INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00770R000100180001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: December 22, 2016
• Document Release Date: June 23, 2011
• Sequence Number: 1
• Publication Date: March 28, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP97-0077OR000100180001-3
Directorate of
Intelligence
::~~& eO;~6r
he ~1Oe4rnoua-01
International
Economic & Energy
Weekly
DI IEEW 86-013
28 March 1986
Copy 6 6 7
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International
Economic & Energy Weekly
iii Synopsis
1 Perspective-OPEC Awaits the Next Saudi Move
3 Iran-Iraq: Economic Situation Worsening
7 Mexico: Charting the Financial Gap
11 Summit Issues: The US Initiative on Debt
15 Summit Issues: The New GATT Round
17 US Sanctions Against Libya: Opportunities for Eastern Europe
21 The USSR and China: Boosting Industrial Use of Computers
25 Briefs Energy
International Finance
International Trade
Global and Regional Developments
National Developments
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Comments an r' ding this publication are welcome. They may be
directed to
Directorate of Intelligence
Secret
DI IEEW 86-013
28 March 1986
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International
Economic & Energy Weekly
Synopsis
The inconclusive end to OPEC's meeting in Geneva this week points to a
further erosion in oil prices. At this juncture, the Saudis do not appear ready to
help reverse the downward price path.
Declining oil prices and the falling dollar are compounding the problems
facing Iran and Iraq from their ongoing conflict. 25X1
Both debtors and creditors have publicly welcomed the US initiative on LDC
debt as a positive first step, but all groups have expressed some reservations.
Bix Six leaders will probably not make the launching of a new round of
multilateral trade negotiations a major issue at the Tokyo Summit. Disagree-
ment on some aspects of the trade talks could arise, however, particularly
1 Perspective-OPEC Awaits the Next Saudi Move
3 Iran-Iraq: Economic Situation Worsening
Even though Mexican officials reduced their estimated financial gap from
$9 billion in early February to $6 billion last week, we believe there still is a
substantial gulf between Mexico's needs and the amount creditors are willing
7 Mexico: Charting the Financial Gap
11 Summit Issues: The US Initiative on Debt
15 Summit Issues: The New GATT Round
regarding agriculture, Japanese trade practices, investment, and textiles.
17 US Sanctions Against Libya: Opportunities for Eastern Europe
paying many of its East European suppliers.
US sanctions against Libya may provide an opportunity for Eastern Europe to
earn badly needed hard currency as well as to diversify its sources of oil. Bloc
countries almost certainly must weigh carefully Tripoli's past unreliability in
iii Secret
DI /EEW 86-013
28 March 1986
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21 The USSR and China: Boosting Industrial Use of Computers
The Soviet Union and China have each embarked on ambitious programs to
bolster labor productivity, raise product quality, and improve management
practices by introducing more low- and intermediate-level computer technol-
ogy throughout their economies. In our judgment, China will achieve more
rapid short-term progress in the widespread introduction of computers in
industrial facilities, but both countries will remain behind the West.
Secret iv
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International
Economic & Energy Weekly
Perspective OPEC Awaits the Next Saudi Move 25X1
The inconclusive end to OPEC's meeting in Geneva this week points to a
further erosion in oil prices. Without active Saudi cooperation, the organiza-
tion will probably be unable to forge an approach to stabilize prices at its next
meeting on 15 April. At this juncture the Saudis do not appear ready to help
reverse the downward price path. Indeed, Saudi Arabia's strategy for captur-
ing a greater market share has been successful so far. Demand is beginning to
respond to lower prices and could register its largest annual increase since the
late 1970s. Some high-cost oilfields-mainly in the United States-are also
beginning to be shut in because of lower prices, a positive development in
Riyadh's view.
The stakes of the Saudi strategy, however, are high. As Saudi output doubled,
and Riyadh boosted sales through netback pricing, revenues for other produc-
ers have plummeted. Moreover, the new marketing approach carries a risk of
reprisal from Iran and Libya that has caused uneasiness among Saudi Arabia's
We believe a combination of objectives is probably behind Riyadh's strategy:
increasing oil revenue; forcing producer cooperation on output to restore price
stability and maintain current market share; ensuring a growing long-term
market for oil; and, to a lesser extent, squeezing Iran economically. Domestic
and international conditions cause one objective or another to dominate Saudi
oil policy at any given time. For example, we believe that short-term revenue
requirements were the driving force prompting Riyadh to abandon its OPEC
role as swing producer. Each of these objectives entails different implications
for the market and Saudi willingness to compromise within OPEC:
? Oil prices around $15 per barrel probably would satisfy Riyadh's revenue
objective, in our view. If maintaining current revenues in the short run is
Riyadh's prime objective, we would expect the Saudis to begin soon to take
steps to stop the price decline.
? If Saudi Arabia wants to "teach other producers a lesson," it is probably pre-
pared to see prices fall as low as $10 per barrel for several months.
? If a desire to ensure a growing long-term market dominates Saudi objectives,
Riyadh will probably attempt to keep prices depressed for several years.
Although it may not have a specific price objective, we believe the market re-
sponse Riyadh would be seeking could be achieved in the $10 to $15 price
range.
Secret
DI IEEW 86-013
28 March 1986
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? Riyadh almost certainly is pleased that lower prices make financing the war
effort more difficult for Iran. A shortfall in oil income, moreover, forces
Tehran to cut domestic spending and limit imports of essential consumer
goods, which probably would lead to an erosion in popular support for the
Khomeini regime.
