INTERNATIONAL ECONOMIC & ENERGY WEEKLY 2 SEPTEMBER 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300080005-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: February 14, 2011
• Sequence Number: 5
• Publication Date: September 2, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
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DI IEEW 83-035
2 September 1983
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International
Economic & Energy
Weekly
2 September 1983
iii Synopsis
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2 September 1983
1 Perspective-Western Europe: Responding to Dollar Movements
5 Briefs Energy
International Finance
Global and Regional Developments
National Developments
13 Big Six: Comparative Economic Forecasts
19 Israel: Development of High-Technology Industries
25 China: Offshore Oil Developments
29 Algeria: Losing Room for Maneuvering
35 Morocco: Living With Austerit~
Comments and queries regarding this publication are welcome. They may be
directed tc~ Directorate of Intelligence,
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International
Economic & Energy
Weekly
Synopsis
Perspective- Western Europe: Responding to Dollar Movements
Although the dollar hit an all-time high against the French franc and a nine-
year high against the West German mark on 11 August, West European
leaders virtually ignored the development. The major West European govern-
ments currently appear to be decoupling their fiscal and monetary policies
from movements in the dollar, a course that can be more easily continued as
long as the dollar remains relatively strong.
Big Six: Comparative Economic Forecasts
Private and official forecasters expect a weak economic recovery in the Big Six
in 1983, with increased momentum likely in 1984. Inflation in the Big Six is
forecast to remain virtually unchanged at 5 to 6 percent in 1983-84, and
forecasters agree that the Big Six balance of payments will improve signifi-
cantly this year and next.
Israel: Development of High-Technology Industries
Many Israelis believe the development of high-technology industries will solve
the country's economic problems. While we agree that the highly skilled labor
force and the experience gained in sophisticated defense industries provide a
promising foundation, we do not believe high-technology industries will prove
quite the panacea many Israelis hope.
China: Offshore Oil Developments
Last week's signing of an Exxon and Royal Dutch Shell joint venture for rights
to explore and develop two offshore blocks paves the way for intensive
exploration of the promising Pearl River Mouth Basin. We consider the
offshore oil program-particularly the Pearl River Mouth Basin effort-to be
of critical importance to China's ability to maintain its position as an exporter
of oil in the 1990s.
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Algeria: Losing Room for Maneuvering 25X1
Algeria has so far weathered the soft oil market through a combination of cau-
tious economic management, expanded sales of noncrude hydrocarbons, and a
drawdown of foreign exchange reserves. The adjustment process has become
increasingly difficult this year.
Morocco: Living With Austerity
Growing debt obligations have forced Morocco to stiffen austerity measures to
secure a new IMF standby loan and to seek a debt rescheduling. Although the
IMF program probably will open the way for additional financing from
traditional benefactors-especially Saudi Arabia-a foreign exchange crisis is
still possible before new money becomes available.
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2 September 1983
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Perspective
International
Economic & Energy
Weekly
2 September 1983
Western Europe: Responding to Dollar Movements
West European leaders are seldom happy when the dollar moves against their
currencies, regardless of the direction. Although the dollar hit an all-time high
against the French franc and a nine-year high against the West German mark
on 11 August, West European leaders virtually ignored the development. The
major West European governments currently appear to be decoupling their
fiscal and monetary policies from movements in the dollar, a course that can
be more easily continued as long as the dollar remains relatively strong. In con-
trast, any sustained weakening of the US currency would create divergent
pressures within the European Monetary System (EMS), forcing West Europe-
an governments to react and leading to further US-West European strains.
The mild response stems, in part, from a growing West European realization
that a strong dollar is not all that bad for their economies. Of course, an appre-
ciating dollar puts upward pressure on dollar-denominated import prices, such
as for oil and some basic commodities, but the overall impact has been small,
cushioned by weak oil prices. Since 1980 the dollar has appreciated 66 percent
against the European Currency Unit (ECU), yet inflation in each of the Big
Four countries has slowed by at least. one-fourth.
A strong dollar is promoting West European exports to the United States and
inhibiting imports. In the first six months of 1983, Western Europe's trade
deficit with the United States was cut by more than one-half compared with
the same period in 1982. Moreover, West European companies are more
competitive vis-a-vis the United States in third-country markets. Simulations
using CIA's Linked Policy Impact Model of the World show that the
appreciation of the dollar in 1983 (assuming it stays at its present level through
1984) will boost West European economic growth by 0.8 percentage point
above what it would have been had the exchange rate relationship remained
constant.
Other factors have dampened criticism of recent dollar movements. Perhaps
most importantly, the dollar's rise has had almost no impact on the EMS.
Since the March 1983 realignment of the system, the mark has been near the
bottom of the currency band-reversing the usual situation. Although
the early August dollar-buying spree pushed the mark down a bit further
against the franc, the system was never seriously threatened. Moreover, the
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Federal Reserve's intervention in the foreign exchange markets nipped in the
bud possible West European complaints that the United States was not helping
to calm a "disorderly" market. Lastly, August vacations undoubtedly lessened
official concern about economic matters.
Passivity toward the dollar may reflect a growing determination by the West
Europeans to follow their own economic policies. They appear to be conscious-
ly decoupling their economic policy from the vagaries of the dollar. If this
policy leads to further strengthening of the dollar, West European leaders
seem willing to accept it. Two days after the dollar reached 2.7 marks,
Bundesbank President Poehl said that an increase in the 4-percent discount
rate would be inappropriate, given West Germany's economic situation.
Similarly, the other central banks have not announced interest rate hikes.
