
22
167
189
52
82
1980
258
231
372
408
269
210
1965
245
166
333
337
253b
179
1980
243-
267
604
383
65
251
1965
10
5
30
30
15 b
6
1980
85 c
88
139
148
64
29
a Source: CEMA yearbooks and Romanian plan reports.
.b Base year is 1970.
1979.
uses. For example, the small farmer accounts for
roughly one third of agricultural output and, ac-
cording to one official estimate, moonlighters may
be responsible for nearly 40 percent of residential
construction. The regime estimates that 75 percent
of all households are involved in the underground
economy and that it accounts for approximately
one-sixth of total consumption.
At the same time, the leadership's emphasis on
consumer welfare-irrespective of the NEM-is
responsible for much of the improvement in con-
sumer supplies. The regime's decision to import
large quantities of consumer goods-their share of
total imports in Hungary is the highest in Eastern
Europe-has been an option open to all the East
European regimes. Moreover, the rather low level
of consumer discontent in Hungary is as much the
result of the relatively liberal political climate
instituted by party Secretary Janos Kadar as the
high living standard. The hallmarks of Kadarism-
open discussion of policy issues and options, level-
ing with the population, on such decisions as price
increases, and the philosophy of "who is not against
us is with us"-have all earned the regime some
trust from the people and convinced many that they
have a real stake in the system. Recent decisions
reluctantly taken by the regime to cut living stand-
ards in order to improve financial prospects proba-
bly have eroded but not yet seriously threatened
this social compact between the population and the
leadership.
A key question is whether the Hungarian system
can serve as a model for centrally planned econo-
mies. The USSR and other East European coun-
tries appear to be studying the economic mecha-
nisms of the NEM carefully, with an eye to
possibly transferring them to their own economies.
They are less likely, however, to consider adopting
the political liberalism that makes the Hungarian
system work.
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The Hungarians themselves say that the NEM was
designed for the particular strengths and weakness-
es of the Hungarian economy and other economies
might well need different solutions. Moreover, the
Hungarians introduced the NEM only after elevat-
ing competent economists and bankers to key policy
positions. The NEM also was instituted at a time
when a prosperous world economy and little domes-
tic debt provided a cushion for correcting mistakes.
Centrally planned economies now face serious debt
problems and a world in recession. Finally, the
Hungarians have a small economy where branch
ministers know every plant manager and are able to
supplement NEM principles with informal pres-
sures and arm twisting. Large economies such as
the USSR or even Poland are less able to use these
informal methods.
Nevertheless, the USSR and East European coun-
tries could well benefit from adopting some of the
principles of the NEM. Decentralization of deci-
sionmaking to the producing unit could ease the
rigidities of detailed planning and allow more
adjustment to local conditions. Agriculture, in par-
ticular, could gain from greater authority and
control at the farm level and from wider latitude in
permitting farms to set up new agriculture-related
operations. Price reforms could bring prices closer
to real costs and scarcities and retail markets closer
to equilibrium. And consumers and workers alike
could benefit from legalization of underground
economic activities and more favorable treatment
of small private businesses.
Secret 34
1 April 1983
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Cuba: Hard Currency Constraints
and Debt Problems
The Cuban economy is facing its most difficult
period since Fidel Castro took power in 1959. A
steep decline in sugar prices since late 1980, fol-
lowed by the withdrawal of over $550 million in
international credit lines as banker nervousness
grew, presented the Castro regime with a hard
currency crisis by mid-1982. Even after sharp
import cuts, the Castro government in August 1982
requested a rescheduling of the $1.3 billion in
medium- and long-term debt falling due through
1985. Accordingly, Havana signed an agreement
with its creditors last month
Still, Havana faces serious hard currency con-
straints for the foreseeable future. World market
prospects for sugar are bleak, earnings from Cuba's
other sources of foreign exchange are unlikely to
make up shortfalls, and lender apprehension proba-
bly will continue. Furthermore, we believe that
Cuba will not be able to rely on the USSR to
provide it with enough foreign exchange to resolve
its difficulties. Thus, we project that Cuba will
almost certainly look to secure additional net credit
from Western sources in 1984 and, perhaps, in
1985. In our view, these constraints will prevent
Havana from meeting the balance-of-payment tar-
gets that were established in. the recent reschedul-
ing agreement and will make negotiations for any
rescheduling more difficult in the future. In these
circumstances, Cuba will experience little or no
growth for 1983 and will fall well short of most of
its ambitious targets for 1984 and 1985
The Beginnings of Stress
The Cuban economy began to worsen in late 1980
with plummetting world sugar prices-the source
of more than half of Havana's hard currency export
earnings-and a sharp rise in debt service require-
ments. Increased hard currency sugar purchases by
COMECON countries and earnings from Ha- 25X1
vana's other major sources of foreign exchange-
nickel, seafood, tobacco, tourism, and construction
services-did not fill the gap. By 1982 the debt
service ratio had reached 50 percent.
