INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000400050004-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 40
• Document Creation Date: December 22, 2016
• Document Release Date: August 12, 2011
• Sequence Number: 4
• Publication Date: June 27, 1986
• Content Type: REPORT

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Directorate of -Secret
Intelligence
Weekly
International
Economic & Energy
DI IEEW 86-026
27 June 1986
Copy 6 8 2
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Secret
International
Economic & Energy Weekly
iii Synopsis
1 Perspective-Latin American Debt:
The Risks in Financial Brinksmanship
3 Latin America: Export Difficulties in the 1980s i
7 Gorbachev's Industrial Modernization Program:
From Strategy to Implementation
11 Bolivia: Struggling for Economic Recovery
15 China: Alternative Energy Sources for Rural Development
19 Briefs Energy
International Finance
International Trade
Global and Regional Developments
National Developments
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Comments and queries regarding this publication are welcome. They may be
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Secret
DI IEEW 86-026
27 June 1986
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International
Economic & Energy Weekly 25X1
Synopsis
1 Perspective-Latin American Debt: The Risks
in Financial Brinksmanship 25X1
The international cooperation that has sustained debt negotiations between
Latin American governments and their international creditors increasingly is
under stress. Although the main intent of the debtors may be to prod the US
Government and world bankers into pursuing new solutions to the debt
problem, a showdown in key financial negotiations could precipitate a financial
crisis that neither side really wants.
3 Latin America: Export Difficulties in the 1980s
The growth of Latin America's export earnings, which is critical to the region's
debt servicing capabilities, has slowed considerably from a robust average
annual pace of 18 percent in the 1970s to 5 percent during the 1980s. To re-
store rapid export expansion, we believe Latin American countries will have to
take a more active role in enhancing the competitiveness of their products to
compensate for the lack of vigorous OECD economic growth
7 Gorbachev's Industrial Modernization Program:
From Strategy to Implementation
Gorbachev has outlined a strategy to revitalize the stagnant Soviet economy,
but has yet to translate the strategy into a fully consistent plan of action. If his
modernization program does not begin to show results soon, the gap between
Western and Soviet technology is likely to widen during the 1990s, thus
threatening the USSR's capability to match the productivity of the industrial
West in critical areas.
11- Bolivia: Struggling for Economic Recovery
The economic stabilization program launched by President Paz Estenssoro last
August has achieved sufficient success to persuade some foreign lenders to
offer new credits. We judge, however, that the government's efforts to sustain
an economic recovery will be constrained by its limited ability to attract
foreign investment, boost exports, and resist inflationary wage pressures from
leftist labor unions.
iii Secret
DI IEEW 86-026
27 June 1986
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15 China: Alternative Energy Sources for Rural Development
China's interest in developing alternative energy sources, such as solar, wind,
and biogas power, stems largely from problems in supplying the growing
demand for energy in rural areas. Alternative sources alone will not solve the
rural energy problem, and, to minimize foreign exchange costs, however, we
expect China to seek technology transfers or coproduction agreements rather
than large purchases.
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Perspective
International
Economic & Energy Weekly
Latin American Debt: The Risks in Financial Brinksmanship
existing mechanisms for mediating debt problems.
The international cooperation that has sustained debt negotiations between
Latin American governments and their international creditors increasingly is
under stress. Since late 1985, the region's governments have taken tougher
positions and are sticking to their guns longer than in the past. Although the
main intent of the debtors may be to prod the US Government and world
bankers into pursuing new solutions to the debt problem, a showdown in key fi-
nancial negotiations could precipitate a financial crisis that neither side really
wants. At a minimum, we believe that financial brinksmanship could paralyze
amount.
Brazil, Latin America's largest debtor, started the trend when it rejected a
formal agreement with the IMF as a basis for rescheduling its commercial
debt last fall. It has negotiated with its private creditors without budging from
this position, but the tentative agreement reached with the banks in March has
yet to be ratified. Meanwhile, Brasilia took the same position with the Paris
Club, although an IMF agreement is a prerequisite for opening talks. Paris
Club members also want the Brazilians to become current on interest
payments, but Brasilia has proposed paying only 15 percent of the overdue
loggerheads.
Upon taking office last year, Peru's Garcia administration announced that it
would not negotiate with the IMF to obtain financial assistance. It also limited
debt service payments to the value of 10 percent of exports. Creditors
responded by placing new financial assistance agreements on hold and
reducing their trade credits. Today, Peru and its creditors are still at
Talks between other Latin debtors and their creditors also have become more
confrontational:
? Mexico surprised its bank advisory committee in February with an estimated
$9 billion financial gap for 1986. The Mexicans backed off in the face of ve-
hement bank opposition to extending new loans without a government
commitment to economic reform. Unlike in 1982, however, Mexico City has
not acceded to creditor demands and is still wrangling with the IMF over
conditions for an agreement.
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? Venezuela in May invoked a contingency clause in its rescheduling accord to
reopen negotiations before the agreement entered into force. The banks,
however, refuse to start negotiations as long as Caracas has not made the
$750 million downpayment specified in the accord. The Venezuelans, in
turn, may seek $600 million in new money-without IMF conditions-to
ease the drain on their reserves
We believe that Latin American governments have become even more
frustrated over a debt bind that perpetuates slow economic growth. With
interest payments taking a growing share of export earnings, if they fully
service their debts, the capital outflows would hold down investment and
economic growth. On the other hand, refusal to make scheduled interest
payments would probably lead creditors to retaliate by cutting trade and
development finance, which several past econometric studies have shown also
would reduce GNP growth for the rest of the decade.
For their part, we believe that foreign creditors have toughened their positions
because they are in better financial shape than at any time since the debt crisis
surfaced in 1982. Press reports indicate that most banks worldwide have
lowered their exposure in Latin America relative to capital and have built up
an loss reserves
Moreover, many creditors believe that Latin American
countries-including Mexico-need stronger prodding to undertake serious
economic adjustments.
In contrast to 1982 and 1983, debtors and creditors increasingly are losing
patience with protracted negotiations and with the perceived unwillingness of
the "other side" to agree on solutions. In the Mexican negotiations, each side
may be looking to Washington to intervene to avoid a financial crisis with the
view that a tougher stance will yield a more favorable compromise.
Latin American leaders are watching Mexican developments closely. Venezue-
la and Chile, in particular, seem to be delaying their own negotiations, hoping
to cash in on any concessions granted Mexico. If Mexico succeeds with a
unilateral payments moratorium, we believe that, over time, other debtors
could adopt similar tactics, making compromises harder to achieve. Under
such conditions, a temporary suspension of payments could become an
indefinite moratorium that leaves a pile of bad debt on the books of creditors.
At that point, both debtors and creditors could pressure Washington to come
up with a solution.
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Latin America:
Export Difficulties
in the 1980s t
The growth of Latin America's export earnings,
which is critical to the region's debt servicing
capabilities, has slowed considerably from a robust
average annual pace of 18 percent in the 1970s to 5
percent during the 1980s. In our judgment, the
dramatic deceleration of Latin American exports
has mainly been the result of unfavorable trends in
industrialized country-especially West European
and Japanese-markets, which normally absorb
more than 70 percent of the region's foreign sales.