Ironically, the West Europeans would be agitated should the dollar significant-
ly weaken-a development they previously have encouraged. Decoupling
would soon be forgotten as pressures on the EMS intensified. A weak dollar
would undoubtedly cause-or be caused by-large capital flows out of the
dollar into other currencies. The transfer, however, would not be spread evenly
among West European currencies. Dollar holdings almost certainly would
move more strongly into marks than francs because the West German
economy is still perceived-at least in a relative sense-to be the strongman of
Western Europe. West German real GNP is expanding, albeit quite slowly;
inflation is below 3 percent; and the current account surplus is growing. In
France, on the other hand, growth is slowing; prices are rising at an annual
rate of about 9 percent; and the current account deficit is likely to reach
$8 billion this year.
To counter pressures on the EMS, Bonn would have to reflate and Paris
further deflate-unpalatable moves in both countries. Chancellor Kohl's
coalition and the opposition Social Democrats want to shrink the budget
deficit, not expand it, and polls show President Mitterrand's austerity program
has helped make him the least popular president under the Fifth Republic.
Massive intervention, perhaps a short-term policy option, is not a viable
alternative in the long run, and in any event, France already has borrowed
heavily. While the EMS can accommodate further realignments, Bonn is not
likely to accept them without accompanying policy adjustments in the weak
currency countries. France came close to pulling out of the EMS last March
when an internal economic policy dispute spilled over into the negotiations.
The system may not be able to withstand another fractious battle.
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Aside from the impact on the EMS, Western Europe would gain little from a
weak dollar. Lower prices for dollar-denominated imports would be of
relatively little positive political benefit to West Germany or the United
Kingdom, given already low inflation. What would matter, however, would be
that West European goods would lose their competitive edge in the US
market-one of the few expanding markets for West European exports.
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Syria
iripoli
Lebanon
Mediterranean BEIRU
Sea *DAMASCUS
Saudi
Arabia
Egypt j,
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c Oilfield
Oil pipeline
^ Pump station
Oil terminal
Note: Pipeline alignments
are approximate
Iraq Strategic PiPeIine
/.i ll17?may!?.'i;
*RIYADH
Persian
Gulf
MANAMA
Sahrai
0 200
Kilometers
Boundary representation is
not necessarily authoritative.
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Energy
Iranian Threats Tehran has renewed its threat to blow up Iraq's pipeline through Turkey,
Against Iraqi Oil Baghdad's only oil export route. A senior official in the Iranian Foreign
Pipeline Ministry recently was quoted in the Turkish press as saying that Iran views the
pipeline as belonging solely to Iraq and that increased trade between Iran and
Turkey would compensate Turkey for the loss of transit fees. Since late June,
Iraq has increased the flow of oil through the pipeline to about 800.000 barrels
a day
The Iranian official's statements probably are intended to warn Baghdad not
to interfere with oil exports from Khark Island, which the Iraqis recently have
been threatening. Although loss of the pipeline would be economically
devastating to Iraq, Tehran would need to destroy a pump station to shut down
exports for an extended period. Past sabotage to pipeline sections has been
repaired in a few days, and Turkey is unlikely to honor Iranian requests to
close the pipeline.
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Nigerian Crude Output For the fourth consecutive month, Nigeria's crude production has exceeded its
Tops Ceiling Again OPEC-mandated ceiling. __August 25X1
output averaged 1.5 million b/d-200,000 b/d above Nigeria's quota. After
drawing sharp criticism from other OPEC members for overproducing in June
and July, Lagos reportedly ordered equity producers to reduce liftings in
August to 1.2 million b/d to allow third-quarter production to drop within the
ceiling. Crude output will have to drop below 1 million b/d in September if
Lagos intends not to violate its quarterly ceiling for the second time. Nigerian
crudes remain extremely attractive, and Lagos's dire need for foreign ex-
change will make it difficult to voluntarily restrict output in September to this
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Possible Impact of EC To increase domestic energy production, the EC Commission has developed a
Coal Policy comprehensive program to promote greater use of solid fuels. Much of the
program involves using subsidies to modernize marginally economic mines or
increase production of peat and lignite. One aspect of this plan, however, is a
subsidy scheme to reduce the Community's nearly 56 million tons of coal
stocks. This is the highest level since 1978. The plan would provide a subsidy of
$8.50 per ton for up to 10 million tons annually. Producers receiving these
funds could use them for any purpose, including directly subsidizing selling
prices by 12 to 16 percent per ton.
If EC producers dump an additional 10 million tons of coal on the EC market,
it is likely to be at the expense of third-country suppliers. The United States is
already one of the highest cost suppliers to the EC, and it probably would bear
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the brunt of most of the lost sales. The potential additional domestic coal
represents about 30 percent-or about $600 million worth-of US coal exports
to the EC. The principal beneficiary of the subsidy would be the United
Kingdom, which is the EC's largest coal producer. The subsidy might be one
method of providing additional EC budgetary flows to the United Kingdom to
offset what London regards as its excessive contribution to the Community
budget.
Norway Eyeing US he Ministry of Oil and Energy has commis-
LNG Market sioned Norsk-Hydro to undertake a study-to be completed in October-of
the technical and economic viability of liquefying Troms gas and exporting it
to the United States. Expected stiff competition from other suppliers in the
European gas market in the 1990s has prompted the Ministry to examine
alternative markets for Troms gas, Norway's northernmost gas find. While
sufficient gas reserves have not been proved in the area to support a major ex-
port project, Oslo believes sufficient additional discoveries will be made to
justify a commercial venture. Development of Norwegian LNG export
terminals could reduce leadtimes in bringing new exports to market by a year
or two and would add to the flexibility of the West European gas infrastruc-
ture.