As the situation worsened, Havana undertook a
variety of measures to deal with its hard currency
bind that proved insufficient and costly. Import 25X1
cuts slashed economic growth from 12 percent in
1981 to 2.5 percent in 1982. Moreover, the actions
failed to impress Western financial institutions.
New loans were denied, and short-term credits
were withdrawn as international bankers became
more wary 25X1
In late August 1982 Havana formally requested a
rescheduling of part of its debt. These negotiations
were completed last month. As a result, 95 percent
of Cuba's medium- and long-term principal due
from September 1982 to December 1983 was re-
scheduled for eight years, including a three-year
grace period. The creditors established the follow-
ing convertible currency performance targets for
the end of 1983 in place of a traditional IMF-
stabilization program:
? Minimum trade surplus of $410 million.
? Current account surplus of $6 million.
? Short-term debt minimum of $1.1 billion and
maximum of $1.2 billion. 25X1
Maximum total debt of $3.4 billion.
? A minimum of $180 million and maximum of
$360 million in the foreign exchange reserves.
? Real growth rate of economy of 2.0 to 2.5
percent. 25X1
To assure compliance with these targets, a task
force composed of five of the largest creditors was
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Cuba: Hard Currency Current Account Balance a
Current account
balance
-586.5
-101.7
-194.4
150.8
201.9
-299.7
-272.9
21.3
Merchandise trade
balance
-88.4
135.9
384.3
1,719.5
1,513.1
1,155.6
1,297.0
1,550.3
1,264.4
880.3
1,050.5
1,157.8
1,167.6
-304.3
-430.9
-404.8
-412.1
-361.4
440.1
318.4
286.0
318.0
375.6
Service expendi-
tures
721.1
641.7
918.9
744.4
749.3
690.8
730.1
737.0
a Data for 1978-81 is from Cuban sources. Merchandise export
earnings for 1982-85 are CIA estimates and differ from Cuban
projections. All other forecasts (imports, service earnings and
expenditures) are Cuban projections, which we believe are
reasonable.
established to monitor Cuba's performance. The
group mandated a monitoring system consisting of
quarterly economic reports to be released by Ha-
vana and a semiannual review by the creditors.
Provision for rescheduling principal due in 1984
was linked to Cuba's compliance with the targets.
Trade Adjustments
Cuban projections envisage a gradual buildup in
hard currency imports, but even in 1985 the pro-
jected level would still be nearly 15 percent below
the 1981 level in real terms. Havana has stated it
will import only essential items, but our study of
Cuba's hard currency imports reveals that few
nonessential goods are imported from the West.
Machinery and transport equipment, basic manu-
factured goods, and food make up the bulk of these
imports
We forecast that Havana's current account balance
will be deeply in the red in 1983 and 1984. Exports
should increase somewhat because of renewed policy
Secret
1 April 1983
emphasis but material shortages arising from im-
port cutbacks will limit their growth. Cuba depends
on these imports for high-quality capital and inter-
mediate goods unavailable within the Soviet Bloc,
including items that affect production of export
goods such as herbicides, pesticides, spare parts,
and whole plants. The transport sector is particu-
larly vulnerable, and its growing inefficiency would
quickly hurt all other sectors
Economic Stagnation
Cuba's 1981-85 Five-Year Plan envisioned average
annual real growth-as measured by GSP-of 5
percent.' Major increases in production were pre-
dicted throughout the economy, particularly in
electric power generation, steel output, and housing
construction
z The Cuban measure of economic output-gross social product
(GSP)-counts the value of goods and services at all stages of
production, a procedure that results in significant double counting.
