INTERNATIONAL ECONOMIC & ENERGY WEEKLY 1 JULY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200130004-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: January 10, 2011
• Sequence Number: 4
• Publication Date: July 1, 1983
• Content Type: REPORT

Directorate of S ti'CLl
Intelligence
International
Economic & Energy
Weekly
DI IEEW 83-026
1 July 1983
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International
Economic & Energy
Weekly F_~
1 July 1983
iii Synopsis
1 Perspective-Soviet Assistance to Non-Communist LDCs
Energy
International Finance
Global and Regional Developments
National Developments
17 USSR: Assistance to Non-Communist LDCs Up Sharply in 1982
21 Thailand: New Government, Old Economic Problems
29 Hong Kong: Deteriorating Economic Conditions
Spain: The Challenge of Entry Into the European Community
directed to Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
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International
Economic & Energy
Weekly F__1
Synopsis
Perspective-Soviet Assistance to Non-Communist LDCs
For nearly three decades the Soviet Union has sought to gain influence in non-
Communist Third World countries around the globe, mainly through the
proffering of military and economic assistance. While experiencing some
reverses, such as those in Indonesia, Egypt, Sudan, and Somalia, the perma-
nence and resolve of the Kremlin's "penetration" strategy cannot be disputed.
USSR: Assistance to Non-Communist LDCs Up Sharply in 19821 25X1
Soviet military sales and economic aid commitments to non-Communist Third
World countries rebounded strongly in 1982 from the low ebb of the year
before, but they still remained below the high levels of 1979-80. Decisions to
equip the Iraqi and Syrian armed forces largely accounted for the turnaround
in Soviet arms sales. Economic aid pledges rose as a result of new agreements
signed with Nicaragua and several hard-pressed black African clients.
Thailand: New Government, Old Economic Problems 25X1
Thailand continued its relatively strong economic performance in 1982, but
Prime Minister Prem's new government still faces economic problems. Bang-
kok is under pressure from the IMF and World Bank to decrease consumer
subsidies, improve agricultural productivity, increase manufacturing efficien-
cy, and promote manufacturing exports. Although some economic reforms
have taken place, others are meeting considerable domestic opposition.
Hong Kong: Deteriorating Economic Conditions) 25X1
The economic climate in Hong Kong has deteriorated sharply during the past
two months, largely because of waning investor confidence in the face of a pos-
sible Chinese takeover in 1997. Short-term prospects for an economic rebound
are nevertheless good. Over the next five to seven years the continued political
uncertainty surrounding the 1997 issue will restrain economic growth and
deepen economic downturns.
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Spain: The Challenge of Entry Into the European Community
Spain's Socialist government is pressing EC leaders to accelerate negotiations
on Spain's entry into the Community. In order to prepare for entry into the
Community, however, the ruling Socialists face the daunting prospect of
restructuring industry, agriculture, and finance.
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Perspective
International
Economic & Energy
Weekly
1 July 1983
For nearly three decades the Soviet Union has sought to gain influence in non-
Communist Third World countries around the globe mainly through the
proffering of military and economic assistance. While experiencing some
reverses, such as those in Indonesia, Egypt, Sudan, and Somalia, the perma-
nence and resolve of the Kremlin's "penetration" strategy cannot be disputed.
Indeed, the growing instability and armed conflict in the Third World since
the early 1970s has provided not only fertile ground for new Soviet successes
(Angola, Ethiopia, and Nicaragua) but the opportunity to turn a handsome
profit on LDC arms purchases and related services as well.
Despite its occasional successes, and an apparent willingness to extend
assistance to almost any developing nation, Moscow's Third World assistance
programs continue to be circumscribed by the historic ties and political
affinities of individual LDCs. As a result, Soviet arms sales and economic aid
commitments have remained heavily concentrated among countries along the
Soviet borders and in the Middle East. Together, this group of about one dozen
countries accounts for 90 percent of Moscow's $57 billion in total military
transfers and three-fourths of the $11 billion of economic aid disbursements to
non-Communist LDCs. Some 80 other non-Communist recipients of Soviet
assistance have shared the remainder.
While the Soviet military and economic programs generally work in tandem,
Moscow found early on that arms transfers were the most direct and fastest
route to influence. Newly independent Third World states often could obtain
economic relief from the West, but not military assistance that many clamored
for most. Offering a wide assortment of weaponry, along with rapid delivery,
free training, and generous repayment terms, the USSR soon parlayed its
initial arms deals with Afghanistan and Egypt into a half-billion-dollar-a-year
program. By the mid-1970s, the Soviet Union had become the world's second-
largest supplier of military equipment, chalking up annual sales of $5 billion;
and in 1980-81, Moscow overtook the United States as the number-one arms
seller to the Third World.
The rapid growth in Soviet military transfers and the increasing concentration
among Middle East clients were spurred originally by the 1967 and 1973
Arab-Israeli conflicts. The spectacular increases monitored since then, howev-
er, can be attributed largely to the soaring demand for new and better
armaments from the oil-rich nations of the region and others with access to
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Arab wealth. Soviet willingness to make available many of its most modern
weapons on short notice set the stage for full-scale competition with Western
arms suppliers.
To boost its arms sales campaign, the USSR added more and larger carriers to
its merchant fleet, and in 1975-76 began a construction program that would
triple the size of its principal arms export facility in the Black Sea. The results
have been impressive: the volume and value of Soviet arms transfers more than
doubled in 1978-82 compared with the previous five-year period. During this
period almost three-fourths of the arms delivered-valued at $23 billion-
went to cash-paying Middle East customers.
Military sales increasingly have become a critical component of the Soviet
foreign trade. Arms transfers currently account for as much as two-thirds of
total Soviet exports to the Third World and earn Moscow an estimated $6-7
billion in much-needed hard currency each year-about 15 percent of its total
hard currency returns. Although receipts from arms deliveries may temporar-
ily dip as a result of the falling oil revenues of major Soviet clients, huge order
backlogs for Soviet weaponry ensure that cash earnings from this source will
remain a constant, if not a growing, share of Moscow's hard currency income.
Despite the overwhelming emphasis on arms transfers, Moscow still considers
its economic aid program an important, low-cost instrument in furthering its
goals in the non-Communist LDCs. Economic aid often is more able to endure
strains created by new political alignments and regime changes, the continu-
ance of many Soviet programs in Egypt being a case in point. Another
important spinoff has been the expansion in Soviet-LDC trade, largely because
the aid programs opened new markets for Soviet capital goods that would not
otherwise have found a market outside the Soviet Bloc.
Soviet military and economic assistance to non-Communist LDCs rebounded
strongly in 1982 from the low levels of the year before, as Moscow took steps
to:
? Recoup lost prestige and influence in the Middle East.
? Undercut the Indian arms diversification effort.
? Ensure its position in key black African countries and the Caribbean.
Decisions to equip Syria and Iraq with more weaponry, and record purchases
by India explain the upturn in Soviet arms .sales. Economic aid commitments
rose as a result of generous pledges to Angola, Ethiopia, and Nicaragua.
The upturn in Soviet assistance last year also brought major modifications in
the conduct of Moscow's aid program. The worsening economic climate and
increased competition from Western suppliers prompted a return to conces-
sionary financing and a greater Soviet willingness to supply even more of its
best armaments and production technology to LDCs. New Delhi will be a
major beneficiary through its signing of a $1 billion purchase agreement for
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production technology and the license to build Soviet MIG-27 fighter-bombers
in India. Moscow's economic aid extensions in 1982 were also generous,
particularly oil credits to Ethiopia and commodity and project assistance
pledged to Nicaragua.
The USSR's arms sales and economic aid programs are vital to the preserva-
tion of its influence and strategic interests abroad. Shifts in program tactics,
such as those seen last year, demonstrate Moscow's determination not only to
protect current gains, but to take advantage of new penetration opportunities.
Moreover, its arms sales have become an increasingly important financial
asset. Given the priority Moscow attaches to arms sales and the huge backlog
of undelivered orders, Soviet arms transfers are likely to remain at current
high levels for the next several years.
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Energy
Possible Energy Pricing US Consular officials in Calgary report that a tentative agreement has been
Agreement Between reached between federal and provincial officials on modifications to the
Ottawa and Alberta Ottawa-Alberta Energy Agreement of 1981. The most significant change
involves the maintenance of the price for old oil-oil discovered before 1974-
at the current level of $24.14 (83 percent of the OPEC benchmark price). This
decision abandons, temporarily at least, the provision of the National Energy
Program which decreed that the price of old oil would be kept at a level not to
exceed 75 percent of the world price. In addition, special old oil-oil
discovered during the 1974-80 period-will receive the new oil reference price
(that is, the world price). The agreement apparently will also allow increases in
the domestic price of natural gas of $0.20 per thousand cubic feet (tcf) in
August 1983 and again in February 1984 and will institute an incentive price
of $3.30/tcf for natural gas exports to the United States at levels exceeding 50
percent of licensed volumes.
British Oil Production British North Sea oil production-including natural gas liquids-averaged
Increasing 2.3 million b/d in May, a 3-percent increase over depressed April levels. Oil
production from the British sector of the North Sea has averaged 2.36 million
b/d this year, up about 150,000 b/d from last year's average output. Except
for the Brent field, which is undergoing scheduled maintenance, production in
May probably was close to capacity. Many industry sources expect further
increases in output later this year when four new fields-Magnus, South Brae,
Central Cormorant, and Maureen-come on stream. These four fields will
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eventually have a combined production capacity of about 350,000 b/d, and
their increased output will more than offset the anticipated decline in
production from some older fields.