Brazil Shores Up Oil Brazil's purchases late last month of 145,000 b/d of crude oil on 120-day
Supplies credit from Saudi Arabia, Kuwait, and Qatar should ease pressure on its
dwindling oil supplies. Since May, when the suspended IMF program led to a
severe foreign exchange shortage, Brazil has found it difficult to finance
critical oil imports. A number of traditional supplier-including Algeria,
Libya, Nigeria, and Venezuela-increasingly demanded that Brazil pay for
their oil with cash, terms Brasilia has been unable to meet. As a result, Brazil
was forced to cut back its oil imports from $600 million in May to $400 million
In some parts of
Brazil, particularly Recife and parts of Sao Paulo state, spot shortages of
gasoline, diesel, and other petroleum products emerged. To deal with the
growing oil shortfall, Brasilia instituted major oil product price increases and
restrictive distribution quotas.
The US Consul in Rio de Janeiro believes the new contracts with the three
Arab Gulf countries, together with likely additional purchases from multina-
tional corporations, will permit Brazil to restore its oil imports to levels
originally programed for 1983 and to begin replenishing its domestic stocks.
As long as Brazil's foreign exchange crisis persists, however, its oil supplies will
remain vulnerable to any disruption of short-term trade credits. Moreover,
should Iraq-now Brazil's second-largest supplier-curtail its sales because of
Brazil's growing relations with Iran, Brasilia's oil situation would deteriorate
rapidly, leading possibly to additional forms of rationing.
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Iraq Studies Oil Embassy reporting indicates that Iraq g q is considering construction of a crude-
Pipeline Across Jordan oil export pipeline across Jordan to the Red Sea
Baghdad has apparently concluded that its agreement with 25X1
Riyadh to build a similar pipeline through Saudi Arabia is dead, and Iraq is
still intent on diversifying its oil export routes. Few details of the project-
which is still in a preliminary stage of study-are available, although the cost
is said to be about $1 billion, significantly less than the $3-4 billion price tag
for the proposed Iraq-Saudi pipeline. The latter apparently has foundered on
Iraq's inability to arrange independent financing when Riyadh refused to
provide the cash. Embassy sources report it could also take Iraq and Jordan
two to three years to find financial backing and another three years to
complete construction. The trans-Jordan pipeline would terminate at the
northern Red Sea port of Aqaba, and its capacity most likely would be in the
1.0-1.5 million b/d range, similar to that of the proposed Saudi line and
approximating the 1.2 million b/d capacity of the now closed Iraqi-Syrian
pipeline. 25X1
Colombian Oil Occidental Petroleum's discovery in mid-July of light crude oil in northeastern
Prospects Colombia has renewed government and industr hoes for substantial oil finds
in the Llanos Basin well flows exceeded 3,900 25X1
b/d from each of two proaucing zones. more we s are being drilled to assess
the field's potential, which Occidental officials currently place at 40-50 million
barrels. The discovery comes on the heels of Exxon's determination that its
Arauca field-once considered by industry experts to be the most promising
Colombian oil find in the past 20 years-will only be a small, break-even
producer. Occidental plans to explore several other promising structures near
the July discovery. We believe that finds will have to be large, or numerous
and close together, in order to make a proposed integrated Llanos pipeline
feasible. 25X1
French Financingfor n February the Soviets
Soviet Sour Gas Project designated the French bank arias to take the lead in arranging financing for
the construction of the $300-400 million Tengiz gas desulfurization plant in
northwestern Kazakhstan. Credit for a period of 8.5 to 10 years is to be at an
interest rate of 7.8 percent. The difference between that rate and the OECD
consensus rate of 12.8 percent for conventional French financing is to be
reflected in higher prices charged by equipment suppliers. The Soviets have
long insisted on interest rates below those prevailing in the markets in which
they are dealing, perhaps to maintain the appearance of special treatment by
Western lenders. They evidently will agree to pay higher equipment prices to
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in 1990.
Construction reportedly will take 42 months. Four consortiums are still
reportedly competing for the Tengiz contract. As was the case with the
Astrakhan gas project, plans at Tengiz to drill into highly pressured and
corrosive reservoirs have forced the Soviets to seek advanced Western
equipment and process design. The Tengiz field initially is likely to produce
60,000 b/d of oil, 2 billion cubic meters of gas, and about 400,000 tons of sul-
fur annually, possibly rising to peak production of 300,000-400,000 b/d of oil
Sudanese Compliance The Bank of Sudan, acting on IMF recommendations, has implemented
With IMF Standby further import and credit restrictions. Import licenses will not be issued for
Agreement luxury items such as cars and refrigerators, and advance deposits on other
imports were increased to 100 percent from 40 percent. In addition, the
Central Bank has established ceilings on the growth of the money supply and
has required approval on loans exceeding $115,000. These new policies
demonstrate Sudan's continued commitment to the IMF standby arrangement
worked out earlier this year and should reassure foreign lenders that Sudan in-
tends to pursue necessary reforms.
Global and Regional Trends
China May Join
Multifiber
Arrangement
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The Chinese have requested a mid-September meeting in Geneva with the
GATT Secretariat and the United States and other delegations to discuss
membership in the Multifiber Arrangement (MFA). The MFA is administered
under the GATT and governs international textile trade by setting standards
for bilateral textile trade agreements. Although not a member of GATT,
China can join the MFA by acceding to provisions of the Arrangement and re-
ceiving the approval of GATT's Textiles Committee. Although membership in
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the MFA would not help China increase exports of textiles covered by current
bilateral agreements, it would give Beijing a forum to cooperate with LDC
textile producers in attempts to liberalize international restrictions on their
textile exports.
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Government Policy in dies, one of Japan's largest industrial conglomerates, has reversed the
Dealings With the recent decision of the firm's former president that called for downgrading
USSR trade relations with the USSR. The original decision was made after two
Soviet officials were expelled from Japan for engaging in industrial espionage.
