THE POLITICAL REPERCUSSIONS OF THE DEBT CRISIS IN MAJOR LDCS

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• Document Release Date: April 13, 2009
• Sequence Number: 11
• Publication Date: November 7, 1984
• Content Type: NIE

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X Director of Secret
Central F
The Political Repercussions
of the Debt Crisis
in Major LDCs
National Intelligence Estimate
Volume II-The Estimate
Secret
NIE 3-84
7 November 1984
Copy 4 7 2
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N I E 3-84
THE POLITICAL REPERCUSSIONS
OF THE DEBT CRISIS
IN MAJOR LDCs
The Estimate
Information available as of 22 October 1984
was used in the preparation of this Estimate,
which was approved by the National Foreign
Intelligence Board on 30 October 1984.
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SECRET
THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and
the Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
The Department of Commerce
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SCOPE NOTE
This Estimate examines some of the political repercussions of the
debt crisis in the developing countries. It focuses on seven countries-
Argentina, Brazil, Chile, Mexico, Nigeria, the Philippines, and Venezue-
la-whose debt to banks is large enough to constitute a potential threat
to the stability of the international financial system and the servicing of
which has created serious economic problems. Countries whose debt
problems may be serious but not threatening to the system, such as
Bolivia, are discussed only briefly. Countries that have been able to
manage large debts without severe economic difficulties, such as South
Korea, are not discussed.
The Estimate assesses the likely impact of debt-related economic
austerity on political stability and policies in the debtor countries. It
focuses particularly on whether and how much these political repercus-
sions will constrain the ability of debtor-country governments to
maintain economic adjustment policies and deal with their creditors.
For purposes of this paper we define political instability as that
which causes radical changes in a government's policy or in the
government itself.
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CONTENTS
Page
SCOPE NOTE ...................................................................................... iii
KEY JUDGMENTS .............................................................................. 1
DISCUSSION ........................................................................................ 7
Development of the Debt Problem ................................................. 7
Medium-Term Economic Prospects ................................................ 10
Impact of Economic Austerity on Political Stability ..................... 12
Brazil .................................................................................................. 13
Economic Adjustments and Policy Choices ................................ 14
Political Dynamics ........................................................................ 14
Mexico ................................................................................................ 15
Economic Policy Choices ............................................................. 16
Political-Social Dynamics and Constraints ................................. 17
Argentina ......................................:.................................................... 18
Genesis of the Present Problem ................................................... 18
Political Dynamics and Constraints ............................................ 19
Relations With Creditors .............................................................. 19
Chile ................................................................................................... 20
The Economic Problem ................................................................ 21
Political Dynamics and Constraints ............................................ 21
Venezuela ...................................: ...................................................... 22
Economic Trends and Issues ........................................................ 22
Political Constraints and Prospects .............................................. 22
The Philippines ................................................................................. 23
Nigeria ............................................................................................... 24
Economic Constraints ................................................................... 25
Political Constraints ...................................................................... 26
Prospects ........................................................................................ 26
Other Debtors ................................................................................... 26
Implications for Debt Negotiations ................................................. 27
ANNEX: Balance-of-Payments Scenarios for Major Debtor
Countries .............................................................................. 31
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KEY JUDGMENTS
The severe economic repercussions of the debt problem in the
major LDC debtors-declines of some 10 percent in GNP, of 15 to 20
percent in per capita real incomes, and of 40 to 60 percent in imports-
have not yet caused serious political instability or basic changes in
policy orientation for the governments of these less developed countries.
But economic problems have generated political pressures that are
substantially restricting the flexibility of these governments to under-
take economic reforms and to deal cooperatively with foreign creditors,
including the IMF.
If economic recovery proceeds in the next year or two, then
debtor-creditor differences can probably be worked out through ad hoc
adjustments by both sides. In the less likely case that economic recovery
in the debtor countries is prevented by highly adverse external econom-
ic developments-stagnant or closed markets, higher interest rates, or
reduced net capital inflows-the chances are that there would be
defaults, severe financial disruptions, and major changes in the manage-
ment of international debt.
Even if external economic conditions are reasonably favorable,
many debtor countries will face continued economic austerity for many
years in order to service their debt. These conditions will make political
conflicts more difficult to resolve and could thereby contribute to major
political upsets, such as a return to military rule in Argentina, the
fragmentation of political power in Mexico, and the growth of leftwing
violence in Chile and the Philippines.
Perhaps the key determinants of political reaction to prolonged
austerity are how much populations expect of governments and the
flexibility of any given political system. Where little by way of
economic benefit is expected of government and/or where the populace
is so cowed by its rulers that it dares not push for change, strong political
reaction to economic hardships is less likely
When governments can successfully deflect much of
the blame from themselves onto less reachable targets-their predeces-
sors, the bankers, the IMF, and so forth-they thus escape the fallout
that can lead to serious political pressures or to nn1iti-al inctahilitu
In Brazil the
increasingly flexible political system and anticipation of a return to
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civilian government have muted political reaction to the economic
problems. The greatest likelihood of political instability arises when the
sitting government is widely perceived as the main cause of the
problems, as in the Philippines, where the Marcos regime plays such an
enormous role in the nation's affairs. Likewise, the Nigerian Govern-
ment is proving less and less able to deflect the blame away from itself,
largely because the politically significant elites, particularly the mili-
tary, have come to expect so many government benefits, the funds have
dried up
Although most of the debtor countries are likely to begin a slow
economic recovery this year or next, we think that their political
resistance to austerity measures will build. As the shock of the financial
emergencies of 1982-83 passes, and austerity measures are increasingly
designed to restructure the economy to lay better foundations for future
growth rather than simply to deal with the lack of foreign exchange, the
necessity for sacrifices becomes less obvious, more debatable, and
politically more difficult to implement.
Among the seven principal debtor countries that are having serious
debt problems, Brazil probably is best placed to work itself out of its
debt burden. Brazil is well positioned to sustain rapid and diversified
export growth if it can keep its exchange rate competitive and if its for-
eign markets are expanding. Domestic political trends-a gradual
process of democratization-reflect a broad public consensus and are
unlikely to be upset even if the economy does poorly. But democratiza-
tion does constrain the government's economic policy flexibility and
consequently could lead to major problems in negotiations with foreign
creditors. We expect the Brazilian Government to be able to continue a
generally cooperative relationship with the IMF if external conditions
permit economic recovery to proceed and the IMF continues to show
flexibility. But, if external economic conditions turn sour and necessitate
additional painful adjustment as political activity intensifies, Brazilian
policy could quickly turn nationalistic and confrontational.
Mexico has made the most effective adjustment to the debt
problem among all the major debtors. It has shifted from an enormous
current account deficit to a large surplus, permitting a substantial
buildup of foreign exchange reserves; it has also regained a degree of
confidence among the banks, most of which have agreed to extend the
period and ease the terms of rescheduling. Although it has started to re-
cover, Mexico's economy remains depressed because austerity measures
are restricting the public sector while low demand and lack of
confidence have sapped the private sector. Strong leadership from
President de la Madrid and effective use of the ruling party's organiza-
tion have kept public dissatisfaction and political pressures under
control. The government will not be able to tolerate for long, however, a
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situation in which economic recovery is held up by lack of demand
while foreign exchange reserves accumulate. Mexico is already begin-
ning to expand the public sector once again, a process that if continued
could lead to policy differences with the creditors. Moreover, during the
remainder of his term, de la Madrid will face rising pressures for
reforms in the political system even if healthy economic growth
resumes. Although the ruling party-the PRI-has demonstrated con-
siderable resiliency, there is a potential in the longer term for serious
political instability to develop in Mexico-in the form of fragmentation
of the PRI and growing opposition to the system-which would reduce
the government's ability to negotiate constructively on matters of
importance to the United States, such as trade, energy, and emigration,
and could lead to serious domestic polarization and violence.
In Argentina, the inability of the political system to develop any
sort of consensus on policy was the fundamental cause of poor economic
performance in the past and will be the principal barrier to a resolution
of the debt problem in the future. The Alfonsin government's dominant
priority is to establish a democratic political system firmly in Argentina
in hopes of eventually facilitating consensus. The nationalism, fractious-
ness, and impatience of the Argentines will make it difficult to forge
such consensus, however, and hence impair the government's ability to
implement conditions of the tentative IMF agreement. The difference
between IMF criteria and what the Argentines can live with can
probably be bridged, at least temporarily. There is a high risk of
miscalculation, however, which over time could lead to a direct
confrontation and perhaps to a breakdown of negotiations. The chances
of such a breakdown are low, however, even though Argentina would
be better able than other debtors to live with the consequences of
default-its exports being readily marketable without identifying the
source and some possibly shiftable to the USSR. Moreover, Argentina
will almost certainly be unable to meet the conditions required by the
IMF. Thus, debt crises will recur periodically. If interest rates do not in-
crease and foreign demand for Argentine exports is strong, there is a
reasonable chance that these crises will be worked out. In a less
favorable external situation, or if the government appears to have been
forced to take unpopular steps by its creditors, Argentina would soon be
unable to service its debt.
Chile, despite having made perhaps the most painful adjustments
among all the debtor countries, faces a severe foreign exchange
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constraint because its interest costs are growing more than its exports,
which are depressed by low copper prices. The military government,
although still able to impose its authority, has become more sensitive to
public opinion as a result of recurrent public demonstrations and
widespread discontent. It is following mildly expansionary economic
policies, which, if they are continued and if external conditions do not
soon improve, will put Chile out of conformity with the IMF conditions
for loans. In any event, the political opposition to the Pinochet
government (though badly split) is so widespread that it cannot be
bought off by the limited economic carrots available to the government.
And, if economic conditions do not improve, in the longer term, violent
leftwing opposition may grow.
Although Venezuela is going through a fairly severe economic
adjustment, it is buffered by a democratic political system that often re-
sults in weak governments but also in considerable stability in policies,
by still substantial foreign exchange reserves, and by a high standard of
living. The outlook is for continued economic stagnation, which could
cause some erosion of political stability, but is unlikely to trigger major
political upsets in the foreseeable future.
By contrast, Nigeria will continue to encounter highly unstable
political conditions and probably have a series of military coups.
Economic factors contribute to this instability-both the past oil boom,
which fed enormous corruption, and the present economic depression,
which is causing large-scale unemployment and declines in real
wages-and conditions are unlikely to improve substantially in the next
few years. Basic ethnic and regional rivalries and competition for a
stagnant economic pie will be the major factors fueling this instability.
In contrast to the other major debtors, which have already made
severe economic adjustments and whose economies have probably
bottomed out, the Philippines began its economic adjustment to the
debt problem only a few months ago* and its economy is certain to
decline substantially more before it hits bottom. The debt crisis is not
the primary cause of President Marcos's political problems, but the
economic recession is creating rallying points for the opposition. Even
with an agreement with the IMF and debt restructuring, private sector
confidence will remain low, and it is highly unlikely that Marcos can
build a solid basis for future economic recovery. Moreover, as long as
Marcos retains power he cannot deflect most of the blame from the sys-
tem he established and controls. Thus, the potential for political
instability in the Philippines is probably almost as high as in Nigeria
over the next few years.
In general, we expect numerous conflicts between debtors and
creditors during the next year or so. Rather than let these conflicts lead
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to confrontation or ultimate default, debtors and creditors are likely to
agree on various ad hoc arrangements to ease the debt service burden.
Although there will be recurring crises and substantial arrears on
payments of interest, it is unlikely, except under highly adverse
international economic conditions, that any major debtor country will
formally repudiate its obligations or be called in legal default.
Neither the debtors nor the creditors want to run the high risks de-
fault would entail.. But these risks might appear acceptable if external
conditions were unfavorable, especially for Argentina, which is less
vulnerable to creditors' actions than many other debtors.
We believe that debtor-creditor conflicts will be ad hoc and
bilateral. Debtor interests are too diverse to provide a basis for
formation of any sort of cartel except under extremely unfavorable
economic conditions, which might induce the largest debtors, Brazil and
Mexico, to cooperate. However, consultation and communication
among debtors will continue to grow, and political pressure on the
creditor countries to give a higher priority to debtors' needs in their fis-
cal, monetary, trade, and aid policies will become far stronger.
This political pressure will come mostly from the so-called Carta-
gena Group of 11 Latin American debtors (including all the large
debtors). We expect the Cartagena Group to work out common
objectives, strategies, and tactics to use especially in international
forums. Its major objectives include lower interest rates, open markets
for LDC exports, some sort of cap on the debtors' interest burden,
rescheduling repayments over long periods, and increased funding for
international financial institutions. Agreement on such objectives, how-
ever, does not limit any debtor country's freedom of action and is
unlikely to result in any joint actions on debt negotiations.