Negotiations for the British Gas Corporation is in a
Norwegian Gas better position than the rival West European Continental consortium to obtain
gas from Norway's Sleipner field. while
the consortium is still interested in purchasing Sleipner gas, the United
Kingdom can offer a higher price to Norway because its proximity to the field
will reduce transport costs. In addition, Sleipner gas has a very high carbon di-
oxide content, and the British Gas Corporation has apparently agreed to take
delivery without removal of the contaminant. Such an agreement would allow
the Norwegians to be more flexible on price since it will substantially lower
their production costs. Negotiations for the sale of the gas from this field have
been under way for several months, and it now appears likely the British Gas
Corporation will be the final purchaser. The Norwegians also have stated that
negotiations for gas from the huge Troll field could get under way some time
in early 1984 if an agreement for the sale of Sleipner gas is concluded this
year.
Saudis Reduce Oil Saudi Arabia is removing price subsidies on marine bunker fuels for Saudi flag
Price Subsidies shipping, which will gradually raise the cost to shippers to the full internation-
al price-now about $180 per ton-by June 1984. Last month bunker prices
doubled and are currently 60 percent of the international average. Saudi
Arabia initially provided subsidies to encourage development of an efficient,
Saudi-owned coastal shipping fleet, but over the years Saudi long-distance
shippers were allowed to make unauthorized purchases of the subsidized fuel.
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West Germany Bonn has decided to approve a five-year loan of 1 billion marks-about $400
Approves Major Loan million at current exchange rates-from a group of West German banks to
for East Germany East Germany. East Germany will pay 1 percentage point over LIBOR. In
recent years, East Berlin has been able to secure only much smaller loans
maturing in two years or less. If it fails to make scheduled principal or interest
payments, East Germany agreed to forgo fees from the West German
Government for transit and some postal services. Bonn would use the funds to
reimburse the banks. A West German official told the US Ambassador the
agreement would bring West Germany no political concessions. The loan will
ease East Germany's financial problems. It also will tend to confirm many
Western bankers' belief in a West German financial umbrella and thus will
encourage them to resume lending to East Berlin. The Kohl government,
which in general has been unable to reach a consensus on what counterconces-
sions it should demand for aiding the East German economy, emphasized the
approval of all parties in the coalition as well as the backing of the opposition
Social Democrats for this specific arrangement.
Hungary Accedes to According to US Embassy reports, Hungarian policymakers have resolved to
IMF Proposals advance the timetable for actions to ease the country's continuing financial
crisis. The decision, reportedly made in April but as yet not announced
publicly, is seen as a victory by Hungarian bankers who support recent IMF
conclusions that stabilization/reform programs are moving too slowly. The
Ministry of Finance and central planners had hoped to postpone any "major"
resolution of the issues until the next party congress in 1985. The new
stabilization package is expected to be approved formally by the Central
Committee in August and implemented next spring. Presently lacking details,
it apparently will incorporate IMF proposals to increase exports, in part by a
further small devaluation of the forint; cut back again on consumer price
subsidies; and more effectively reorient wage and tax systems toward gains in
labor productivity and efficiency.
Moroccan Financial Morocco and the IMF are close to agreement on a $250-300 million standby
Prospects Improve loan that could be signed by early August, according to a reliable Embassy
source. The standby probably will require deep budget cuts, devaluation of the
dirham, and reductions in food subsidies-a politically sensitive issue which
could ignite riots similar to those in Casablanca in June 1981 that claimed
some 100 lives. Implementation of the IMF reforms, however, probably will
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not occur until after government elections scheduled for early September. The
IMF loan will provide relief for Rabat's financial crunch; foreign exchange
reserves cover less than one week of imports. In addition, the World Bank and
Saudi Arabia will consider major new loans after the IMF accord is signed. F_
IMF-Mandated The general strike in Panama earlier this week comes at a time when
Austerity and Labor continued economic stagnation and IMF-mandated austerity measures have
Unrest in Panama limited the government's ability to appease angry workers. Although IMF
approval this week of an 18-month, $163 million standby loan and a $64
million compensatory financing facility will improve the foreign payments
situation, Fund restrictions on government spending will likely prompt
Panama City to resist workers' bonus demands. Trade union leaders oppose
the proposed revision of the country's labor code and demand the return of the
portion of the wage bonus now paid to the Social Security Administration.
Originally these funds, plus interest, were to be returned to the workers after
10 years. Should the labor issues remain unresolved much longer, however, the
National Guard could preempt the civilian leadership in negotiating with the
unions.
Global and Regional Developments
EC Steel Decision The EC Industry Council last week failed to agree on new steel production
Postponed quotas and extended the current system, which had been due to expire on 30
June, for another month. The EC Commission wants the quotas extended until
the end of 1985, when national and EC financial aids to the industry are to be
phased out. West Germany, Italy, Belgium, and the Netherlands, however,
want only a six-month extension. The negotiations also are complicated by the
demands of Bonn, London, and Paris for larger quotas than the Commission is
proposing.
Although EC members continue to fight over quota levels, the system of
production controls almost certainly will remain in effect indefinitely. All
members agree that, without such controls, cutthroat competition could cause
more steel plants to be closed. At the next Industry Council meeting on 25
July, the Commission is likely to offer some increase in quotas to the West
Germans, French, and British. Most of the increase, however, probably will
come at the expense of other members' quotas.
NIC Trade Surplus Increased exports and lower imports have led to a sharp increase in the trade
With OECD surplus of the newly industrializing countries (NICs) with the OECD since the
third quarter of last year. For the Asian NICs, the trade balance improvement
came in the first quarter of this year as seasonally adjusted exports rose 12 per-
cent from the previous quarter. Hong Kong recorded the largest export gain,
with sales of garments and textiles to the United States leading the way. The
debt-troubled Latin American NICs (Mexico and Brazil) increased their trade
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NICs Trade Balance With the OECD,a Billion US $
Seasonally Adjusted
75.4 77.4 18.9 19.4 19.9 19.2 20.5
Exports 11.7 12.0 3.0 3.1 3.1 2.8 3.1
Imports 13.5 13.1 3.1 3.1 3.4 3.5 3.5
Balance -1.8 -1.1 -0.1 0 -0.3 -0.7 -0.4
Taiwan
Exports 14.4 14.8 3.6 3.8 3.8 3.6 4.0
Imports 11.8 10.8 2.8 2.7 2.6 2.7 2.5
Balance 2.6 4.0 0.8 1.1 1.2 0.9 1.5
Singapore
11.8 11.4 2.8 2.9 2.9 2.8 3.5
12.1 11.4 3.1 2.9 2.8 2.6 2.6
Exports 12.7 12.8 3.3 3.3 3.1 3.1 3.1
Imports 9.3 8.0 2.1 2.2 2.1 1.6 1.7
Balance 3.4 4.8 1.2 1.1 1.0 1.5 1.4
Exports 18.7 20.4 4.7 4.7 5.6 5.4 5.4
Imports 24.9 16.8 5.5 4.7 4.2 2.4 3.0
Balance -6.2 3.6 -0.8 0 1.4 3.0 2.4
a NIC exports to the OECD were derived by dividing OECD imports
from the NICs by 1.1, while NIC imports were obtained using
OECD export data. Both import and export data are valued f.o.b.
b For some OECD countries first-quarter data are estimates.
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surplus with the OECD in the last two quarters by cutting back imports. For
the remainder of 1983, Mexican and Brazilian imports from the OECD are
likely to remain at depressed levels, but exports to the OECD may show some
improvement; Brazil's currency devaluations should help exports, and recovery
in the United States will boost earnings, particularly for Mexico. The Asian
NICs will also probably further expand their sales to the OECD as recovery in
the developed countries stimulates demand for manufactures.
New Israeli Monetary An Israeli press report states that residents of the West Bank and Gaza will no
Controls in West Bank- longer be able to write checks on bank accounts in Arab countries. According
to the press report, the measure was taken to control funds that could be used
for subversive activities. Last week a West Bank newspaper reported that
Israeli authorities were confiscating the personal checkbooks of money-
changers as they crossed the bridges between Jordan and the West Bank. If
the ban on Arab checks is enforced, it will create a hardship for many West
Bank Arabs who keep their funds in banks in Amman. Recently imposed
Jordanian restrictions on the entry of West Bank residents will complicate
their efforts to get their money. The new Israeli measure may be an attempt to
force residents of the West Bank to deal with Israeli banks.
Czechoslovakia Czechoslovakia last week approached the EC Commission to seek trade
Seeking Trade concessions. An EC Commission official predicts tough going for the Czecho-
Concessions From EC slovaks, who want help in increasing exports of glassware, footwear, ceramics,
tractors, and other products. In April Hungary asked the EC for a trade
agreement and raised the possibility of a free trade area and other preferential
arrangements. Romania signed a limited trade arrangement with the EC in
1978.
In the absence of any progress toward an EC-CEMA agreement, Moscow
apparently has not opposed individual approaches by Prague and Budapest.