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This is the first known instance of a Japanese firm opposing the Foreign
Ministry's recent efforts to control technology exchanges with the Soviets. It is
uncertain if this action will affect an earlier decision by the firm to cancel its
negotiations with the Soviets to build a large floating drydock. The United
States had urged Japanese Government officials to stop the project last year,
after another drydock built by the firm for the Soviet merchant fleet was put
to military use. The ensuing international incident caused the United States to
prompt COCOM to consider controlling the export of drydock technology.
National Developments
Developed Countries
Portugal Closer to Preliminary government figures for the first half of 1983 indicate a rapid
Meeting IMF Targets improvement in Portugal's balance of payments. The current account deficit
for the first six months was only $1.2 billion, compared with $2.2 billion for
the same period last year. Approximately 80 percent of the improvement is
attributable to cuts in imports. Government decisions to draw down petroleum
reserves and delay grain purchases, as well as a lack of foreign credit, led to a
17-percent reduction in imports. At the same time, exports rose about 10
percent. Less improvement is likely in the second half, since the drought this
year probably will boost food imports. Nevertheless, it now seems likely that
Lisbon's current account deficit for the year as a whole will be close to the
IMF's $2.0 billion target.
To meet the IMF targets for reducing the budget deficit, Lisbon is planning to
propose several measures at a special parliamentary session next month,
including a one-time 2-percent tax on fourth-quarter incomes; tax hikes on
automobiles, stamps, gambling, and real estate; and a reduction in public-
sector investment. In addition, Lisbon will review controlled prices on a
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monthly basis to ensure that market prices fully reflect import costs to the gov-
ernment trade monopolies. Further budget measures for 1984 are under review
and will be debated in parliament later this year. If approved, these measures
would cut the budget deficit in real terms by about 30 percent this year and 20
percent in 1984.
Expansionary The 1983/84 budget the Hawke government presented to Parliament last
Australian Budget week provides for sharply higher outlays for social security, welfare, health,
unemployment, and housing but also underscores the government's commit-
ment to rebuild Australia's armed forces. The budget will push up real
spending by 7.2 percent while projected real tax revenues are expected to
remain flat because of the sluggish economy. As a result, the budget deficit
will nearly double to $7.4 billion or 4.7 percent of GDP from 2.7 percent last
year. Because of the projected deficit, Canberra will find it difficult to lower
interest rates without intensifying inflation, which slowed to an 8.6-percent
annual rate in the second quarter of 1983.
Less Developed Countries
Libyan Domestic discontent over chronic food shortages has
Problems increased, and dissatisfaction with Libyan leader Qadhafi is being expressed to
foreigners more openly. The special treatment afforded the military reportedly .
is a growing source of irritation to most Libyans. Shortages of consumer goods
at this time probably are only partially a result of Libya's campaign in Chad.
Because information about Chad is closely controlled by the government,
rumors and speculation are prevalent, and the shortages, which are common-
place, are being mistakenly linked to the war effort. The growing perception
that current economic ills are a result of Qadhafi's unpopular adventures,
however, will serve to heighten resentment of the regime.
Chinese Announce Beijing has announced plans to begin constructing a project to divert water
Huge Water Project from the Chang Jiang (Yangtze River) across the Huang He (Yellow River)
into drought-prone areas of North China. The scheme has been under
consideration for over 30 years, although it was rejected only three years ago
as being impractical. Support for the plan was recently rekindled because
ground water tables are dropping in the North China Plain and wells in many
areas are going dry.
The plans for the project are incredibly ambitious and will strain the entire
economy. The project is designed to transport 1,000 cubic meters of water per
second along a 1,150-km route following the ancient Grand Canal. Over that
distance the water must be raised 40 meters requiring 30 pumping stations,
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China: Water Diversion Project
'Jinan
xuzhnu? inv!
Luoma N
Yellow
Sea
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each larger than any currently in operation in China, as well as concomitant
electric power supplies. Engineering problems will also arise when water from
the project must be pumped either over, or more probably under, the Yellow
River. Beijing has set an optimistic completion date of 1990, and we expect
foreign assistance will be called' on to attempt to meet that deadline.
Romanian Economic The Romanian economy is facing growing problems that may jeopardize
Problems Bucharest's goal of avoiding another debt rescheduling in 1984. Exports
slumped 11 percent in the first five months of this year because of the lack of
competitiveness of Romanian products in weak Western markets. Party leader
Ceausescu's drive to boost coal production to offset reduced oil imports is
faltering; miners are reacting to longer working hours with lower productivity
and increased absenteeism. The IMF delayed the scheduled disbursement in
July of $100 million because of Bucharest's foot-dragging on IMF recommen-
dations that Romania increase domestic energy prices and adjust exchange
rates and interest rates.
Ceausescu strongly resents IMF "interference," and continuation of the
current stalemate with the IMF will almost certainly hurt borrowing prospects
with Western governments and banks. Ceausescu probably will continue to
give priority to improving the trade balance at the expense of domestic growth.
If Ceausescu continues to bear down on the miners, however, the potential for
strikes in the critical coal sector will increase.
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Big Six: Comparative Economic
Forecasts I
Private and official forecasters expect a weak eco-
nomic recovery in the Big Six-Japan, West Ger-
many, France, the United Kingdom, Italy, and
Canada-in 1983, with increased momentum likely
in 1984.'Among the Big Six, Japanese real GNP is
generally expected to advance most rapidly in
1983, but some forecasters believe the Canadian
economy may outpace Japan's next year on the
strength of exports to the United States, especially
automobiles and construction materials. All fore-
casters expect the Big Four West European econo-
mies will be less bouyant, with France and Italy
posting little or no growth in 1983.