Even if, as we expect, major confrontations between debtors and
creditors are avoided and workable compromises reached, the United
States will continue to be blamed by many debtor governments for
contributing to their problems. This political fallout from the debt
problem will continue to complicate US relations with many of the
Latin American debtors, which have high and sometimes unrealistic
expectations of the US Government's ability to influence the IMF and
the banks.
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DISCUSSION
1. Many less developed countries, including nearly
all of those in Latin America and seven of the eight
largest debtors-Argentina, Brazil, Chile, Mexico, Ni-
geria, the Philippines, and Venezuela-have been
unable to meet their debt service obligations without
large reductions in imports and economic activity.
Real incomes and employment have fallen sharply for
most segments of the population. Riots, strikes, and
more peaceful protests have occurred in most of these
debtor countries, and resentment toward the Interna-
tional Monetary Fund, the bankers, and the United
States has been rising. This resentment is epitomized in
Argentina President Alfonsin's statement on 6 Febru-
ary 1984: "I cannot visualize the absurdity that our
creditors think we must wreck our economy in order
to pay them." (See text inset and tables 1 and 2.)
Development of the Debt Problem
2. For some time, many of the debt-plagued LDCs
had been following highly expansionary economic
policies that were unsustainable. In the early 1980s the
LDCs were caught in a scissors hold between surging
interest rates, which reflected a fundamental shift in
Western, especially US, economic priorities, and fall-
ing export earnings, which resulted from a combina-
tion of prolonged recession and disinflation. These
trends, on top of the large increase in oil prices in
1979-80, transformed a manageable problem into a
severe crisis and capital flight became massive. Credi-
tors lost confidence first in countries, such as Mexico,
that had been following inappropriate economic poli-
cies and consequently were running large deficits in
domestic budgets and foreign payments. But the loss of
confidence soon spread to many other debtor coun-
tries, including nearly all of Latin America. By the end
of 1983, 25 countries had been forced into reschedul-
ing their debts, and most of these had agreed to
economic adjustment programs under the aegis of the
IMF.
3. The debtors had no choice but to make drastic
adjustments. A combination of declining export earn-
ings, high interest payments, and capital flight drasti-
cally reduced the ability of the debtor countries to
finance imports. Between 1981 and 1983, in 15 debt-
ridden LDCs:
- Imports fell by $50 billion, or 40 percent for the
group as a whole and by more than 50 percent
in Mexico, Argentina, Chile, and Nigeria.
- Exports fell by $14 billion, or more than 10
percent, mostly because of lower prices.
- The trade surplus increased by over $40 billion.
- The current account balance improved by over
$50 billion.
- And, despite this improvement in the current
account, these countries lost some $10 billion in
official reserves.
4. In 1983, imports were at or near the lowest level
of the past decade in relation to gross domestic
Some Debtor Country Statistics
The severity of the debt problem in major LDCs is
illustrated by the following statistics:
- The debt totals reached about $100 billion in both
Brazil and Mexico in 1983 and ranged from 20 to
75 percent of GDP among the major debtors, with
Chile having the highest ratio.
- Scheduled debt service (principal and interest)
takes up about three-fourths of the total exports of
goods and services in several of the major coun-
tries if only medium- and long-term loans are
considered. If short-term debt is included, debt
service obligations exceed export earnings in all
but Venezuela and Nigeria.
- Interest obligations alone make up 30 percent or
more of export earnings in Argentina, Brazil,
Mexico, Chile, and Peru.
- With the net flow of capital to LDCs declining
sharply and, in the cases of Mexico, Nigeria, and
Venezuela, shifting to a net outflow, interest pay-
ments have been financed in effect by the LDCs'
own foreign exchange earnings rather than by
foreign capital.
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Table 1
Debt Profile in Major Debtor Countries
Billion US Dollars As Percent As Percent of
(End of Year) of GDP Exports of Goods
and Services
Brazil
101 50
415
Chile
19 75
395
Mexico
98 70
335
Nigeria
15 20
90
Peru
13 80
330
Debt Service (1983)
as Percent of Exports
of Goods and Services
Excluding Including
Short-Term Short-Term
Principal Payments Principal Payments
160
80
Ratio of Scheduled Interest
Payments to Exports of Goods
and Services (percent)
1980
1982
1983
Argentina
27
47
40
Brazil
33
50
43
Chile
21
40
34
Mexico
29
37
31
product in major debtor countries. Inevitably, these
major import cuts were accompanied by substantial
declines in economic activity and even larger declines
in per capita real income (table 2). Between 1981 and
1983:
- GDP fell 4 to 15 percent in Mexico, Argentina,
Chile, the Philippines, and Nigeria.
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- Because current account deficits had shrunk, real
domestic expenditures fell even more than GDP,
by 10 to 20 percent in the same countries.
- Per capita expenditures were down 15 to 30
percent from the 1980 or 1981 peak to a level
well below the late 1970s in most of the debtor
countries..
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Table 2
Macroeconomic Trends in Major Debtor Countries
197
Av
8-80
erage
Argentina 97
100 95
96
Brazil 96
100 101
98
Chile 88
100 86
85
Mexico 86
100 100
94
Nigeria 99
100 97
92
Peru 100
100 101
90
Venezuela 101
100 101
96
Expenditures per Capita a
(1981=100)
Argentina 104
100
Brazil 100
100
Chile 86
100 76
66
Mexico 87
100 90
80
Nigeria 97
100 96
79
Peru 102
100 95
88
Venezuela (1980) 96
100 102
73
1983 as Percent
of 1981
198
1
9.4
24.1
21.1 16.8
70
24.1
15.1 8.0
33
Chile 6.4
3.5 2.8
44
Venezuela 13.1
12.6 8.7
66
Nigeria 20.9
15.1 8.5
41
Although investment- took the largest cuts, con-
sumption also declined substantially, as a result
of falling real wages and growing unemploy-
ment.
5. In the course of the past several years, all the
major debtors (except Nigeria and Venezuela) turned
to the IMF for help in restructuring their debt service
schedules, for loans, and for help in arranging new
loans from their creditors. While each IMF agreement
differs in specifics, in general the Fund has required
internal as well as external policy changes-a reduc-
tion in public deficits and in the money supply or in
inflation as well as currency devaluation to realistic
levels, plus trade surpluses and an increase in interna-
tional reserves.
6. Creditor banks and governments have linked
their new credits and rescheduling programs to the
IMF, which has become the linchpin of the entire
system. New IMF funding has been made conditional
on net new lending from the banks to several LDCs.
The banks in turn make disbursements on their loans
contingent on the debtors' observance of IMF condi-
tions. bank regulators, at least in the United States, are
making the existence and observance of an IMF
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program a major factor in classifying outstanding loans
on which some terms are not being observed. And the
US Government has made negotiation of a program
with the IMF a condition for some of its loans.
7. The linkages to the IMF are not as strong in the
case of rescheduling private debt as in the case of
provision of new credits. In Venezuela and Nigeria,
however, neither of which apparently will accept IMF
conditionality, the banks are in the process of resched-
uling nonguaranteed outstanding debt to protect their
interests. In the countries that have accepted IMF
programs and consequently are receiving new money,
reschedulings, although separate, are influenced by
the degree of success in following the IMF program.
8. The IMF's involvement in a large number of
programs, each of which is closely linked to the
programs of creditor banks and governments, while
providing a degree of policy coherence to debt rescue
attempts, also tends to reduce flexibility. In 1983, 34
IMF arrangements were initiated, as compared with
19 in 1979. Although the programs differ, they gener-
ally involve similar performance criteria. Obviously,
in negotiating these conditions, the IMF must worry
both about the impact of its decisions on other credi-
tors of the country in question, and about the prece-
dent for its other debtor-country programs. In short,
the IMF must preserve its credibility, but this limits its
flexibility in formulating programs to deal with the
unique conditions of particular debtor countries.
Medium-Term Economic Prospects
9. The decline in imports and production appears
to have stopped (in 1983 or 1984) in the major debt-
troubled countries, except in the Philippines. But the
adjustment process is far from over. For one thing,
unless interest rates turn down and there is a sustained
boom in the industrial countries, it will take years for
most of the major debtors to regain their former levels
of per capita income. For another, most debtors
cannot hope to achieve economic recovery and real
growth without undergoing some major changes in
economic structure, because real interest rates are
likely to remain much higher than they were in the
1970s, and net foreign investment in these countries, is
likely to be substantially smaller, at least until confi-
dence returns and recovery seems to be well under
way. These shifts will require greater efforts to export
and to generate domestic savings to enable the debtors
to finance increased imports. And, without significant
gains in imports, most debtors cannot hope to revive
economic growth.
10. The critical domestic factors in raising exports
will be highly competitive exchange rates, a reduction
of fiscal and regulatory disincentives, and additional
investment. These measures are not easy to implement
and sustain. Although Brazil, for example, has main-
tained competitive exchange rates over the past year
or so by continuous devaluation, other debtors, notably
Nigeria, have refused to follow this course and there
has been some erosion of earlier gains in Argentina
and Mexico.
11. External economic conditions also have great
importance in the way the debt problem will evolve,
especially economic growth in the OECD countries;
movements of commodity prices, particularly of oil;
the level of net new lending to the various debtors; and
world interest rates. For illustrative purposes, we have
considered two possible scenarios: one "optimistic,"
which projects conditions favorable to the debtor
countries; and one "pessimistic," which assumes that
the world economy goes badly off track. In the
"optimistic" scenario, the debtor countries' exports
grow rapidly as a result of strong economic growth in
the industrial countries. In this generally favorable
environment, it is also assumed that the net inflow of
foreign capital will increase, thanks to a return of
more normal trade credits, an end to capital flight,
and some increase in foreign direct investment. In the
"pessimistic" scenario, debtor country exports grow
slowly or stagnate because world economic conditions
are depressed, and the net capital inflow is assumed to
decline further. In both scenarios, nominal interest
rates are assumed to remain at the 1984 level. Al-
though interest rates may rise (a 1-percentage-point
increase in interest rates would reduce import capacity
by 2 to 3 percent in the seven major debtor countries),
it is unlikely that a substantial, lasting increase in
interest rates could be associated with a weak world
economy-even if higher interest rates became a
major cause of an economic downturn, the reduced
credit demand associated with the downturn would
tend to bring rates down. By the same token, a strong
economic expansion is likely to keep credit markets
firm. We have also assumed that oil prices would
remain steady. If they were to rise, the outlook for
economic recovery in the major oil-importing debt-
ors-Brazil, the Philippines, and Chile-would wors-
en, while the oil-exporting debtors-Mexico, Nigeria,
and Venezuela-would be better off. If oil prices were
to fall, the opposite would occur.
12. The rates of change in import capacity-that is,
the level of imports that the countries could pay for
under each of the two scenarios-are shown in table 3.
Although events are likely to evolve in between the
two scenarios, the chances are that they will be closer
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Table 3
Projected Import Capacity a
of Major Debtor Countries
Average
1978-81
1983
1984
4.8
2.8
3.5
3.2
4.2
-8
+31
Mexico
15.8
7.7
9.5
17.4
21.7
+83
+25
Nigeria
14.3
7.2
9.5
13.4
13.3
+20
-1
Philippines
6.6
7.5
6.2
7.2
8.1
+16
+12
to the optimistic one than to the pessimistic one. Most
official and private forecasts are fairly close to, al-
though somewhat below, the optimistic scenario. For
the pessimistic scenario to occur, the growth of the
economies of the industrial countries would probably
have to slow to a rate of 1 to 2 percent in 1985-86,
which is well below any current major forecast. It
serves as an illustration of the potentially serious
consequences of an economic downturn.
13. Calculations show wide variations in the outlook
for import capacity among countries, which result
partly from differences in the magnitude and timing
of each country's economic adjustments:
- Mexico can substantially increase its imports
initially unless oil prices fall greatly, but the
longer term outlook is for slower import growth.
- Brazil has the potential to increase its export
earnings rapidly but needs strong and open for-
eign markets and a sustained competitive ex-
change rate to realize this. Its imports could
begin to recover rapidly as early as 1985 under
favorable conditions.
- Argentina, with less dynamic export prospects,
will be unable to regain anywhere near past
import peaks, even under favorable conditions,
and may face the necessity of further import cuts
if interest rates rise and the capital inflow is
reduced.
- Chile faces continued severe economic difficul-
ties unless there is a surge in the price of copper,
which seems highly unlikely. Its economy is
extremely vulnerable to variations in foreign
markets, interest rates, and capital flows.
- Nigeria can increase its import capacity only if it
can raise the volume of its oil exports.
- Some recovery is likely in Venezuela in 1984, but
longer term prospects are for little if any import
growth.
- The Philippines did not begin its economic ad-
justment until late in 1983 and will have to take
more painful measures in 1984.