At any point in time, it is difficult to specify how growth projections
based on this system would translate to equivalent Western meas-
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Secret
Cuba: Creditor Exposure
Cuba places its total hard currency debt at about
$3.2 billion. Over half of the debt ($1.7 billion) is held
by private institutions, primarily as short-term de-
posits ($1.1 billion) and medium- and long-term
bilateral and consortium loans ($532 million). The
remainder is held by official creditors, mainly as
export credits ($1.2 billion) and intergovernmental
loans ($240 million). The countries with the largest
exposure are:
Spain
406
Switzerland
France
392
Argentina
Japan
376
Canada
United Kingdom
234
131
206
109
Nearly 60 percent of the total debt was on inall
scheduled to be repaid by the end of 1983
Havana has little hope of achieving these targets.
Sagging construction activities will thwart Cuban
efforts to build new sugar mills, hotels, electric
power plants, and similar projects. In addition,
capital equipment will not be replaced or repaired,
and increasing numbers of factories-particularly
in the nonexport sectors-will be forced to close or
reduce operations. Cuba envisions an economic
growth rate of 2.5 percent for this year. We,
however, foresee little or no economic growth for
1983 partly because of crop losses resulting from
recent severe weather.
The outlook for growth in 1984 and 1985 is only
slightly brighter. Even then, growth is unlikely to
recover to the goal of 5 percent annually. Although
we believe the production of exports will increase
steadily in these years, Havana will be constrained
by poor market prospects for its traditional key
foreign exchange earners. Moreover, activity in
nonexport sectors is likely to remain stagnant as
resources are diverted to foreign exchange produc-
ers. We judge that the already spartan standard of
living in Cuba will be reduced further during 1983-
85 as a result of the hard currency shortage and
slowed economic growth.
Cuba: Composition of Hard
Currency Imports, 1981
Machinery and
transport
equipment
Food and oils
Miscellaneous
manufactured
goods
Fuels
Financing Options
Despite the recent rescheduling, Cuba will need
significant new financing in 1983 and 1984 to
import even the reduced amounts it has forecast. It
will be restrained from doing so, however, by the
$3.4 billion limit on total debt-only $200 million
above current indebtedness-set in the reschedul- 25X1
ing agreement. Cuba cannot afford to cut further
into its reserves, which probably are less than the
$180 million minimum-equivalent to nine weeks'
import cover at 1982 levels-established in the 25X1
Financing problems for 1983 will be particularly
acute because $235 million in short-term deposits
falls due this year. Cuba is seeking to roll over
these deposits, but is meeting some opposition. In
recent months it has unilaterally assumed that its
credits have been extended and has placed new
orders, according to a Western embassy in Havana.
We believe Havana may need to ask bankers to
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Cuba:
Hard Currency Foreign Debt and Projected Maturity
Total debt balance owed a
3,219.6
1,033.2
Bilateral public debt
1,478.8
118.2
Intergovernmental loans
239.3
0
Development aid credits
34.9
0.2
Export credits
guaranteed by the state
1,204.8
118.0
Multilateral public debt
21.0
0
Suppliers (credit)
33.1
3.5
Financial institutions
1,686.0
911.2
Bank loans and deposits
1,619.6
894.5
Medium-term bilateral
and consortium loans
531.6
41.8
Short-term deposits
1,088.0
852.7
Current import credits
66.4
16.7
Other credits
0.7
0.5
a Includes short-term obligations as of 31 August 1982; assumes a
constant dollar/peso exchange rate at the 1982 level of $1.2/ 1.
stretch out repayments of short-term debt if it is
unsuccessful in rolling them over. (S NF)
Cuba already has publicly indicated that it will
request a rescheduling of principal falling due in
1984. Based on our current account projections,
such action will be necessary. Because Havana is
unlikely to meet the balance-of-payments and
growth targets set in the rescheduling agreement, it
will probably find negotiations more difficult next
year.
Havana cannot count on the USSR to provide the
necessary foreign exchange to alleviate its prob-
lems. Cuba has indicated that it plans to integrate
its trade further into the Soviet Bloc economic
system in order to decrease its dependence on hard
currency imports. Havana's ability to accomplish
this is hampered by the immediate need to earn
convertible foreign exchange to service its debt and
to purchase imports unavailable from the USSR or
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790.9
438.1
338.6
341.6
294.6
220.8
35.3
35.3
35.4
0.7
1.0
1.4
305.6
258.3
184.0
2.8
2.3
3.7
10.2
10.8
7.0
436.2
130.3
107.0
392.4
124.4
107.0
157.1
124.4
107.0
its allies. Moreover, even if the strategy of further
integration takes hold, subsidies from Moscow for
Cuban sugar exports and oil imports are unlikely to
rise significantly above the $3.8 billion in 1982.'