Notable among those trends have been a decline in
OECD growth, a rise in industrialized country
protectionism, and a significant increase in the
value of the dollar against the West European and
Japanese currencies. Government policies in Latin
America are not, on average, strongly conducive to
export growth, and they have not changed signifi-
cantly since the 1970s. To restore rapid export
expansion, we believe Latin American countries
will have to take a more active role in enhancing
the competitiveness of their products to compensate
for the lack of vigorous OECD economic growth.
than 75 percent of total Latin American exports-
explain much of the decline in the growth of
regional exports in the 1980s. In addition to the
decline in world oil prices in the 1980s, world
recession has cut short the commodity booms in the
1970s that drove up the prices of Latin American
exports of bananas, coffee, copper, fishmeal, sugar,
soybeans, and meat.
The export performances in OECD markets of
individual countries or groups between 1979 and
1985 have varied dramatically:
? Brazil and Mexico, the region's two largest
exporters, recorded major export gains in part
because of their large and well-developed indus-
trial sectors. Also, Brazil pursued aggressive ex-
port promotion policies, while Mexico benefited
from large new oil finds and production increases.
? The export earnings of other major oil producers,
such as Venezuela and Trinidad and Tobago,
either fell or rose only slightly during the 1980s
as oil prices surged at the turn of the decade and
later slumped.
Commodity Exporters Hardest Hit
A sluggish OECD aggregate economic growth rate
of 2.3 percent over the past five years not only has
dampened general demand for foreign goods in the
industrialized countries, but also has indirectly set
back Latin American exports by contributing to a
fall in commodity prices. Indeed, slumping interna-
tional prices for agricultural products, raw materi-
als, and fuels-which together account for more
' We relied on the industrialized partners' trade returns to construct
a comprehensive and reliable data series extending from 1979
through 1985 because comparable statistics generated by Latin
American governments were far less complete, especially for recent
years. As a result, data for Latin American exports are actually
partner country imports, c.i.f. We used two-year dollar value
averages for 1984-85 and 1979-80 to reduce single-year phenome-
na, such as the sharp increase in the international price of oil that
? Chile and Jamaica experienced sharp declines in
their export earnings as the prices of copper and
bauxite plunged in recent years.
? The exports of major agricultural producers, in-
cluding Argentina and a number of small Central
American and Caribbean countries, fared poorly
as prices for grain and sugar nosedived.
Shifting Patterns of Trade With the OECD
Latin America's exports to major industrialized
countries in 1984-85 averaged $77 billion, up
$16 billion from the 1979-80 period. To a degree,
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Latin America: Commodity Export Prices, 1981-85
Index: 1980=100
107.0
99.9
114.4
98.5
101.2
81.7
63.8
77.6
98.4
88.8
76.8
83.4
84.9
93.7
88.6
92.7
70.1
89.7
74.0
55.5
101.8
82.9
the disparity in imports from Latin America among
individual OECD countries paralleled differences
in the growth of each country's economy. For
example, the United States and Japan, which re-
corded higher average annual GDP growth than
other OECD countries during the 1980s, increased
their imports from Latin America at a faster rate
than did the countries of Western Europe.
The United States considerably outperformed all
other industrialized countries in expanding its pur-
chases of Latin American goods, partly because of
relative exchange rate movements and lower import
barriers. The region's exports to Japan and West-
ern Europe, particularly manufactures, were hurt
by the appreciation in the early 1980s of the US
dollar-to which most Latin American currencies
are linked:
? Despite its modest 2.3-percent average annual
GDP growth in the 1980s, the United States
hiked its imports from Latin America-mostly
manufactured products-7 percent per year.
? Exports to EC countries performed relatively
poorly. Purchases of Latin goods by West Germa-
ny, France, and Italy each rose less than 2
percent a year (UK imports actually declined
because of that country's break in trade relations
with Argentina).
In contrast to the progress on trade liberalization in
the 1970s, depressed growth and soaring unemploy-
ment in industrial countries in the 1980s have
caused a number of governments to succumb to
mounting demands at home for greater import
restraints. Although tariff rates continue to impede
trade flows in some instances, the World Bank
notes that the more serious obstacle to Latin
American exports has been the growing use of
nontariff barriers (NTBs), especially in Western
Europe. According to Bank analysis, by the early
1980s 22 percent of EC imports from developing
countries were subject to NTBs, 10.5 percent of
Japan's imports and 12.9 percent of US imports.
? Japan, Canada, and Spain raised their imports
from the region at rates varying between 3 and 6
percent per year, with particular emphasis on
foodstuffs and petroleum.
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Latin America: Annual Average Exports to
Major OECD Countries
Argentina
Brazil
Chile
Mexico
Venezuela
Andean
Central
America
Caribbean
Total
Beef
99
116
0
9
0
0
117
11
352
Raw materials
761
2,979
722
767
211
957
342
547
7,286
Iron ore
0
1,710
162
0
184
54
0
0
2,110
Iron, steel
109
1,066
6
219
177
39
0
121
1,737
Copper mfg.
2
45
1,009
64
0
363
0
0
1,483
Other
17
134
12
531
63
59
64
125
1,005
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OECD Countries: Average Annual Percent
GDP Growth and Import Growth From
Latin America, 1981-85
Restraints on agricultural trade have proliferated.
While the overall dollar value of Latin American
agricultural exports to the OECD remained rela-
tively constant during the 1980s, Western Europe's
absorption of these commodities declined while
those of the United States and Japan went up,
probably in part because of tighter European im-
port restraints. Overall, Latin American exports of
beef and sugar have been hit the hardest. For
example, the EC generally imposes tariffs and
import quotas on both commodities. Only Barba-
dos, Jamaica, Guyana, Trinidad and Tobago, and a
few smaller countries in the region-members of an
EC preference scheme largely for former colo-
nies-were exempt
Protectionist barriers against imports of Latin
American manufactures, though not as extensive as
restraints on agricultural trade, have been growing
more rapidly, according to the Inter-American
Development Bank. Our research indicates that,
although limitations on imports of manufactured
products are on the rise throughout the OECD,
they are more restrictive in Western Europe and
Japan than in the United States. While the value of
US purchases of manufactured goods originating in
Latin America more than doubled since the begin-
ning of the decade, purchases by most other indus-
trialized countries remained at previous levels or
declined.
In specific markets, Latin America has had partic'
ular difficulty expanding its sales of products that
compete with OECD industries that are either
labor intensive or are plagued by world overcapaci-
ty and low demand. The EC countries in the late
1970s were the leaders in urging tougher restric-
tions on trade in textiles and clothing during nego
tiations for the renewal of the Multi-Fiber Ar-
rangement and they concluded voluntary restraint,
agreements (VRAs) with eight Latin American, as
well as 18 other, textile exporters. Also, both the
European and Japanese governments have moved
to restrict imports of Latin metal products. For
example, quantitative limits imposed by Tokyo on
imports of copper and copper products had contrib-
uted to declining imports from Chile and Peru. In
the early 1980s, EC countries took steps to restrain
imports of steel-including VRAs with major Latin
American and other suppliers-to protect major
parts of Western Europe's steel industries.
In our judgment, Latin America will not be able to
count on robust industrialized country economic
growth to spur major increases in its regional
exports as it has in the past. Most forecasters
believe that OECD growth over the next few years'
will at best speed up slightly to the 2.5 to 3.0
percent level and that a major rebound in commod-
ity prices is unlikely. They also indicate that it
probably is unrealistic to expect industrialized
countries to roll back existing import restraints in a
major way at a time when domestic demand is low
and their own industrial structures are threatened.
Accordingly, we expect that Latin American gov-
ernments and businesses will be forced to under-
take significant reforms and cost-cutting measures
aimed at making the region's products more com-
petitive on world markets to enhance their export
prospects. For example, Latin countries may re-
structure their existing array of commercial, credit,
and fiscal policies to provide greater export incen-
tives. Despite the recent depreciation of the US
dollar, additional devaluations will be necessary to
enhance the competitiveness of Latin American
goods.
