INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000400210004-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: July 27, 2011
• Sequence Number: 4
• Publication Date: October 17, 1986
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
DI IEEW 86-042
17 October 1986
841
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iii Synopsis
Perspective-New Third World Agricultural Competitors:
The Growing Challenge
3 Japanese Fiscal Policy: The View From Tokyo
7 West Germany: Kohl's Economic Agenda
15 Pakistan: Deteriorating Irrigation System
International
Economic & Energy Weekly
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19 Colombia: Impact of the Insurgency on the Economy
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directed to Directorate of Intelligence
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 86-042
17 October 1986
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International
Economic & Energy Weekly
Synopsis
1 Perspective-New Third World Agricultural Competitors: The Growing Challenge
Advances in agrotechnology and shifts to more market-oriented agricultural
policies have transformed a few countries such as Brazil, Malaysia, and Thailand
into major international suppliers of grain and other farm products in recent years,
and we expect their strength to expand through 1990.
3 Japanese Fiscal Policy: The View From Tokyo
Despite Tokyo's commitment to fiscal austerity, the prospect for continued
sluggish economic growth has renewed the debate over whether to use government
spending and taxing policies to stimulate the economy.
7 West Germany: Kohl's Economic Agenda
When Chancellor Kohl visits Washington next week, he will be prepared to defend
his economic policies as well as to emphasize Bonn's perennial concerns over West
European security, Moscow-Washington relations, and inter-German affairs.
Kohl-whose government is likely to win reelection-will resist calls for change,
arguing instead that his next term will focus more on growth-oriented structural
reform programs.
11 Morocco: Economic Problems Persist
A large foreign debt burden and lax fiscal policies limit prospects for additional
foreign borrowing and economic growth. With little chance for improvement in
living standards in the coming years, popular disgruntlement over the economy
almost certainly will increase.
? 15 Pakistan: Deteriorating Irrigation System
Pakistan must address longstanding water management problems if it is to boost
food production for its growing population. Government efforts, however, are
hindered by provincial competition and obstruction by politically powerful
farmers.
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DI IEEW 86-042
17 October 1986
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19 Colombia: Impact of the Insurgency on the Economy
The Colombian economy appears to be on the road to recovery after five years of
sluggish activity, but efforts by the new Barco government to sustain growth may
be hindered by the insurgent campaign against a variety of economic targets.
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International
Economic & Energy Weekly
Perspective New Third World Agricultural Competitors: The Growing Challenge
(Advances in agrotechnology and shifts to more market-oriented
agricultural policies have transformed a few countries such as Brazil, Malaysia,
and Thailand into major international suppliers of grain and other farm products
in recent years, and we expect their strength to expand through 1990. Several
other LDCs, including Argentina, India, and Indonesia, will probably join the
ranks of diversified agricultural exporters within the next five years.F_
Several factors indicate that expansion of LDC farm exports will probably
continue. Most important, nearly all the new Third World agricultural competitors
are efficient producers, relying little on production or export subsidies. Only in
Brazil has such support played a major role in boosting export capacity. We
believe that increased LDC competitiveness will continue to stem primarily from
government policies offering strong production incentives and from lower labor
costs, more productive investments, and natural comparative advantage.
In addition, LDC agricultural sectors have only begun to tap the benefits of
agrotechnology. While several of the new LDC competitors have been using high-
yielding varieties of grain and advanced farm inputs, most have improved their
productivity without substantially relying on the products of agricultural research.
As agricultural export revenues expand, LDC governments will be able to increase
funding for research on and imports of new agricultural technology. Even more ef-
fective application of traditional farming methods will substantially improve
productivity in some LDCs.
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DI IEEW 86-042
17 October 1986
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We believe that additional LDCs could become agricultural competitors in the
1990s. Although overall agricultural prospects in Africa and Latin America are
not good, selected countries-including some in hard-pressed regions-will make
advances in exporting certain commodities. If they follow relatively market-
oriented policies and exploit new farming techniques, several LDCs could achieve
strong growth in exports of selected products-cotton in Panama, Zimbabwe,
Sudan, and Pakistan; and palm oil in Papua New Guinea, Colombia, and Ivory
Coast. Many of these countries, however, will first have to deal with domestic
instability and the politically explosive issue of land reform.
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Japanese Fiscal Policy:
The View From Tokyo
Despite Tokyo's commitment to fiscal austerity, the
prospect for continued sluggish economic growth has
renewed the debate over whether to use government
spending and taxing policies to stimulate the econo-
my. We believe the discussions will focus on whether
a policy of short-term economic stimulus is worth the
long-term costs, particularly decreased investment
and higher inflation
Japanese economic policy makers are in
Japan: Growth in Real Government
Spending, 1977-85
agreement: spending and tax reductions would bring
additional economic growth but not a large increase in
imports. In our judgment, however, this view under-
states the potential role of domestic demand in shift-
ing investment away from export-related industries.
We also believe Japanese economists do not give
enough weight to the impact of higher domestic
growth in slowing the drop in wholesale prices
The near certainty that economic growth will fail to
meet the government's 4-percent target for the fiscal
year ending next March is prompting some leading
politicians, MITI officials, and businessmen to en-
courage the Nakasone government to alter, at least
for the time being, its austere fiscal stance. In our
judgment, the outcome of the debate will depend on
how Tokyo evaluates several factors:
? The effectiveness of a bond-financed increase in
government spending or cut in taxes in pulling the
economy out of its doldrums.
? Whether any such increase would ease trade ten-
sions with Washington.
? How many long-term economic problems would be
caused by this policy shift.
? Most important, whether the deterioration of the
economy is serious enough to require a boost in
government spending to maintain growth.
The Short-Term Impact of Fiscal Policy
an increase in government spending
or a tax cut financed by the sale of government bonds
will, in the short term, boost real GDP.
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DI IEEW 86-042
17 October 1986
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Japan: Effect on Real GNP of a Sustained
10-Percent Increase in Government Spending,
1987-88
I I I i I i i i
0 1987 1988
We believe there is ample evidence to support this
judgment. Simulations conducted with our economet-
ric model of Japan suggest that a sustained 10-
percent increase in government spending-$35 billion
roughly split between government consumption and
public investment-would boost real economic growth
by 2.5 percentage points in the first year and 1
percentage point in the second year. An OECD study
last year came to a similar conclusion.
On the Current Account Balance. Despite the effec-
tiveness of fiscal policy in boosting real economic
growth in the short term, Japanese economic policy
makers claim that faster growth would do little to
reduce the country's large current account surplus.