Inflation in the Big Six is forecast to remain
virtually unchanged at 5 to 6 percent in 1983-84
with only Italian prices expected to rise at double-
digit rates. Projections of the Big Six current
account balances, however, vary widely. Forecast-
ers agree that the Big Six balance of payments will
improve significantly this year and next, but projec-
tions differ by as much as $20 billion for 1983 and
$14 billion in 1984, largely because of differences
in projections of US economic growth.
Improving Prospects for Growth
Most forecasters think that the economic upturn in
Japan will start later this year and accelerate in
1984. Lower oil prices and a stronger yen (com-
pared to most non-US currencies) should improve
'The US Embassy forecasts were made in August 1983; the OECD
projections come from the July 1983 OECD Economic Outlook; the
Blue Chip forecasts represent the averages of projections made by
about 40 organizations and printed in the 15 August 1983 issue of
the Blue Chip Economic Worldscan; DRI's estimates were made in
the July 1983 issue of its European Review, the June 1983 issue of
the Canadian Review, and the Spring 1983 issue of the Japanese
Review; the forecasts prepared by the Deutsches Institut fuer
Wirtschaftsforschung (DIW), an economic research institute based
in West Berlin, were made this spring.
the terms of trade, thus sustaining growth in
domestic demand despite high real interest rates
and tight fiscal policy. The expected recovery in the
OECD-and especially in the United States and
Canada-should result in a substantial advance in
Japanese exports of manufactures. The expansion
of foreign sales, however, will not be as rapid as in
past recoveries because of the imposition-and
threats-of trade barriers by the United States,
Canada, and Western Europe. Excess manufactur-
ing capacity and a widespread desire by Japanese
businessmen to improve slumping profits are gener-
ally expected to lead to lackluster investment-at
least by past Japanese standards.
Almost all forecasters agree that an anemic eco-
nomic recovery in West Germany should get under
way this year. Estimates of 1983 GNP growth
range from the 0.5 percent projected by DIW to the
US Embassy estimate of 0.8 percent. Unlike past
recoveries, foreign demand for West German goods
is not expected to provide much stimulus; West
Germany's four most important trading partners-
France, the Netherlands, Italy, and Belgium-
which together buy almost 40 percent of its exports,
are all implementing austerity policies that will
dampen import demand. Slow growth in investment
worldwide should also hold down West German
exports, which are concentrated in capital goods.
Domestically, a more relaxed monetary policy and
interest rate subsidies should promote new housing
construction. Bonn, however, is keeping a tight rein
on the budget deficit, so little stimulus is expected
from government spending. High unemployment
and modest wage hikes, along with higher tax rates,
should hold down household income and thus pri-
vate consumption.
The austerity program that Paris announced in
March 1983 is expected to push the French econo-
my into recession this year; the pickup in other
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Big Six: Comparative
GNP Growth Rates
1.6 2.9
1.4 2.5
1.6 2.9
1.6 3.1
US Embassy
OECD
Blue Chip
DRI
DIW
France
OECD countries should enable France to register
some growth in 1984, although not much. Higher
taxes and utility rates should hold down private
consumption, which accounts for two-thirds of
GNP. Utility and transportation rates were raised
an average 8 percent, and oil import tax hikes
offset the fall in oil prices to consumers. Paris
boosted social security tax rates by 1 percentage
point and increased excise taxes on tobacco and
alcohol. The Mitterrand government also placed a
10-percent surtax on all people liable for at least
$625 in income tax. Lackluster consumer spending
is expected to depress investment. Government
efforts to control the budget deficit and inflation
Secret
2 September 1983
US Embassy 3.1 2.0
OECD 1.8 2.3
Blue Chip 2.2 2.3
DRI 2.4 2.3
US Embassy
3.0
4.7
OECD
1.9
4.8
Blue Chip
2.3
4.1
DRI
2.2
4.7
DIW
DIW
are widely expected to lead to slower growth in
government consumption and the money supply.
On the other hand, the weakness of the franc
should make French goods more competitive, there-
by boosting sales abroad and slowing imports.
Most forecasters expect that the recovery that
began in early 1982 in the United Kingdom will
accelerate during 1983-84. The outlook for private
consumption is bright because of income tax cuts
earlier this year and an anticipated reduction in the
savings rate. Several forecasters expect a strong
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Secret
pickup in investment because of the strength of
consumer spending and the decline in excess manu-
facturing capacity that began in 1982; moreover,
low British inflation should allow lenders to lower
interest rates. Moderate growth in public invest-
ment and revival of housing construction are also
expected to boost investment. Forecasters believe
that the fall of the pound should boost exports by
as much as 4 percent in real terms in 1984. Moder-
ate wage demands stemming from low inflation and
high unemployment-expected to hover at about
13 percent of the labor force in 1983-84-should
avoid a major decline in British price compet-
itiveness.
Government efforts to bring the public-sector defi-
cit and inflation under control are expected to keep
the Italian economy in the doldrums in 1983. The
brunt of the efforts to stabilize the economy has
been borne by monetary policy. To finance the
public-sector deficit-now about 16 percent of
GNP-without adding more inflationary pressures,
the Banca d'Italia has restricted private credit
expansion, forcing the business sector-including
the dynamic underground economy-to trim out-
put. The stagnation in real income is generally
expected to depress private consumption. A decline
in the price competitiveness of Italian exports,
mostly due to inflation and the relative stability of
the lira in the European Monetary System, is
expected to harm trade performance. All the fore-
casters believe that the Italian economy will stage a
recovery in 1984; little agreement exists on the size
of the upturn, however, with estimates ranging
from 1 percent to almost 4 percent. The key factors
determining the 1984 forecasts are the stringency
of credit controls and Italian export performance.