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Gorbachev's Industrial
Modernization Program:
From Strategy to
Implementation
Gorbachev has outlined a strategy to revitalize the
stagnant Soviet economy, but has yet to translate
the strategy into a fully consistent plan of action.
The Gorbachev and Ryzhkov speeches at last
week's party plenum and sessions of the Supreme
Soviet failed to clear up many of the gaps and
contradictions in published economic plans that
suggest continuing debate concerning appropriate
modernization policies. Delays in developing such
policies could signal a rocky road for Gorbachev. If
his modernization program does not begin to show
results soon, the gap between Western and Soviet
technology is likely to widen during the 1990s, thus
threatening the USSR's capability to match the
productivity of the industrial West in critical areas.
USSR: Average Annual Growth of GNP,
1966-90a
Overall Strategy
Since Gorbachev became General Secretary, offi-
cial pronouncements emphasizing the importance
of industrial modernization have become more
urgent. In his address to the April 1985 Party
Plenum, Gorbachev painted a bleak picture of the
current level of Soviet technology, "S&T progress
in the majority of industries is flagging ... pro-
gressing in an evolutionary way when what is
required is revolutionary change." This speech was
soon followed by a special conference, held in June,
to develop a strategy to deal with the issue. Since
the conference, the economic plan for 1986 and the
1986-90 Five-Year Plan with guidelines to the year
2000-approved just last week by the Supreme
Soviet-have set ambitious growth goals and have
enshrined industrial modernization as Moscow's
number-one domestic priority. Modernizing indus-
try will require years of effort:
? Gorbachev is relying on the more efficient use of
existing resources-primarily through discipline,
his antialcohol campaign, less waste, and im-
proved worker effort-to prompt an immediate
Estimates using 1982 sector-of-origin factor-cost weights.
bProjection using official Soviet plans.
growth dividend that can support future modern-
ization. This growth dividend itself will be sup-
ported by organizational changes to "streamline"
management and speed industrial innovation by
bringing R&D closer to the production line.
? Modernization is to be achieved within a frame-
work of renovating existing plants rather than
building new ones. To provide the equipment to
be installed in these renovated plants, the
machine-building and metalworking sector
(MBMW) will itself undergo rapid moderniza-
tion. Investment in civilian MBMW is scheduled
to grow 80 percent over the next five years, with
special emphasis on the sophisticated technologies
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that have led modernization efforts in the West-
machine tools, measuring instruments, and com-
puters, for example.
Gorbachev clearly hopes that large investments in
these technologies today will pay off in the 1990s
with increasing output of high-technology equip-
ment to spur the economy. In the meantime, he
intends to achieve growth primarily by accelerating
the replacement of workers in labor-intensive in-
dustries with machinery that is already in stock or
can be produced quickly. The leadership has de-
clared that such increases in productivity will ac-
count for two-thirds of the planned increase in
economic output during the period 1986-90.
Missing Links
Despite the more urgent rhetoric, Gorbachev's poli-
cies are, by and large, repeats or extensions of past
ideas. Renovating plants instead of building new
ones has been a high priority for more than 15
years. Organizational changes to speed technologi-
cal change by bringing R&D closer to the produc-
tion line have been tried in various forms since
1965. Even the Gorbachevian call for a "scientific-
technological" revolution was a main Brezhnev
theme. What is new about the current program is
the vigor with which it is being pushed. Gorbachev
has made impressive gains in replacing bureaucrat-
ic deadwood with younger, handpicked allies that
may enable him to more successfully implement the
current brew of old policies than did his predeces-
sors.
On the other hand, bureaucratic resistance remains
strong and was identified by Gorbachev at last
week's plenum as a major obstacle to industrial
modernization. Moreover, analysis of published
economic plans and the speeches of the leadership
suggest questionable linkages and, in some cases,
contradictions that may reflect political divisions
within the leadership and tensions between indus-
trial modernization and other economic priorities:
? Output targets for steel and nonferrous metals
seem too low to support the high rate of growth-
7.4 percent per year-planned for machinery
output.
? Plans for long-term growth rely largely on a
retooled machine-building sector-by 1990 about
60 percent of the present stock of machinery is to
be "new"-but the ambitious machine-building
output goals for 1986-90 do not seem to allow the
necessary downtime for enterprises to install new
equipment and learn to use it.
? The plans imply that Siberia will continue to be
developed on a priority basis, while, at the same
time, resources for new construction will be cut
back drastically throughout the economy. Just to
continue development of Siberia's natural re-
sources (especially energy) will require massive
infusions of capital and labor in contrast to a
growth strategy based on renovation.
? The five-year plan goals for savings of energy,
metals, and other materials far exceed the low
level of savings realized during 1981-85. The long
leadtimes necessary to design and produce more
efficient equipment make it highly unlikely that
substantial savings could be realized in this
decade.
Ridding the economic program of inconsistencies
and contradictions will not, by itself, spell smooth
sailing for industrial modernization. Indeed, Gor-
bachev's high expectations for MBMW raise doubt
about the feasibility of his ambitious modernization
goals. For his strategy to succeed, the civilian
MBMW sector must be able to efficiently absorb a
very large amount of investment-an 80-percent
increase over 1981-85 levels-in a very short time.
Moreover, it must change the structure and mix of
its output to a degree unparalleled in post-World
War II Soviet history. This is a difficult task for an
industry accustomed to producing large lots of a
small variety of equipment for use in plants being
constructed under highly standardized designs. In-
deed, the increased pressure to accelerate output of
producer durables may prompt machine builders to
sacrifice innovation for cosmetic change and repro-
duce the same output mix that has prevailed for
years-only faster and in a more slipshod manner.
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? The age and condition of plants in Soviet industry
bring into question the feasibility of trying to
modernize through renovation. Many facilities in
the European USSR are so old that they would
have to be gutted to house more sophisticated
machinery.
? Planned renovation projects probably exceed the
capabilities of the chronically poor-performing
Soviet construction industry.
? Reallocation of investment to civilian machine
building and energy may squeeze other vital
sectors-especially metals and transportation-
risking production bottlenecks.
? Exogenous constraints-labor shortages and ris-
ing raw material costs-will remain severe.
? Hard currency constraints and Soviet problems in
using foreign technology will limit the potential
contribution of imports.
It is also doubtful that the S&T revolution that
Gorbachev envisions will result in large quantities
of modern equipment coming off Soviet production
lines in the 1990s. Creating and efficiently using
advanced machinery is something the Soviet system
has never done well. Today, the development of
sophisticated automated technologies is a rapidly
changing and high-risk business: the pace of im-
provements in high-technology products and pro-
duction processes in the West is increasing rapidly,
largely because of the free flow of information and
competitive pressures in Western market econo-
mies. In the Soviet economy, where performance is
judged by achievement of annual quantifiable goals
and rewards are predetermined by central authori-
ties, the rapid creation and widespread assimilation
of sophisticated technologies-let alone product
improvements-may be incompatible with any sys-
tem of management and rewards that the Gorba-
chev regime is willing and politically able to imple-
ment. The relative successes of the Soviet defense
industries in the past have resulted primarily from
their priority access to scarce high-quality re-
sources and the willingness of the regime to ignore
the high cost of success-a condition that cannot be.
applied economywide.