Indeed, EPA Director General Kondo made this
argument publicly at the recent GATT talks in
Uruguay. Both the Finance Ministry and the EPA
argue that higher Japanese growth has a minimal
effect on imports of commodities because the Japa-
nese economy is moving away from industries that are
heavy users of energy and raw materials. Japanese
models also show only a modest impact on imports of
manufactures from higher growth.
imports by only $700 million.
Japanese Government economists support their judg-
ment on the relationship between the current account
and fiscal policy with results of simulations done on
large econometric models. The EPA model, for exam-
ple, shows that a 10-percent increase in government
spending would reduce the trade surplus by only $4.5
billion. According to these calculations, GNP growth
would have to increase by more than 6 percentage
points to achieve even a $10 billion cut in the trade
surplus. For its part, the Ministry of Finance calcu-
lates that a 10-percent increase in government spend-
ing would boost imports by only $2 billion and that a
one-third-$30 billion-cut in taxes would increase
Although our model and OECD studies produce a
similar current account impact, we believe large-scale
macroeconomic models fail to capture two important
results that tend to decrease exports over time. The
models do not account for the fact that increasing
domestic demand boosts the return to investment in
nonexport-related industries. Consequently, their
forecasts understate the drop in exports as investment
shifts away from export industries and toward prod-
ucts geared to domestic sales.'
' In the late 1970s and the early 1980s, the slowdown in Japan's
domestic demand caused firms to look to export markets to
maintain sales. Indeed, 30 percent of Japan's investment spending
during the 1980s has been export related, according to estimates
made by the US Embassy. The share of exports in total sales
increased from less than 20 percent in 1974 to 26 percent last year,
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Japan: Effect on Current Account Surplus
of a Sustained 10-Percent Increase in Government
Increase in Government Spending, 1987-88
I I I I I I 1 1
-4 1987 1988
In addition, most economists contend that more ro-
bust domestic demand is necessary for a currency
appreciation to reduce the trade surplus. Without an
increase in domestic demand, we believe even the
gains made thus far-export volume has declined
since early this year, while import volume is up
sharply-could erode. Failure to stimulate the econo-
my could lead to price reductions that would go far in
restoring the competitive position Japan enjoyed be-
fore the yen appreciation. In some respects, this
adjustment process is already occurring: wholesale
prices, which have fallen for 17 consecutive months,
are now declining at an annual rate of over 10
percent. An increase in domestic demand would
dampen their slide
While Japanese policymakers agree that boosting
government spending or cutting taxes can provide
short-term stimulus, they are equally convinced that
in the long run it leads to serious economic problems.
They believe, for example, that a bond-financed fiscal
expansion increases inflation and interest rates, there-
by discouraging domestic investment and reducing
potential production. Recently, Director General
Umezawa of the Finance Ministry Tax Bureau sug-
gested that expansionary fiscal policy actually reduces
economic growth. Indeed, many of the individuals and
organizations who are in positions to influence fiscal
policy-such as close advisers to Nakasone and the
Finance Ministry-appear to be the most concerned
about the long-term implications of adopting a policy
of fiscal expansion. Last month's pump-priming pack-
age demonstrates these views because the package
will probably include only small amounts of new
funds, making the effect on the economy minimal.
An OECD study suggests that Tokyo's concerns may
be valid. OECD simulations show that long-term
interest rates-an important determinant of the cost
of capital for private investment-increase sharply in
Japan following a bond-financed increase in govern-
ment spending. The study even suggests that interest
rates rise more in Japan than in the other Big Seven
countries for a similar increase in government spend-
ing. We suspect that the narrow and tightly regulated
government bond market accounts for these results.
In addition, many Japanese officials argue that over
the long term increased deficit spending will limit
Tokyo's flexibility to use fiscal policy in response to
natural disaster or full-fledged recessioj
A key long-term concern is the in-
creased government spending that will be needed to
support Japan's aging population.
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A growing number of Japanese officials apparently
believe that the current economic slowdown is serious
enough to warrant acceptance of some longer term
costs. Many of these groups
are under pressure from small-
and medium-size export firms, who have been particu-
larly hard hit by yen appreciation. This suggests that
if the economy continues to weaken in the months
ahead-a likely prospect in our view-the calls for
fiscal stimulation will increase.
A key player to watch in the months ahead will be
Finance Minister Miyazawa. Unlike former Finance
Minister Takeshita who tended to rely on the Finance
Ministry bureaucracy for policy guidance, Miyazawa
is taking a more active role. Miyazawa has publicly
expressed interest in using countercyclical fiscal poli-
cy to offset the negative aspects of yen appreciation. If
this in fact is his personal policy preference, and not
just a political posture adopted to distance himself
from the Prime Minister, he could then develop into
an important voice in favor of a more expansionary
policy. Success would strengthen his currently poor
chance of succeeding Nakasone as LDP President and
thus as prime minister.
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West Germany: Kohl's
Economic Agenda
When Chancellor Helmut Kohl visits Washington
next week, he will be prepared to defend his economic
policies as well as to emphasize Bonn's perennial
concerns over West European security, Moscow-
Washington relations, and inter-German affairs. Past
bilaterals have been reasonably free of economic
frictions, but escalating international criticism of his
country's slow economic growth, widening current
account surpluses, and tight economic policies has put
Kohl on the defensive. While Kohl wants a harmoni-
ous visit to bolster his coalition's electoral prospects in
next January's elections, he cannot appear to capitu-
late to US pressure or to repudiate the programs he
has championed for the last five years. He may even
conclude that standing up to the United States would
blunt Social Democratic criticism that he is too docile
in dealing with Washington. Kohl-whose govern-
ment is likely to win reelection-will resist calls for
change, arguing instead that his next term will focus
more on growth-oriented structural reform programs.
The dramatic appreciation of the deutsche mark-
particularly since the September 1985 (Group of Five)
accord-has undercut Bonn's reliance on export-led
growth, leaving Kohl to preside over an economy
making the difficult transition to domestic-led expan-
sion. West German officials had earlier hoped that
declines in oil prices and interest rates would offset
the deflationary impact of mark appreciation. Growth
in first half 1986 was essentially flat, however, with a
strong pickup in April-June compensating for a dis-
mal first quarter. Industrial production appears to
have plateaued this summer and export-oriented in-
dustries-which so far have been filling contracts
secured before the mark's spectacular rise-are in-
creasingly concerned about declining foreign orders.
On the positive side, West German consumers may
finally be spending more in response to higher real
incomes.