Cuba is constrained in diverting its soft-currency
trade into hard-currency markets because its quota
for sugar exports to the West is established by the
International Sugar Agreement. In addition,
multilateral agreements with the USSR and its
allies specify that the major portion of future
output of new nickel and citrus plants be exported
to the East.
' Subsidy levels swing with the world market prices of sugar and oil.
Accordingly, the oil price decline will reduce the nominal value of
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Secret
Implications for the United States
Cuba's inability to get its economic house in order
could lead to a Soviet move to demand greater
control over economic activities on the island. This
risk would rise sharply if Havana shows signs of
being unable to begin repayments of its over $7
billion soft currency economic debt to the USSR,
scheduled to begin in 1986 25X1
In the domestic arena, Havana's primary preoccu-
pation will be how to motivate the work force while
imposing tighter austerity. In our view, worker
apathy and absenteeism will grow, productivity and
product quality probably will decline, and black-
market activities will expand. It is unlikely, howev-
er, that the social ferment of 1979-80 will reappear
in the near future. The Mariel exodus purged the
island of those who were the most dissatisfied, and
the Castro regime is unlikely to repeat its mistake
of allowing thousands of Cuban exiles to return for
visits
Over the longer run, however, Cuba's dim econom-
ic prospects will cause increasing domestic stress as
large numbers of entrants join the labor force.
During the next seven to 10 years, record numbers
of young people will seek jobs and housing. Because
the cumulative effect of these population trends
will develop gradually, Havana will be more likely
to use the emigration option toward the end of the
decade than in the short term. However, if Castro
perceives that US actions are causing popular
discontent, he might well unleash another Mariel-
style exodus in retaliation
The growing labor surplus will also provide a
powerful motive for the expansion of Cuba's over-
seas military and civilian forces. The economic
costs of Cuba's overseas activities probably are not
large enough to offset the benefits. Some of the
larger civilian assistance projects-such as the
construction teams in the oil-producing Arab na-
tions-actually return a profit. Perhaps most im-
portant, the Cuban "internationalists" are central
to Castro's drive for foreign influence.
Finally, we believe Cuba's hard currency shortages
will push the island toward even greater depend-
ence on the USSR. As Havana's dependence on
Moscow grows, Castro will have little room for
maneuverability should the USSR call upon Ha-
vana to suonort Soviet interests in the Third World.
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USSR: Labor Discipline Campaign
A crackdown on workers to reduce shirking on the
job is General Secretary Andropov's major initia-
tive thus far to increase production and rejuvenate
Soviet economic performance. The campaign to
improve labor discipline aims at punishing workers
or depriving them of rewards because of absentee-
ism, tardiness, excessive job turnover, and alcohol-
ism. The campaign was initially well received by
the public and appears to be boosting production. If
greater effort is not rewarded by an increase in
consumer goods and services, however, the disci-
pline campaign is likely to lose momentum.
Origin of the Campaign
Andropov's strategy to get laggards back on the job
began with the use of administrative measures to
enforce discipline: "Although everything cannot be
reduced to discipline," he said, "it is with discipline
that we must begin, comrades." The regime hopes
for a gain in production large enough to provide
incentives for boosting productivity. At the same
time, Andropov is promoting two additional meas-
ures designed to elicit better job performance: (1)
linking wages and bonuses more directly to produc-
tion results and (2) granting more managerial re-
sponsibility at the primary production level.
The keynote of the current campaign was
Andropov's 22 November plenum speech noting
that poor performance should have "an immediate
and unavoidable effect on the earnings, official
status, and moral prestige of shoddy, inactive, and
irresponsible workers." Since mid-December, when
a Politburo meeting focused on letters from work-
ers complaining about the lack of labor discipline,
the campaign has picked up steam. At a 24 Decem-
ber meeting, representatives of Moscow enterprises
called for a reduction in absenteeism and turnover
and demanded increased firings for those who do
not comply. That meeting has been followed by a
daily barrage of articles, exhortations, and exposes
in the central and regional press reinforcing these
themes. Soviet frustration over the effect of drunk-
enness on work time was stressed in a December
1982 Pravda article; it stated that as a result of
excessive drinking by workers "machines stand idle
and building sites come to life on Tuesday instead
of Monday, becoming deserted again by Friday."