Although Czechoslovakia's hard currency problems are less serious than those
of other East European countries, Prague would like additional markets in the
EC to increase export earnings. Czechoslovakia is less likely to win EC
concessions than Hungary because of the EC's interest in giving the more
politically moderate Hungarians special consideration.
Cocoa Prices Cocoa prices have reached a 39-month high on news of continued production
Continue Upward problems in West Africa, which accounts for over half of world exports.
Drought and brush fires in the region, as well as the recent coup attempt in
Ghana, the second-largest exporter, have fueled speculative price increases on
cocoa futures markets. Ghanaian cocoa production has been declining because
of a failing transportation network, inadequate producer incentives, and, more
recently, poor crop management.
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Stimulated by the strengthening Western recovery, world cocoa consumption
this year will exceed production for the first time since 1977. Output will be
the lowest in three years, but cocoa bean stocks remain at near-record levels.
Long-term prospects for cocoa production remain strong. While West African
cocoa supplies will play a reduced role in world markets, Brazil, Malaysia, and
several other Southeast Asian countries are expected to pick up the slack.F_
National Developments
Developed Countries
Restraints on Japanese Canadian Trade Minister Regan announced this week that Japan has
Auto Exports to voluntarily agreed to limit its automobile shipments to Canada to 202,600
Canada units in the 15-month period ending 31 March 1984, the same total as in the
previous 15-month period. The agreement satisfies one of the major demands
of the recent highly publicized task force report on the status of the domestic
automobile industry. The report called for the continuation of import restric-
tions on Japanese automobiles until regulations on Canadian content are
implemented. The task force, composed of industry and labor leaders,
recommended that all automobiles sold in Canada should eventually have a
60-percent Canadian content. Negotiations between Japanese and Canadian
officials on voluntary restraints, which had been in progress for several
months, apparently were given additional impetus by the publication of the
task force's report in May.
Portugal's Austerity The new coalition government is moving rapidly to deal with Portugal's
Program pressing economic problems. In an effort to stem capital flight and stimulate
worker remittances, Lisbon last week devalued the escudo by 12 percent
against a basket of 18 currencies. Finance Minister Ernani Lopes subsequently
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announced a two-month freeze on government investment and price hikes
ranging from 15 to 41 percent for subsidized foodstuffs. Another round of
price increases for fuel and energy appears likely. The government has also
won a vote of confidence in parliament for a program that maps out a
somewhat vague strategy for stabilizing the economy. The program includes
proposals to exert greater control over public-sector spending, allow private
competition in some sectors of the economy, and revoke the Balsemao
administration's 17-percent wage guideline. Prime Minister Soares is seeking
the Assembly's approval this week to govern by decree during the summer
recess. Such power would enable the government to enact further austerity
measures-which would reduce real personal income and raise unemploy-
ment-without fear of parliamentary sabotage by the Communists.
Less Developed Countries
Continuing Economic Severe cash roblems are eroding Brazil's ability to import and are deepening
Pressures for Brazil its recession many banks are reluctant to
extend new trade credits and are gradually withdrawing their interbank
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deposits, which in recent weeks have declined some $300 million. Export
earnings have not been faring well because of sluggish demand. They will be
further constrained by flood damage to soybeans and other crops in the south.
Brazil's import expenditures through last month were more than 20 percent
below the same period last year, and inadequate supplies of key materials have
forced manufacturers to scale back production. To meet the IMF-mandated $6
billion trade surplus target, Brasilia will have to continue squeezing imports.
The cut in imports and the unanticipated agricultural losses, combined with
depressed demand, may lead to as much as a 5-percent decline in economic ac-
tivity this year and raise unemployment to double digits. The growing
recession will heighten government concerns about the potential for more labor
back austerity plans to reduce growing discontent. 25X1
Brazilian Government President Figueiredo is giving increased authority for economic decisionmak-
Wary of Discontent ing to his principal political adviser, suggesting that the government will trim
the role of Joao Leitao, the head of the President's civilian staff. 9.r; X
has expanded. 25X1
Leitao's
influence has been increased partly as the result of the continuing disarray in
the government's economic team, which may be headed for a shakeup.
Planning Minister Delfim and Finance Minister Galveas favor more expan-
sionary policies, while Central Bank President Langoni prefers the IMF-
mandated austerity program. The prestige of all three has been lowered by
their disagreements.
Leitao evidently is concerned about mounting signs of disgruntlement. Al-
though many of the 100,000 federal workers on strike in early June have
returned to work, recently announced new cuts in their benefits may spark
more job actions. Private-sector workers also are staging sporadic walkouts
and demonstrations. In addition, the US Embassy reports that the grumbling
is spreading in the middle class and among middle-level military officers. The
ascendancy of Leitao indicates that political considerations probably will play
an ever greater role in economic policymaking, with or without changes in the
economic team. Brasilia is afraid of aggravating public dissatisfaction and is
likely to resist IMF demands for stronger action. Even if a new accord is
reached with the IMF, political pressures will make it difficult for Brazil to ad-
here to tough austerity measures.
Mexico's Balance of Austerity measures, devaluations, and deep cuts in trade financing have
Payments Improves But resulted in a sharp improvement in Mexico's balance of payments, but the
Domestic Recession resulting recession is provoking growing domestic economic strains. A two-
Deepens thirds cut in imports produced a $4.5 billion trade surplus in the first three
months of this year. Despite continuing capital flight, new funds from the IMF
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and commercial banks have been sufficient to partially restore depleted
financial reserves. Mexico was then able to postpone drawing of the second in-
stallment of the $5 billion commercial bank loan that it arranged earlier this
year. According to US Embassy reporting, Mexican financial officials planned
to draw half of the available $1.1 billion in late June and the rest soon
thereafter.
The economy is now in deep recession. Government outlays are dropping,
bankruptcies and unemployment are multiplying, consumer demand is falling,
and raw material shortages are growing. In addition industrial production is
off sharply, and overall economic activity is falling at an annual rate of 5 to 6
percent. Nevertheless, inflation is staying near the triple digit range. A recent
poll of private businessmen showed 76 percent of the firms project losses this
year, 62 percent plan further layoffs, and 15 percent were insolvent. Bank of
Mexico officials reported that middle-class incomes have
declined 25 to 40 percent since the financial crisis began last year.
Philippine Austerity To deal with his country's financial crisis, President Marcos last week
Measures announced that the peso will be devalued by 8 percent and that five major in-
dustrial projects will be canceled. Other large projects requiring foreign
exchange will be subject to a strict review. In addition, Manila is eliminating
domestic oil price subsidies. Both the devaluation and the elimination of oil
price subsidies were promised in earlier negotiations for new loans with the
IMF and World Bank. The US Embassy attributes the delay in implementing
them to political pressures on Marcos, and it says that the postponement is
largely responsible for the IMF's criticism last week of Philippine economic
performance. The Embassy also reports that the balance-of-payments deficit
for the first half of this year reached $600 million-twice the government's
target.
Even with the austerity measures in place, Manila may have difficulty
avoiding some form of foreign debt rescheduling. Some commercial bankers
are already refusing to renew short-term credits, and others probably will be
disturbed by the IMF's criticism. Manila is especially worried about any
falloff of short-term credits. Its current short-term indebtedness may total
twice the official figure of about $4.5 billion, and its foreign exchange position
is precarious.
Secret
1 July 1983
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Iran Seeking Wider The US Embassy in Tokyo reports that Iranian Deputy Foreign Minister
Foreign Contacts Ardebili recently indicated to Japanese officials that Tehran wants to improve
its relations with some key industrialized nations. Ardebili said Iran was
particularly interested in expanding contacts with Japan, West Germany, and
Canada, although Canada would first have to apologize for its role in the US
hostage crisis. He indicated that Iran has no intention of opening a dialogue
with the United States and ruled out closer ties with France while it supplies
arms to Iraq. Iran's imports from Western countries and Japan already have
doubled during the first quarter of 1983-to over $2.3 billion-compared with
the same period last year.
The resurgence of Iranian oil revenues over the past year and Tehran's new
emphasis on economic development will give Western countries and Japan new
opportunities for trade with Iran. Tehran needs Western equipment, technol-
ogy, and skilled labor to realize its economic goals. Political relations, however,
are not likely to keep pace with expanded trade. Some Iranian leaders remain
opposed to moves that would draw Iran closer to either the West or the East.
New Soviet Law on The Supreme Soviet at its mid-June session approved a new law-to take
Worker Participation effect 1 August-that allows workers to participate in the management of
in Management enterprises. The law does not, however, give the workers any real power to im-
prove their own welfare or play an active managerial role. The language of the
law makes clear that the party will remain firmly in control and, regarding
such critical matters as formulating enterprise plans, selecting managers,
setting norms, and negotiating salaries, that workers will play a passive role.
Workers, for example, are to "propose the names of workers as candidates for
The new law does not differ significantly from the codes and regulations it su-
percedes. Its major substantive contribution is to clarify the functions and
responsibilities of various commissions and volunteer groups in such areas as
health, labor safety, and protecting state property. The law-proposed in draft
form in April by the Council of Ministers and the All-Union Council of Trade
bonuses, discuss the state of labor discipline, and ratify the proposals of
management and the trade unions on the internal organization of work.'