Given the strong US economic recovery, most
forecasters believe the Canadian economy will pick
up speed rapidly, particularly in 1984. The Canadi-
an economy usually follows the US business cycle
closely because Canada sells 70 percent of its
exports-30 percent of GNP-to the United
States. The manufacturing sector is expected to
benefit most from the recovery-especially export-
oriented industries and those serving the construc-
tion sector. The automobile industry should see
sales rise briskly from an expected pickup of de-
mand in the United States and Canada, coupled
with continuing US and Canadian restrictions on
imports of Japanese cars. The renewed trend to
larger cars also should help the industry. While
housing construction probably will improve because
of recent cuts in interest rates, excess capacity is
likely to dampen business investments. Private con-
sumption should gain from an anticipated increase
in employment, lower inflation, and a fall in the
savings rate as fears of layoffs ease. Government
spending also should boost demand as Ottawa
follows an expansionary fiscal policy.
Forecasters believe that inflation in the Big Six
countries will stabilize in the 5- to 6-percent range
during 1983-84. The slow pace of the recovery,
high excess capacity, and high-and in Western
Europe growing-unemployment are expected to
prevent bottlenecks that would force prices upward.
Moreover, oil prices, which triggered the past two
major bouts of inflation in the OECD, are widely
expected to stabilize or even decline through 1984;
several forecasters cite increased supplies from non-
OPEC countries and slow growth in OECD oil
demand as factors that could create downward
pressure on prices.
Unlike the inflation projections, forecasts of Big
Six current account surpluses vary widely, ranging
from $6 billion to $26 billion for 1983 and from
$16 billion to $36 billion for 1984. Most of the gaps
are due to differing forecasts of the Japanese
current account surplus, and, to a lesser extent, the
size of the West German surplus. These differ-
ences, in part, reflect diverse projections of US
economic growth. Generally, the forecasters who
expect strong US growth believe that the United
States will run a substantial balance-of-payments
deficit, which will be mirrored by a large Big Six
surplus.
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DRI
D1 W
Japan
OECD
Blue Chip
DRI
1.9 2.3
1.7 2.5
2.3 2.9
2.4 3.0
14.5 13.5
14.6 12.3
15.0 13.5
14.1 11.2
US Embassy
5.6
6.5
OECD
6.2
5.5
Blue Chip
6.2
6.1
DRI
5.5
5.2
DIW
7.2
6.0
US Embassy
9.5
7.4
OECD
9.3
7.5
Blue Chip
9.4
8.5
DRI
9.3
9.8
DIW
10.0
8.0
At this stage of the recovery, few forecasters are
willing to estimate the duration of the upturn-
especially in light of the poor record in projecting
the course of the last recession. Nonetheless, they
do point to areas that could shorten or weaken the
overall recovery in the Big Six economies.
An almost universal concern is the effect of large
US Government deficits on interest rates in the Big
Six. If interest rates go up abroad, interest-sensitive
consumption would slacken, housing construction
would slow, and investment needed to sustain the
US Embassy 4.6 5.8
OECD 6.8 6.0
Blue Chip 5.6 6.4
DRI 5.6 8.9
DIW 6.0 6.0
recovery would remain sluggish. The deflationary
effects of high interest rates on West Germany,
France, and Italy would be particularly strong
because of the reliance of their business sectors on
banks for financing new investment. Moreover,
higher rates could further dampen demand by
debt-ridden countries for Big Six exports. Another
effect emphasized particularly by the OECD Sec-
retariat is that higher interest rates would shake
consumer confidence, thus making people less will-
ing to spend.
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Big Six: Comparative
Current Account Balances
US Embassy
24.9
36.3
OECD
16.0
22.5
Blue Chip
11.8
16.2
DRI
7.6
16.6
US Embassy
21.4
24.7
OECD
18.2
21.8
Blue Chip
16.1
18.0
DRI
15.9
19.3
DIW
11.0
18.0
10.6
13.5
4.5
2.0
5.8
6.3
DRI
5.2
10.1
DIW
5.0
4.0
US Embassy
-9.3
-4.2
OECD
-9.2
-4.0
Blue Chip
-8.6
-5.4
DRI
-8.1
-5.3
DIW
-7.5
-5.0
Secret
US Embassy
1.4
2.2
OECD
1.8
1.3
Blue Chip
0.1
-0.5
DRI
NEGL
0.7
US Embassy
-2.1
-2.0
OECD
-1.5
-2.0
Blue Chip
-2.9.
-2.5
DRI
-4.0
-3.9
DIW
-4.0
-3.0
US Embassy
2.9
2.1
OECD
2.2
3.5
Blue Chip
1.3
0.3
DRI
-1.4
-4.3
DIW
0.5
2.0
The source of investment needed to keep the eco-
nomic upturn going, particularly in Western Eu-
rope, is cited by both the OECD and DIW as a
major worry. In their view, Western Europe re-
mains poorly positioned in the industries that are
expected to face growing demand. With stagnant or
declining demand for West European products,
internally generated investment funds will be limit-
ed. Most West European governments also are
likely to hold back on investment projects in an
attempt to reduce already large budget deficits.
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Secret
Israel: Development of High-Technology
Many Israelis believe the development of high-
technology industries will solve the country's eco-
nomic problems. While we agree that the highly
skilled labor force and the experience gained in
sophisticated defense industries provide a promis-
ing foundation, we do not believe high-technology
industries will prove quite the panacea many Israe-
lis hope. Even though these industries will play an
increasingly important role, high-technology firms
face a number of pitfalls-raising venture capital
for research and development is probably the most
important, especially for small new companies. F_
Current State of High-Technology Industries
Defense needs have provided the major impetus to
the development of high-technology industries in
Israel. According to the US Embassy, as Israel
expanded its defense procurement to include in-
creasingly complex weapons systems, defense-
related firms acquired growing capabilities in high
technology. As major Israeli firms won contracts to
provide high-technology products to the Israel De-
fense Force (IDF), high technology was diffused to
smaller companies through contracts to supply
subsystems and components.