The West Germans argue that their capacity for non-
inflationary growth has diminished during the 1980s
because of structural or supply-side factors-chiefly
rigidities in the labor maket. High and sticky real
wages, reduced pay differentials between skilled and
nonskilled labor, and high nonwage labor costs-
mainly social security, unemployment, and severance
charges-are blamed for inducingJIIrms to substitute
capital for labor, thereby increasing structural unem-
ployment. Indeed, capital utilization rates in West
German manufacturing are presently on par with
those experienced during the last cyclical peak in
1979, while unemployment remains several times
higher.
The Kohl government's progress in addressing labor
market rigidities has been slow and somewhat mixed.
New labor legislation has increased flexibility for
hiring youth and part-time workers, but the govern-
ment added to the labor cost problem by hiking
mandatory social security contributions. In addition,
many labor market rigidities result from collective
bargaining decisions that are beyond the govern-
ment's direct control.
We agree that structural rigidities keep unemploy-
ment higher than it otherwise would be, but believe
the impact of such rigidities on economic growth is
exaggerated. While capacity utilization rates are high
in the export-dependent manufacturing sector, capital
is not a constraint in the labor-intensive construction
and service industries. Tight economic policies, by
weakening domestic demand, have discouraged in-
vestment and the economy's capacity to grow. We
also believe the West German tax system is itself a
major contributor to structural unemployment. So-
cial charges per employee are equal to 80 percent of
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highest and most progressive in the OECD.
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DI IEEW 86-042
17 October 1986
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West Germany: Selected Economic Indicators,
1980-86
Real GNP Growth
Percent
Global
? US Bilateral
Trade Balances
Billion US $
Consumer price
- Wholesale price
Inflation Rates
Percent
-2
111111111 IIII111II_II_liii
84 85 -4 1980 85 86
I
I I \V I I I I
-1 1980 85 868 -5 1980
Government bond
Discount
Key Interest Rates
Percent
1111111 l i i i I I I i i 1 1 1 1 1 1 I I I I I I I I I I I I I I I I II liii III I II
0 1980 85 86 50 1980 85 86
Real effective deutsche mark
Dollar - deutsche mark
Exchange Rate
Index: 1980 1= 100
70
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The economy faces a continuation of the unimpressive
growth that has plagued West Germany during the
latest cyclical upswing. The major West German
economic institutes have revised their 1986 growth
forecasts downward-by about .1 percentage point-
to 2.5-3.0 percent, with roughly the same growth rate
expected in 1987, while the government is maintain-
ing its official forecast of 3 percent growth this year.
We expect West German GNP to rise 2.8 percent
both this year and next, based on simulations of our
reportedly remains optimistic that the economy is on
an upswing; and that his medium-term'-programs of
deficit reduction and expenditure restraint, have set
the stage for balanced, sustainable growth. Kohl has
stated that his predecessor, Helmut Schmidt, erred in
acceding to US requests at the 1978 Bonn Summit to
adopt stimulative policies.
econometric model.
West Germany's mixed economic performance pro-
vides arguments for both the government and its
critics. Kohl boasts that 600,000 jobs have been
created since 1983, while the Social Democrats stress
that 2.2 million Germans-nearly 9 percent of the
work force-remain unemployed. The government
argues that its tight economic policies have tamed
inflation, while skeptics worry that recent price de-
clines at both the wholesale and retail levels could
worsen the bankruptcy rate and generate a deflation-
ary spiral. Even the robust current account surpluses
have been accused of squeezing LDC debtors and
contributing to worldwide protectionist pressures.
The government recently submitted the 1987 budget
to Parliament. Expenditures are programed to rise a
scant 2.9 percent and, unlike in 1986, no tax cuts are
planned. In presenting the new budget, Finance Min-
ister Stoltenberg ruled out any loosening of fiscal
policy after 1987.
The overriding economic concern in Bonn is that a
further sharp decline in the dollar could have an
additional impact on the mark by forcing a revalua-
tion of the West German currency within the Europe-
an Monetary System (EMS). West German industry,
which we estimate is just about breaking even on
foreign sales at the present dollar-mark rate, would
probably react to falling export revenues by slashing
investment, thus weakening domestic demand. More-
over, a devaluation of the franc'within the EMS
would embarrass French Prime Minister Chirac and
strain relations with Paris, which has been particular-
ly critical of West Germany's refusal to reflate the
economy.
Kohl and his ministers reject foreign pressures for
Bonn to abandon-even temporarily-its tight eco-
nomic policies and stimulate domestic demand. Kohl
Kohl can hang tough in defending his economic
policies partly because polls indicate a strengthening
of his government's popularity, although voter senti-
ment toward his handling of the economy is clearly
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ambivalent. Barring a major personal gaffe or scan-
dal, we expect Kohl's coalition to be returned to
power. Paradoxically, the Social Democrats, whose
talents for. economic leadership are held in low, esteem
by the voters, second US calls for more expansionary
policies.
Monetary and Exchange Rate Options
Interest rate cuts could have a dual benefit of stimu-
lating West German internal demand while
ing further appreciation of the mark.
Short of interest rate cuts and politically unattractive
capital controls, Kohl has few policy-tools to prevent
an unwelcome rise in the mark. West Germany led a
concerted joint European intervention effort earlier
this month to defend the dollar and stabilize the
EMS; but we believe a repeat performance is unlikely.
The West Germans-believe intervention without US
participation would ultimately prove futile and would
only inflate the domestic money supply.
Kohl is most likely to emphasize that his next admin-
istration will focus on more fundamental reforms.
success in
expenditure restraint has not been matched by im-
provements in the quality of expenditure. Subsidies
for inefficient sectors'such as agriculture and mining
have continued to grow-for example, while public
investment has been slashed. The government has also
indicated willingness to pass on future savings to
consumers in tax cuts. Finally, Bonn plans to acceler-
ate its, much-postponed privatization effort and to
debate reforms for-regulated sectors, such as
telecommunications.
impact of tax. reform into the next decade.
Implementation of these concepts, however, is unlike-
ly to assuage proponents of faster growth. Tax reform'
is to be the centerpiece of Kohl's next term, and
Finance Minister Stoltenberg has suggested about 40
billion DM in tax cuts, one-half of which is to be
financed by reduced grants and tax subsidies. The
next 20 billion DM tax relief is roughly 7 percent of
expected government revenue. Cuts in politically sen-
sitive'subsidies, however, could easily be derailed by
coalition infighting. Moreover, Stoltenberg favors a
two-stage, implementation that could delay the full
Bonn's medium-term fiscal and economic plans both
suggest only marginal policy changes if the Kohl's
center-right coalition is returned to power. The fiscal
plan envisages expenditure increases of less than an
average annual of 3 percent over the rest of the
decade while the economic plan targets a moderate
2.5-percent GNP growth rate. Adoption of this slow
growth path suggests Bonn will have to rely on
demographic shifts-for example, the waning of the
baby boom generation-to make a substantial dent in
unemployment.