Prospects
Gorbachev clearly hopes that the economic divi-
dend from his dynamic management style and no-
nonsense approach will provide the breathing space
necessary to work out the details of industrial
modernization. We believe, over the next few years,
that vigorous leadership and mobilization of effort
will probably provide this economic dividend-even
if industrial modernization gets off to a slow start.
Nonetheless, continuing bureaucratic resistance
and exogenous factors-bad weather and electric-
ity shortages caused by the Chernobyl' nuclear
disaster, for example-could make the achievement
of this economic dividend difficult.
In either case, Gorbachev is under considerable
pressure to work out the flaws in his modernization
strategy as quickly as possible. The military ap-
pears to have bought into the General Secretary's
program to modernize the civilian economy-at
least for the time being-out of the belief that
defense will be a major long-term beneficiary.
Because of large investments in defense facilities
over the last decade, the military is well positioned
to accommodate a shift in resources to civilian
machine building over the next couple of years. If
Gorbachev tries to curb defense demands for ma-
chine building much longer, however, the military
could become restless while waiting for the spillover
from improvements in the civilian technological
base. If this occurs, and Gorbachev reacts by
cutting resources to civilian machine building, the
pace of modernization is likely to trail off, leading
to an even wider East-West technology gap in the
1990s and making it more difficult for Moscow to
match Western productivity gains in both the
defense and civilian economies.
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Bolivia: Struggling for
Economic Recovery
The economic stabilization program launched by
President Paz Estenssoro last August to strengthen
the private sector and improve external accounts
has achieved sufficient success to persuade some
foreign lenders to offer new credits. La Paz has
obtained a standby loan from the IMF and has
initiated rescheduling talks with the Paris Club and
commercial banks. We judge, however, that the
government's efforts to sustain an economic recov-
ery will be constrained by its limited ability to
attract foreign investment, boost exports, and resist
inflationary wage pressures from leftist labor
unions.
Halting the Economic Tailspin
When Paz Estenssoro took office in August 1985,
the economy was in chaos. Public finances, which
had been deteriorating steadily since 1982, reached
a new low in 1985 when the Central Bank was
forced to print money to finance the public sector,
according to the IMF. Inflation was soaring at an
annual rate of more than 20,000 percent in Sep-
tember 1985; the official exchange rate was pegged
at 67,000 pesos per dollar, while the parallel rate
pushed past 1 million; and arrears on the public
external debt totaled more than $700 million. In
addition, per capita income had fallen by about 30
percent over the past 10 years. Almost immediate-
ly, Paz Estenssoro instituted an economic program
designed to stabilize the economy and to restore
government control over the operations of the
Treasury, the Central Bank, and state enterprises.
Although La Paz expected these measures to pro-
duce a modest recovery in the short run, hopes were
dashed when the prices of key exports declined. In
October, world prices for tin fell below domestic
production costs, forcing several mines to close.
Natural gas, which in recent years has eclipsed tin
as Bolivia's largest export earner, also declined in
Bolivia: Consumer Price Increase,
1984-86 a
100 1 11 III IV I II III IV I lib 111b IVb
1984 1985
a Quarterly data annualized.
b Estimated.
price. We estimate that export earnings will drop
10 percent and unemployment will rise by 450,000
this year. In addition, flooding around Lake Titica-
ca over the past eight months has left over 83,000
homeless and destroyed 12,000 hectares of crops,
according to the US Embassy.
To overcome the financial crisis, La Paz ap-
proached the IMF last year to discuss arranging its
first standby loan since 1980. The bungling eco-
nomic policies and payment defaults of previous
administrations had dried up Bolivia's international
sources of credit. Because of his domestic populari-
ty and de facto majority in Congress, Paz Estens-
soro was able to break with Bolivia's past refusal to
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Paz Estenssoro's New Economic Program
Paz Estenssoro announced his new economic plan,
designed to strengthen the private sector and invig-
orate foreign trade, in August 1985. The plan took
effect in September when he froze public-sector
wages for 10 months, removed price and exchange
controls, and halted runaway growth of the money
supply. The program produced striking improve-
ments, according to the US Embassy: inflation
dropped from an annualized rate of 23,447 percent
in September to 1,900 percent in April, the peso
has stabilized in both official and parallel mar-
kets, and the government has begun to receive
revenues from state enterprises.
The government also enacted a series of adminis-
trative measures intended to strengthen the econo-
my over the longer term. La Paz prepared its first
federal budget in five years, a major step toward
regaining control of the economy and providing the
statistics needed to receive foreign aid and loans. It
audited its Central Bank, and, according to the US
Embassy, brought charges of graft against 93
former officials. Finally, it passed a comprehensive
tax reform, a crucial step-Bolivia's tax revenues
have amounted to less than 1 percent of GDP, the
lowest share in the world. Taxes will be easier to
collect and enforce and are expected eventually to
equal 10 percent of GDP per year, according to the
US Embassy.
The last major step of the new economic plan is to
streamline the public sector. Paz Estenssoro aims
to eliminate up to 200,000 excess government
positions and to decentralize large state enter-
prises. Enactment of this step is currently on hold,
awaiting the inflow of funds from the IMF and
other sources to be used for severance payments to
those laid off.
Bolivia: Financing Needs, 1986 a Million US $
Capital requirements
1,293
Imports of goods
609
Interest on external debt
267
Other factor payments
105
Amortization
312
Multilateral
63
Bilateral
164
Commercial banks
85
1,293
Direct foreign investment
25
Use of reserves
51
Transfers and other net service payments
4
Other capital flows (net)
62
Rescheduling (estimated)
344
Capital inflows
246
World Bank/IDA
42
plan to raise domestic energy prices.
deal with the Fund. Standby negotiations with the
IMF, originally expected to be completed by the
end of January, hit a snag, however, when the
economic program lost momentum. Partly in re-
sponse to these developments, Paz Estenssoro re-
shuffled his Cabinet and directed his new ministers
to revive the program. The government was able to
hold prices steady in February and March, and the
exchange rate stabilized. In April, Congress passed
a major tax reform that the IMF deemed essential,
and, in late May, La Paz and the IMF agreed on a
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Real GDP Growth Combined Public-Sector
Deficit a
As a share of GDP.
First instituted in November 1982.
Estimated.
Change in Real National
Minimum Salaryb
The IMF Standby and Other Financial Inflows
Approval of the $55 million standby loan on 19
June will trigger the release of project loans and aid
from the World Bank and foreign governments.
According to the World Bank, if Bolivia covers its
external financing needs of $1.3 billion this year, it
can avoid a further erosion of GDP. Formal talks
with the Paris Club to reschedule some $1 billion in
loans and loan guarantees took place on 24-25
June. La Paz hopes to reschedule an additional
$870 million in non-Paris Club debt on similar
terms and to obtain up to $143 million in new loans
and aid from Paris Club lenders, according to the
US Embassy. Bolivia has already met once with its
commercial bank lenders, and talks will begin in
earnest this summer. The banks, according to the
US Embassy, have proposed to roll over Bolivia's
entire commercial debt of $670 million in exchange
for an $85 million cash payment this year; private-
ly, bankers have indicated to the Embassy that they
would accept $10 million
Bolivian efforts to comply with the requirements of
an IMF program are likely to be haphazard, at
best. For example, demands on the federal coffers
will increase this summer when La Paz removes the
public-sector wage freeze and makes severance
payments of an estimated $50 million to recently
dismissed government employees. We believe that
La Paz will find it politically difficult to deny
demands for larger-than-targeted wage hikes, wors-
ening its chances of keeping its fiscal deficit below
the IMF target of 6.4 percent of GDP. In addition,
the hikes in wages and domestic energy prices may
rekindle inflation.