15 Secret
1 July 1983
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Unions-indicates that Andropov is continuing efforts initiated by Brezhnev,
largely in response to the labor turmoil in Poland in recent years, to introduce
cosmetic changes that create the appearance of enhanced power for workers.
Record Soviet Meat production on collective and state farms reached a record level during
Meat Production the first five months of this year-about 7 percent above the comparable
period last year and 6 percent above the previous high achieved in 1978. The
improved performance was largely due to a mild winter that reduced the need
for feed followed by the early arrival of spring weather that further bolstered
feed supply. Herd sizes are at record levels, and substantial growth in meat
production is likely after three years of stagnation. Output this year could
approach a record high of 16 million tons if grain production reaches an
estimated 210 million tons and if there are grain imports of 20 million tons and
ample supplies of forage crops. Even at this production level, however, 400,000
tons of meat would have to be imported in order to maintain per capita meat
consumption at the level of 1982. Imports of 400,000 tons would be roughly
half of the total in 1982.
Secret 16
1 July 1983
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Secret
USSR: Assistance to Non-Communist
LDCs Up Sharply in 1982
Soviet military sales and economic aid commit-
ments to non-Communist Third World countries
rebounded strongly in 1982 from the low ebb of the
year before, but they still remained below the high
levels of 1979-80. Decisions to equip the Iraqi and
Syrian armed forces largely accounted for the
turnaround in Soviet arms sales. Economic aid
pledges rose as a result of new agreements signed
with Nicaragua and several hard-pressed black
African clients.
Military Sales
New Soviet arms contracts reached $9 billion in
1982, almost 50 percent higher than the year
before and well above the average for the last five
years. Nearly 90 percent of new orders were from
Iraq, Syria, and India. Purchases by Libya, Ku-
wait, Afghanistan, Angola, Peru, and Nicaragua
accounted for the bulk of the remaining sales.
Moscow modified the terms of sale for its arms in
1982 in light of the worsening economic climate
and increased competition from Western arms sup-
pliers. It offered concessionary terms, a growing list
of its best armaments, and a rescheduling of debts.
The military resupply accords signed with Iraq and
Syria were indicative of Moscow's increased flexi-
bility. In both cases, Moscow used its military
assistance program to repair strained relations,
and, in the case of Iraq, to prevent further loss of its
arms market to France and other Western suppli-
ers. In the latest arms agreements with Iraq and
Syria, Moscow provided both easier repayment
terms and new model T-72 tanks and high perform-
ance aircraft.
The Soviets also licensed the sale of some of its
more advanced military production technology to a
non-Communist country-India. The license to
produce MIG-27 aircraft accounted for approxi-
mately one-third of the nearly $3 billion worth of
new Soviet-Indian agreements last year. This pro-
duction program is an advance in the transfer of
Soviet technology to a non-Communist country,
both in terms of the advanced technology in the
system and in terms of production methods.
Although down from the 1981 levels, East Europe-
an suppliers again capitalized on the continuing
heavy demands generated by the Iran-Iraq war.
About one-half of the $1.2 billion in East European
sales went to Iran and Iraq, with most of the sales
coming from Czechoslovakia, East Germany, Po-
land, and Romania.
25X1
25X1
Arms Deliveries Also Surged Last Year 25X1
The volume of Soviet military equipment deliveries
increased substantially last year, spurred by record
order backlogs and the heavy resupply efforts to
Iraq and Syria. Almost 50 percent of the military
tonnage shipped out of the Black Sea in 1982 went
to those two recipients, with deliveries to Iraq
tripling over 1981, when the short-lived Soviet
embargo curtailed shipments. Except for jet fight-
ers, nearly all categories of Soviet weapons deliver-
ies showed sizable increases, especially surface-to-
air missile launchers and artillery. Iraq also
received record arms deliveries from Eastern Eu-
rope, worth over $800 million and consisting mostly
of high consumption items such as artillery ammu-
nition, spare parts, infantry weapons, and transport 25X1
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DI IEEW 83-026
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Soviet Bloc: Military and Economic Assistance Agreements
with Non-Communist LDCs, 1982
USSR
Eastern
Europe
USSR
Eastern
Europe
Total
9,120
1,223
882
577
Middle East/North Africa
5,706
1,134
NEGL
83
Algeria
0
3
0
0
3,003
258
Libya
386
362
0
0
Syria
2,012
36
0
0
Other
36
141
NEGL
83
141
24
173
101
Nicaragua
35
24
163
84
Peru
106
0
0
0
Other
0
0
10
17
South Asia
3,136
31
75
280
Afghanistan
169
6
75
0
India
2,959
25
0
0
Other
8
NEGL
0
280
Sub-Saharan Africa
137
34
634
113
Angola
100
19
400
0
Ethiopia
10
0
170
0
Mozambique
2
10
5
10
Other
25
5
59
103
equipment was shipped to Iran last year by Libya.
Arms deliveries to other Soviet recipients decreased
last year, due in part to the resupply operations to
Iraq and Syria. Protracted negotiations with
Tripoli over late payments for arms may also have
contributed to the slowing of shipments to Libya.
1982. Moscow bolstered the defenses of its south-
ern African patrons because of their increased
frictions with South Africa. Record shipments to
Angola included the country's first guided-missile
patrol boats and T-62 medium tanks. Two addi-
tional squadrons of MIG-21 fighters were also
delivered. To better protect Mozambique's south-
ern flank, Moscow sent new armored personnel
carriers, tanks, and tracked bridging equipment.
Although Angola, Mozambique, and Nicaragua
accounted for only a small part of total deliveries,
they received larger shipments of Soviet arms in
Secret
1 July 1983
Soviet deliveries to Nicaragua rose from $6 million
in 1981 to $53 million last year. They included
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USSR: Major Weapons Deliveries
to Non-Communist LDCs, 1982 a
Tanks Other Field Naval Patrol Jet Fighters Helicopters SAM
Armored Artillery and Missile and Trainers Launchers b
Vehicles Combatants
Total 858 1,252 803
Middle East/North Africa 555 1,065 342
Angola
Ethiopia
Mozambique
Other
74 177 80
221 NA 12
140 59 189
140 59 175
0 0 14
144 128 260
39 4 24
40 82 210
65 42 26
a Minimum number identified.
b Includes SA-2, SA-3, SA-6, SA-8, and SA-9.
additional T-55 tanks, the country's first BM-21
mobile rocket launchers, and mobile radio intercept
stations to locate guerrilla communications sites.
Cuba and East Germany augmented the Soviet
shipments with antiaircraft guns and transport
vehicles
The volume of Soviet military-related shipments to
Communist LDCs increased slightly in 1982, on
the strength of increased deliveries to Laos and
Vietnam.
6 183 134 219
1 39 0 43
0 66 23
0 0 0
0 14 35
3 5 9
1 0 1
0 4 5
0 14 15
0 91 4
10 21 0
4 20 0
3 0 0
0 0 0
3 1 0
Overall deliveries to Cuba last year dropped only
modestly from the 1981 peak, as Havana continued
to upgrade its arsenal. Deliveries included MI-24
helicopter gunships, record numbers of MIG-21
and swingwing MIG-23 fighters, and additional
naval craft.
Moscow's economic aid commitments of almost
$900 million were up nearly 70 percent from 1981,
dominated by large new pledges to three favored
clients:
? Angola signed a $400 million contract-under a
framework agreement valued at $2 billion-for a
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I July,1983
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dam and powerplant that probably are to be
financed with 10-year credits.
? Ethiopia received $170 million in credits and
grants to finance oil purchases from the USSR.
? Nicaragua received about $165 million in new
commitments for development projects, technical
assistance, and emergency commodity assistance.
Disbursements of economic aid reached $1.2 billion
last year, a 40-percent increase over the prior
record level of 1981. Commodity support to Af-
ghanistan and Ethiopia and large deliveries to
Nigeria and Pakistan for steelmaking projects were
responsible for most of the increase in disburse-
ments last year. About 42,000 Soviet economic
technicians were employed in LDCs in 1982, with
more than one-half working on projects in the
Middle East and North Africa.
The USSR's economic aid to non-Communist
LDCs remains a small fraction of that supplied to
the Communist LDCs, mainly Cuba and Vietnam.
Estimates on economic aid to Communist clients in
1982 range up to $5-6 billion, much of it in the
form of oil and sugar subsidies.
Its Third World aid program, especially military
transfers, is vital to the preservation of the USSR's
influence and strategic interests abroad. The
mounting instability arising from the poor econom-
ic and financial conditions in most LDCs poses
both new opportunities for penetration, and rising
economic costs if Moscow is to maintain its present
position among favored Third World clients.F_
In view of the political priority that Moscow atta-
ches to its military aid program and the record
amount of undelivered military orders of about $22
billion, Soviet arms transfers are likely to remain at
or near the current high levels for the next few
years. Moreover, the expected deliveries will con-
tain a wider array of newer and more advanced
Secret
1 July 1983
weapons to a growing list of customers. The avail-
ability of advanced weapons and an apparent in-
creased willingness to offer concessionary terms
will help offset recent efforts by some of Moscow's
largest buyers to diversify their inventory pur-
chases.
Soviet willingness to sell arms on concessionary
terms probably will reduce hard currency earnings
somewhat. Returns from military sales nevertheless
will continue to be an important source of Mos-
cow's hard currency earnings.