14. The relationship between imports and GDP is
too variable in all the LDCs for projections of import
capacity to provide a sound basis for projections of
economic growth. Nevertheless, it seems highly likely,
at least in most of the countries, that imports will have
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to increase substantially faster than GDP during the
next several years. In Argentina and Brazil, the ratio of
imports to GDP constant prices in 1983 was the lowest,
or one of the lowest, in more than a decade, and in
several countries import shortages have been causing
disruptions of economic activity. Moreover, in all the
debtor countries, investment is much more import
dependent than consumption, and has declined far
more than consumption, although the recent data are
poor. To sustain an economic recovery beyond a year
or two, investment will have to rise substantially, and
consequently imports too will grow rapidly.
15. With the many uncertainties in mind, the fol-
lowing generalizations as to economic growth pros-
pects in the principal debtor countries seem indicated:
- All the economies, except that of the Philippines,
bottomed out in 1983 or early 1984 and most will
probably grow slowly (1 to 3 percent) in 1984.
- A healthy economic recovery (4 to 6 percent
annual growth) could begin in 1985, except in
Venezuela and Nigeria, but only under highly
favorable external conditions.
- If external conditions are not favorable, signifi-
cant economic recovery would be postponed to
1986 or later.
- Economic performance in Venezuela and Nige-
ria will depend almost exclusively on oil exports,
the outlook for which is not bright.
- Even if rapid economic recovery begins soon, the
1980-81 per capita levels of expenditures will not
be regained until the late 1980s at the earliest.
16. The implications of delayed economic recovery
for employment and real wages are grim when the
labor force is growing 2 to 3 percent a year, as it is in
nearly all the major debtors. Unemployment reached
unprecedented levels in most of the major debtors in
1983. Real wages fell sharply. Nutrition, education,
housing, and health services-all of which showed
significant improvement in the 1970s-suffered severe
setbacks. Compared with those of more prosperous
years, crime rates are up markedly in major cities such
as Rio de Janeiro, Sao Paulo, Buenos Aires, Manila,
Lagos, and Mexico City. Thus, the general level of
well-being, however measured, for many or most of
the inhabitants of the debt-plagued countries has
fallen markedly since the beginning of this decade,
although, given the expansion of the informal or
underground economies, probably not as far as the
statistics would indicate.
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Impact of Economic Austerity
on Political Stability
17. Despite enduring prolonged recession and aus-
terity, few major debtors have so far experienced
marked political instability attributable to the eco-
nomic hardships. Leaders of the military coup that
ended civilian rule in Nigeria last year blamed the
civilian government for food shortages and rising
inflation, but we think that rampant corruption was
probably the major reason for the coup. Elsewhere
there have been riots, strikes, and violent demonstra-
tions but they have not produced political instability
or even major policy changes designed to head off
such instability.
18. Since there is no generally accepted theoretical
framework that explains the myriad connections be-
tween economic development and political reactions,
we cannot be certain about how much austerity a
people will accept without severe political reactions.
Logic indicates, however, that only a highly authori-
tarian LDC government would or could deliberately
choose indefinite postponement of economic growth
without risking its own future. We also recognize that
economic conditions are not the only factor that can
produce political instability. Indeed, particularly in
the Philippines and Chile, discontent long antedates
the recent debt crisis and subsequent austerity.
19. Nevertheless, there are some generalizations
about austerity and instability that help illuminate the
outlook for a number of major debtor countries. First,
there is no discernible direct link between general
economic conditions and political stability.' Moreover,
political protests-strikes, riots, demonstrations-do
not necessarily lead to political instability, that is, to
threats to the government or its basic policies. Indeed,
such protests may serve as a safety valve that defuses
underlying anger or suffices to reverse an onerous
policy change like reduction of the subsidy on bread.
20. Second, in many countries there appears to be a
significant distinction between the political impact of
general economic deterioration or recession that can
be attributed to impersonal forces (effects of the
business cycle, or drought, or change in the terms of
trade) and the political impact of a government-
initiated austerity program. Adjustment programs-
whether self-imposed or IMF mandated-usually re-
quire specific and painful policy changes like a reduc-
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tion of subsidies and government spending, higher
taxes, or restrictions on wages. Such changes have an
identifiable impact, clearly stem from open govern-
mental acts, and thus offer much better defined
targets to protest.
21. Third, reaction to government activities will be
stronger the more these actions appear to reflect the
governments' own choices rather than being driven by
external events. For example, tax and wage changes
will often generate more political heat than the impo-
sition of drastic exchange controls when the country
has run out of foreign exchange reserves. By the same
token, measures taken at a time when a financial
situation has eased a bit will be politically more
difficult than the same measures taken in an obvious
crisis situation.
22. Political reactions to painful government eco-
nomic measures also depend on how accustomed the
population may be to such measures-devaluations are
normal in Brazil but rare and more painful in the
Dominican Republic, where a recent devaluation trig-
gered serious riots and violence; or on how well the
measures are managed and explained; or on their
specific effects (cutting food subsidies in Egypt, for
example, produces instant riot); and, of course, on how
unpopular the government already is.
23. Finally, perhaps the key determinants are how
much populations expect of governments, and how
flexible the political system is. The most stable and
least worrisome situation is where little by way of
economic benefit is expected of government and/or
where the populace is so cowed by its rulers that it
dares not push for change.
in most of the
debtors, existing governments have been able to de-
flect much of the blame from themselves onto less
reachable targets-their predecessors, the selfish de-
veloped world, the bankers, the IMF, etc.-and thus
escape much of the fallout that can lead to serious
political pressures or to political instability
blame their government for some or much of the
economic problem, a tradition of compromise and
political flexibility, coupled with anticipation of a
return to democracy, has muted political reaction. In
the most unstable countries, the sitting government is
widely perceived as the main cause of the problems, as
in the Philippines, where the Marcos regime plays
such an enormous role in the nation's affairs. Nigeria is
also likely to prove highly unstable because the politi-
cally significant elites have come to expect so much
from government largess-and funds for such benefits
have been dramatically reduced. We doubt that the
present government or any likely successor will be able
to remedy the situation any time soon.
24. It is in such countries and in others which may
be moving from relative passivity into this dangerous
stage that threats to political stability and/or to exist-
ing policies of playing by the debt-servicing rules seem
to be greatest. When a sitting government is blamed
for implementing onerous conditions dictated by its
creditors (especially if they produce sudden shocks like
a leap in prices of staples), for grossly mismanaging
national affairs, or for sinking into unacceptable levels
of corruption (as in Nigeria and the Philippines),
public discontent is more likely to evolve into effective
political pressure or into political instability.
25. Conditions in a number of major debtors high-
light the potential for such shifts. The postelection
honeymoon in Argentina may be waning, Mexican
labor is likely to push harder against wage restraint
while the middle class seems to be focusing more on
corruption and mismanagement. Peruvians and Chil-
eans seem to be shifting more blame onto their own
governments. This, in turn, argues strongly for rising
intransigence on the part of some debtor governments
seeking to deflect blame.
Brazil
26. Of all the major debtors, Brazil, the largest, has
the best prospects of weathering current and near-
term austerity while avoiding significant political in-
stability or radical changes in economic policies. Com-
pared with most of their neighbors, Brazilians have a
generally high tolerance for imperfect government
performance. As the process of democratization, or
abertura, continues over the next several years, we
expect the level of interest in and expectations from
the political process to grow, but we do not expect
sudden or drastic changes in the political landscape.,
27. The Brazilian economy is broadly industrial-
ized, fairly flexible, blessed with a variety of resources,
and not highly dependent on foreign trade. The
recession appears to have bottomed out in late 1983 or
early 1984, and Brasilia has thus far met IMF condi-
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tions for 1984 far better than had been expected by
most observers at the turn of the year. There appears
to be a growing feeling among the economic-financial-
commercial community that the worst is over. Given
at least moderate growth in its export markets and
reasonable exchange rate policies, Brazilian exports
can probably increase fast enough to permit imports to
recover in the next several years, provided net new
lending continues at modest levels. This, in turn,
would permit growth to resume and, after a short lag,
per capita income to grow again, although it would
take several years, perhaps into the early 1990s, to
make up for the 15-percent decline that has occurred.
Economic Adjustments and Policy Choices
28. Brazil's severe debt problem is the legacy of
policies during the 1970s that were highly successful in
sustaining high rates of economic growth through the
two large oil price hikes. The 7-percent average rate of
GDP growth during the period 1974-80 was not far
below the extraordinary 10 percent achieved in 1968-
73 and was one of the highest in the world. But,
although exports continued to do well, they could not
cover the enormous rise in the cost of oil imports-up
from 10 percent of imports in 1972 to 40 percent in
1980-and of interest payments. To cover its pay-
ments, Brazil had to borrow abroad on an enormous
scale. At the same time, efforts to substitute domestic
production for imports and to subsidize exports, while
continuing economic growth by expanding financing
of public enterprises, caused worsening economic
distortions.
29. The recession began in 1981 and intensified in
1982 and 1983, when GDP fell about 3 percent; as the
current account deficit was slashed, domestic expendi-
tures declined 10 percent. This year GDP is expected
to increase 1 to 2 percent. Clear signs of improvement
in living standards, however, are unlikely for at least
another year.
30. Although the economy is no longer contracting,
the management of Brazil's debt problem will be
politically more difficult for at least the next year or
two. Brazil is meeting IMF conditions-thanks partly
to IMF flexibility on monetary targets. Nevertheless, it
will face some severe economic policy conflicts, which
are likely to create new strains with the IMF. IMF
demands for further cuts in the public sector deficit
will run counter to growing domestic pressure to
stimulate general economic recovery as popular impa-
tience with austerity builds:
- Meeting IMF internal economic conditions will
require a substantial slowing of inflation, which
is unlikely if wages continue to grow faster than
called for in the price-wage indexing law. But
wage increases well below the rate of inflation
would encounter strong popular resistance.
- Funding of public enterprises (parastatals) will
conflict with the needs of private business for
access to credit under IMF-prescribed limits on
total credit. If cuts in the public sector deficit
prove insufficient to slow inflation substantially,
the private sector will continue to be squeezed
out of the credit market. Consequently, econom-
ic recovery may be held back.
31. These policy decisions will be far easier if
external economic conditions are favorable than if
they are unfavorable. If import capacity grows rapidly
and, by 1985, the overall economic recovery is well
under way, domestic stabilization measures can be
taken without hurting any important segment of the
population. But, if domestic policy moves affecting
income distribution are attempted in a stagnating
economic environment, political resistance would be-
come stronger.
Political Dynamics
32. Until very recently, the Brazilian political sys-
tem allowed its leaders considerable latitude in formu-
lating economic policy and imposing some painful
measures. Many years of military/technocratic rule,
during which the government has used forceful meas-
ures to quiet dissent, combined with a politically
acquiescent society experiencing broad economic
gains, resulted in remarkable political stability-an
avoidance of drastic or sudden policy changes.
33. Labor is fragmented and disorganized, more
concerned with job security than with wage gains.
Political parties are shallow rooted and basically non-
programmatic, focused more on a specific leader than
on ideology. Parties, as such, have never been power-
ful; the two main ones are both heterogeneous and
fractious. There are no coherent political extremes, on
either the left or the right. Political power has rested
with the active military and their technocratic col-
leagues, allied with a large number of retired military
officers who run most of the large parastatal concerns
that dominate the economy. The private sector has
had little political clout. Even Congress has been weak.
34. Under this system, Brazilians tolerated and ad-
justed to fairly drastic cuts in their real incomes,
perhaps because few saw any other feasible options,
although confidence in the economic leaders has de-
clined markedly. While crime has risen sharply in
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urban areas, and there have been periods of protests
and supermarket lootings in the major cities of Sao
Paulo and Rio de Janeiro, they do not represent or
express organized opposition. Even the more political,
middle-class demonstrations earlier this year in favor
of direct presidential elections were peaceful.
35. Moreover, a wide spectrum of Brazilians seems
resigned to the military regime's carefully paced
program of democratization. Although the recent talk
of speeding up the timetable and instituting direct
elections next year was very popular, demonstrations
and other pressures for such a move were peaceful.
Now that this option has been precluded for the 1985
election, attention is again focused on the candidates'
chances in the electoral college, where political alli-
ances are fluid and engender much popular
speculation.
36. Neither candidate stands far from the center;
neither has advocated drastic policy change. Yet the
very opening up of the political process is likely to put
more constraints on the future leaders of Brazil. The
political horsetrading that will lead to the selection of
the next president has given Congress more clout. Its
first major success was in refusing to ratify govern-
ment decrees last fall that reduced wage indexing.
While it eventually went along with a milder measure,
it had tasted some power. Whoever assumes the
presidency on 15 March 1985 will have to pay even
more attention to Congress and to the people it is
coming to represent; the increased necessity for politi-
cal bargaining will reduce his power to impose unpop-
ular measures.