Limited potential to attract foreign investment and
boost exports will hamper efforts to sustain an
economic recovery. Although Paz Estenssoro's sta-
bilization program has produced some impressive
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Bolivia: Balance of Payments, 1984-86
Million US $
Current account
-129
-281
-416
Trade balance
232
69
-48
Exports, f.o.b.
724
621
561
Imports, c.i.f.
-492
-552
-609
Services and transfers
-361
-350
-368
Net interest
-334
-317
-267
Capital account
-163
-103
21
Financial gap
-292
-384
-395
Change in official reserves
148
30
-51
results, Bolivia's record as an impoverished, unsta-
ble, and unpredictable nation continues to discour-
age foreign investment. At least for the near term,
La Paz will rely solely on foreign aid to restructure
and modernize its mining and hydrocarbons indus-
tries. It will also continue to look for new export
markets for these products and has already ap-
proached Brazil, Peru, and Chile.
Political Challenges to the. Adjustment Program
We believe that the government has, at best, an
even chance of meeting its economic goals and
moving toward a long-term economic recovery. The
Communist-dominated labor unions, historically a
disruptive force in Bolivian politics, represent the
majority of workers. Although the union movement
is currently divided, worsening economic condi-
tions, shrinking real wages, or rising taxes could
lead to large-scale work stoppages and violence.
Should labor agitation provoke major social unrest,
the Bolivian military would most likely move to
restore order, possibly intervening once again in the
political process. If labor unrest or military pres-
sure force Bolivia to seriously compromise its eco-
nomic program or agreements with foreign lenders,
disbursements of IMF funds and foreign aid would
be delayed. With imports already cut to the bone
and export performance weak, La Paz would be
unable again to service its foreign debt, bringing
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China: Alternative Energy
Sources for Rural
Development?
China's interest in developing alternative energy
sources, such as solar, wind, and biogas power,
stems largely from problems in supplying the grow-
ing demand for energy in rural areas. Much of this
growth in energy demand stems from the economic
reforms implemented since 1978 to stimulate rural
development. Traditional sources of energy (fire-
wood, crop waste) are already overused, and, al-
though China has progressed in rural development
of commercial energy sources-including small lo-
cal coal mines and hydrostations-many rural ar-
eas lack these resources. Although alternative
sources alone will not solve the rural energy prob-
lem, they can play a major role where other
resources are inadequate or impractical. Beijing is
particularly interested in harnessing China's con-
siderable solar and wind potential, and has talked
with US, Swedish, and Japanese companies about
acquiring appropriate technologies. To minimize
foreign exchange costs, however, we expect China
to seek technology transfers or coproduction agree-
ments rather than large purchases.
The Rural Energy Problem
China's peasants, which comprise 80 percent of a
population of more than 1 billion, have long de-
pended on crop wastes and firewood for fuel. As the
population has grown, these sources have been
increasingly diverted from use as fertilizer, animal
fodder, and building materials. In addition, as
Chinese officials have acknowledged, widespread
deforestation has brought about severe soil erosion.
To stem the growth in consumption of traditional
fuels, China in the 1960s and 1970s tried to develop
rural sources of commercial energy-locally run
coal mines and hydropower stations-that would be
more efficient and not tax national networks that
supply urban areas. Beijing also tried to protect and
replenish forested areas and promoted the use of
China: Rural Energy Demand, 19831
0
N
O
Stalks/crop waste
23
innovative energy sources, such as biogas pits that
use human and animal wastes to provide methane
for rural cooking and heating.
By 1984, coal had become the largest source of
energy in the countryside, and small hydrostations
with a capacity of less than 12 megawatts (MW)
accounted for one-third of China's hydropower
capacity. Even so, traditional fuels still accounted
for one-half of overall energy supplies and 90
percent of rural household consumption. Deforesta-
tion remained a serious problem, and, although
biogas use enjoyed some success, it provided less
than 1 percent of rural energy needs.
Secret
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Rural Energy Resources: Status and Plans
Firewood/Crop Wastes. China is trying to improve
the efficiency of biomass energy consumption; cur-
rently, only about 10 percent of its potential energy
is being extracted. In 1984, Beijing began a cam-
paign to promote the use of more efficient wood-
burning stoves in peasant households. According to
the Chinese press, the new stoves use only one-half
as much firewood as the old models. About 25
million peasant households have replaced their
stoves in the last two years. Beijing hopes to have
the new stoves in 100 million peasant households
by 1990, saving the firewood equivalent of 33
million tons of coal per year.
Wind Power. China claims to have wind potential
that in Inner Mongolia alone totals 540,000 MW,
nearly equal to China's entire hydropower poten-
tial but much more difficult to exploit. China
produces about 10,000 wind generators per year,
mostly in 50- and 100-watt sizes, compared with
US generators in the 300- to 1,000-kilowatt range.,
China's windpower devices, moreover, have serious
quality problems, and most, apparently, have had
to be given away.
Solar. China claims it has large areas that are
among the world's most suitable for solar power.
Press reports to date, however, indicate that China
Local Coal Mines. The sharp rise in China's local
coal production actually led to a lower free market
price in 1985, although by press accounts it was
still four times the state price. These mines pro-
duce coal quickly by exploiting the largest veins,
but make later extraction of the remaining coal
much more costly. Even so, Beijing expects local
mines of all sizes to supply about two-thirds of
rural coal demand by the end of the 1980s
Small Hydrostations. Small hydrostations provide
8,500 megawatts (MW) of China's 24,000 MW of
hydropower capacity. They produce about 25 bil-
lion kilowatt-hours of electricity per year, 42
percent of total rural consumption of electricity.
China hopes to at least double small hydropower
capacity by the year 2000, with consumers paying
all costs. Small hydropower installations are lim-
ited mostly to the south and southwest, where
there is hydropower potential..
has used solar power for little more than solar
cookers in Gansu and for greenhouses in Tibet.
Biogas. China now estimates that it has 4.5 mil-
lion biogas pits, supplying energy for 20 million
people, and hopes to double the number by 1990.
Methane pits work best in warmer regions but
generally provide only a supplemental source of
fuel for heating and cooking.
Geothermal. China's practical sites for developing
geothermal resources are limited. Most geother-
mal sites lie in remote mountainous areas such as
Tibet, where China has built a 7-MW power plant
at Yangbajing, now being expanded to 22 MW. A
3-MW generator has been ordered from Japan and
is scheduled for operation by February 1987. A
geothermally heated greeenhouse covering about 5
hectares is under construction, which is intended to
become a key supply of vegetables for Lhasa.
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Leadership Interest in Alternative Energy Sources
According to Embassy reporting, the State Council
in 1984 created a special committee-the Rural
Energy Leading Group-to assess energy prob-
lems. Vice Premier Li Peng, an energy expert,
heads the group. Other participants include repre-
sentatives from the State Planning Commission,
the State Science and Technology Commission,
and the China Rural Development Research Cen-
ter. Although our information is sketchy, conversa-
tions between Chinese officials and Western busi-
nessmen suggest that this group is behind the
current interest in alternative energy sources.
Press reports indicate that some provincial govern-
ments have also set up rural energy groups, and
Beijing apparently has authorized them to deal
directly with foreign governments; for example,
Denmark has signed a memorandum of under-
standing with Tibet to provide feasibility studies
on wind powered generators. Most contacts with
foreigners, however, have been initiated by the
national-level leading group.