We expect Moscow's commitments for economic
assistance to stay near the billion-dollar level this
year. New pledges, however, probably will be allo-
cated to a more select group of Soviet-oriented
regimes.
25X1
^
25X1
.25X1
25X1
25X1 11
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Secret
Thailand: New Government,
Old Economic Problems
Thailand continued its relatively strong economic
performance in 1982. Its 4.2-percent economic
growth rate and 50-percent decrease in the current
account deficit contrasted sharply with the per-
formance of most other countries. Prime Minister
Prem's new government still faces economic prob-
lems, however. The global recession has slowed the
domestic economy, and Bangkok is under pressure
from the IMF and World Bank to decrease con-
sumer subsidies, improve agricultural productivity,
increase manufacturing efficiency, and promote
manufacturing exports. Although some economic
reforms have taken place, others are meeting con-
siderable domestic opposition. Bangkok is delaying
utility price increases because of concern over
public protests, and progress in reducing tariffs and
streamlining foreign investment procedures is being
slowed by entrenched business and military inter-
ests. Moreover, shortfalls in natural gas production
threaten the development of a major industrial
complex.
The new government, which took office in early
May, inherits an apparently healthy economy by
world standards:
? For the past two decades economic growth aver-
aged 7 to 8 percent annually.
? Per capita income rose about 4 percent a year
over the same period to about $760 in 1982,
placing Thailand well in the ranks of middle-
income developing countries.
? Agricultural output has grown to the point where
Thailand is a net food exporter-and the world's
leading rice exporter.
? Unemployment is low-officially at 6 percent.
? The country has a good international credit rat-
ing with a manageable debt service ratio of only
16 percent.
Both the agricultural and manufacturing sectors
played roles in Thailand's economic success. Dur-
ing the past 20 years, agricultural output grew
more than 5 percent a year, largely from the
extension of arable land. At the same time govern-
ment policies restricting rice exports encouraged
farmers to diversify into other crops, especially
sugar, corn, and tapioca. By 1982, Thailand had
become the worlds fifth-largest sugar exporter and
a growing presence in the international corn trade,
exporting over 2 million tons last year. (u)
Since 1960 the manufacturing sector expanded by
more than 10 percent a year, transforming a
basically rural economy into one in which the
share of manufacturing in total production nearly
equals the share of agriculture. Manufacturing
exports-garments and increasingly electrical 25X1
components-now account for 15 percent of export
earnings. As additional evidence of the economy's
adaptability, the tourist industry now earns as
much foreign currency as rice exports, and over-
seas workers send home more than $500 million a
year, according to the Bank of Thailand. F I 25X1
Beneath this robust exterior, however, there are
some serious difficulties stemming both from the
global recession and, more importantly, from inter-
nal structural problems. Last year's 4.2-percent
economic growth and remarkable improvement in
the balance of payments-with both the current
account and trade deficits falling by more than $1
billion-cloak a substantial slowdown in the do-
mestic economy. Agricultural production stagnated
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DI IEEW 83-026
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Production Indicators
Percent
Inflation Rate
Percent
Balance-of-Payments Foreign Debte
Billion US S Billion US S
Trade Balance
Current Account
Total
Public Sector
-2
I I I I I I I I I I I I I J I I I I T I I 1 1 1 1 1 1 1
0 1977 78 79 80 81 82a 83b 0 1977 78 79 80 81 82a 83b -3 1977 78 79 80 81 82a 83b 0, 1977 78 79 80 81 82a83b
a Estimated.
b Projected.
c Excludes short-term debt.
because of drought in some growing areas and
reduced plantings due to low crop prices. Depressed
foreign and domestic demand cut manufacturing
growth from 10 to 4 percent, and together with
high real interest rates led to a nearly 15-percent
drop in real private-sector investment, despite a
condominium construction boom in Bangkok. The
economic slowdown would have been even sharper
had'Bangkok not boosted government spending by
17 percent and public-sector investment by 6 to 7
percent. The other major factor propping up de-
mand was a 4-percent rise in export earnings,
resulting from a 10-percent rise in export volume,
despite a precipitous drop in international commod-
ity prices.
More important for the longer term, World Bank
analysts believe Thailand's growth potential along
previous lines is largely exhausted. Increases in
area under cultivation were responsible for about
one-fourth of total GDP growth over the last
decade, but most good agricultural land is now
Secret
1 July 1983
under cultivation. Segments of the manufacturing
sector-especially basic consumer goods, which
developed behind moderately high tariff barriers-
are inefficient and unable to compete in interna-
tional markets. Planned fertilizer and petrochemi-
cals plants probably would also be uncompetitive.
In addition, more than one-fourth of the popula-
tion, principally in the north and the northeast, live
in poverty, and the income disparity between met-
ropolitan Bangkok and the rural areas is growing.
Economic Challenges
Slow to adjust to the second round of OPEC oil
price hikes in 1979-80, Thailand's balance of pay-
ments deteriorated sharply as the value of oil
imports doubled to $2.5 billion between 1978 and
1981, absorbing nearly 40 percent of export earn-
ings. As a result, the current account deficit also
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Current Account
Trade balance
Exports f.o.b.
Of which:
-784 -859 -1,551 -1,903 -2,032 -930 -1,600
3,454 4,045 5,234 6,449 6,898 7,170 7,300
Rice 656 513 764 953 1,208 950 1,050
Sugar 365 195 235 145 441 564 600
Tapioca 378 535 484 727 754 696 700
Rubber 302 395 605 603 500 406 600
Tin 223 356 453 554 423 377 500
Corn 159 208 276 356 382 429 500
Manufactures NA NA 699 886 830 1,014 1,170
Imports f.o.b. 4,238 4,904 6,785 8,352 8,930 8,100 8,900
Services(net) -398 -439 -783 -760 -1,169 -930 -800
Transfers (net) 84 144 247 585 645 609 680
Oil 937 1,016 1,423 2,552 2,519 2,352 2,000
726 489 1,743 2,351 2,446 1,332 1,700
428 646 1,477 2,107 2,352 1,602 2,000
106 50 51 189 288 179 225
298 -157 266 244 94 -270 -300
a Estimated.
b Projected.
c Includes errors and omissions and allocations of SDRs.
d End of period.
doubled to $2.6 billion-over 7 percent of GDP-
and foreign borrowing expanded by 70 percent,
mostly to pay for imported oil.
110 81 -20
2,727 2,729 2,900
approximately $1 billion, five-year structural ad-
justment loan in return for Bangkok's commitment
to reduce tariffs, improve manufacturing efficien- 25X1
cy, and promote rural development and labor-
intensive, export-oriented manufacturing. 25X1
$288 million standby loan for 1982-83 requires Some of the reforms called for by the IMF and the
Thailand to limit the growth of domestic credit and World Bank will require difficult, politically sensi-
reduce the budget deficit. The World Bank- tive economic decisions by the new Prem govern-
Thailand's largest creditor-in 1981 granted an ment. Prem's biggest economic headache is the size
As part of an IMF/World Bank financing package
designed to help fund these deficits, the IMF's
23 Secret
1 July 1983
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Thailand: IMF/World Bank Loan Conditionality
Structural Adjustment Loan
Program. Two loans for $150
million and $175 million already
granted. Additional loans forth-
coming if the Bank is satisfied
with Bangkok's performance.
of the public-sector budget deficit, which hit $1.7
billion in FY 1982-4.5 percent of GNP. The
principal cause was a 15-percent shortfall in
income-sensitive taxes, especially trade taxes, and
increases in government subsidies to unprofitable
public enterprises. In 1982, Bangkok adopted a
property tax, expanded the income tax, and im-
posed a 10-percent import tax in an unsuccessful
attempt to contain the deficit. Restraints were also
placed on the growth of government expenditures.
A $288 million balance-of-
payments standby loan for
1982-83.
$110 million loan for railroad
expansion and modernization.
Reduce fiscal deficit, limit do-
mestic credit creation, and hold
debt service ratio for public and
publicly guaranteed foreign
debt to 9 percent.
An increase in passenger and
freight charges to reduce the
deficit of the State Railways of
Thailand (SRT).
Raise public utility prices, im-
prove industrial incentives, de-
crease import restrictions, take
measures to promote rural de-
velopment and raise rural in-
comes, increase tax revenues.
Debt service is just below the ceil-
ing; money supply growth is down
because of low demand. 1983 fiscal
deficit above that of 1982.
A 7-percent passenger fare hike
proposed early this year was with-
drawn by Prem before the April
election. The Bank, which is holding
up the loan, wants a 10-percent
increase implemented by Septem-
ber. Communications Minister
Samak has proposed a 7-percent
increase for late June.
Despite these measures, Bangkok projects a $2.2
billion deficit in FY 1983, which ends 31 August.
The draft 1984 budget, passed by the Cabinet in
June, calls for an 8.5-percent increase in expendi-
tures, versus the 15 to 20 percent common in recent
years. After adjusting for inflation, the budget
contains no increase for salaries of civil servants or
Secret
1 July 1983
As part of earlier adjustment ef-
forts, Bangkok removed most price
controls, introduced new taxes, low-
ered some tariffs, and increased
energy prices to world levels. It has
put off fare increases for the bus
and rail systems and has made little
progress in agricultural develop-
ment or industrial job creation.
for education and only 2- to 3-percent increases for
other programs, including defense.