37. Thus, Brazil's leaders will hesitate, even more
than in recent years, to further dramatically reduce
subsidies or cut the parastatals' budgets, because a
confrontation with Congress could either block the
measures or lead to government paralysis, eventually
creating conditions that might draw the military back
countries-would be blamed far more than would the
domestic leadership. This in turn would lead at least to
increasing pressures for debt renegotiation and a re-
duced debt service burden. At worst, it could produce
a unilateral moratorium on debt service until matters
could be rearranged. In sum, we think that Brazil can
peacefully endure the next year or so of recovery and
under favorable external economic circumstances will
make serious efforts to play by the rules of the
international financial game. But we doubt it would or
could continue to do so if hopes of recovery and
growth were severely dampened by external factors.
40. We think the outlook is similar over the longer
term. If external economic conditions are favorable,
Brasilia will probably continue to muddle through its
economic difficulties, achieve at least some structural
reform, and regain a reasonable rate of economic
growth without encountering severe domestic political
pressures. The progress of abertura toward more
democracy and direct presidential election under a
revised constitution is likely to raise both public
interest and confidence in the political process. If, on
the other hand, there is a marked economic downturn
in the industrialized countries or if interest rates rise
sharply in the United States, Brazil's next president
will face much more congressional resistance to the
restraints on wages and further budget cuts that would
probably be required to service the debt. Under such
conditions, we would expect Brazil to become more
nationalistic and probably confrontational vis-a-vis
creditors, arguing that it had done all it could on the
domestic front. But, apart from more difficulty in debt
renegotiations and in trade and investment issues, we
would not expect Brazil to pose additional foreign
policy problems for the United States.
41. In neither case do we expect Brazil to make
radical policy shifts or encounter serious political
instability. The military, though it will move to the
background, would prevent the former and, if neces-
sary, repress the latter.
38. Given these political pressures, meeting IMF
conditions for internal Brazilian policies, especially
further reductions in the budget deficit and inflation,
will be difficult even if favorable external conditions
enable economic recovery to get under way. Meeting
IMF conditions would probably be impossible if eco-
nomic recovery were delayed-for example, because
creditor banks refused to continue net new lending, or
export growth were seriously impeded by economic
stagnation or protectionism among OECD. countries.
39. Under such circumstances, we think the exter-
nal actors-foreign banks, the IMF, the industrial
Mexico
42. The odds are good for Mexico to work its way
through the next year or so without serious political
instability or dramatic economic policy changes. Mexi-
co made an earlier and more drastic economic adjust-
ment to its debt problem than any of the other large
debtors; as a result, Mexico is running a large surplus
in its foreign payments, and consequently has more
flexibility in its economic policy options than most of
the debtors have. Moreover, Mexico has a strong
government capable of making and implementing
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decisions, having been ruled by a single, well-orga-
nized, and reasonably dynamic party for over 50
years.
43. At the same time, the Mexican political system
is coming under more strain. The president plays a
large and highly visible role in national affairs. He, the
party, and the government appear to get much more
of the credit or blame for what happens in Mexico
than is the case in Brazil. The oil boom of the 1970s
produced not only rapid economic growth but also
major socioeconomic changes in Mexico. In fact, the
very rapidity of change under the dominant Institu-
tional Revolutionary Party (PRI) has sowed the seeds
for more pressures for change.
44. Between the end of World War II and 1981, the
Mexican economy grew 5 to 6 percent per year while
managing to avoid the recessions that periodically
afflicted most other LDCs. Toward the end of the
1970s, buoyed by booming oil revenues, Mexico em-
barked on a program of headlong economic expan-
sion-largely within the public sector-financed by oil
sales and heavy borrowing abroad. At the same time
the government expanded generous subsidies to both
local producers and consumers (on food, transport, and
public services) which also raised the fiscal deficit.
Moreover, a fixed nominal exchange rate let the peso
appreciate in real terms and boosted imports. To keep
these policies intact in the face of weakening oil prices
in 1981, Mexico continued to increase foreign borrow-
ing, mainly in short-term loans, and its foreign debt
exceeded $80 billion. The crisis-the first major one
among LDC debtors in this series-came in August
1982 when Mexico City had to suspend payment on
about $2 billion a month in debt service.
45. When President de la Madrid took office in
December 1982, the initial shock was over, the rescue
effort was under way, and he could implement the
austerity measures required by the IMF during his
political honeymoon. The result was a sharp recession
that hit virtually all sections of Mexican society but
one that resulted in plaudits from the creditors and
sizable new credits. Mexico is one of the few major
LDC debtors meeting IMF conditionality require-
ments, in particular having reduced the public sector
deficit from 18 percent of GDP in 1982 to 8.7 percent
in 1983, and targeted 6.5 percent for 1984. On
external payments, Mexico shifted drastically from a
current account deficit of nearly $14 billion in 1981 to
a surplus of $5.5 billion in 1983, enough to allow a $3
billion increase in official reserves. But the costs, in
terms of economic pain, have been very high, particu-
larly for the private sector and the middle class.
46. Since 1981, Mexico has undergone one of the
sharpest economic adjustments of any major debtor
country. Tight exchange controls and drastic devalua-
tion cut imports as much as 70 percent, industrial
production and employment fell about 20 percent,
real wages about 30 percent, and investment more
than 50 percent. There are indications that the eco-
nomic slide has stopped, but few signs of recovery are
visible yet.
Economic Policy Choices
47. The extraordinary reversal in Mexico's current
account balance has given the government a substan-
tial buffer and a much wider range of economic policy
choices than other major debtors have. Last year's
current account surplus was equal to about 70 percent
of merchandise imports and the increase in foreign
exchange reserve to nearly 30 percent of imports. In
1984 or 1985 a substantial rise in imports could be
financed even though increases in interest payments
are likely to absorb much of the likely growth in
export earnings.
48. At this point, what is holding back economic
recovery is insufficient aggregate demand, not the
availability of foreign exchange. With employment
and real wages down sharply, consumption is de-
pressed. Public investment has been cut sharply, al-
though a small increase is planned for this year.
Private investment is severely depressed because of
lack of demand, excess capacity, and the still substan-
tial, although somewhat reduced, burden of govern-
ment controls and regulations. Nonoil exports, even
though expanding, are still too small to become a
major source of economic recovery. With IMF guide-
lines calling for further reductions in the public sector
deficit, and with wages continuing to lag at least
slightly behind inflation, it is difficult to identify any
strong sources of economic recovery any time soon.
49. This situation presents the government with
difficult policy choices. Domestic political pressure to
reflate the economy is building but to do so on a large
scale would put IMF support and the goodwill of
foreign banks at risk. Reflation via increased public
investment has already begun; if this process contin-
ues, it will eventually increase the public sector deficit.
Such policies would be criticized by the IMF, and
Mexico would probably lose its ability to raise new
voluntary bank loans. On the other hand, the Mexican
Government cannot afford for long to tolerate severely
depressed economic conditions, especially at the same
time that it is accumulating foreign exchange reserves.
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50. Beyond the next year or two, Mexico's econom-
ic performance will depend heavily on the extent to
which exports can be diversified and the private sector
encouraged to develop. Should Mexico continue to rely
on public sector expenditures to sustain growth, its
economy is unlikely to be anywhere near as dynamic
as in the 1970s, because of the poor outlook for oil
earnings. To a degree there is a trade-off between
short-term and longer term economic growth. Building
up the private sector may mean restraining economic
recovery this year and next year, while laying the
foundations for more rapid continued growth later.
But the political obstacles to such a course are
daunting.
Political-Social Dynamics and Constraints
51. Mexico's half-century-old system of government
by one authoritarian party, based on a broad coalition
of interest groups, has thus far proved remarkably
resilient and adaptable, co-opting or suppressing most
dissidence and providing continued benefits to the
growing federal work force and the rising middle class.
The PRI regime's total control over patronage and the
distribution of material awards has been perhaps its
most powerful asset in maintaining its monopoly on
52. But the very success of this system has generat-
ed or hastened political-economic changes that are
now creating unprecedented challenges. Economic
development has spurred the growth of an educated,
sophisticated middle class, of the private business
sector, especially in the northern cities close to the US
market, and of a new group of PRI leaders and
officials dubbed technocrats in contrast to the more
traditional political bosses. Moreover, Mexico's high
population growth rate produces hundreds of thou-
sands of entrants into the labor force annually. Most
are not employed in union jobs, many are semi-
employed or illegal migrants in the United States. Both
economic and population growth have also contribut-
ed heavily to the very rapid increase in urban slums
and shantytowns, which have a high potential for riots
or violent protest, particularly if faced with sudden
increases in the price of staples or losses of public
services. Moreover, rapid economic gains by the urban
middle class and northern (largely private) business
interests have increased these elements' influence, and
spurred unprecedented growth and local election vic-
tories of the conservative opposition party (PAN).
53. Perhaps even more ominous has been the spill-
over from the oil wealth. The sudden spurt of oil
revenues, public development projects, and other
spending greatly increased the opportunities for cor-
ruption on the part of public officials to levels far
beyond those traditionally practiced and accepted in
earlier decades. The economic downturn that began in
the early 1980s focused additional popular attention
on these excesses as most Mexicans began to feel the
pinch of economic austerity.
54. A final danger: the Mexican political system
depends heavily on a strong and effective president,
yet it lacks a tested mechanism for replacing him
should he be unable to serve his full term. In many
senses, the president is the focus of politics-his
performance and lapses are key factors in public
expectations and perceptions of government. No mat-
ter how effectively de la Madrid deals with his
economic and political problems, his sudden departure
from the scene could trigger considerable confusion
and infighting over the succession and undermine
public confidence in the system and in Mexico's
economic prospects.
55. In the past, significant social and political
groups gave the PRI and the system credit for Mexico's
economic growth. But it is now becoming increasingly
clear that many in the middle class at least show signs
of being more dissatisfied with the corruption, mis-
management, and rigidity of their political system in
the aftermath of the 1982 shock and subsequent
recession. As time passes, the present administration
will find it more and more difficult to focus such
criticisms on its predecessor without being tarred by
the same brush.
56. The chances are that the Mexican Government
will try to follow a middle course, involving cautious
domestic reflation without departing too widely from
IMF policy recommendations. This strategy will prob-
ably prove successful, at least for the next year. We see
little evidence that political pressures are building up
to the point of either forcing major economic policy
shifts or threatening a breakdown of central govern-
ment authority. In the longer term, however, policy
choices will be narrowed, both by the likely buildup in
domestic political pressures and by the likely reduc-
tion in balance-of-payments flexibility as imports re-
cover while export growth slows. Even if a foreign
exchange bind is avoided, the reaction in Mexico to
any adverse trends in international interest rates or
foreign markets will significantly affect the political
feasibility of a policy that sacrifices short-term recov-
ery for lasting longer term benefits.
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57. We doubt that the private sector will succeed in
becoming Mexico's new engine of economic growth
because the PRI's statist preferences are of long stand-
ing and the private sector lacks confidence in govern-
ment promises. If it does not, then political pressure
for more rapid expansion of the public sector will
become irresistible. In that case, the economy is likely
to stagnate or grow only slowly, while the President
and the existing political system incur increasing
blame for Mexico's problems.
58. We are less sanguine about the prospects for
Mexico over the longer run. The outlook for the
economy is for slow growth at best because Mexico
cannot hope to expand exports rapidly (barring a
major rise in oil prices, which we do not expect).
Moreover, we expect the efficiency and cohesiveness
of the PRI and perhaps of the political system at large
to erode. The key determinants of political stability
will include the President's success in managing the
economy, his leadership capabilities, and his ability to
control corruption.
59. We do not foresee a genuine strengthening of
the political system. This would require a restoration
of the PRI's past popularity and effectiveness, a major
drop in the general level of corruption, and the
integration of disparate interests-represented by the
relatively prosperous north, oriented toward the Unit-
ed States, and the increasingly impoverished rural and
southern areas-into some sort of national consensus.
It would probably also require steady economic recov-
ery and growth. Nor do we expect a general decline
into civil anarchy, although that possibility cannot be
ruled out.
60. We think the most likely developments over the
rest of this decade will be gradual erosion of popular
support for the leadership, and growing dissatisfaction
on the part of urban labor, the middle classes, and the
private sector. As popular support wanes, the Mexican
Government is likely to resort to more nationalistic
and anti-US rhetoric in an effort to avoid blame and
regain more political unity. This would undoubtedly
impinge on Mexican attitudes toward US goals in
Central America and would probably affect many
other ongoing issues between the United States and
Mexico.
Argentina
61. The outlook for Argentina, the third-largest
debtor, is highly uncertain. Argentines are fiercely
nationalistic when dealing with the outside world.