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Morocco: Economic Problems
Persist
A record grain harvest and lower oil and interest costs
have fueled a rebound in Morocco's economy after
years of sluggish performance. A large foreign debt
burden and lax fiscal policies, however, limit prospects
for additional foreign borrowing and economic
growth. This, coupled with reduced foreign aid in-
flows, puts Rabat's ability to finance economic devel-
opment and military modernization in jeopardy. With
little chance for improvement in living standards in
the coming years, popular disgruntlement over the
economy almost certainly will increase, forcing King
Hassan to rely even more heavily on his security
forces to maintain order.
Austerity Pays Off
Morocco has made progess over the past three years
toward stabilizing the economy. Under the auspices of
an IMF standby loan program, Rabat has reduced
domestic consumption, stimulated savings, and gained
greater control over national finances-the $13 billion
foreign debt has been rescheduled twice since 1982.
Real GDP growth probably will top 4 percent again
this year, compared with the
2.4-percent annual average for 1981-84. Inflation-
7.7 percent last year-fell below the double-digit level
for the first time since 1982.
Much of the gain, however, has come from external
factors. Sharply higher GDP growth reflects the
recovery of the agricultural sector after several years
of drought and overshadows continued weakness in
the industrial sector. Greater domestic food produc-
tion, combined with the 45-percent drop in petroleum
prices, resulted in a substantial reduction of Moroc-
co's import costs both this year and last. The more
than 9-percent appreciation of the dirham against the
US dollar and sharply lower international interest
rates since 1984 trimmed an additional $200 million
Despite progress toward economic reform, Morocco
has not cinched its fiscal belt tight enough. A growing
budget deficit has been financed by expansionary
monetary policy and slow payment of commercial
obligations-arrears topped $500 million last spring.
The surging budget deficit caused Morocco to lose
access to badly needed IMF funding earlier this year.
Negotiations with the Fund for a new $275 million,
18-month, standby loan are under way. The US
Embassy reports that a new round of austerity mea-
sures including lower budget deficits and monetary
growth will be part of the package. The government
also must secure $350 million in long-term, conces-
sional money from official and commercial sources to
help cover the remaining financial gap this year. New
austerity measures, however, probably will be difficult
to sell domestically given rising popular expectations
of continuing economic recovery. Nevertheless, if
donors cooperate and Rabat moves forward with
fiscal reforms, a letter of intent for a new standby
program could be signed by late November.
Rescheduling Morocco's foreign debt has become
increasingly difficult for the government. Rabat has
not signed the rescheduling agreement with London
Club banks for debt due in 1985-86 and probably will
have to negotiate additional rescheduling agreements
with both Paris and London Club members for debt
payable next year. The government's refusal to guar-
antee rescheduled debt payments has resulted in a
protracted series of meetings with commercial lenders
and has generated considerable ill will toward Moroc-
co. In addition, relations with Paris and London Club
creditors have been tarnished by payment delays.
Maintaining Morocco's important short-term credit
line of $450 million with commercial banks is of
off Rabat's annual foreign payments burden.
Secret
DI IEEW 86-042
17 October 1986
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Morocco: Current Account, 1982-87
-1,381
-666 b
-547 b
-520 b
-1,774
-1,214
-1,407
-1,020
-983
-1,000
2,042
2,086
2,162
2,167
2,365
2,600
Phosphates and
derivatives
913
925
1,010
921
780
950
Imports, f.o.b.
3,816
3,300
3,569
3,187
3,348
3,600
Fuels and lubricants
1,174
988
1,021
700
650
780
581
533
660
506
320
320
-216
87
26
354
436
480
a Projected.
b Includes effect of $400 million Saudi oil grant.
Morocco's trade position also remains weak, despite
significant improvement. Export growth continues to
be sluggish because of reduced demand and prices for
phosphates and citrus-the primary exports. More-
over, imports have turned upward again despite the
savings on oil and food imports. This, in part, reflects
government foot-dragging on achieving the trade lib-
eralization goals of the IMF program. As a result,
Morocco's foreign exchange reserves remain below
$70 million-about one week of import cover.
Heavy defense spending puts an added burden on
scarce government resources. Defense costs have aver-
aged about 22 percent of the national budget and 6
percent of GDP over the past decade. Over $700
million was allocated for national defense last year
alone. Only education claims a larger share of nation-
al revenues. Moreover, Hassan announced a $1 bil-
lion, multiyear modernization program in April 1985
to upgrade air and armor capabilities. These defense
priorities have even caused Rabat to divert $250
million in Spanish economic assistance to purchase
transport equipment needed for the military effort in
Western Sahara. Neither Saudi Arabia nor France-
the major sources of military assistance in the past-
have committed new aid for the military moderniza-
tion effort.
The greatest casualty of Morocco's austerity program,
however, has been economic development. Capital
expenditures have declined as a share of GDP from
over 11 percent in 1980 to less than 3 percent last
year. Many development projects have been delayed
or scrapped. The decline in investment is especially
troubling given Morocco's rapid population growth
(2.8 percent annually) and youthful population (56
percent is under 20 years of age).' Unemployment
already tops 25 percent. Coupled with new fiscal
restraints most likely under the next IMF program,
there is only a limited chance for improvement in
economic growth and living standards in the years
ahead.
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Secret
There is little evidence that King Hassan's domina-
tion of the political scene in Morocco will be threat-
ened in the near term, despite continuing economic
uncertainty. The political opposition has either been
co-opted by the King or isolated. Moreover, Hassan
does not appear to have lost any domestic support as a
result of his meeting with Israeli Prime Minister Peres
in July. Although several radical Arab states-includ-
ing Libya and Syria-opposed the meeting, most
moderate Arab states including Saudi Arabia have
taken a neutral position. The meeting with Peres also
offered Hassan a convenient opportunity to break the
increasingly uncomfortable Arab-African Union with
Libyan leader Qadhafi and to improve relations with
Washington. In addition, Hassan has taken signifi-
cant measures to improve domestic security against
hostile actions by some radical Arab groups.
Rising popular expectations, however, present a long-
term challenge to the King. Dissatisfaction created by
deteriorating economic conditions flared into violence
in 1981 and 1984 when the government attempted to
reduce sensitive subsidies. In addition, military mo-
rale could be adversely affected by a sharp reduction
in defense spending.
Hassan is not, in our opinion, blind to his economic
problems and the political difficulties they imply.