Bangkok also is under pressure from the IMF and
World Bank to increase politically sensitive utility
prices-especially transportation fares-in order to
reduce government subsidies to unprofitable state
enterprises. Public protests against higher bus fares
late last year forced Prem to rescind the increase.
We believe that new Communications Minister
Samak, head of the populist Thai Citizens Party,
will find it difficult to go along with higher bus
fares for his Bangkok constituency. He recently
proposed transferring control of the bus system
from the national government to Bangkok city in
an attempt to escape the responsibility for any fare
increase, according to the Thai press. Samak is
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Secret
already facing a no-confidence vote engineered by
the Thai Nation Party, the major opposition party,
over his plans to raise passenger train fares in
return for a $110 million World Bank loan for
railway expansion.
Energy prices may also present a problem for the
new coalition. To ensure continued IMF/World
Bank financing, Bangkok more than doubled ener-
gy prices between 1980 and 1982, bringing most
prices up to world levels. In response to public
pressure, however, Bangkok in late March reduced
domestic petroleum prices by the equivalent of
$1.50 per barrel and lowered electricity prices by
about 10 percent. The government is likely to come
under pressure from populist politicians for further
reductions.
Continuing low world prices for rice, sugar, tin, and
rubber have depressed rural incomes. Large dem-
onstrations in late November over low government
rice support prices led Bangkok to agree to a higher
price that it does not have the resources to meet.
The Social Action Party-the dominant party in
the new coalition-controls the Agriculture Minis-
try and intends to propose additional measures to
raise prices paid to farmers. But such measures will
be strongly opposed by Finance Minister Sommai
because they will add to the government's budget
deficit problems.
Longer Term Issues
Thai economic policymakers will also have to take
a hard look at Bangkok's development plans for the
1980s. The labor force is projected to grow by
about 700,000 a year for the remainder of the
decade. The economy's job creation potential, how-
ever, even under the best of circumstances, will be
much less. There is little additional land for new
entrants to go into farming. Bangkok's emphasis on
capital-intensive industrial development, despite
rhetoric to the contrary, will produce relatively few
urban, industrial jobs. Further expansion of the
textile and garments industry, which dominates
manufacturing exports, is limited by growing pro-
tectionist sentiment in major markets. And civil
service employment, the traditional sinecure of the
well-educated, is currently frozen because of bud-
get austerity and is unlikely to expand much over
the decade.
Increased supplies of domestic natural gas, which
will be used to fuel a heavy industry complex, are
the keystone of Thai industrial policy. Based on
projected gas flows of 20-23 million cubic meters
per day from the Gulf of Thailand by late in the
decade, Bangkok drew up plans to replace the
imported fuel oil used in electricity generation with
natural gas and to build a petrochemical and
fertilizer complex using natural gas feedstocks, and
explored the possibility of exporting liquefied natu-
ral gas (LNG).
Production shortfalls in Erawan, the only gas-
producing field, make it appear that Thailand will
fall short of its goal. The gas flow has averaged less
than half the contracted 7 million cubic meters per
day, not even enough to supply the newly converted
Bangkok power plants. Union Oil, the operator of
the field, now claims that Erawan's reserves are
less than one-third of the originally estimated 45
billion cubic meters, because of fragmentation
problems. Union also claims that other fields in the
Gulf will probably exhibit similar problems and
argues that the original estimate of reserves-some
280-340 billion cubic meters of natural gas-is
substantially overstated. Because Erawan is only
one of seven gasfields with proven reserves, howev-
er, we believe Thailand has sufficient natural gas
supplies to continue reducing its dependence on
imported fuel oil and to carry out a scaled-down
version of its heavy industry complex. Bangkok's
hardline negotiating strategy over gas pricing is
hindering the development of additional fields. We
believe neither Thailand's gas reserves nor world
demand will support an LNG export project for the
next decade.
Bangkok is also having difficulty attracting foreign
investment for its planned energy and industrial
development program. The development of export
processing zones, with special privileges and incen-
tives for investors, is just beginning, and Bangkok
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Thailand: Eastern Seaboard
Development Program a
Natural gas $200 million for each
separation plant of two units. Japan
and World Bank
loans provide pri-
mary financing.
Petrochemical $870 million
complex
munications links
nearing comple-
tion. Port expan-
sion under way.
First unit under
construction;
completion
scheduled for
1985.
Bangkok is hav-
ing trouble re-
cruiting private
investors and may
have to increase
its participation.
Olefins plant
scheduled for
completion in
1987.
Fertilizer plant $500 million Construction
scheduled to be-
gin in late 1983.
ASEAN soda ash 70-percent Japanese Feasibility study
plant financing concluded the
project would be
unprofitable and
implementation is
doubtful.
Light industry No estimate Bangkok is count-
development ing on private-
Expansion of tourist No estimate for both light in-
facilities dustry and tour-
ism development.
a The centerpiece of the Eastern Seaboard Development Plan
(ESDP) is a $4 billion industrial complex located between Rayong
and Sattahip. Government plans also include development of a
labor-intensive, export-oriented sector centered at Laem Chabang
and expansion of tourist facilities centered at Pattaya. The ultimate
hope is to turn the eastern seaboard into an industrial alternative to
overcrowded Bangkok.
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1 July 1983
has made little progress in streamlining foreign
investment procedures. Moreover, Industry Minis-
ter Ob's recent ruling banning the establishment of
firms whose production may compete with compa-.
nies promoted by the Board of Investment will-if
enforced-reduce the attractiveness of foreign in-
vestment
Finally, Bangkok has not seriously addressed the
question of rural development. Thai economic poli-
cy over the past 20 years has favored urban and
manufacturing interests over agriculture, which
remains the backbone of the economy. Over two-
thirds of the labor force is employed in agriculture,
and agricultural exports still provide more than 60
percent of export earnings. Measures to keep urban
food prices and thus urban wages low have de-
pressed farm incomes and discouraged investment
in high-yield seeds, fertilizer, and irrigation facili-
ties. As a result, urban incomes are more than
double those in rural areas, according to the World
Bank, and the divergence is growing. Although
most of the arable land is under cultivation, there is
much room for improvement in agricultural yields,
among the lowest in Southeast Asia. Government
measures leading to gains in real income for farm-
ers will be required if they are to undertake the
spending necessary to increase yields. Some ana-
lysts believe that even with increased incomes many
Thai farmers lack the motivation to increase pro-
duction. Despite rhetoric by Thai officials endors-
ing rural development-reiterated in Prem's policy
statement to parliament in May-we have seen
little effective reorientation of development priori-
ties or funding. We believe a continuation of
Bangkok's policy of slighting the rural sector will
accelerate rural-urban migration and add to pres-
sures for more jobs in the urban sector.
Political Constraints on Economic Progress
In response to advice from the World Bank and its
own technocrats, Bangkok has made some progress
in reorienting its economy to regain its growth
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momentum. A measure of financial liberalization
has increased the domestic incentives to save and
invest. Most energy prices have been adjusted to
world levels, while a number of tariffs have been
cut and further reductions are scheduled. The
retention of senior technocrats and Finance Minis-
ter Sommai indicates Prem's basic support for the
World Bank program.
Further substantial economic reform will be diffi-
cult to implement, however. Although Prem's four-
party coalition government has a clear majority in
the National Assembly, poor relations among the
leaders of the coalition parties will keep it factiona-
lized and politically unstable. The division of the
economics ministries among three of the coalition
partners reduces the chances of obtaining a consen-
sus on economic reforms
Because the governing coalition remains somewhat
shaky, we expect it to back down from, or postpone,
many unpopular economic decisions. Although in-
ternational financial institutions will be pressing for
budget austerity and utility price increases, we
believe Bangkok will move slowly on these political-
ly sensitive issues. Improved external finances
would allow Thailand to replace some IMF and
World Bank loans with commercial funding, albeit
at higher interest rates. Doing so, however, would
adversely affect Thailand's international cre-
ditworthiness and attractiveness to foreign inves-
tors.
Even if the new government wished to change the
direction of economic policy or accelerate the pace
of reform, moreover, it would run into opposition
from the influential business community, elements
of the military, and the bureaucracy. These groups
have generally opposed liberalization of import and
foreign investment restrictions, as well as a shift in
emphasis from industrial to agricultural develop-
ment.
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Hong Kong: Deteriorating
Economic Conditions
The economic climate in Hong Kong has deterio-
rated sharply during the past two months, largely
because of waning investor confidence in the face of
a Chinese takeover in 1997. The Hong Kong dollar
broke the psychological barrier of HK$7/US$1 in
May and has continued to weaken despite govern-
ment open-market intervention and a 2-percentage-
point increase in interest rates. The Hong Kong
stock index, which had been on an upward trend
since last November, turned sharply downward in
May., Efforts to rescue several failing financial
companies and three large property concerns are
also meeting little success.
Short-term prospects for an economic rebound are
nevertheless good. Speculative pressure against the
currency has shown signs of easing somewhat, and
Hong Kong exports have begun to respond to
Western economic growth. Inflation, however, will
remain a major problem owing largely to the cur-
rency depreciation. Over the next five to seven
years, the continuing political uncertainty surround-
ing 1997 will restrain economic growth and deepen
economic downturns. We expect cyclical fluctua-
tions to become more severe unless Britain and
China can work out an arrangement that leads to a
smooth takeover. The currency will probably con-
tinue to weaken, and the Hong Kong stock market
will reflect increasing investor uncertainty.