Political instability and inept governments have been
the rule, not the exception, over the past 30 years
largely because interest groups are unusually powerful
and have seldom been willing to perceive a national
interest that was more important than their immediate
particular goals. Labor, dominated by the Peronist
opposition, is especially powerful and generally un-
willing to postpone satisfaction of immediate demands
for the sake of a more prosperous future.
62. Argentina's newest experiment with democra-
cy, which began last year with a fair election that
produced a new, non-Peronist government, offers the
best hope for political stability in many years. Presi-
dent Alfonsin entered office with broader support
than most of his predecessors. The civilian opposition
is in considerable disarray, and the military are thor-
oughly discredited after their years of repressive and
inept rule. The new government has moved slowly and
cautiously to consolidate its position, and come to
terms with labor and the military. It has not focused
on economic policy beyond promising sustained eco-
nomic growth and making halfhearted attempts to
curb inflation. It has been adamant on a critical
point-that economic recovery cannot be sacrificed to
pay debts. Thus, the prospects for Argentina appear to
hinge on Alfonsin's political skills in handling the
conflicting domestic interest groups, all of them unac-
customed to compromise, while gingerly introducing
more order into an economy ravaged by inflation at
over 600 percent per year.
63. The apparent conflict between IMF conditions
and economic growth is most clearly articulated in
Argentina; political dynamics weigh heavily against
sustained austerity; and at least some major political
figures appear to think that Argentina could survive in
default as well as or better than it could by trying to
pay its enormous debts. We do not expect Argentina to
go into default, but the odds on default are higher
there than in any of the other major debtors.
64. Argentina is potentially a rich country. Its prob-
lems stem largely from a chronically unstable political
system. From 1946 until 1983 the Peronist party won
every national election it was allowed to enter. The
opposition parties saw no chance of taking power in
democratic elections, and the only way the Peronists
could be ousted when confidence in their rule faded
was by military coup. When Peronists were in power
they tended to promote labor benefits and protect
domestic industries. When the military were in power,
they sought to undo the damage, open the economy to
outside forces and markets, and foster exports. As a
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result of these stop-and-go policies, internal and exter-
nal confidence in Argentina's prospects has remained
low. Thus, for decades, Argentina has been plagued by
very slow growth, bouts of severe inflation, and loss of
confidence. GDP is currently at about the level of a
decade ago and per capita GDP at the level of two
decades ago.
65. In the late 1970s and early 1980s, Argentina
borrowed heavily abroad to finance a major public
investment program and cover foreign payments defi-
cits. At the same time, the military government held
currency devaluations below the inflation rate to
encourage import competition. Private firms and indi-
viduals also borrowed to cover import bills and in
some cases to build foreign nest eggs. By the end of
1981, Argentina's debt service burden (principal and
interest) had grown to about three-quarters of its
export earnings. The Falklands war (April-June 1982)
was the final blow to lender confidence and new
lending stopped. Argentina reached agreement with
the IMF in January 1983, was out of compliance by
midyear, and only recently came to a tentative new
agreement with the Fund.
Political Dynamics and Constraints
66. The government of President Alfonsin, inaugu-
rated in December 1983, represents more hope for
Argentina and for its creditors than was expected
before the October elections. For one thing, by win-
ning an absolute majority (52 percent) of the votes
Alfonsin avoided a protracted process in the electoral
college. For another, the size of the vote indicated
surprising support for the Radical presidential candi-
date. Finally, the free and open election of a non-
Peronist government restored hope for real change in
Argentine political life and has been a major factor in
reviving the country's self-confidence.
67. The Radical government faces several very
difficult problems at the same time: (1) the economy
and the debt burden; (2) relations with the military;
and (3) relations with the labor unions. Inflation is now
running at the rate of over 600 percent a year,
government deficits are enormous, and payments on
the external debt cannot continuously be postponed
without a new agreement with Argentina's creditors.
Any agreement with the IMF will require at least
some austerity for Argentina's working and middle
classes over the next several years. It would almost
certainly involve lowering inflation and government
deficits, and holding down increases in real wages and
imports while expanding exports. None of these meas-
ures is likely to be popular. While the Radicals have
the lead in the lower house (Chamber of Deputies),
they do not control the Senate. Moreover, at least some
of their strength represents not pro-Radical but anti-
Peronist voters, who may or may not be willing to
follow through on tough measures.
68. Relations with the armed forces represent a
problem of almost equal magnitude for the new
government. Alfonsin campaigned on the promise to
bring to justice those senior officials responsible for
crimes against civilians during the antisubversive cam-
paign of the mid-1970s (during which thousands "dis-
appeared" and were killed). The new government has
already taken some steps against the guilty military
personnel and raised concerns within the military
establishment as to how far it will go. At the same
time, Alfonsin has sharply reduced military spending.
While the armed forces are now discredited and show
no signs of preparing to intervene in the political
process, their history of doing so repeatedly means that
Alfonsin cannot ignore this possibility in the future.
- 69. Finally, the Peronists themselves-especially
given their traditional labor supporters-also represent
a serious problem for the Alfonsin government. Peron-
ist leaders appear deeply divided as to what their
course as the opposition party should be and they have,
little effective control over the rank and file. But
Alfonsin failed last March to get Senate approval for a
reform of the Peronist-dominated unions which he
hoped would lead to a more moderate labor leader-
ship. This failure, in turn, has meant delicate and
prolonged efforts to contain union power and elicit at
least tacit support for efforts to reduce the budget and
inflation. The crux of this problem is Alfonsin's prom-
ise that real wages will rise-a promise likely to be
impossible to keep, yet one that is politically very
potent. In recent months, the Argentine Government
has emphasized a more realistic objective-that real
wages for the poorer workers will not be cut. With
luck and political skill, this may offer an adequate
face-saving way out of the wage dilemma, but so far
the Peronists have refused to compromise and strike
activity has intensified. These problems with labor will
continue to complicate the broader problem of dealing
with the foreign creditors and the IMF.
Relations With Creditors
70. The Argentine political scene guarantees that
negotiations with the IMF and the banks will continue
to be difficult. Implementation of an agreement with
the IMF will require prior agreement with the banks
on both rescheduling and new loans. Even if such
agreements are reached, the chances that Argentina
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will be able to conform to IMF conditions for long are
low, and subsequent negotiations with the banks for
new loans will probably require months.
71. Alfonsin now realizes he must take measures to
stabilize the economy-especially to drastically reduce
inflation-for domestic reasons. Without stabilization,
he cannot reasonably hope to sustain economic
growth. But he wants stabilization to be as painless as
possible, and consequently has pushed and will push
the creditors hard for all the concessions he can get.
72. Alfonsin probably has the political clout to sell
the stabilization program to the Argentine people,
even to gain tacit labor support, if he can present it as
an essentially Argentine program-any program that
appeared to be "imposed" by the IMF or the creditors
would trigger opposition so strong that it probably
could not be implemented. Appearances are of critical
importance: real differences between Argentina and
the creditors probably can be papered over in the hope
that they can eventually be worked out.
73. Even under favorable external economic condi-
tions over the next year or so, Argentina is unlikely to
meet IMF conditionality for long, given the powerful
domestic political pressures for economic growth and
the nationalistic attitudes of the Argentines. There will
probably be repeated renegotiations of debt service
terms and policy conditions, although there is a rea-
sonable chance that problems can be worked out. But
if external economic conditions deteriorated, making
it necessary to cut imports further to cover debt
service, we think Argentina would probably stop
paying interest on its loans and accept being called
into default if necessary, although it would not itself
repudiate the debt. Although the Argentine Govern-
ment does not want the high economic costs, risks, and
probable isolation that default would bring, it is aware
that Argentina, virtually self-sufficient in food and
energy and exporting mostly readily marketable agri-
cultural products, is less vulnerable to creditors' sanc-
tions than any other major debtor.
74. The outlook for Argentina is even less clear than
for most of the other major debtors. If President
Alfonsin is lucky and skillful enough to get a consensus
on the course Argentina should follow, he might be
able to implement drastic but short-term measures
sufficient to reverse the inflationary trend and restore
domestic and creditor confidence. We think the
chances for such an outcome are well under 50-50,
but, if it occurs, then US-Argentine relations would be
likely to remain good, and Argentina would have a
good chance to weather the debt crisis and resume
economic growth.
75. The more likely outlook is for a continuation of
various efforts to slow inflation and revive investment
and real growth that fail to achieve their goals-that
is, a real increase in tax revenues and cut in public
spending. Under such circumstances, Argentina could
muddle along for several years from "debt crisis" to
Chile
77. Opposition to the Chilean military junta's rule is
broad and deep. Much of it antedates the current
economic troubles, which are adding further impetus
to public protests, strikes, and violence. Even this
military government, which has long ruled by force
and with the tacit support of conservatives and moder-
ates who fear the far left even more than authoritar-
ianism, is now constrained to soften its austerity
policies in the face of public protests and the gloomy
economic outlook.
78. Chile's economic situation is among the worst of
all the large debtors. It suffered the sharpest recession
of any of the major debtors in 1982 and, although the
economic decline appears to have stopped, many key
banks and firms are in poor financial condition. With
the largest external debt of the major LDCs in relation
to GDP (75 percent) and a heavy reliance on exports of
minerals, especially copper, Chile has been facing
extremely difficult external economic conditions. Un-
less interest rates turn down or the downward trend in
copper prices is reversed, increased interest payments
will more than offset the likely increase in export
earnings in 1984.
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79. These conditions give the Chilean Government
no attractive options and very little room to maneuver.
It can choose to stay within the IMF guidelines and
hope that the resultant slow economic growth and high
unemployment would be politically tolerable or that
protests could be contained. In this event, it would
probably retain IMF support and get at least some net
loans from the banks to cover the current account
deficit. Or it could turn away from its free-market
orientation and fiscal restraint in order to stimulate
more growth and reduce unemployment through pub-
lic spending. These policies could not be sustained,
however, because they would almost certainly produce
inflation and current account deficits above IMF
targets and endanger Chile's relations with its
creditors.
80. Whichever course Chile chooses, and the odds
favor the greater public spending option, President
Pinochet and his economic team are likely to be
blamed increasingly for the economic misery and to
seek to deflect that blame onto the IMF, the bankers,
and the US Government. In recent months, Pinochet
has changed his economic team and appears to be
changing his views on orthodoxy and honoring debt-
servicing obligations at all costs.
81. Over the past decade or so, Chilean economic
policies have shifted drastically from the socialism of
President Allende to the free market of the successor
Pinochet regime. In 1975, Chile experienced a deep
recession as copper prices fell by half while the
economy had to adjust to the sudden shift to market-
oriented policies in which price controls and subsidies
were virtually ended. Then, during 1976-81, Chile
enjoyed one of the longest booms of this century-
average growth of 7 percent, with inflation declining
from nearly 400 percent to about 20 percent. The
combination of this return to prosperity, harsh rule by
the Pinochet-led military junta, and middle-class fears
of the disruptive power of the left served to dampen
political opposition to authoritarian rule.
82. In 1981, a series of external shocks and Chilean
responses to another dramatic fall in copper prices
(copper accounts for nearly half of Chile's exports),
lower prices for other exports, the sharp increase in
international interest rates, and the virtual end to
capital inflows, while Santiago persisted in maintain-
ing full wage indexation and an overvalued peso and
failed to monitor the fragile domestic banks, led to the
sharpest recession of any among the major LDC
debtors. Between 1981 and 1983, GDP fell by about
15 percent, real domestic expenditures fell roughly
one-third, and imports dropped by about half, while
unemployment, particularly in manufacturing and
among skilled professionals, rose markedly.
83. The recession probably bottomed out around
mid-1983. Agreement with the IMF in early 1983 and
a rescheduling of commercial bank debt in midyear
for 1983 and 1984 provided some new loans and some
stability in external accounts. Sluggish or declining
copper prices, higher interest rates, and a severely
depressed private sector added to the pressures for
measures to spur the economy, even at the expense of
continued compliance with the IMF's conditions.
Political Dynamics and Constraints
84. Chile is perhaps the most highly politicized of
all the South American nations. Popular ferment,
fueled in part at least by the recession, appears to be
building. The rightist parties (and much of the middle
and upper classes) still support Pinochet as the bulwark
against the Communists. The latter condemn and
attempt to sabotage any attempts at dialogue between
the government and the moderate opposition, which
itself is fragmented.
85. Last year saw a dramatic rise in popular pro-
tests, which have carried over into 1984. Pinochet
dallied with the moderate opposition, allowing some
concessions such as permitting the return of several
thousand exiles, but remains adamant about not speed-
ing up the return to democracy. As the recession
continued, he shuffled his cabinet last spring, replac-
ing his finance and economy ministers (in the midst of
delicate negotiations with the IMF) in what many see
as a move toward an increased government role in
reviving the economy-one that would involve higher
budget deficits and thus require greater leniency from
the IMF. We believe that Pinochet has come to see the
economic situation as a significant threat to his rule,
and is inclined to deal with domestic discontent by
trying to improve economic conditions rather than by
accelerating political liberalization.