Nonetheless, the nation's financial difficulties, even
with additional foreign financing, will remain acute
for at least several years and will require that the
King devote more of his attention to the economy.
With current account deficits likely to persist through
the end of the decade, the government will be hard
pressed to launch most aspects of its current develop-
ment plan. Even with renewed access to IMF loans,
Rabat faces additional debt rescheduling on stiffer
terms over the next several years. Economic growth
will be slowed by continuing austerity, and unemploy-
ment will remain a troubling issue. Living standards
almost certainly will decline further to accommodate
necessary economic reform and military moderniza-
tion. As a result, Hassan may have to rely more
heavily on the country's security forces to contain any
rise in domestic unrest.
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Pakistani Water Management Problems Hampered by Deteriorating Irrigation System
Afghanistan
Baluchistan
Water disputes between
Punjab and Sind
Provinces hinder
progress on water
management.
ISLAMABAD
Mangla
Kbldbngh
Dam the
I Poor maintenance afid
inefficient water applications
account for the majority
of water loses.
Indus Water Treaty of 1960
Granted Pakistan the water rights of
with an annual flow of 148 million
acre feet.
Granted India the water rights of
the Sutlej, Beas, and Ravi rivers
with an annual flow of 33 million
acre feet.
Boundary representation is
not necessarily authoritative.
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Pakistan: Deteriorating
Irrigation System
Pakistan must address longstanding water manage-
ment problems if it is to boost food production for its
growing population. Growing water shortages, in our
view, are likely to make it increasingly difficult for
Pakistan even to maintain its current level of agricul-
tural production, adding to the country's import needs
and foreign payments problems. Improvement of the
archaic and inadequately funded irrigation system is a
first priority. Government efforts, however, are hin-
dered by provincial competition and obstruction by
politically powerful farmers. Moreover, water rights
to the subcontinent's rivers are an ongoing issue with
India.
The agricultural sector employs 50 percent of the
labor force, earns approximately 70 percent of the
export revenues, and contributes roughly 25 percent
of GDP. Use of advanced agricultural inputs-high-
yielding varieties of seeds, fertilizers, and pesticides-
and increased farm mechanization have contributed
to Pakistani food self-sufficiency. In fact, food exports
earned Pakistan $300 million last year-12 percent of
total exports. Nevertheless, water shortages continual-
ly threaten output of foodgrains and several cash
crops, including cotton and sugar, reducing export
potential and, in some cases, necessitating imports.
Some 90 percent of the harvest depends on irrigation
water.
Crumbling Irrigation System
Pakistan's Indus River Irrigation System-extending
about 57,100 kilometers, the largest in the world-
irrigates about 70 percent of the 20.5 million hectares
of cultivatable land. Completion of the Mangla and
Tarbela reservoirs in 1967 and 1976, respectively,
have increased the amount of water available for
irrigation, but additional capacity is still limited by
domestic political feuding over the location of new
Pakistan: Provincial Area Covered by the
Indus River Irrigation System, 1986
Providence and
Baluchistan - 5
Half of the water entering the irrigation system is lost
because of poor maintenance and inefficient applica-
tion. Seepage from unlined canals, evaporation, and
poor drainage have also contributed to the high water
losses. Several programs to improve water channels
have been carried out. Pakistan has already rehabili-
tated 4,800 kilometers of canals with the help of the
United States and the World Bank, but the situation
is little better because of poor maintenance.
According to press reports, government management
of the irrigation system ends with the main distribu-
tion channels where local farmers take control.
Groups of farmers in a particular area designate one
person to manage the water courses between the
government system and each farmer's fields based on
schedules determined decades ago. Moreover, sporad-
ic supplies force farmers to use water when available
regardless of requirements because the water might
reservoirs and funding.
Secret
DI IEEW 86-042
17 October 1986
I
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Secret
Indus Water Treaty
Pakistan's creation in 1947 left the Indus River
irrigation system divided by international borders.
Disputes arose between Pakistan and India because
the headwatersfor a number of canals irrigating
Pakistani land were located in India. The Indus
Water Treaty of 1960 gave the water rights of the
eastern rivers-Ravi, Beas, and Sutlej with an annu-
alfow of 33-million-acre feet (ma/)-to India and
the western rivers-Indus, Jhelum, and Chenab with
an annual flow of 148 maf-to Pakistan. The treaty
also provided for the construction of a large link
canal system and several dams to transfer water from
the western rivers to areas in Pakistan formerly
served by Indian-assigned tributaries. One of the
most recent irritants in Indo-Pakistani relations has
been Islamabad's public charges that New Delhi
plans to divert water from the Jhelum River to India
in violation of the treaty.
not be available at their next scheduled turn. This
practice has contributed to serious waterlogging and
salinity problems, leaving many hectares unproduc-
tive.
Water charges are inadequate to cover operation and
maintenance costs, let alone to expand the system, but
Islamabad has been reluctant to ask politically power-
ful farmers to cough up more money. The share of
operating and maintenance costs covered by water
charges has fallen from 57 percent in fiscal year (FY)
1982' to 48 percent in FY 1985.
the last nationwide increase in water
charges was in FY 1982. Minor rate hikes have been
enacted in most provinces, but rates in Punjab Prov-
ince-the largest provincial water recipient-have
remained unchanged. Reductions in development
funds for irrigation have also contributed to poor
maintenance.
Pakistan: Irrigation Receipts and Expenditures,
1980-85 a
Million US $ = Receipts = Expenditures
Water disputes between the provinces of Sind and
Punjab-these two account for almost 95 percent of
the land irrigated by the Indus irrigation system-
hinder progress. The politically dominant farmers of
Punjab receive a disproportionate share-about 75
percent-of tubewell Z and canal water. Sind, located
at the end of the irrigation system, receives the
remainder, which contains high salt concentrations
after passing through Punjab.
'A tubewell pumps water from the ground by using a motor
attached to a sunken tube.
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Secret
Provincial rivalries have stymied the proposed Kala-
bagh Dam project that approaches the joint capacities
of the Tarbela and Mangla Dams. Because the Tar-
bela Dam is frozen in winter, the Kalabagh Dam
project is designed to increase the winter water sup-
ply. Farmers and other land owners in the North-
West Frontier Province claim that their land would be
flooded for the economic benefit of the Punjab.
Moreover, Sind Province farmers are concerned that
the Punjabis will siphon off the additional water.
Islamabad established a commission in 1977 to re-
solve provincial differences. The commission's main
objective is to coordinate cropping patterns to get the
most efficient use of irrigated water. Objections by
Punjabi farmers and the large bureaucracy managing
the country's water supply, however, have thwarted
the commission's efforts to improve water distribu-
tion.