Hong Kong began 1983 with most major economic
indicators improving. Exports-the traditional en-
gine of growth in the colony-were up an estimated
5 percent in real terms during the first four months
after a 2-percent decline in 1982. Bankruptcies,
mostly tied to the major slump in the property
market last year, were easing somewhat as residen-
tial buyers returned to the market. Reflecting the
overall improvement, the major stock index
climbed 30 percent from 1 January to 30 April of
this year.
Despite these positive indications of economic re-
covery, the local currency has been gradually losing
foreign purchasing power since January of this
year. The strengthening US dollar probably ac-
counts for much of the early decline; most other
Asian currencies were also losing ground during
this period. But waning investor confidence took
over in early May, cutting more than 5 percent off
the currency's value against 15 major currencies 25X1
and nearly 10 percent off its value against the
dollar in a one-month period. The currency
strengthened only slightly in June.
The Chinese Specter
China plans to take control of Hong Kong in
1997-when the British lease expires-and local
investors are jittery about economic prospects un-
der a Communist regime. Although Beijing has
gone to great lengths to publicize its intention to
leave the colony's social and economic status quo
unchanged after takeover, local businessmen re-
main unconvinced. Moreover, talks between Lon-
hoped would bring some form of continued British
presence in the colony after takeover, have not gone
don and Beijing, which most Hong Kong residents 25X1
No data for capital flight are available. Bankers in
Singapore, Thailand, Sri Lanka, the United States,
and Canada reported increased inflows of Hong
Kong capital late last year when a similar bout of
nervousness sent the Hong Kong dollar into a less
severe tailspin. These same countries were probably
major recipients during the most recent scare. In
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Hong Kong: Volume of Trade
addition, local savers are shifting out of Hong Kong
dollar deposits in favor of foreign currencies and
gold. We estimate that about 60 percent of Hong
Kong bank deposits are now being held in foreign
currencies compared with 38 percent a year earlier.
Although data for 1983 gold imports are unavail-
able, purchases from Western Europe reportedly
jumped 50 percent in 1982 to more than 135 tons.
Government Attempts To Restore Stability
Thus far the Hong Kong Government's efforts to
stem the currency outflow and to bolster sagging
confidence have met with little success. The gov-
ernment probably attempted to support the curren-
cy with small-scale open-market purchases of Hong
Kong dollars in mid-May and early June; with only
an estimated $3-4 billion in its foreign currency
reserve fund, long-term, large-scale intervention is
impossible. By midmonth the government resorted
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to a more drastic measure to halt the outflow,
pressuring the Hong Kong Association of Banks
(HKAB) to raise interest rates 2 percentage points.
HKAB's announcement of the upcoming rate in-
crease bolstered the dollar for only two days,
however. By the time the increase went into effect,
the dollar was once again sinking to new lows
Nor was its failure to halt the downward slide of
the currency the only negative aspect of the rate
increase. Hong Kong's always volatile stock market
plunged 5 percent in one day as a result of investor
fears that the rate increase would stymie economic
recovery. Two of Hong Kong's largest textile man-
ufacturers are among the many industrial firms
currently attempting to stave off bankruptcy with
short-term borrowing. Major property companies-
among the biggest investors in the Hong Kong
stock market-are also in need of significant
amounts of short-term funds.
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Foreign Exchange Rates for Selected
Countries'
75 _ A L 1982 1983
Outside Support
The largest foreign holder of Hong Kong currency
is probably China's official foreign exchange
bank-the Bank of China. Although no data are
available on total bank holdings, Beijing's exports
to Hong Kong in 1982 amounted to $5.4 billion,
almost entirely paid for in Hong Kong dollars.
Indeed, according to a Chinese research institute,
nearly one-third of China's annual foreign ex-
change earnings come from Hong Kong. The hold-
ings have put Beijing into a difficult situation. By
holding Hong Kong dollars, Beijing is suffering a
sizable loss in purchasing power. Converting to
foreign currency, however, would exacerbate the
decline in the Hong Kong dollar and could contrib-
ute to instability that Beijing is trying to discour-
age.
I ~ I
40 J F M A M) J A S O N D J F M A M June 7
1982 1983
Hong Kong could probably also turn to the Bank of
England for support. Although such a move would
be unprecedented, we believe that the Bank would
be willing to work out some type of swap arrange-
ment if the economic deterioration was deemed
extreme. Bank of England support would probably
give investor confidence a major boost and, at least
temporarily, could discourage speculative pressure
on the currency.
In the short run, we believe Hong Kong's prospects
for economic recovery are good. During the past
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few days, the currency has shown signs of leveling
off at about HK$7/US$1. Stronger-than-expected
recovery in the West bodes well for sharp increases
in exports this year. Major gains in the export
sector would bolster confidence colonywide and
could contribute to overall economic stability dur-
ing the remainder of the year. With the 1997
deadline still 14 years away, investors probably
continue to see sizable short-term opportunities in
the Hong Kong market. Although the recent hike
in interest rates will hinder growth somewhat, we
expect GDP to rise 5 percent this year. Unemploy-
ment should fall below its current peak of 5.1
percent to perhaps 3 to 4 percent.
Because the colony is totally dependent on imports
for food, energy, and industrial raw materials, we
expect the recent depreciation will hamper efforts
to arrest inflation. Gasoline prices jumped nearly
2 percent in May alone, and other increases are
imminent. By yearend the consumer price index
will probably be at least 15 percent above the year-
earlier level. In fact, the price increase will proba-
bly offset any beneficial effect of the exchange rate
depreciation on Hong Kong exports. Although the
currency should regain some of the ground lost
recently, we do not expect it to approach the 1982
average rate of HK$6/US$1.
As long as residents remain uncertain about the
colony's future, long-term economic prospects for
Hong Kong remain gloomy. A large number of the
colony's residents are making efforts to get at least
one member of their immediate family established
overseas; Hong Kong's most highly trained workers
are likely to be among the most successful in
leaving the colony. Moreover, investors, even those
publicly praising the current Chinese leadership
and its policies, are diversifying their investments
and moving capital offshore.
The drain on investment funds and skilled workers
will constrain Hong Kong's long-term growth. Over
the next few years, we expect that Hong Kong's
growth rate will fall short of historic levels and
probably remain well below rates being achieved by
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1 July 1983
its traditional competitors in the area. Growth is
also likely to be erratic, reflecting swings in inves-
tor uncertainty.
We believe that, in the long run, the floundering
economy will pressure Beijing to exhibit flexibility
in negotiations with the British. At present, howev-
er, Beijing appears convinced that it can pacify
Hong Kong investors and maintain economic vitali-
ty without a significant British presence and,
hence, will probably continue to take a hardline
approach. Beijing's recognition that this approach
is causing severe problems and modifications in
Chinese demands might not, however, come until
investor confidence in Hong Kong has been irrepa-
rably damaged.
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Spain: The Challenge of Entry
Into the European Community
Spain's Socialist government is pressing EC leaders
to accelerate negotiations on Spain's entry into the
Community. The Ten have been unable to agree on
increased budgetary contributions and reforms of
the Common Agricultural Policy (CAP) that must
precede EC enlargement. The scope of this dissen-
sion probably precludes accession before early
1986, a delay that would vex Spanish officials. In
fact, frustration already has led Madrid to suggest
that it might reconsider its bid if sufficient progress
has not been made by next year. We believe,
however, that a growing appreciation in Madrid of
the potential benefits of membership-despite some
possible dislocations in the short run-will sustain
the government's commitment to the process of
application.
If Spain does join the EC, the repercussions on its
economy will be considerable. The liberalization of
trade following accession will both open up Spain's
highly protected economy to increased foreign com-
petition and provide Spanish exporters with greater
access to EC markets. In order to prepare for entry
into the Community, however, the ruling Socialists
face the daunting prospect of restructuring indus-
try, agriculture, and finance. This task will be all
the more difficult because reforms will have to be
instituted at a time when industry is still suffering
from the world recession and the unemployment
rate has reached 18 percent.
Removing Barriers to Trade
As part of the EC, Spain will be required to remove
import barriers against the other members, abolish
subsidies and tax rebates on its exports to them,
and adopt the common external tariff (CXT) on
imports from third countries. Madrid's acceptance
of these rules of membership will drastically reduce
the levels of protection its various industries cur-
rently enjoy. Under the terms of the 1970 trade
agreement with the Community, Madrid promised
to lower its tariffs by an average of 25 percent,
while EC members agreed to reduce tariffs by 60
percent. IMF calculations indicate that Spain's
average tariff on EC goods is currently 13.3 per-
cent, versus an average EC tariff on Spanish
products of only 3.3 percent. Similarly, Madrid's
tariffs on goods from third countries average about
17 percent-more than 12 percentage points above
the average CXT.