These additions to rural energy supplies were offset
by economic reforms in the countryside that since
1978 have accelerated growth in rural energy
demand. Higher peasant incomes from private plots
and sideline occupations have increased demand for
fuels for heating and cooking and for electricity to
power newly available consumer goods, such as
televisions, refrigerators, and washing machines.
More important, policies to develop township indus-
try have created a rapidly growing rural industrial
sector whose demand for coal, oil, and power
outstrips the growth in rural supplies. According to
the Chinese press, rural industry is not only grow-
ing rapidly, but also is concentrated in energy-
intensive industries such as machine building and
cement. Furthermore, much of the present capital
stock of rural industry consists of older machinery
and equipment salvaged from urban factories under
renovation. Beijing claims this equipment is incred-
ibly wasteful; compared with urban factories, for
example, township metallurgical enterprises report-
edly consume three and a half times as much
energy per unit of output.
Beijing estimates that the annual shortfall current-
ly facing rural industry and households is 80
million metric tons of coal equivalent, which is
twice the electric power shortfall facing China's
urban industry. Furthermore, Beijing estimates-
and we agree-that, despite its best efforts, the
rural shortfall by the year 2000 could reach 200
million tons of coal equivalent, and traditional and
commercial energy sources would satisfy only 72
percent of demand compared with the current 84
percent.
Addressing the Problem
To supplement their efforts with biogas, the Chi-
nese are pursuing the use of solar, wind, and
geothermal installations. Chinese officials
are seeking inter-
national cooperation in developing technologies
that are easy to use and maintain, that are practical
to build and use on a scale suitable for rural
operation, and that China can learn to manufacture
and eventually export.
China has approached the US Government on
bilateral cooperation in windpowered generators
and in the construction of a model village using
renewable energy sources. Both projects would use
mainly existing technologies and could provide
ready-though small-sales for US firms. The
Chinese, however, expect firms to provide free
goods and technology before they agree to purchase
equipment or know-how, which may dampen the
interest of some firms.
China is also considering Swedish windpowered
generator technology and Japanese proposals for
the development of solar-generated electricity (pho-
tovoltaic, or PV). PV equipment, at present, is
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Secret
prohibitively expensive, but Japanese suppliers
claim costs will drop to acceptable levels by the
1990s.
Japan hopes its coop-
eration with China will provide opportunities to
experiment with and perfect its solar energy tech-
nology.
We believe alternative energy sources will take
time to develop but can provide power in many
rural areas that lack access to coal, hydropower, or
electric power grids. They will at best, however,
offset a fraction of expected rural shortfalls nation-
wide by the end of the century; China will continue
to rely on conventional commercial and traditional
energy sources.
We believe the United States and Sweden have an
edge in China's alternative energy market for the
next few years because their windpowered technol-
ogies are already commercially feasible. Japan
could capture a share of the market, however, if it
is able to develop solar energy at a competitive cost.
In any case, the market is likely to be small; budget
and foreign exchange restraints will probably limit
China's purchases to prototypes and technology
transfer agreements.
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Energy
Spot Oil Price Spot oil prices have been slowly falling over the past four weeks. Key North
Developments Sea and US crudes are selling for $11.45 and $14.05 per barrel, respectively,
and the world average price has dropped approximately 70 cents in a month to
$14.34 per barrel. OPEC production remains high and, without agreement at
this week's meeting to reduce output, prices will remain weak. A large volume
of Middle Eastern oil, still on the water, is due to arrive in markets in late
June, and the need to aggressively market the crude also will keep downward
pressure on prices for at least the next few months.
Italian Difficulties Italian officials say Rome is willing to reduce oil imports from Libya further if
in Cutting Libyan other West European countries do so, but is likely to have great difficulties.
Oil Ties Italy reportedly already has ceased purchasing Libyan crude on the spot
market and failed to renew a 25,000-b/d contract that expired this month.
Rome still depends on Libya for about 15 percent of its total oil needs,
according to the US Embassy, and currently imports about 300,000 b/d from
Libya. This figure is higher than it was last year, in part because Tripoli
recently resumed paying with oil some of the $800 million it owes to Italian
companies. Both Prime Minister Craxi and Foreign Minister Andreotti have
said that the debt payments of about 60,000 b/d, as well as another 60,000
b/d the state-owned oil company receives from its interest in a Libyan oilfield,
cannot be eliminated. Therefore, cutback efforts probably will center on
contracts for more than 90,000 b/d held by Montedison, the huge chemicals
conglomerate, and 60,000 b/d purchased by the Tamoil refinery, in which
Libya has a 70-percent interest. Although alternative suppliers are available,
Montedison would lose the concessionary rates Libya offers, would have to pay
higher transportation costs, and would have to make minor adjustments to
equipment at the refinery-altogether increasing costs by about $1.85 per
barrel. Montedison is controlled by several of the country's politically powerful
leading industrialists, however, and company officials have said that they see
no reason to break off profitable economic relations with Libya. Rome also can
do little to sever Tamoil's Libyan ties. If the government could persuade
Montedison to purchase oil elsewhere, Italy's dependence on Libyan crude
would be reduced by almost one-half.
19 Secret
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Secret
More Brazilian New discoveries in the Campos Basin increase Brazil's chances of becoming
Oil and Gas self-sufficient in oil and gas by the mid-1990s. Initial exploration indicates the
Discoveries discoveries could triple Brazil's oil reserves to over 6 billion barrels and nearly
triple gas reserves to 242 billion cubic meters. The new discoveries are located
in deep water, but the Brazilian national oil company does not believe this will
hinder development. These new discoveries probably will provide significant
quantities of oil and gas in three to four years. If additional drilling confirms
the new oil discoveries, Brazil's reserves would approach those of Norway.
Continued exploration in the Campos Basin and other offshore areas is likely
to result in more discoveries, and Brazilian oil reserves might eventually equal
those of the entire North Sea.
Dropoff in IMF/IBRD The two major multilateral financial institutions may become negative net
Net Lending lenders to LDCs. On the basis of IMF data, we estimate that the Fund will
take in about $1 billion more from LDCs than it lends out during 1986 as re-
payments on 1982-84 lending begin to mount. We expect a similar net inflow
of IMF credits during 1987. Meanwhile, the IBRD projects that its net
transfers-disbursements less repayments of principal and interest-will be
close to zero for the Bank's current fiscal year ending 30 June, continuing a
downward trend begun in 1984. World Bank officials claim that this is only
cyclical, although the IBRD has drawn criticism from some financial observers
for not doing more to assist LDCs in a period when commercial bank lending
has fallen sharply. In our judgment, the installation of new World Bank
President Barber Conable-who has publicly stated his desire to expand the
IBRD's role, particularly as a key element of the Baker Initiative-should lead
to a resurgence of new loans to LDCs over the next few years.
Secret 20
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Secret
The Gambia's The Gambia has obtained a 15-month IMF standby arrangement worth
New IMF Package $15.5 million. The US Embassy reports that the program will require Banjul
to raise its tax on rice and to match Senegalese prices for peanut and
petroleum products in an effort to reduce illegal cross-border trade. According
to open sources, The Gambia also will lay off another 1,500 civil servants, in
addition to the 3,000 fired last October, as part of a four-year austerity
program. In addition, the government reportedly has agreed to recruit foreign
economic advisers to assist the President and the Central Bank. These long-
overdue reforms carry significant political risks to President Jawara's already
vulnerable government, which already weathered one coup attempt in 1981
and faces the threat of intervention by its larger neighbor Senegal.