Pakistan's Sixth Five-Year Plan (1982-88) will focus
on balancing canal rehabilitation with larger projects
such as the Kalabagh Dam and improving operation
and maintenance through steady increases in water
use fees. Funding has been provided by several multi-
lateral development banks to expand Islamabad's
rehabilitation efforts. But, growing operation and
maintenance costs, particularly for the country's
dams, coupled with the likelihood that water charges
will not be increased significantly may force Pakistan
to curtail future development efforts and engage in
quick-fix projects to increase water availability in the
irrigation system.
Although the government has proposed more private-
sector participation in the installation of tubewells,
Punjabi farmers and government bureaucrats are
likely to forestall any significant private-sector pro-
grams that might undermine their control. The new
civilian government of Prime Minister Junejo, which
is already displaying a marked reluctance to under-
take risky initiatives in the wake of August's political
violence, is unlikely to challenge those powerful inter-
est groups.
Islamabad is unlikely to raise the several hundred
million dollars annually needed to rehabilitate and
expand the irrigation system. As a result, Pakistan
will have a difficult time, particularly if there should
be a severe drought, maintaining the current level of
agricultural output, let alone increasing it.
Implications for the United States
The $4.02 billion aid package for US fiscal years
1988-93 offers little hope of relief for Pakistan's
deteriorating irrigation system. According to the US
Embassy, the economic assistance portion of the
package will have $1.5 billion allocated to economic
support funds and $300 million for development assis-
tance. Most of the $1.5 billion, however, will cover
debt service on existing loans, and there are many
competing uses-health care, education, and trans-
portation-for the remainder. Islamabad is almost
certain to ask for Washington's support for increased
funding and technical assistance from such donors as
the World Bank and the Asian Development Bank for
irrigation projects. If agricultural shortfalls contribute
to a foreign exchange shortage, Islamabad may seek
additional US aid.
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Secret
Colombia: Impact of the Insurgency
on the Economy
The Colombian economy appears to be on the road to
recovery after five years of sluggish activity, but
efforts by the new Barco government to sustain
growth may be hindered by the insurgent campaign
against a variety of economic targets. Guerrilla activi-
ty is imposing increasing costs on the Colombian
economy in terms of capital damage, production
losses, and rising protection expenses, especially in the
most frequently targeted energy sector. In addition,
guerrilla attacks on small businesses and banks-to
obtain cash-have become frequent. At a minimum,
the insurgency will hamper Barco's promised efforts
to accelerate development, stimulate agrarian reform,
and attract new foreign investment.
Violence in Colombia, 1980-86 Number of incidents
Kidnapings
Guerrilla-
Related
Deaths
Extortions
Attacks
Involving US
Businesses
1981
62
206
1982
93
251
1983
113
379
183
5
1984
299
359
162
5
1985
200a
440-460
39 b
13
1986
NA
615
The guerrillas' campaign to undermine the economy
has gained momentum in recent months. Previously,
sabotage operations tended to be against random
targets of opportunity, such as local wealthy landown-
ers and private businesses to obtain food, money,
weapons, and recruits for their cause.
More recently, insurgent groups have systematically
begun to attack oil and power facilities and multina-
tional corporations, and their executives have been
increasingly targeted. Since 1980, Colombia has
ranked first in Latin America in recorded terrorist
incidents involving US investors. The National Liber-
ation Army (ELN) has been particularly active in
northeastern Colombia, where Occidental and Shell-
in association with Ecopetrol, the state oil company-
are developing a new field, with estimated reserves of
over 1 billion barrels.
a Minimum estimate.
b First quarter.
c January-May.
d January-September.
1980s.
Guerrilla activity has probably begun to erode busi-
ness confidence. New foreign investment in 1985
amounted to only $86 million-one-half the 1984
level and the lowest figure since 1978. In addition,
guerrilla disruption of ranching and farming activity
is partly responsible for the high food import bills,
averaging $400 million annually since the early
Secret
DI IEEW 86-042
17 October 1986
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Secret
Colombia: Selected Sectors as a Share of
Real GDP, 1951-85
Note scale change
Average annual percent
Impact by Sector
Energy. The oil sector has been particularly hard hit
by the insurgents:
? Bombing of Colombia's major pipeline in early
October inflicted damages estimated at $10 million
and spilled $200,000 to $300,000 worth of oil
destined for export.
? A September attack on Chevron's Rio Zulia oilfield
and pipeline inflicted damage estimated at $2-2.5
million.
? A late-August takeover and bombing of an Occiden-
tal production tower forced the company to reduce
oil flow from 180,000 b/d to 120,000 b/d.
? Sabotage of the new Cano Limon pipeline in July
and August stopped the oil flow for several days.
? A May 1985 strike at an Occidental drilling site
inflicted damage estimated at $2 million.
Electrical pylons and transmission substations that
are easily damaged and frequently located in remote
areas have become frequent target
Agriculture. The farm sector-which accounts for
more than 20 percent of real GDP, over 30 percent of
the labor force, and 60 percent of export earnings-
has been a frequent target of the insurgency. Rural
crime and guerrilla attacks on cattle ranchers contrib-
uted to an 80-percent fall in beef export volume-
from 21,600 metric tons in 1981 to 4,100 tons in 1985.
Insurgent activity has hindered agricultural develop-
ment especially in the western region, according to
press and US Embassy reports. Major guerrilla
groups also have begun to foster agitation among
rural laborers.
Commerce. Guerrilla attacks on local banks and
businesses have resulted in sizable financial losses.
Guerrilla incidents this year have also included the i
theft of $6 million in gold from a miners' camp,
kidnaping of businessmen, car thefts from dealerships,
and bombings of stores and local factories when
owners rejected extortion demands.
The potential for more serious economic damage is
high, given the lack of progress in the government's
counterinsurgency capabilities. Bogota is concerned
about the attacks on the economic infrastructure, but
only recently has been able to expand official protec-
tion for highly vulnerable guerrilla targets, such as
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Secret
Petroleum Development and Insurgent Operating Areas, 1986
l Onto
ELN attack,
22 July
B~arrancahermeja
Casaba
d
Ba ran'ni~~
O _ ihta n
\\bia
~%Y
MWEEMON rBraz(l'
a0
North
Pacific
Ocean
Ecuador
*oulio i
Oilfield
Crude oil pipeline
existing
------ under construction
Refinery
Major oil export port
100 200 Kilometers
Upp&i
MiPrgm
Medial
M
100 200 Miles
8
0
gdalena
0
of
Rio,
Wit!