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87. On the political front, all the ingredients for
increasingly violent protest and repression seem to be
present. We see little chance that the large but divided
opposition to Pinochet can force peaceful change any
time soon. We doubt that Pinochet will end his
stubborn refusal to speed up plans for elections and a
return to democracy (now scheduled for the end of the
1980s) or make other significant concessions to the
moderate opposition. The chief question is whether his
stance will induce so much protest that the junta will
be impelled to replace him with a less intransigent
chief who is willing to make greater concessions and
Economic Trends and Issues
88. Venezuela was one of the earliest victims of the
OPEC disease. Over the past several decades, both its
people and its government grew used to lavish spend-
ing and an expanding public sector. Economic and
later financial mismanagement contributed heavily to
the present situation. Government dependence on oil
revenues and emphasis on grandiose investment pro-
jects (in steel, petrochemicals, fertilizer, etc.) enlarged
its role in the economy to the detriment of agriculture
and private enterprise. Venezuela now must import
about half the food and consumer goods that it uses.
Oil provides about 95 percent of export earnings,
about two-thirds of central government revenues, and
about a quarter of GDP. The public sector-including
a number of expensive and highly inefficient public
enterprises-employs about a third of the labor force
and accounts for about half the country's GDP.
89. During 1982 the current account deteriorated
significantly, reflecting mainly the impact of the
world oil surplus, while the public enterprises and
financial institutions continued short-term borrrowing
for capital projects as well as current expenditures.
External public debt grew to nearly $30 billion, over
half of which was due in 1983. In the early part of
1982, Venezuelan authorities sought to refinance
through a series of medium-term jumbo loans at small
spreads, but delayed too long and missed the opportu-
nity when the Mexican crisis of August removed that
possibility. Thereafter, despite an increasingly appar-
ent need for formal rescheduling, Venezuela delayed
and temporized, awaiting elections at the end of 1983,
while capital flight reached enormous proportions and
foreign exchange reserves fell sharply.
90. Venezuela devalued the bolivar in February
1983 and established a cumbersome triple exchange
rate system and tight exchange controls that cut
imports by half and temporarily almost halted servic-
ing of private sector debts. Caracas demanded and
subsequently received repeated moratoriums on prin-
cipal repayments because it declared it politically
impossible to accede to IMF conditions before the
national elections in December of that year, although
it has met most of its interest obligations on public
sector debt.
91. The new government of President Lusinchi's
Accion Democratica (AD) inherited an economy in
recession. GDP was essentially stagnant in 1982 and
probably fell almost 5 percent last year. Because of the
sharp cut in imports, however, total consumption
expenditures in real terms have had to be cut substan-
tially. In recent months, Lusinchi has obtained en-
abling legislation and begun to cut the government's
deficit, mainly by slashing investment expenditures,
and to reorganize and shrink some of the parastatal
concerns, while trying to protect at least the poorest
urban workers from large cuts in real incomes. His
program won the grudging informal blessing of the
IMF, an approval sought by Venezuela's creditor
banks before they would negotiate on rescheduling the
outstanding debt, while avoiding recourse to an IMF
rescue program.
92. This avoidance of IMF conditionality has
proved politically popular, as has Lusinchi's campaign
to attack the extensive public corruption that had
prevailed during the previous regime. Thus far, at
least, the new government has proved more cohesive
and effective than had been expected by many observ-
ers at the turn of the year. Moreover, Venezuela and
its creditor banks have reached a general agreement to
stretch out debt servicing over a fairly long term; the
banks agreed, at least in part, because the Lusinchi
government has adopted many of the IMF
recommendations.
Political Constraints and Prospects
93. Venezuelans in general and organized labor in
particular have not yet reacted much to the economic
crunch and mild austerity program outlined by the
new government. During the election campaign, nei-
ther party faced or discussed the problem of loner
term stagnation (GDP is at about the 1978 level). L_
observers detected a profound
unease in the body politic-a sense that democracy in
Venezuela has not produced good government or
much economic progress. But this unease does not
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seem to be translating into factors provoking political
instability.
94. The major current constraints on Lusinchi's
ability to implement his economic program is the
reaction of urban labor. Here, the AD's long associa-
tion with labor is proving helpful; union leadership
recognizes the need for wage restraint and will try to
support the program. But some problems between the
government's economic team and labor have already
arisen over price increases for basic essentials. The
austerity program calls for wage restraint over the next
year or so while various price controls, import subsi-
dies, and other controls are reduced. This will put
considerable additional strain on labor leaders' efforts
to restrain wage demands.
95. We doubt that government-labor relations can
remain as smooth as they have been in the first half
year of the new administration. Instead, we expect a
growing confrontation that will probably cause the
government to back down at least somewhat on wage
restraint in return for union leaders' help in channel-
ing and controlling protest, particularly in urban areas.
This, in turn, would be likely to spur inflation and
cause more concern on the part of private business and
the middle and upper classes. But we do not expect
major unrest or political discontent over the next few
years, despite the prospects for very slow growth.
96. There are several contingencies, however,
which, though not very likely to arise, could alter this
relatively sanguine political-economic outlook. A
marked drop in the price of oil (say $5 per barrel)
would make debt servicing nearly impossible, unless
labor accepted large cuts in real wages. The political
reaction would be strong and would probably include
massive urban unrest and protests. Another prolonged
standoff with the creditor banks in which the latter
demanded significantly greater annual payments than
Venezuela has offered would probably provoke at least
more stonewalling on Caracas's part and might lead to
a moratorium on payments. We think it highly unlike-
ly that Venezuela would turn to the IMF for help in
view of the widespread popular dislike of externally
imposed conditions. Finally, the Lusinchi government
could prove to be as inept, corrupt, and complacent as
its predecessor. In this case, we would expect faltering
implementation of the mild austerity measures now
planned, much more rapid inflation, further capital
flight, and generally deteriorating economic condi-
tions. We think the resulting hardship for a people
long used to a pretty confortable life would polarize
Venezuelan politics and produce extensive social un-
rest that probably would reduce Venezuela's ability
and will to service its debt.
97. Over the longer run, the outlook for Venezuela
is for economic stagnation without much political
reaction-a succession of basically similar elected gov-
ernments as long as the real price of oil remains about
the same. If the economy were to fall into a deep and
prolonged recession, however, we think the odds for
serious urban unrest and marked political instability
would rise, perhaps enough to impel the military to
step back into power.
The Philippines
98. The Philippines entered its debt crisis much
later than most of the other major debtors, and the
crisis was caused more by creditor fears of political
instability and by economic mismanagement than by
external factors like the oil shock and world recession.
For much of the past decade, Manila has run current
account deficits, both borrowing heavily and using up
foreign exchange reserves. Creditors became increas-
ingly concerned about the growing debt burden as
well as about the erosion of key economic and political
institutions under President Marcos's rule. Their confi-
dence was further shaken last year by the growing
signs of political unrest and virtually collapsed in the
wake of the assassination of opposition leader Benigno
Aquino in August 1983. Widespread and prolonged
protest demonstrations followed this event, and Mar-
cos's relations with key interest groups, including the
business community, were damaged. The unity of the
military and of the ruling party apparatus were also
adversely affected.
99. In the aftermath of the assassination, capital
flight (long a problem) grew enormously, apparently
led by the immensely rich businessmen who dominate
the economy in what Filipinos call "crony capitalism."
At the same time, many banks refused to roll over
credits and trade financing dried up. In October,
Manila announced a 90-day "standstill" on principal
falling due, devalued the peso (for the second time
that year) by 21 percent, and began to put foreign
exchange controls in place. Strikes, protests, and other
indications of political instability further alarmed
creditors. Thereafter, Manila muddled along through
one moratorium after another, implementing some
austerity measures (subsidy cuts, import restrictions,
budget cuts, etc.) but not enough to satisfy the IMF or
the creditors. The need to await the parliamentary
elections (14 May 1984) was cited as a compelling
reason not to move toward austerity (especially anoth-
er major devaluation) before then.
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100. Now that the elections are over, the options
open to the Marcos regime are even less palatable than
they were a year ago. In some respects at least, the
elections were a defeat for Marcos personally although
his party retains a majority in parliament and he has
much latitude to rule by decree. The elections were
relatively free (by Philippine standards) and produced
a much stronger showing for the opposition parties
than had been expected. Marcos thus lost some of the
aura of invincibility that had so long sustained his rule.
What is likely to be severe economic austerity for
several years now will add to the depth and extent of
this opposition.
101. Manila introduced some economic measures
after the elections-a small budget cut, higher taxes,
higher prices on petroleum products-and agreed to
float the peso. But preelection spending, financed by
expanding the money supply, has spurred inflation to
about 60 percent a year, and the IMF, probably
annoyed by earlier procrastination and shenanigans
with financial records submitted to it, has insisted on
implementation of these measures before reaching a
standby arrangement. The creditor banks, moreover,
have shown little faith in Marcos's willingness to
undertake more than patchwork solutions and will be
slow to extend new loans.
102. By September, with foreign exchange reserves
at record lows, Manila finally reached agreement with
the IMF on an 18-month economic adjustment pro-
gram under which the Fund will extend a $615
million loan. In return, Manila must float the peso,
raise new tax revenues, restrain the growth in the
money supply, and dismantle the coconut and sugar
monopolies.
103. The lack of foreign exchange will continue to
force further cuts in imports and hurt employment,
particularly in urban areas over at least the next few
months. Further devaluation will hit the overprotected
domestic manufacturing sector, and reductions in gov-
ernment spending are likely to affect subsidies, as well
as the pay of government employees, and the military
budget.
104. Even with an IMF agreement, the Philippines
thus faces a period of difficult economic adjustment
that will be politically painful. GDP will decline at
least 5 percent this year, and probably fall again next
year. With imports likely to be cut further, investment
expenditures will drop drastically and there will be
substantial reductions in real consumer incomes.'
105. The outlook for the Philippines is thus for
continued economic stagnation at best and for growing
political instability. We believe Marcos will seek to
delay and dilute the economic measures required by
the IMF and the other creditors because they will be
politically painful to so many groups-his business
cronies, urban labor, the peasants, and even the mili-
tary, whose morale is already low. Failure to comply
with the IMF program would, in turn, further de-
crease the confidence and willingness of the creditors
to make new loans. And, without loans and a restora-
tion of confidence, the economy will remain in reces-
sion. Further arrearages and difficult debt renegotia-
tions seem inevitable.
106. The more critical question, however, is wheth-
er the Philippines will enjoy enough political stability
to be able to continue to muddle through the economic
problems. Confidence in Marcos's regime is eroding
rapidly, and opposition is building. He cannot deflect
the blame for the economic mess, the corruption, and
the military atrocities that accompany attempts to
counter the leftist insurgency, without making major
changes in the way he governs the country. We doubt
he will make such changes because they would almost
certainly reduce his power and probably lead to his
ouster. Moreover, his further disability or death could
and probably would set off a long and destabilizing
struggle over the succession.
107. In any event, recession and prolonged austerity
can only feed the widespread discontent with his
regime and increase the appeal of the far left insur-
gency, which seems to have grown markedly over the
past year. We do not think it will grow strong enough
to overthrow the government any time soon, but the
longer the present disarray lasts, the more likely it is
that civilian opposition to Marcos will move further to
the left and take on more of an anti-US tone. It is too
early to judge whether that would, in turn, focus on
the major US bases in the Philippines, but such a
contingency cannot be ruled out.
Nigeria
108. The prospects for political stability, economic
recovery, and reasonably smooth debt servicing are
probably the worst in Nigeria, among the major debtor
countries. Fortunately, Nigeria's debt-now $18-25
billion including arrears-is not so large as to threaten
international financial stability even if it were to be
formally repudiated.
109. Nigeria developed a bad case of the "OPEC
disease" in the 1970s. Booming oil revenues combined
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with an extraordinary level of public and private
corruption and an overvalued currency (the naira) led
to a severe decline in traditional exports (mainly
agricultural), and rapidly growing imports of food and
consumer goods. Oil accounts for close to 95 percent of
export earnings and about 85 percent of total govern-
ment revenues. The shift from oil shortage to oil glut
hit Nigeria hard. Oil sales dropped from a peak of
about $24 billion in 1980 to some $10 billion in 1983,
while Nigeria's real GDP dropped an estimated 15
percent over the same period. Until 1983, imports did
not decrease in step with export earnings, as Nigerian
importers were able to obtain huge amounts of trade
credits. But now, even trade credits are drying up in
the face of mounting arrearages, and imports have
been cut by about 50 percent.