Approximately 500 Israeli firms are active in re-
search and development projects compared with
only 200 six years ago, according to Israeli press
reports. The most successful firms are those that
have concentrated on securing markets too small to
be of much interest to large firms in the United
States, Western Europe, or Japan. Newer, smaller
firms are involved in biotechnology, robotics, com-
puter software, cad-cam (computer-aided design,
computer-aided manufacture), and fiber- and
electro-optics; a recently established kibbutz is
devoted entirely to the development of computer
software.
Because the domestic market is so small, high-
technology companies are export oriented. Exports
of locally developed science-based products in re-
cent years have grown twice as fast as overall
exports, reaching $1.3 billion in 1981. Science-
based exports constituted one-fifth of all exports in
1981 (the most recent year for which data are
available), compared with 10 percent in 1976.
According to a recent study by the Israel Produc-
tivity Institute, about 140 firms are exporting
science-based products. Exports of electronics for
civilian uses exceed $500 million, according to a 25X1
press report, and Elscint reportedly is the third-
largest supplier of the computerized axial tomo-
graphic scanner-known as the CAT scanner-in
the United States.
Potential for High-Technology Industries
Many Israelis believe that the country's brain-
power gives it a comparative advantage in research
and development. They believe high-technology
industries will provide jobs, exports, and a higher
standard of living. According to reporting from the
US Embassy, the Israelis believe they can compete
with anyone in the high-technology field
The Israel Defense Force is an important source of
highly trained individuals for science-based indus-
tries. Since almost all are required to enter military
service at 18 years of age or after completing high
school, many young Israelis are exposed to high-
technology military equipment. Those who do not
go on to college can apply their practical knowledge
in the area of equipment maintenance. The college
bound may be motivated to further develop these
skills in their university studies.
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Cycon, Ltd. Programing and machine control systems for
mold and die milling applications
Elbit Computers, Computers, military equipment, medical
Ltd. equipment, and communications equipment
Elex Control Computerized numerical control systems
Systems, Ltd.
Elscint, Ltd. CAT-scanner, nuclear medical imaging
equipment
Fibronics, Ltd. Fiberoptic fibers, cables, components, and
communications systems
Intelligent Informa- Communication and terminal products for
tion Systems, Ltd. large computer systems
Israel Aircraft KFIR aircraft, missiles, radar, and communi-
Industries cation equipment
Koor Electric & Telephone exchanges, military telecommuni-
Electronics, Ltd. cations equipment, data transmission systems,
medical equipment
Metalworking Lasers Industrial carbon dioxide lasers
International, Ltd.
RAD Computers Data communications
Rafael-Armament Specializes in R&D; products include special
Development purpose computers and special communica-
Authority tions systems
Sharnoa Electronics, Computerized numerical control equipment
Ltd. for lathe and milling machines, robotics
Tadiran Israel Elec- Electronics and telecommunication equipment
tronics Industries,
Ltd.
1,700 $72.7 million (1 April $29.2 million (
1981-31 March 1982) 1981-31 Marc
1 April
h 1982)
90 $1.6 million (1982) $1 million (198
2)
NA $71.9 million (1 April NA
1981-31 March 1982)
150 $1.7 million (1982) $1 million (19
82)
20,000 $820 million (1981) $520 million (
1981)
30 Production
late 1983
to start in
25 $900,000 (1
982) $120,000 (198
2)
Several NA
thousand
Israelis believe they have other advantages and
opportunities that they can exploit. These include:
? Israel already is an exporter of major military
equipment.
? Israel's high-technology firms take advantage of
the country's expertise in other fields, such as
agriculture and health care, to a greater extent
than do competing firms abroad. For example,
Israel's reputation for water resource manage-
ment is a strong selling point for its computerized
irrigation systems.
Secret
2 September 1983
? Israel can compete in the United States and
Europe by adapting technology to meet the needs
of small users. A government official claims that
many large Western firms are simply not inter-
ested in tailoring products to meet specific mar-
kets if sales potential is small.
? Latin America and Africa also offer promising
markets for Israeli high-technology products, ac-
cording to some Israeli businessmen, because
Israel offers these countries simplified mainte-
nance and training.
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The Office of the Chief Scientist of the Ministry of
Industry and Trade is the main source of govern-
ment funds for R&D. According to US Embassy
reporting, approximately $50 million was spent in
FY 1982 for a program that funds up to 50 percent
of the costs of R&D projects in industry and up to
60 percent for a newly established company. We
believe limited financial resources are, and will
continue to be, the major constraint on government
efforts to help the industry.
Many Israelis believe that high-technology indus-
tries will provide the catalyst for economic growth,
lower unemployment, and better living standards.
Experience shows that for every dollar invested in
industrial R&D, Israel will export $8 to $10 worth
of products In their
aid request for FY 1984, Israeli officials stated
that, by 1986, 55 percent of industrial exports
(excluding diamonds) will be products based on
Israeli research and development. The import com-
ponent of Israel's high-technology industries, more-
over, is lower than that of traditional industrial
products; for example, the major component of
computer software is the brainpower that created
it. Thus, the import bill associated with $100
million of production from science-based industries
will be lower than the bill associated with $100
million of production from more traditional manu-
factured goods like furniture and plastics.
High-technology firms face a number of pitfalls
that may prevent the industry from becoming quite
the panacea the Israelis foresee. Raising venture
capital to finance R&D is probably the most impor-
tant, in our view, especially for the newer, smaller
companies. The "crash" of the Tel Aviv Stock
Exchange last January and proposed changes in its
operation will probably result in a period of uncer-
tainty that will make it difficult for high-
technology firms to raise capital. Another potential
source of funds, foreign direct equity investment, is
rare in Israel.