%~ 0
Lego ,
de
Maracaibo
South
Maraceib'o J
~Salgar
Casanare
BOGOTAO
//~~ Apt
illavicencio
patina rests- \
Cravo\Norte
(/0 Arauc-bTfincy
29'~9ui `~
C,6lom bia o
0 100 200 Kilometers
i t _
0 100 200 Miles
Caribbean Sea Barranquill
Canagenaj
Ecuador
QUITO*
rlf0:
Santa
Marta
M-19 (19th of April ELN (National Liberation
Movement) Army)
Note: America Battalion's activity coincides with principal ith M-19's southwestern territory.
groups also have urban guerrillas in Bogota and other major cities.
Aruba
iNoth.1
Netherlands Antilles
(Nsth.)
Cvrarao~HOnai.o
Principal insurgent groups
FARC (Revolutionary Armed ^ EPL (People's Liberation
Forces of Colombia) Army)
10
Caribbean Sea
Santa
Marta
n
Peru
Peninsula
de is Guajira
ELN attack, 14 July and 3 October
Venezuela
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supreme court judges and threatened legislators. Al-
though Defense Minister Samudio is working with
Ecopetrol to develop a protection plan for Colombia's
major oil pipeline, serious military manpower short-
ages and tactical mobility problems make it unlikely
that the government will be able to defend important
economic facilities or industries from guerrilla attack.
Even if the insurgency does not escalate, the current
level of attacks against economic targets could easily
undermine President Barco's efforts to increase agri-
cultural productivity and attract new foreign invest-
ment. Indeed, some guerrilla groups may focus more
on rural targets, in response to Barco's stated belief
that agrarian reform and increases in agricultural
productivity would reduce popular support for the
insurgency.
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Developed Countries
Ottawa The need for fiscal restraint stressed by Finance Minister Wilson probably means
Considers Aid that Ottawa's recently promised aid to farmers will be less generous than
for Farmers anticipated by the agricultural provinces. The request for aid originally came from
Saskatchewan's Tory Premier Devine, who is in danger of losing the 20 October
provincial election. Prime Minister Mulroney-who has seen three Tory provincial
governments fall since he took office in 1984-responded with a carefully crafted
promise to work with Saskatchewan and other provinces suffering from low grain
prices to devise an agricultural assistance program that could total more than $700
million. Since Mulroney's announcement two weeks ago, however, opposition
questioning in parliament has revealed that the government is considering less
generous options than Devine had envisaged-including loan guarantees for
farmers already heavily in debt. Moreover, the aid package will be divided among
all affected provinces and not just the western ones. These clarifications have
almost certainly disappointed farmers in Saskatchewan and will do little to
improve Devine's electoral prospects.
Canadian Task Ottawa's task force on broadcasting has recommended increasing the Canadian
Force Recommends content of television programing on private networks as well as on the Canadian
Broadcasting Changes Broadcasting Corporation (CBC). The suggested changes could limit access for US
broadcasters and cost the federal government $60-70 million more a year. To
enforce the proposed content limits, the government's license review board would
receive more authority and funding. The task force also recommended two new
channels for the CBC, a tax credit worth 150 percent for Canadian advertising on
certain programs, and creation of a joint federal/ industry firm to buy US
programs not already regulated. US broadcasters would stand to lose advertising
revenue and sales of programs not broadcast simultaneously by Canadian
networks. Taxes could also be increased for US cable programing and video-
cassette sales. While implementation might take more than a year, in the interim
the federal government could engineer a gradual increase in Canadian programing
by raising content requirements in license hearings.
Outline of Tokyo's Tax Advisory Council has nearly completed its recommendations for the
Japanese first major reform of the Japanese tax code in the postwar era. In designing the
Tax Reform $32 billion tax cut package, the Council apparently paid little attention to the
meshing of tax reform with the Maekawa recommendations for turning growth
inward, to developing measures to promote housing construction, or to the
possibility that the reforms as a whole might increase Japan's trade surplus.
23 Secret
DI IEEW 86-042
17 October 1986
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Secret
Instead, the Council concentrated on expanding the tax base, removing perceived
inequities, and acquiring additional revenue. According to the US Embassy, the
key proposals include reducing the number of personal income brackets from 15 to
5 or 6, reducing the top personal rate from 70 percent to 45 or 50 percent, reducing
the top rate for large corporations from 44.3 percent to about 37.5 percent,
accelerating the depreciation of selected plant and equipment, and modifying the
system of tax-free savings accounts. The Council is currently debating a European-
style value added tax (VAT) versus a simpler manufacturer's sales tax to make up
for lost revenues. The Embassy expects only a modest stimulus to the economy
from the current Council proposals-and only if the tax cuts take effect well in ad-
vance of any offsetting tax hikes. Moreover, the Finance Ministry's hopes of
incorporating the Tax Council's final recommendations in its FYI 987 budget
submission, due in late December, will depend on the agreement of the ruling
party's parallel Tax Council. Modification of the tax-free savings system and the
introduction of an indirect tax are certain to generate strong political resistance.
Portuguese Benefiting from declining interest rates and lower oil and commodity prices,
Economy Improving Portuguese real GDP growth will reach an estimated 3.7 percent for the year.
Investment-a major element in Prime Minister Cavaco Silva's recovery plan-is
strong although its growth will fall several percentage points below the govern-
ment's 9-percent target. Inflation probably will fall to about 13 percent by
yearend-more than 6 percentage points lower than last year. The current account
balance is also improving, with a $700 million surplus expected this year, paving
the way for the government's proposed early repayment of some of the $16.6
billion foreign debt. Despite these improvements, several problems remain.
Secret 24
17 October 1986
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challenge of EC entry.
Projected real wage increases of 4 to 5 percent and real money supply growth of
about 6 percent threaten to boost inflation next year. The public-sector deficit-
equal to an estimated 11 percent of GDP in 1986-will continue to be a drag on
the economy. Most important, the failure of the government to remove serious
rigidities in the economy is likely to make it difficult for Portugal to cope with the
Brasilia is likely to push hard for concessions to reduce its debt repayment burden
Debt Strategy in negotiations that begin soon with foreign commercial banks to reschedule debts
that fall due during the next five years.
Although the government has yet
to set its negotiating position, Brazilian officials repeatedly have said they will
strive to reduce net debt payments from more than 4 percent of GDP this year to
2.5 percent next year. The difference will be used to fund additional imports and
domestic investment. Officials have said they will attempt to reduce debt payments
by negotiating a lower interest rate. Brasilia reportedly may also seek new
voluntary loans that would further reduce the repayment burden. In return for
lower interest payments, Brazilian officials may be prepared to negotiate an IMF
agreement after the congressional election next month. The government realizes
that an accommodation with the Fund is necessary to reschedule its debts to
foreign government creditors through the Paris Club.