110. The results have been inflation, rising unem-
ployment, and falling output. Moreover, the fact that
the naira continues to be greatly overvalued breeds
widespread corruption, creates distortions in imports,
and stimulates large capital flight. This worsening of
economic conditions and the apparent increase in
corruption were cited by the leaders of the military
coup on New Year's Eve 1983 among their reasons for
the overthrow of the Shagari government, reelected
only in August 1983.
111. The new government, under Major General
Buhari, has proved as cautious as its predecessor about
making major policy changes, for fear of the domestic
political repercussions. Buhari has reportedly said,
perhaps facetiously, that if the new leaders had known
just how bad the situation was they might not have
carried out this coup.
112. Thus far, the new Nigerian Government has
played heavily on the popular perception that most of
Nigeria's current predicament can be blamed on the
corruption and mismanagement of the ousted Shagari
government. About 500 politicians and officials in that
regime were arrested, and many are being tried for
corruption by military tribunals. But even this effort to
deflect attention and blame is likely to backfire:
grumbling among lower-ranking officers and in sensi-
tive civilian circles about the ethnic mix of those being
tried, the continuation of corruption (if not quite as
flagrant as before), and the worsening economy will
sooner or later reflect on the present government. (See
inset.)
Economic Constraints
113. The Buhari government's economic policy
choices are either very difficult to implement or are
dangerous to its political survival. Nigeria's only real
The decline in public confidence and in public hopes
for eventual improvements in government performance
were described as follows
Nigerians in past economic good times have
exhibited a remarkable tolerance for endemic cor-
ruption, political chicanery, and administrative
inefficiency and mismanagement. There is increas-
ing evidence, however, that public disenchantment
with the seemingly inevitable cycle of failed civil-
ian regimes followed by military regimes is grow-
ing and that this disillusionment goes beyond un-
happiness with the performance of the government
of the day. Moreover, special interest groups that
offered early support for the coup increasingly
have voiced growing skepticism as the regime's
policies-or lack thereof-impact more directly on
their welfare. Students and labor, in particular,
have found it difficult to support measures that
have included reintroduction of school fees, in-
creased worker layoffs, and wage freezes. With
little to offer Nigerians in the way of economic
hope, the regime has been forced to rely heavily on
symbolic ploys. The detailing of financial misdeeds
of former civilian politicians, fanning Nigerian
xenophobia by raising the specter of a mercenary-
led invasion and "sinister forces" pushing an IMF
agreement, and launching a highly publicized
"war against indiscipline" have given the regime
some time, but the impact is wearing thin. More-
over, even popular steps such as trying corrupt
former politicians carry risks if it appears that the
government has singled out certain ethnic or politi-
cal groups for harsh treatment while overlooking
misdeeds of others.
three years is to increase the volume of oil exports.
This will be difficult to do in a soft oil market. Nigeria
has gotten away with periodically producing some-
what above its OPEC quota of 1.3 million barrels a
day and gained a small, temporary increase in its
quota at the last OPEC meeting. With the prices of
light crudes sliding, however, this extra production has
not helped much. The present Nigerian Government
appears unwilling to risk a break with OPEC by
increasing production substantially. But a future, less
conservative government might take the risk, in the
hope that other OPEC countries-especially Saudi
Arabia-would support the existing oil price by cut-
ting their own production, leaving Nigeria with larger
exports.
114. A revival of traditional exports, especially co-
hope for raising additional revenue in the next two to coa and palm oil, would take years because these crops
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do not bear for several years after planting. Other
agricultural exports and/or domestic food crops-
peanuts, staple grains, and fibers-would require both
time and a shift away from imports to revive. A major
devaluation, coupled with steps designed to improve
the real prices paid to farmers, would be essential
conditions for progress in these areas. But devaluation
is politically anathema. Labor, industry, and the whole
government bureaucracy, with its strong interest in
import-consuming urban living, all argue strongly
against it. And, at least in the short run, devaluation
would raise the prices of imported consumer goods,
including food in the cities, worsen the plight of the
import-dependent manufacturing sector, and reduce
employment.
115. Without devaluing, Nigeria cannot expect to
receive new credits from the IMF and the banks,
because these institutions insist on a devaluation of
between one-third and one-half as a precondition.
Although creditor banks may agree to reschedule the
large debt service arrears, a general debt rescheduling
is not feasible, and debt servicing will continue to be
difficult and probably chaotic.
116. Since it cannot hope to increase exports by
much, and probably cannot accept IMF and creditor
conditions for new loans, the government has no
choice but to restrain imports. Yet imported essential
spare parts, raw materials for industry, and some foods
and consumer goods are already in very short supply.
117. The Buhari government avoided any mention
of devaluation recently when it announced its eco-
nomic program and budget for 1984. It clearly fears
that a major devaluation would prompt another coup;
it is probably right.
Family and tribe are the strongest social institutions;
ethnic rivalries are never far below the surface, even
in the Army, which is perhaps the strongest national
institution. The long and bloody civil war of the late
1960s was largely a struggle over control of the oil
riches. Subsequent governments responded by creating
many more states (and extra costly layers of govern-
ment) in an effort to diffuse ethnic tension and spread
the wealth. Nigerians of all tribal affiliations came to
look on government as a provider of jobs and opportu-
nities for enrichment. Now that the oil revenues are
down, state and local governments are getting much
less from Lagos. The oil wealth that, in effect, bought
social peace has greatly diminished.
119. Rumors of coup plots by lower-ranking offi-
cers, disgruntlement over the northern bias in the
Buhari government, and rising crime and social ten-
sion have already appeared. Despite the effort to catch
and prosecute corrupt former officials (which at least
some Nigerians seem to feel would solve the whole
problem), corruption even at high levels remains a
major problem.
Prospects
120. Nigeria is in for prolonged recession, inflation,
high unemployment, and falling living standards as it
is forced to adjust to lower oil revenues. Rising discon-
tent and increased coup plotting seem inevitable. A
successor government of lower-ranking military offi-
cers would have no more palatable options than the
present military rulers have. It would, however, proba-
bly be even more nationalistic or xenophobic and
hence more difficult for creditors to deal with.
121. While we do not rule out the possibility that
the present Nigerian Government may manage to stay
in power through the next several years, it seems more
likely that Lagos will experience one or several more
additional coups and deepening social fragmentation.
122. A number of other Latin American countries
face political/economic constraints similar to those of
the more troubled major debtors-Peru, Bolivia, and
Ecuador are the most prominent. Peru's deteriorating
economy-worsened by weather disasters in 1983 that
destroyed infrastructure, food and export crops, and
contributed to inflation-persistent insurgency, and a
major election in Lima have severely eroded support
for President Belaunde. The tentative agreement with
the IMF includes unusually tough performance tar-
gets, and Lima is pushing hard for more generous
terms. Presidential elections are scheduled for next
April; opposition parties (particularly the Marxist Unit-
ed Left coalition that won the mayoralty in Lima) are
gaining strength, and the moderate left APRA party is
likely to win the presidency. An APRA government
probably would be even more inclined than the
present one to resist conditionality and engage in
confrontation tactics with the IMF and the banks. In
the meantime, Belaunde has precious little room to
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maneuver as consumer protests, strikes, and civil
disorder mount.,'
123. Bolivia has recently declared at least a tempo-
rary moratorium on servicing foreign bank loans in the
face of'mounting protests and strikes. Bolivia is facing
near hyperinflation, crippling strikes, and general
incapacity on the part of the government.
124. Elsewhere in the Third World, some minor
debtors-Tanzania, Somalia, Sudan-have proved
even more stubborn in dealing with their creditors,
while a growing number of beleaguered LDC govern-
ments are pressing for softer terms, pleading for more
understanding of their "special circumstances," and
warning of political fallout unless they get more help.
Urban protests and.riots in Morocco, Tunisia, and,
more recently, the Dominican Republic are cited as
proof of the dangers of imposing austerity.
125. As time passes and especially if growth proves
difficult to revive in many of the debtor countries, we
expect stronger domestic political pressures for relief.
IMF-sponsored programs that appear to delay or
impede economic recovery are already under fire in a
number of countries. Debtor governments have been
quick to blame the banks, the IMF, higher interest
rates, and trade barriers for much of their economic
problems. We expect this trend to intensify and to
further complicate relations with the creditors in
almost all cases.
Implications for Debt Negotiations
126. Growing political resistance to IMF condition-
ality almost guarantees conflict between debtors and
creditors over terms and conditions. Debtors will try to
negotiate longer term reschedulings in order to free
themselves from external pressures on their economic
policies. They will try to minimize the burden of
interest payments: by negotiating reduced spreads; by
obtaining new credits; by getting banks to capitalize
interest; and probably by proposing various new forms
of creative adjustments, such as putting part of interest
payments in "escrow" accounts in domestic currency
payable later in hard currency as exports grow.
127. The bargaining power and strategy of the
debtors are influenced by the creditors' and debtors'
assessment of the costs, benefits, and risks of default,
by the willingness of creditor governments to provide
assistance, and by domestic, political, and foreign
policy considerations. (See table 4.)
128. Default could occur under a wide variety of
circumstances, which would greatly influence the
outcome. Several debtor countries have already accu-
mulated substantial arrears on interest payments and
even announced temporary moratoriums on debt serv-
icing. In some cases, creditors could have found these
countries in legal default but did not do so. If a debtor
did not meet its interest obligations for many months,
the chances of default actions would increase. And, if
the debtor country government formally repudiated
debt obligations, legal default would become inevita-
ble. In a default action, the creditors would try to
attach whatever debtor country assets they could and
would generally try to block transfers from the debt-
or's foreign deposits. The success of these actions
would depend greatly on the degree of cooperation
among the creditors, which would certainly be much
greater in the event of repudiation than if the debtor
accepted its obligations, claimed only inability to pay,
and made at least token payments of interest.
129. Among the seven countries we are examining,
at least four-Brazil, Mexico, Argentina, and Venezue-
la-have bank debts large enough so that default by
any of them would seriously threaten the stability of
several large banks, especially in the United States,
and create major risks of a liquidity crisis in the
international banking system. Clearly Mexico and
Brazil have by far the greatest debtor's clout, while
Chile, the Philippines, and Nigeria have the least.
130. Debtors' calculations as to the impact of de-
fault on their economies must take the following
factors into account:
- The level and expected trend in interest rates,
and their impact on the country's interest
payments.
- The expected net inflow of foreign capital and
the extent to which it eases the interest burden.
- The prospects for export earnings.
- The vulnerability of export earnings to disruption
by creditors' actions in the event of default (for
example, attaching assets, blocking financial
transfers).
- The dependence of the country on foreign trade.
- The availability of trade credits for imports.
- The amount of material support likely to be
forthcoming from other countries, including oth-
er debtors.
131. No one knows what the impact of a default by
a major sovereign debtor would be: there is no prece-
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Table 4
Factors Affecting Debt Bargaining
in Major Debtor Countries
Size of US Gross Foreign
Bank Debt Share Reserves,
(billion US (percent) Mid-1984
dollars, end (as percent of
of 1983) estimated
1984 imports)
dent and opinions vary widely. Clearly, there would
be a loss of trade and other credits and some disrup-
tion of trade, especially a decline in export earnings.
On the other hand, interest payments would cease.
Table 5 gives illustrative numbers. It suggests that most
of the major debtors would be able to finance larger
imports by cooperating with the creditors than by
defaulting if external economic conditions were favor-
able (that is, rapid export growth, stable interest rates,
and substantial capital inflows). In the case of all the
countries except Mexico and Venezuela, export losses
resulting from disruption due to default would have to
be less than 20 percent or so for import capacity to be
reduced. The picture is entirely different, however, if
the debtors come to expect a pessimistic scenario to
Interest
Payments
Relative to
Expected Net
Capital
Inflows, 1984
(percent)
Other Key
Influences
? High nationalism
? High inflation
? Maintenance of fledgling
democracy
? Low vulnerability of exports to
disruption by creditors
? Importance to United States
? Evolving democracy
? Worst foreign financial
position
? Lower-than-expected copper
prices
No ? Importance to United States
capital ? High vulnerability of exports
inflow to disruption by creditors,
since most trade is with
United States
No ? Weak government's fear of
capital popular reactions
inflow ? Impossibility of raising export
revenues
? Worst financial
mismanagement
? Bases important to United
States
? Declining government
effectiveness
Net ? High nationalism
capital ? Best ability to be financially
outflow independent
develop (that is, slow export growth, rising interest
rates, and small or no capital inflows). For Mexico and
Argentina, import capacity would be reduced by
default only if export earnings were thereby cut
drastically-by over 40 percent.
132. The debtor countries appear strongly disin-
clined to press the creditors to the point that default
action would be likely, even when the basic arithmetic
seems to favor default, because of fear of uncertainty
and of possible isolation. from the international
community.