While malingering workers are the prime targets
for punishment, laggards in management-includ-
ing party, trade union, and enterprise authorities-
are under pressure to shape up as well. For exam-
ple, in late December, Pravda published an open
letter from dissatisfied workers in a heavy construc-
tion enterprise complaining about nondelivery of
supplies.
The police reportedly have raided stores, restau-
rants, theaters, and public transportation to check
documents. These tactics appear to have been
successful. Queues at shops are said to be shorter,
and the US Embassy Moscow reports having heard
of numerous cases of workers who were dismissed
for being absent without leave.
Popular Reaction
Many Soviets have expressed satisfaction with the
discipline campaign as something that is long over-
due and will get the economy moving again. Be-
cause the Soviet system can implement coercion
more quickly and easily than it can change en-
trenched bureaucratic procedures, however, the
campaign runs the risk of being carried too far too
fast. Indeed, in a manner typical of Soviet-style
campaigns, the police have been heavyhanded and
indiscriminate in cracking down on absenteeism. A
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continuation of this tactic could foster an atmos-
phere of resentment and fear throughout the work
force. Because of widespread use of shift work in
industrial centers, many workers are on the streets
during normal working hours. Such workers report-
edly are becoming annoyed and frustrated by de-
lays involved in waiting for document checks.
Perhaps recognizing that too much zeal in carrying
out the discipline program could further alienate
the work force, the Politburo, at a meeting in mid-
January, evidently examined other measures to
keep workers on the job. The Council of Ministers
issued a resolution providing flexible work hours for
the services sector and expanding consumer.serv-
ices such as shoe repairs, laundries, and retail food
outlets at factories. This would reduce the pressures
on workers to leave work for long stretches during
the day to attend to personal business. The deadline
set for implementation of this decree is 1 April
1983. The US Embassy Moscow reports that a
number of stores are already adopting evening
hours in response to the resolution.
The campaign seems to be boosting efficiency and
production. East European diplomats have report-
ed, for example, that, the tempo of work in the
Soviet institutions with which they do business has
picked up markedly. Moreover, some of the
5-percent increase in industrial production in Janu-
ary, as compared with January 1982, may have
been the result of better work habits. January 1982,
however, was a particularly poor month for Soviet
industry, and we have no way of determining how
much of the rebound was due to tighter discipline
and how much to a rebound from an unusually poor
production month.
The best the Soviets can probably hope for from the
present campaign is a gain in production per
worker corresponding to an increase in the hours
actually worked. The payoff ends when downtime
is reduced to the level dictated by machine break-
downs, interruptions in material supplies, and the
like. This benefit could be offset by growing resent-
ment if greater worker effort is not rewarded by an
increase in the supply of consumer goods and
services.
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1 April 1983
The discipline campaign will face tough sledding.
Until priorities change, there is little hope for large
increases in the supply of consumer goods and
services. Public tolerance of a tough discipline drive
is likely to be transitory. Moreover, in the current
tight labor market, management will be reluctant
to crack down on workers, who can easily quit and
get jobs elsewhere. In addition, it has been standard
managerial practice to hoard labor "reserves" to
meet erratic work schedules or provide temporary
help for the harvest from the pool of nonfarm-
workers. Finally, firing workers goes against the
grain of Soviet society, which believes a worker has
the right to a job.
The aim of reducing excessive job turnover will
have a particularly heavy impact on young workers
and could be counterproductive. Workers under 30
are responsible for about 60 to 65 percent of all
turnover, and 75 percent of those leaving their jobs
have worked less than three years.
Soviets Recognize Limits
Several recent articles have suggested that im-
provements in economic management rather than
harsh measures to change poor attitudes and habits
among workers hold the key to higher productivity.
V. Kostakov, a sector head at Gosplan's Institute
for Economic Research, recently wrote in Litera-
turnaya gazeta that "it is necessary to infuse the
struggle for strengthening discipline with the un-
derstanding that we should have in mind the whole
productive chain. This matter should not be re-
duced only to a struggle with idlers." Andropov
himself stressed the long-term nature of the task
and collective responsibility in carrying it out. He
may have been signaling the police to back off
somewhat by emphasizing the risks in getting
bogged down in "trivialities like coming a few
minutes late for work or taking too many breaks."
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