Japan Monitoring The Japanese press reports the Trade Ministry is developing an export
Trade Problems surveillance system to alert policymakers to new areas of trade friction. The
system, to be in place by September, will monitor export statistics, the
economic condition of affected industries in Japan's trading partners, and
prospects for foreign restrictions on Japanese exports. If a product is deter-
mined to be sensitive, the Trade Ministry reportedly intends to advise
exporters to slow sales. Aware that Japan's trade surplus is likely to grow
throughout 1986, officials and top business leaders are increasingly concerned
about restrictive trade legislation in the United States and the EC. The head of
Japan's most influential business organization, for example, recently floated a
proposal for "managed trade" between Japan and the United States. Imple-
mentation of the proposed surveillance system is uncertain. Moreover, the
Trade Ministry would probably face strong opposition from the business
community if it tried to use the procedure to impose formal export restrictions.
Global and Regional Developments
Possible Chinese China is claiming Indonesia has asked it to launch the Palapa B-2P communi-
Launch of cations satellite by 1988. Following the US shuttle loss, Indonesia approached
Indonesian Satellite the West European Arianespace and was offered a launch slot in 1988. The
subsequent failure of an Ariane launcher, however, has made Arianespace's
schedule uncertain. The US and Arianespace setbacks may have led Jakarta to
believe that neither could launch the Palapa before the presidential election
scheduled for 1988. The Palapa B-2P is intended to replace an older satellite to
ensure continued internal communications. The Indonesian ruling party is
counting on the use of communications satellites to broadcast its political
campaign messages. The Chinese have offered commercial launch services but
have successfully placed only two satellites in geosynchronous orbit, and
Indonesia's alleged request suggests desperation.
21 Secret
27 June 1986
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Secret
Reserve Position Many of the 15 major debtors will improve their reserves-to-import ratio for
of Major Debtors the current year-based on lower estimated imports for 1986-despite a
projected decline in their reserves. Official import estimates, however, may
understate actual needs. The Latin and Asian debtors continue to show
comfortable reserve levels, but the African countries have little or no reserve
cushion to sustain needed imports. To sustain their reserve levels, Latin
American countries have the highest debt/GNP ratio of the three regions,
followed closely by Africa. Major shifts in reserve levels have occurred only in'
Argentina and Nigeria.
Key LDC Debtors: Foreign Exchange Reserves
Reserves a Reserves-to-Import Ratio, 1986 b
(billion US $) (number of months)
a Total reserves minus gold; IMF data for the first quarter 1986.
b Projected.
c CIA fourth-quarter estimate.
d CIA first-quarter estimate.
Less than half a month.
Reserves in Central Bank only.
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27 June 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Secret
National Developments
Developed Countries
Canadian Province To Ontario is proposing to reduce barriers to foreign and domestic financial
Open Securities institutions' and other businesses' participation in its securities industry, which
Industry to accounts for 75 to 80 percent of Canadian stock market trading. The province
Foreign Firms plans to raise the limit on foreign dealers' ownership of Canadian securities
firms from 10 to 30 percent, allow foreign full-service firms to enter the
market, and permit foreign and domestic banks and other companies to own up
to 30 percent of a Canadian securities firm. To meet its 1 January 1987 target,
Ontario must not only change its own regulations, but also persuade the
federal government to alter national legislation affecting the banking and
insurance industries. Opposition from the House of Commons Finance Com-
mittee probably will delay implementation of Ontario's proposal.
23 Secret
27 June 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Secret
Japanese Economic Japan's real GNP fell 0.5 percent in the January-March quarter-the first
Slowdown Revives quarterly drop in 11 years-largely because of the deflationary effects of the
Austerity Debate strong yen. Export volume dropped almost 5 percent from the previous quarter,
capital investment in the manufacturing sector slowed, and unemployment
while low compared with that in other industrial countries-now stands at a
record 2.9 percent. The bad economic news was generally anticipated,
however, and should have little impact on legislative elections next month. The
current slowdown is nonetheless strengthening the arguments of those favoring
temporary economic stimulus. Influential business leaders and politicians in
the ruling party are increasingly calling for a major public works program. The
influential Administration Reform Council, which supports Tokyo's fiscal
austerity, laid the groundwork for such a move in its final report this month by
recognizing the need for "flexible" measures in "emergencies." Whatever the
composition of the Diet after elections, another quarter of near-zero growth
would move the government closer to declaring an economic emergency and
adopting an expansionary budget.
Japanese Semiconduc- According to press reports, Japanese semiconductor producers plan to reduce
tor Firms Cut Planned plant and equipment investment by an average of 30 percent for the fiscal year
Investment that began in April. Although we believe that uncertainty over the world
semiconductor market's recovery and Japan's current semiconductor overca-
pacity will keep investment low, Japanese manufacturers may be overstating
the drop to avoid US criticism that heavy investment will depress semiconduc-
tor prices and thus aggravate trade friction. The US Embassy indicates that
Japanese semiconductor firms are increasing research and development spend-
ing, some of which might be used to upgrade production equipment. Japanese
companies, moreover, still appear to believe heavy investment is necessary to
stay competitive.
Secret
27 June 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Projected Shifts in A recent study of future manpower needs in Britain points to a continued shift
British Labor Market into service industries and small businesses. Based on interviews with 3,000
employers, the Institute of Manpower Studies concludes that between now and
1990 the sharpest fall in employment will occur in the heavy engineering,
energy, manufacturing, and construction industries. Jobs will grow most
rapidly in financial and business services, leisure industries, and commerce. In
occupational terms, demand will be strongest for managers, skilled craftsmen,
engineers, and scientists, while unskilled workers face a bleak future. With
these findings in hand, many groups, including Conservative supporters of
Prime Minister Thatcher, are pressing the government to expand and improve
training programs both for young people entering the job market and for the
long-term unemployed-many of whom have no marketable skills. Critics
claim that existing programs do not meet employers' needs and pale in
comparison with the more rigorous, skill-specific training provided by competi-
tors such as Japan, West Germany, and France.
Bonn To Unveil Details of major tax cuts for 1989 and 1991 reportedly will be unveiled this
1989-91 Tax Cuts year and introduced in parliament right after the January election. According
to a West German newsletter that often accurately reports insider information,
the cuts will total at least $22 billion and be introduced in roughly equal
installments. About one-half of the $22 billion would be financed by cuts in
subsidies and by an increase in the VAT. A $3.4 billion tax cut already is
scheduled for 1988, and a $4.3 billion cut took effect last January. Although
Bonn started talking about major tax reform last year, it has kept the timing
vague. The reported timing would be intended to achieve maximum political
impact, while defusing international calls for West German reflation.
Spain Pushing The Spanish National Telephone Company (Telefonica) and Corning Glass
Joint High-Tech have set up a joint venture that will provide Spain with its first optical fiber
Projects manufacturing facility. Scheduled to come on stream in mid-1988, the plant
will further Madrid's ambitious telecommunications program, which envisions
the construction of an optical fiber communications network. The project is
part of the government's reindustrialization effort, and is one of several deals
between Telefonica and leading multinationals aimed at securing foreign
technology, capital, and managerial expertise. Other ventures have been
concluded with AT&T for custom-made microchips, Fujitsu for computer
equipment, and Hewlett-Packard for computer-aided design plotters. Foreign
firms have become increasingly confident of Spain's economic and political
stability-particularly since its entry into the EC and the reaffirmation of its
NATO ties.