133. Among the seven countries, Argentina would
be in the best position to withstand default. Its interest
payments are large; net capital inflows are likely to be
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Table 5
Parameters of Default in Major Debtor Countries,
Optimistic and Pessimistic Projections for 1985 a
Pess.
4.0
Brazil
6.0
3.0
11.3
11.7
.5.3
8.7
17
30
Chile
2.0
1.0
2.0
1.9
0
0.9
0
23
Mexico
3.0
1.5
11.6
11.5
8.6
10.0
33
42
Nigeria
1.5
0
1.6
1.5
0.1
1.5
1
12
Philippines
2.0
1.0
2.0
2.0
0
1.0
0
18
Venezuela
0
0
4.1
4.1
4.1
4.1
25
26
a It is assumed that in a default situation the net capital flow would
be zero and interest would not be paid. The difference between
interest obligations forgone and the net capital inflow forgone is a
gain resulting from default. This gain is calculated as a share of
export earnings to show how much these would have to be reduced
by creditors' actions to leave the debtor country no better off than
without default.
small; exports are not very dynamic. Moreover, grain
and food products constitute nearly two-thirds of
exports and can be sold on the open market without
identifying the source, and at least some of them
might be shifted to the USSR. Standing up to creditors,
even alone; would be politically popular among the
nationalistic Argentines. Even Buenos Aires, however,
is unlikely to take action leading to default unless
external economic conditions turn sour.
134. For the other major debtors the risk of actions
leading to default is probably small unless external
economic conditions worsen markedly. Although there
can always be miscalculations, both the debtors and
creditors will probably go far to avoid a break because
neither wants to accept the high risks such an action
would bring.
135. The chances are that confrontations will force
compromises involving repeated, small adjustments.
One way or another will be found to cover part of
interest obligations if these cannot be reduced. Where
political pressures further restrict the freedom of
action of debtor country governments, the creditors
will have to make the greater adjustments.
136. A major factor in debt negotiations will be the
debtors' expectations of special assistance from credi-
tor country governments, especially that of the United
States. Some major debtors, such as Mexico, the Philip-
pines, and the debt-ridden countries of Central Ameri-
ca and the Caribbean, are bound to factor special US
economic, security, or other foreign interests into debt
negotiations. They will use their leverage on the US
Government to push for special bilateral economic
concessions and to resist politically distasteful condi-
tions from the IMF and from the banks. Other
countries, with less claim to special treatment from the
United States or another major industrial power, none-
theless will make the strongest case they can for such
treatment. Argentina, for example, is playing hard on
the theme that a liberal approach on the debt problem
by creditors is essential to the preservation of Argen-
tine democracy. There is a strong tendency among the
debt-ridden developing countries, especially in Latin
America, to exaggerate the importance of special US
foreign policy interests as well as the degree of
influence of the US Government on the actions of the
IMF and the banks. Consequently, the United States is
likely to get a great deal of blame if debtor countries'
expectations are disappointed.
137. Another major uncertainty in debt negotiations
is the role of cooperation among debtors. There has
been a great deal of speculation about a so-called
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debtors cartel. In our opinion, a debtors' cartel in the
strict sense is highly unlikely to be formed. Such a
cartel would require agreement among a group of
debtors to accept nothing short of certain minimum
terms on new credits and reschedulings. To give teeth
to such an agreement the debtors would have to be
prepared to refuse any bilateral offer that was not also
extended to other countries. If their conditions were
not met, they would have to be prepared jointly to
withhold debt servicing and risk default. Yet the
economic interests of the debtors vary considerably
because of the differing prospects for export earnings
and capital inflows, the differing vulnerability of
export earnings to creditor actions, and the differing
extent to which various countries can expect special
treatment from the US Government. Brazil and Mexi-
co probably believe they have little to gain by belong-
ing to a cartel because their individual bank debt is so
large that the banks will be forced to make concessions
in any event. Moreover, Mexico and Brazil would be
reluctant to jeopardize their improved standing with
the banks.
138. The best candidates for a debtors' cartel would
probably be a group of medium-size Latin American
countries under Argentine leadership. Argentina, Peru,
Colombia, Chile, and Bolivia have an aggregate debt
nearly as large as Brazil's or Mexico's. All five of them
are either strongly resisting IMF conditionality or are
in a particularly difficult financial position. Should
Argentina give up on IMF negotiations it would
probably seek support from at least some of these
countries. Although they are more vulnerable than
Argentina to creditors' actions in the event of default,
these other countries could find the prospect of a
cartel attractive. In this situation, the banks would
certainly try to isolate Argentina by trying to make it
an example and perhaps by offering "carrots" to some
of the other debtors.
139. If external economic conditions turn sour to
the extent that even Mexico and Brazil would consider
actions leading to default, a broad debtors' cartel
would become a real possibility. Whether or not a
cartel were organized, major adjustments in debt
servicing would become necessary.
140. The fact that a formal debtors' cartel is unlike-
ly to develop does not preclude increased cooperation
among debtors. Exchanges of information on credit
terms and debt negotiations have been under way for
some time, and regular consultative meetings were
agreed on at the Cartagena conference. Better ex-
change of information obviously improves the debtors'
bargaining position. Moreover, the debtors are certain-
ly going to increase the degree of political pressure on
creditor country governments to ease the debt burden.
This pressure will occur in many forums-in the UN,
at the economic summit, and elsewhere-and take
many forms.
141. In any event the United States as the major
developed power, home to the main creditor banks,
and seen to be the main player in the IMF's decisions,
is already being blamed for some of the debtor
nations' economic trouble. As the debtor governments
try harder to deflect blame from themselves, the
United States will be the most likely scapegoat. We
also expect rising nationalism in many debtor countries
reflecting resentment of outside pressures. Particularly
in Latin America, it is likely to take on more anti-US
coloration.
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ANNEX
Balance-of-Payments Scenarios for Major Debtor Countries
We use optimistic and pessimistic scenarios to illus-
trate plausible balance-of-payments positions for key
LDC debtors for 1985 and 1986. The scenarios are
based on assumptions about changes in exports, inter-
est rates, net capital flows, and foreign exchange
reserves. Services (and private transfers) other than
interest payments are held constant at the 1984 value.
Import capacity is derived as a residual.
In the case of the optimistic scenario, the projected
growth in exports is based on a continuation of OECD
economic expansion at near 3 percent per year, as well
as on each country's export mix. Interest rates are
assumed to hold steady at the 1984 level. Net capital
flows return to a normal level-that is, direct invest-
ment regains pre-1982 levels, commercial bank lend-
ing increases 5 to 10 percent per year, and short-term
Table 6
Argentina: Balance-of-Payments Scenarios
1983 Actual
1984 Estimate
Optimistic Projection
Pessimistic Projection
1985
1986
1985
1986
Exports
7.8
8.5
9.4
10.3
8.5
8.5
Imports
-4.1
-4.5
-5.7
-6.4
-2.5
-2.5
Trade balance
3.7
4.0
3.7
3.9
6.0
6.0
Interest payments
-3.8
-4.0
-4.2
-4.4
-4.0
-4.0
Other services
-2.4
-2.0
-2.0
-2.0
-2.0
-2.0
Service balance
-6.2
-6.0
-6.2
-6.4
-6.0
-6.0
Current account balance
-2.4
-2.0
-2.5
-2.5
0
0
Capital account balance
-0.2
2.5
3.0
3.0
0
0
Change in reserves a
2.6
-0.5
-0.5
-0.5
0
0
31
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trade credits return to pre-1982 norms. Reserve levels
are rebuilt as shown.
In the pessimistic scenario, the growth in exports is
based on OECD economic growth of 1 to 2 percent
annually. Interest rates are again assumed to hold at
the 1984 level. Net capital flows are estimated to be
half the optimistic level or near zero, according to the
country's situation. There is no rebuilding of foreign
exchange reserves.
Published IMF data are used where available; other-
wise we use the latest country reporting. In both
scenarios, future interest payments are obligations (not
estimates of what may be paid).
The following country tables (tables 6-12) include
the export assumptions used.
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Table 7
Brazil: Balance-of-Payments Scenarios
1985
1986
1985
1986
Exports
22.0
26.5
31.8
38.2
29.2
32.1
Imports
-15.5
-15.5
-21.0
-27.7
-17.0
-20.6
Trade balance
6.5
11.0
10.8
10.5
12.2
11.5
Interest payments
-10.0
-11.0
-11.3
-12.0
-11.7
-11.5
Other services
-3.4
-3.5
-3.5
-3.5
-3.5
-3.5
Service balance
-13.4
-14.5
-14.8
-15.5
-15.2
-15.0
Current account balance
-6.9
-3.5
-4.0
-5.0
-3.0
-3.5
Capital account balance
6.5
5.5
6.0
7.0
3.0
3.5
Change in reserves a
0.4
-2.0
-2.0
-2.0
0
0
Table 8
Chile: Balance-of-Payments Scenarios
1985
1986
1985
1986
Exports
3.9
3.9
.4.5
5.2
3.9
3.9
Imports
-2.8
-3.5
-3.2
-4.2
-2.2
-2.1
Trade balance
1.1
0.4
1.3
1.0
1.7
1.8
Interest payments
-1.6
-1.8
-2.0
-2.2
-1.9
-2.0
Other services
-0.5
-0.6
-0.8
-0.8
-0.8
-0.8
Service balance
-2.1
-2.4
-2.8
-3.0
-2.7
-2.8
Current account balance
-1.1
-2.0
-1.5
-2.0
-1.0
-1.0
Capital account balance
0.6
1.5
2.0
2.0
1.0
1.0
Change in reserves a
0.5
0.5
-0.5
0
0
0
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Table 9
Mexico: Balance-of-Payments Scenarios
1985 1986
1985
1986
Exports
22.2 2
3.6
26.0
2
8.6
23.6
23.6
Imports
-7.7 -
9.5
-17.4
-2
1.7
-14.6
-14.9
Trade balance
14.5 1
4.1
8.6
6.9
9.0
8.7
Interest payments
-9.9 -1
1.4
-11.6
-1
1.9
-11.5
-11.7
Other services
0.6
1.0
1.0
1.0
1.0
1.0
Service balance
-9.3 -1
0.4
-10.6
-1
0.9
-10.5
-10.7
Current account balance
5.2
3.7
-2.0
-
4.0
-1.5
-2.0
Capital account balance
-3.2
0
3.0
4.0
1.5
2.0
Change in reserves a
-2.0 -
3.7
-1.0
0
0
0
Table 10
Nigeria: Balance-of-Payments Scenarios
1985
1986
1985
1986
Exports
11.6 13
.5 16.0
16.0
13.0
13.0
Imports
-7.2 -9
.5 -13.4
-13.3
9.5
9.5
Trade balance
4.4 4
.0 2.6
2.7
3.5
3.5
Interest payments
-1.4 -1
.5 -1.6
-1.7
-1.5
-1.5
Other services
-2.0 -2
.0 -2.0
-2.0
-2.0
-2.0
Service balance
-3.4 -3
.5 -3.6
-3.7
-3.5
-3.5
Current account balance
1.0 0
.5 -1.0
-1.0
0
0
Capital account balance
-1.6 -0
.5 1.5
1.5
0
0
Change in reserves a
0.6 0
-0.5
-0.5
0
0
Optimistic
Based on oil production of 1.6 million barrels a day
Pessimistic
Based on oil production of 1.3 million barrels a day
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Table 11
Philippines: Balance-of-Payments Scenarios
1985
1986
1985
1986
Exports
5.0
5.5
6.0
6.6
5.5
5.5
Imports
-7.5
-6.2
-7.2
-8.1
-6.2
-6.3
Trade balance
-2.5
-0.7
-1.2
-1.5
-0.7
-0.8
Interest payments
-1.7
-2.3
-2.0
-2.2
-2.0
-2.1
Other services
1.7
1.7
1.7
1.7
1.7
1.7
Service balance
0
-0.6
-0.3
-0.5
-0.3
-0.4
Current account balance
-2.5
-1.3
-1.5
-2.0
-1.0
-1.2
Capital account balance
0.9
1.3
2.0
2.5
1.0
1.2
Change in reserves a
1.6
0
-0.5
-0.5
0
0
Table 12
Venezuela: Balance-of-Payments Scenarios
1983 Actual
1984 Estimate
Optimistic Projection
Pessimistic Projection
Imports
-6.8
-7.3
-10.2
-11.0
-9.4
-9.4
Trade balance
7.9
8.4
6.3
6.3
6.3
6.3
Interest payments
-3.0
-3.2
-4.1
-4.1
-4.1
-4.1
Other services
-1.2
-2.2
-2.3
-2.3
-2.2
-2.2
Service balance
-4.2
-5.4
-6.4
-6.4
-6.3
-6.3
Current account balance
3.7
3.0
0
0
0
0
Capital account balance
-3.8
-3.8
0
0
0
0
34
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