The EC Commission and Madrid agree that
Spain's protective measures should be dismantled
gradually in order to minimize the shock to its
economy. However, there is no agreement yet on
the length of the transition period or the size of the
annual tariff reductions. The Gonzalez administra-
tion has requested a 10-year transition period for
lowering tariffs, whereas the Commission has rec-
ommended a seven-year period. Under the terms of
a recent Spain-EC agreement on import quotas,
Madrid will be permitted to maintain existing
quotas on a number of sensitive items, generally for
four years.
Impact on Spanish Industry
Whatever the eventual compromise, it will expose
Spanish manufacturers to more intense competi-
tion. High protective barriers have encouraged a
lower degree of specialization and a larger number
of small firms within each sector than in the EC.
Over 90 percent of Spanish firms employ fewer
than 25 people. The value added per employee and
the volume of sales per employee are less than half
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Exports Share of Imports Share of
(million US $) Spanish Exports (million US $) Spanish Imports
by Commodity by Commodity
(percent) (percent)
10,195
2,083
30.7
16.0
Paper
127
39.4
Wood
30
38.8
Steel
457
24.7
Machinery
1,111
43.7
129 42.4
60 11.8
588 80.3
2,948 64.3
1,682 61.5
1,049 70.4
41 73.9
firms may be driven out of the market by more The detrimental effects of EC membership on the
efficient competitors. industries vulnerable to foreign competition may be
larger European corporations and that, unless by the Community.
mergers or acquisitions take place, some small
EC levels. This implies that many Spanish compa- import tariffs that in some cases are over 30
nies operate at a disadvantage compared with the percentage points higher than the tariffs imposed
only partly offset by the growth of export industries
The eventual removal of the import barriers poses a in the near term. Since EC tariffs on Spanish
particularly serious threat to Spain's textile, steel, imports are already quite low and since Spanish
shipbuilding, and electrical appliance and compo-
nents industries. These industries have been pro-
tected by quantitative restrictions, subsidies, and
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manufacturers will lose the benefit of export subsi-
dies and tax rebates, the stimulus to export indus-
tries may be limited. Moreover, Spanish wages are
close to those in the member countries while labor
productivity is less than half the EC level. Until
traditional labor-intensive export industries, such
as footwear, leather, and clothing, bring in more
modern equipment and quality control, they are
likely to have a low potential for expanding sales to
the Community. In the long run, their performance
depends on the Socialists' success in restructuring
and persuading workers to accept a drop in real
wages.
In order to enhance the ability of Spanish firms to
compete eventually with European multinationals,
Madrid is developing plans to modify the four-year
industrial reconversion program introduced in
1981. The Socialists intend to continue the previous
government's efforts to reduce capacity, eliminate
job redundancies, increase investment, and provide
financial assistance but also propose to restructure
these sectors and reallocate resources to those
producers with a better chance of surviving in the
international market. In some cases, this approach
will necessitate closing firms. At least two steel
mills will be closed under the Ministry of Industry's
proposal to cut production to 7.7 million tons and to
raise the efficiency of the steel sector. Similarly,
the government will offer assistance to only a
limited number of firms manufacturing domestic
appliances.
According to a Spanish Government study, the
social costs of restructuring will be high-more
than 20 percent of the existing jobs in the affected
sectors may be eliminated. An even larger share of
the work force could be trimmed after accession if
Madrid is obliged to adhere to the EC's restructur-
ing programs. Although government officials have
promised to create a program to retrain displaced
laborers, the unemployment rate probably will con-
Recognizing the weaknesses of both traditional
labor-intensive industries and small plants, the
Socialists are encouraging foreign investment. For
example, since Madrid has little time to foster the
growth of its infant electronics industry, it has
persuaded several Japanese firms to buy into
Spain's electronics industry. The prospect of using
the protected domestic market as a springboard to
the EC has also prompted General Motors to locate
a new plant in Spain. Madrid's continued ability to
attract foreign capital will not only diversify its
export market but also provide the managerial
expertise and technology that its domestic industry
Agriculture: The Common Agricultural Policy
Spain's adherence to the CAP will have a mixed
impact on the country's farming sector. Some
products will be subject to greater competition. In
the highly protected olive oil sector, this will lead to
increased domestic consumption of cheaper vegeta-
ble oils and exacerbate the existing olive oil surplus.
Madrid will also be obliged to buy agricultural
commodities from the Ten at EC market prices,
boosting its food import bill. Furthermore, some
agricultural purchases from non-EC members will
be subject to an import levy to bring their price up
to the EC level. According to an EC Commission
proposal, Madrid will be permitted to retain the
proceeds of the levies during the initial transition
period. Subsequently, this money will be trans-
ferred to the Community as part of Madrid's
contribution to the budget. Since about 80 percent
of its agricultural imports originate outside the EC,
Madrid has estimated that its import levies could
be close to $700 million.
Despite these obstacles, Madrid could achieve both
a net inflow of EC funds and a small agricultural
trade surplus. Madrid may be able to counterbal-
ance its contribution to the common agricultural
fund by obtaining a combination of export subsi-
dies, regional development assistance, and special
subsidies for domestic producers. The Spanish
Ministry of Finance calculates that net transfers 25X1
from the EC will total $440 million to $525 million.
Spain also should be able to increase its agricultur-
al exports to the Community once the present
tariffs, reference prices, and import schedules for
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Spanish produce are lifted. The price competitive-
ness of Spanish agricultural goods, reflecting rela-
tively low farm wages and transport costs, suggests
that Spanish exports could displace produce from
Israel, the Maghreb, France, Italy, and Greece on
the EC market.
Accession will force Madrid to revamp its ap-
proaches to market intervention and price supports.
Whereas Brussels purchases surpluses of key agri-
cultural products when the market price falls below
the desired level, Madrid currently negotiates the
range of minimum and maximum prices for princi-
pal agricultural products with the farm federations
and labor unions and provides permanent assist-
ance to support these prices. As in the EC, inter-
vention prices do not apply to most fruits and
vegetables. In anticipation of the changes that must
follow accession, Madrid intends to abolish the
state monopoly, the National Service for Agricul-
tural Products (SENPA), and to model its market
intervention system on the CAP. The Socialists will
also continue past efforts to bring agricultural price
supports into line with generally higher EC inter-
vention prices.
The Ministry of Agriculture is also preparing to
alter the structure of the agricultural sector in
order to conform to EC regulations. Like other
members of the Community, Spain needs to reduce
its large surpluses of wine and olive oil. Conse-
quently, the government proposes cutting the area
planted to wine grapes by 25 percent-taking
200,000 hectares out of production entirely and
converting an additional 200,000 hectares of vine-
yards to the production of other crops. Similar
measures will decrease the production of olive oil.
In fact, 70,000 hectares of olive trees have already
been plowed under.
EC and Spanish negotiators have not yet addressed
the fisheries question. When they do, progress is
likely to be slow because of the size of the Spanish
fishing sector. Madrid's fishing fleet is more than
half as large as the combined fleets of the EC
countries; Spanish fishermen number 70 percent of
the total in the Ten. Madrid reportedly intends to
begin rationalizing its fishing industry, but this will
do little to reduce the threat posed to the Commu-
nity. Moreover, a paper prepared by the EC Com-
mission indicates that Spain may attempt to obtain
a preponderant share of the Community's annual
quota. According to the study, Madrid might claim
access to waters it fished until barred by EC
regulations. The study also suggests that Spain
might seek preferences as a coastal country and
compensation for the loss of fishing licenses in third
countries. We expect that the Ten will try to
prevent the immediate integration of Madrid's
fishing sector in order to protect their own indus-
tries.
Banking Reform
EC membership would expose the Spanish banking
system to intense competition, because the existing
restrictions on foreign banks would have to be
eliminated. Under present Spanish law, foreign
banks must provide five times more paid-in capital
than domestic banks to open a branch, and the
number of branches they can open is limited.
Moreover, foreign banks are permitted to invest
only in fixed-interest bonds and public securities.
competing with international banks.
The possibility of an influx of foreign banks has
helped to focus attention on the weakness of the
Spanish banking system. Policymakers are aware
that existing laws have permitted the proliferation
of small, inefficient, and even unsound branches. A
recent proposal to curtail new branches falls well
short of the needed restructuring. Unless mergers
and acquisitions occur, the small scale of the
present banks suggests that they will have difficulty
Both the preaccession and transition periods seem
likely to produce some economic and social strains.
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Restructuring and rising imports will probably lead
to dislocations and the loss of jobs in both industry
and agriculture. The government will have to resist
union pressure to preserve jobs in inefficient indus-
tries. In the long run, the reallocation of resources
and the disappearance of weak, inefficient indus-
tries is both a necessary and positive step, whether
Spain joins the Community or not.
Madrid may also have to contend with a growing
trade deficit in the short run. The mutual reduction
of tariffs and quantitative restrictions will stimulate
Spanish imports of EC manufactured goods, while
the current Commission proposal to deny Spanish
fruits and vegetables free access to the Community
during the first four years of membership will delay
the expected boost to agricultural exports. Over the
longer run, the prospects for Spain's trade balance
should be more favorable, as Spanish industry
responds to the stimulus of increased competition
and as agricultural trade is liberalized. Since the
European Community is Spain's largest trading
partner by far, this promise will probably be suffi-
cient to keep Madrid on the track toward accession
even if the negotiations drag on into 1985.
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^
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Secret
Secret
Sanitized Copy Approved for Release 2011/01/10: CIA-RDP84-00898R000200130004-7