Other pitfalls include:
? The problems of backing good technology with
adequate marketing.
? The reluctance of many governments and foreign
companies to purchase Israeli equipment; some
African and Latin American countries that rely
on Arab financial assistance do not want to
jeopardize those aid flows.
? Israel's skilled labor force is not likely to grow
rapidly enough to accommodate the degree of
high-technology expansion many Israelis appar-
ently hope to attain.
High-technology industries, while not a panacea, 25X1
will play an important role in the Israeli economy.
Israel's comparative advantage lies in using its
highly skilled, well-educated labor force in the
development of high-technology products, and its
strength will continue to be adapting existing tech-
nology to meet specific needs. We agree with the
US Embassy's judgment, however, that a shaking- 25X1
out period is likely and that some firms will not
survive; for example, the Embassy reports that
there are 25 companies engaged in robotics
Several steps have already been taken to deal with
the problems confronting Israeli high-technology
industries:
? Some companies have arranged to sell their prod-
ucts I
to West European and US firms who then
resell them under their own trade names,0 25X1
This practice frees 25X1
Israeli firms from undertaking their own market-
ing programs and results in Israeli products
reaching customers who would not deal directly
with Israeli firms.
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? The Ministry of Industry and Trade gives incen-
tives to employ new immigrants and returning
Israelis as researchers by providing up to 80
percent of the cost of their initial employment,
according to reporting from the US Embassy.
Israelis appear to realize that some sectors of high
technology will not be profitable. One government
official said that Israel could never compete with
Japan and the United States in manufacturing
silicon chips.
the country will never be a
major producer of consumer electronics because the
domestic market is too small and Israel's advantage
is not in manufacturing. There appears to be a
general consensus that Israel's comparative advan-
tage lies in using its brainpower in the development
of software that can be sold to foreign companies.
The development of Israel's high-technology indus-
tries will not solve all of the country's economic
problems; indeed, it probably will only ease some of
them. We used the CIA econometric model of
Israel to project the economic impact of a boost in
high-technology exports of $250 million annually'
in 1984-86 over a baseline scenario. While the
civilian goods and services deficit in 1986 would be
reduced by $600 million, it would still reach $4.3
billion. The unemployment rate would be 0.6 per-
centage point lower than in the baseline, but, at 7.7
percent, the rate would still be unacceptably high
to the Israeli public; real GNP would increase at an
annual rate of 4.1 percent compared with 3.5
percent in the baseline case.
While we do not believe Israeli products will offer
much competition to US firms engaged in large-
scale production of major systems and components,
they may have an impact on sales in certain
specialized areas. In addition to competing in the
US market, Israeli companies will be vying with
US exporters for market shares in third countries;
Israeli products may have an advantage in Western
Europe because they receive certain tariff con-
cessions from the EC not available to US exports.
We agree with the US Embassy's judgment that,
particularly in Latin America where Israel's
reputation as a supplier of military equipment is
established, US exporters may find strong Israeli
competition in certain sophisticated civilian prod-
uct lines, such as computers, telex equipment, and
electronics.
We believe Israeli firms will look to the United
States for joint venture or licensing deals that will
provide them with technology that would be too
expensive to develop domestically and for market-
ing arrangements whereby the US firm sells Israeli
equipment under its own name. Israeli firms will
also be looking to the United States for financing.
According to an Israeli press report, nine Israeli
companies, most of them oriented toward science-
based industry, publicly trade their stock in the
United States; Scitex recently raised $37 million in
the equity market. In addition, we believe Israeli
executives could well look for financing from US
banks.
Financing will also come from joint US-Israeli
organizations that receive US Government support.
The Binational Science Foundation and the Bina-
tional Agriculture Research and Development
Foundation provide funds for basic research. Mon-
ey for the process of turning an innovation into a
commercial product can come from the Binational
Research and Development Foundation (BIRD-F).
The US Embassy reports that demand for BIRD-F
financing is already so great that the foundation
must impose limits on the financing available for
new projects.
We agree with the US Embassy's judgment that
the Israeli Government will continue to push its
proposal for a two-way free trade area as an
alternative to the Generalized System of Prefer-
ences (GSP) that will help in marketing Israel's
high-technology products in the United States.
Secret
2 September 1983
25X1
25X1
25X1
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Secret
According to US Embassy reporting, Israeli offi-
cials are already concerned that Israel may not be
considered an LDC, and thus not be eligible for the
tariff reductions when the legislation is renewed.
The Embassy reports that Israel has already come
up against the competitive need limitations on GSP
because of its tendency to specialize in narrow
markets. A country can lose the preference on a
specific item if the country accounts for more than
half of total US imports of that item or the
country's exports of that item to the United States
exceed a specific value limit.
In their aid request for FY 1984, Israeli officials
stated that Israel's need for US assistance will
diminish if the civilian goods and services deficit
declines. Israeli officials are reluctant to severely
cut back imports because of the negative impact on
economic growth and living standards, so major
improvement in the civilian goods and services
deficit would have to come from export growth.
Even under the best of circumstances, however, we
do not believe the impact of export growth on
Israel's civilian goods and services deficit, and thus
its need for economic assistance, will be substantial
in the next few years. In order to make major
inroads on the deficit with high-technology exports,
the Israelis will have to overcome the marketing,
financing, and manpower problems they face,
which will require tremendous skill and not a little
luck.
Secret
2 September 1983
25X1
^
25X1
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*BEIJING
Japan-China Oil --
Development Corporation
Concession
Macau
of (Port.)
Hong Kong
(U. K.) F
Chang Jiang Shanghai
Wuhan,
Elf Aquitaine/Total