25 Secret
27 June 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Greek Officials
Admit External
Target Unobtainable
Secret
27 June 1986
Athens's current account deficit target of
$1.7 billion for this year is unobtainable and that the deficit is likely to be
closer to $2.5 billion. additional measures will be
necessary to prevent a further deterioration of the Greek economy, but are
unlikely before the October municipal elections. These measures may include
further import restrictions. Greece's foreign exchange reserves have been
falling steadily this year, and a banking source has told the US Embassy that
reserves at the end of May were $320-360 million-less than two weeks' worth
of imports. A further decline of foreign exchange reserves could force Athens
to seek additional assistance from the EC. At a minimum, Greece will be
required to continue to pay high margins on future borrowings to retain access
to foreign credit.
Less Developed Countries
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Secret
Libyan Black-Market Libyans are increasingly turning to a flourishing black market as food and
Activity Increasing goods supplies dwindle. obtaining goods and services
now depends on who you know, how much you are willing to pay, and how long
you will stand in line. Most products, however, are not available in Tripoli
from government-run stores, and store managers hoard goods for friends or
those willing to pay nearly double official prices. So far, the government has
tolerated such activity. Moreover, a true black market has evolved to satisfy a
growing demand for drugs, alcohol, foreign currency, auto spare parts, and
cigarettes.
Although the
current shortages are not critical-starvation is not a problem-domestic
disgruntlement with the regime's economic and foreign policies is undoubtedly
increasing.
Tunisian Structural Tunis has unveiled new austerity measures aimed at trimming domestic
Adjustment Program demand, redressing mounting financial imbalances, and promoting exports
Defined that have sagged as a result of the weak oil market and a severe drought this
year. According to the US Embassy, investment will be trimmed by
$170 million this year and domestic prices raised by almost 6 percent to help
curb import growth. Moreover, the government may devalue the dinar by 15
percent to stimulate tourism and manufactured goods exports that account for
60 percent of foreign exchange earnings. Even with planned cuts in domestic
spending, Tunis probably still faces a financing gap of $500 million this year,
which the government hopes to fill through foreign borrowing. The debt
service ratio, however, is near 30 percent, and reserves cover less than two
weeks of imports. While the measures are designed to minimize the impact on
the neediest, disgruntlement over unemployment and the government's intran-
sigent position on wages is sure to rise.
Economic Conditions The Afghan conflict has resulted in high inflation and labor shortages in the
in Afghan Countryside agricultural regions of the country, according to a recent traveler to the area.
While government subsidies and price controls have kept inflation at about 25
percent annually in Kabul, in provinces such as Qandahar it has averaged
about 200 percent over the last two to three years. The exodus of refugees has
also caused severe labor shortages in various regions. Unskilled day laborers in
Qandahar now earn about 500 afghanis per day, approximately $3.70 at the
bazaar exchange rate-compared to 50 afghanis per day, about $1.20, in 1977.
The labor shortage has cut critical maintenance of the country's traditional
irrigation systems. There has also been a shift from labor-intensive cash crops,
such as cotton and sugar beets, to food crops, such as wheat, according to a
separate source. To reverse this trend, which is hurting the regime's ability to
earn hard currency, Kabul has introduced large subsidies for cotton and sugar
beet production, but, to date, has had little success.
27 Secret
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Secret
Bhutto's Proposed Benazir Bhutto, head of the opposition Pakistan People's Party (PPP),
Economic Policies announced a "people's budget" during a visit to Lahore last week. Several of
for Pakistan her budget proposals are likely to alienate important sources of support for her,
election bid. The budget calls for a one-third or $666 million reduction in
defense spending that would anger the military, a group whose tolerance she
needs. Businessmen are uneasy about her call for an almost doubling of the
minimum wage; the textile industry, Pakistan's largest, would be severely
affected by such a move. The proposed measures will probably cost Bhutto
needed financial support from the business community while a proposed
agricultural tax will antagonize Pakistan's powerful landowners. At the same
time, there are indications that support for Bhutto among workers and
peasants is causing the Junejo government to reconsider some policies,
including using some of the windfall gains from lower oil prices for a new na-
tional employment fund.
Intergovernmental Foreign aid donors pledged $2.5 billion in new development assistance for the
Group Pledges fiscal year that began 1 April at last week's annual coordinating session in The
Indonesian Aid Hague. Although it is an increase of $100 million over 1985, the amount is
much less than hoped for by Jakarta-net financial requirements for the year
might balloon to $5 billion, compared with just over $2 billion in each of the
previous two years. Aid donors, however, beset by their own budget problems,
were reluctant to substantially increase development assistance. This has
already forced Jakarta to dip into an estimated $2.5 billion in unused credit
lines and will encourage the government to seek new sources of capital in the
private market. The result will probably be a major increase this year in the
country's debt service burden, which totaled nearly $6 billion in 1985.
Soviets Scrap Soviet officials have notified Western contractors bidding for a new $1 billion
Plans for olefins complex at Budennovsk that the project has been canceled for financial
Chemical Complex reasons. The complex was to have supplied a variety of plastics for consumer,
industrial, and, possibly, military use. Moscow now plans to revamp an existing
facility at Budennovsk and to install a linear, low-density polyethylene plant
there using Western technology. Another chemical project under negotiation
with Western firms-a polyester fiber complex near Ufa-is still hanging on,
albeit in reduced form. Although the feedstock plant will be the same size as
originally designed, polyester fiber capacity will be halved. Hard currency
constraints caused by the decline in oil prices probably are responsible for the'
cutbacks in planned purchases of Western chemical technology and equip-
ment. Moscow will find it difficult to meet the goals of the "chemicalization"
program without these facilities.
Secret 28
27 June 1986
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
Secret
China Reacts Beijing is reacting cautiously to the increasingly vocal opposition in Hong
to Hong Kong's Kong to the construction of the Daya Bay Nuclear Power Plant, about 50
Antinuclear Power kilometers north of the territory in Guangdong Province. The opposition,
Movement which claims to have gathered 80,000 signatures, is attempting to force the
local utility, China Light and Power Co., Ltd., to withdraw from the joint
venture and to pressure the Hong Kong Government to cancel its agreement to
purchase 75 percent of the plant's electricity.
Britain also has a vested interest in squelching the
protests because it is providing the plant's turbines. Nonetheless, the antinucle-
ar movement will be seriously hampered by Hong Kong's traditional apolitical
climate and the lack of democracy.
New Chinese Rail Line China plans to add some 240 kilometers to the single-track, Harbin-Longzhen
railway, extending the line to Aihui on the Sino-Soviet border in northern
Heilongjiang Province. The line will be built along the route of a previous line
destroyed 40 years ago by the Japanese. The Chinese probably will attempt to
complete this rail crossing quickly to facilitate expanding Sino-Soviet border
trade. The two existing rail crossings, Manzhouli and Suifenhe, handled
approximately $30 million in border trade last year. Chinese grain sales and
log purchases accounted for much of the trade
Beijing Forms Telecom- The Ministry of Posts and Telecommunications (MPT) has organized four
munications Enterprise enterprise association groups designed to promote interenterprise cooperation
Groups in an effort to increase efficiency and the level of technology in the
telecommunications industry. Although the individual enterprises retain some
autonomy in planning joint projects, organizing production, and marketing,
the central ministry maintains ultimate control through its sponsorship of the
associations and its position as China's major purchaser of telecommunications
services and equipment. According to the Chinese press, the MPT's estab-
lished groups-which include microwave and television communications-
have bid on 11 international telecommunications projects and have won four of
the bids. The microwave communications group has also been particularly
successful in securing domestic projects. The MPT plans to set up six more en-
terprise groups by the end of June.
29 Secret
27 June 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1
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Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/01/03: CIA-RDP88-00798R000400050004-1