If bankers
do not offer concessions, .Funaro may advocate again threatening them with only
25 Secret
17 October 1986
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partial interest payments.
Brazilian Growing dissatisfaction with the Cruzado Plan is. hurting Finance Minister
Finance Minister Funaro's standing among businessmen and the middle class.
Drawing Fire Brazilian businessmen are increasingly critical of Funaro's unwilling-
ness to ease the price freeze, and the influential
Sao Paulo business community now believes he is arrogantly pursuing unrealistic
policies. Although the 23 July hike in surtaxes on cars, fuel, and foreign travel was
unpopular, Funaro is still rated high in public opinion polls.
President Sarney has become irritated with Funaro over his handling of recent
food shortages. We believe, however, that Sarney may use Funaro to deflect
criticism of the Cruzado Plan by government opponents and is unlikely to dismiss
his economic czar in advance of the November elections. If measures taken after
the elections fail to stem dissatisfaction with the Plan, Funaro may end up a
scapegoat and be replaced.
US Seed Varieties According to US Embassy reporting, Ethiopia has entered into a deal with a US
Purchased by Ethiopia firm to buy seeds of improved wheat and corn varieties that could greatly increase
yields. Trial plots are presently being grown in Ethiopia and early reports indicate
the, varieties were doing well. Because of the expense, use of such varieties will be
limited to state farms-new seed has to be bought each year and there will be
large requirements for fertilizers and pesticides. The production history of the
state farms, however, suggests that the full benefit of the new varieties will not be
realized. Moreover, similar instances in other underdeveloped countries have
resulted in neighboring farmers pilfering seed and attempting to grow it on their
own plots. Without proper management, improved varieties will not perform as
well as local varieties-leading to a lack of confidence in improved varieties. We
believe that, rather than limiting use to state farms, a program of subsidies to help
local farmers obtain and grow the improved varieties would be more beneficial.
Debate Over Indonesian officials are debating whether to tighten or relax economic controls to
Indonesian counter a faltering economy. Jakarta last month devalued the rupiah by 31 percent
Economic Reform to stem Indonesia's deteriorating balance of payments-a move that has hit the
middle class hard and provoked heavy criticism of the government's economic
policy, according to the US Embassy.. Technocrats trying to eliminate trade
restrictions and favored monopolies are thwarted by protectionist forces intent on
further insulating the economy from foreign competition. Jakarta's next moves on
economic policy remain unclear. President Soeharto's pragmatic but image-
conscious regime is reluctant to resort to deficit financing or heavy foreign
borrowing to prop up government spending. Officials also deny that controls will
be imposed to conserve foreign exchange. Although Jakarta's technocrats are
studying options for removing certain trade barriers, the regime is unlikely to
dismantle those regulations and monopolies that benefit business interests having
close ties to elite elements, including the Soeharto family.
Secret 26
17 October 1986
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Thai Policies Bangkok's economic cabinet-the Council of Economic Ministers-this week
To Stabilize approved measures to reduce the country's dependence on foreign borrowing and
Economy imports and to sustain export growth. The package calls on the government to
maintain a $1 billion annual ceiling through 1988 on new foreign borrowing,
minimize exchange rate risks by spreading foreign exchange transactions across a
wider range of currencies, and shift investment away from large-scale, capital-
intensive projects. In addition, Bangkok plans to reduce its dependence on the US
market-which last year took 20 percent of Thailand's total exports-in response
to nervousness about US import restrictions. This move is probably timed to take
advantage of the baht's recent decline against most foreign currencies, a major
factor behind the almost 30-percent jump this year in exports to Japan and the EC.
Burma's Foreign A severe foreign exchange shortage has slowed production in about one-half of
Exchange Shortage Burma's highly import-dependent manufacturing enterprises
Intensifying Foreign exchange reserves were down to $17 million-less than
one month of imports-at the end of June, in large measure because of low world
rice prices and production shortfalls for teak, Burma's two major export commod-
ities. Important manufacturing enterprises such as textile mills and an oil refinery
are operating at no more than half capacity because they cannot obtain imported
raw materials. Rangoon's principal response appears to be requests for additional
financial assistance from Japan, Burma's largest aid donor.
Czechoslovakia Prague is planning to cut the wholesale prices of three-fourths of Czechoslovak
Pressingfor industrial products by January 1988 to force improvements in productivity and
Greater Productivity efficiency. The price cuts-projected to amount to over $18 billion at official
exchange rates-will require enterprises to reduce production costs in accordance
with 1986-90 plan provisions in order to record a profit. This measure may result
in some waste cutting but probably not enough to meet planned efficiency targets.
The industrial sector has consistently fallen short of comparable goals in the past,
and we expect it will continue to do so as long as the leadership refuses to
undertake needed reforms, such as decentralizing decisionmaking or rewarding
managers for technical proficiency rather than political suitability. As the deadline
for implementing the price cuts approaches, Prague probably will be faced with
the choice of either greatly reducing their magnitude or explicitly subsidizing
enterprise losses. It is highly unlikely that the Czechoslovaks would force loss-
making enterprises to go bankrupt.
27 Secret
17 October 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3
Secret
China Considering
Short-Term Debt
Refinancing
debt is largely denominated in yen and is thus more costly to repay as a result of
the yen's appreciation. According to Western estimates, short-term debt-which
nearly doubled last year to $9.6 billion-accounts for approximately one-half of
China's total foreign debt. A new interministerial committee, formed to monitor
the country's macroeconomic developments, will probably approve the refinancing
package in the coming weeks. This committee is Beijing's first attempt to
coordinate its overall debt and the activities of the various financial institutions.
China Forms Beijing has established the China Technology Market Development Group to
National Technology promote technology development and transfer activities. According to Chinese
Market Group press reports, the group-representing industry, research, and government-will
cooperate with financial organizations to invest in technology development, to
transfer results to rural areas, and to offer unspecified services relating to
technology imports and regional technology development. Over the past several
years, Beijing has encouraged technology sales and joint research and development
contracts to increase the use of technology. Chinese officials report, however, that
the volume of domestic technology commerce has declined significantly during the
first half of 1986 compared with the same period in 1985. We believe the new or-
ganization may stimulate technology transfers by developing new sources of much-
needed funding, but is unlikely to address the other key problems hampering
technology trade: broken contracts, fraudulent sales, and an overreliance on low-
level technology because of its lower initial costs. Moreover, the new organization
is one of several competing national groups with similar mandates.
Secret 28
17 October 1986
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3
 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3
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Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400210004-3