Although Riyadh may believe that it has the capacity to fine-tune the system,
because of the complexity of the international oil market the Saudis might not
be in a position to control a price collapse. Riyadh, in that event, would be
blamed for precipitating a crisis and would face the risk of retaliation from
other oil producers such as Iran and Libya, increasing the probability of a
disruption of Persian Gulf oil supplies.
US vulnerability to future price shocks or supply disruptions is heightened
considerably by any Saudi strategy promoting lower prices, regardless of the
motive. Low oil prices discourage investment in exploration and development,
especially in high-cost regions like the United States. Moreover, lower oil
prices will encourage oil consumption and hasten a return to tight market
conditions. Because of the high concentration of oil reserves in the volatile
Middle East, lower oil prices will accelerate a return to greater dependence on
this region. By the early 1990s, even a relatively minor disruption could
produce another price shock. Since the Saudis hold the largest oil reserves in
the area, Western dependence on Saudi Arabia as a major oil supplier would
be increased, and Riyadh's political and economic clout would be enhanced.
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Secret
Iran-Iraq: Economic
Situation Worsening
Declining oil prices and the falling dollar are
compounding the problems facing Iran and Iraq
from their ongoing conflict. Severe economic hard-
ships in the months ahead will almost certainly
increase the level of popular discontent in both
countries. Neither Tehran nor Baghdad face eco-
nomic collapse, however, and it would take several
months before sustained economic strains would
pose a serious threat to Iraqi President Saddam
Husayn's grip on power or cause Iran to consider
adopting a less aggressive stance on the war.F
Iraqi Economic Outlook
Because of the sharp decline in oil prices, the Iraqi
people face a severe decline in living standards in
1986. Assuming a $15 per barrel average oil price,
we estimate Iraqi oil revenues will fall to about $8.5
billion this year from $11.4 billion in 1985. More-
over, the lower value of the US dollar increases the
real impact because oil is priced in dollars, whereas
most Iraqi imports and debts are valued in other
currencies. If the dollar stabilizes at its current
level, we estimate the impact would be equivalent
to an additional 5-percent decline in revenues. In
addition, oil exports, which represent 97 percent of
foreign exchange earnings, are already at capacity.
Iraq is likely to reschedule approximately $1.5
billion in debt payments due this year, but is
unlikely to obtain additional credit from its trade
partners. We estimate Baghdad owes non-Arab
creditors $9-10 billion. Western banks were reluc-
tant to increase their exposure in Iraq even before
the recent drop in oil prices and Iran's capture of
Al Faw. The Embassy reports Baghdad also failed
to obtain additional credits for imports of consumer
goods from East European countries.
Baghdad can probably count on continued large-
scale financial support from Saudi Arabia and
Iraq: Current Account, Billion US $
1984-86
10.4
11.4
8.5
8.5
Net services and
private transfers
-2.8
-3.1
-3.4
- 3.4
a Projection based on an average oil price of $15 per barrel, oil
exports averaging 1.55 million b/d, and a 25-percent reduction in
imports.
b Projection based on an average oil price of $15 per barrel, oil
exports averaging 1.55 million b/d, and maintaining imports at the
1985 level.
Kuwait, especially while Iran is doing well militari-
ly. Riyadh and Kuwait 25X1
have renewed an agreement to sell oil on Iraq's
behalf, which brought in about $2 billion in 1985.
In addition, Baghdad has probably received large
cash infusions. Even with additional Arab aid, 25X1
however, Baghdad cannot avoid substantial auster-
ity measures.
New economic realities will force the Ba'thist
regime to virtually abandon the domestic spending
policies it has so far used to shore up political
support. We estimate Iraq will need to cut imports
by 25 to 30 percent. Most of the cuts will fall on re-
maining development projects and goods for domes-
tic industry, creating shortages of nonessential con-
sumer goods and fueling inflation. The US 25X1
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28 March 1986
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Secret
Embassy already reports shortages of important
domestically produced goods, and we foresee fur-
ther reductions in the perquisites of military offi-
cers and public officials and in benefits to families
Iran: Current Account, Billion US $
1984-86
of war dead.
Heightened austerity will contribute to popular
discontent and increase the likelihood of a coup
within the Bath party. In particular, loss of perqui-
sites and power as a result of lower oil revenues
could encourage government officials and military
officers-already upset by mismanagement of the
war-to seek Saddam Husayn's removal. The
greatest threat over the next several months, how-
ever, will be from Iran. A further deep incursion
into Iraqi territory could push the army to stage a
coup.
Iran has more options than Iraq in dealing with
falling oil prices but lacks deep-pocketed allies like
the Saudis. Oil accounts for only one-third of Iran's
GDP compared with two-thirds for Iraq. Moreover,
Tehran retains some $3-4 billion in liquid foreign
exchange reserves and has negligible long-term
foreign debts.
Net services and -3.0 -2.8 -2.7 -2.7
private transfers
a Projection based on an average oil price of $15 per barrel, oil
exports averaging 1.66 million b/d, and a 20-percent reduction in
imports.
b Projection based on an average oil price of $15 per barrel, oil
exports averaging 1.66 million b/d, and maintaining imports at the
1985 level.
Iran could manage its finances with such a cut by
accepting foreign credits, which it has so far avoid-
ed on ideological grounds. Tehran will probably
avoid running down foreign exchange assets be-
cause it regards these as a cushion against an
extreme emergency such as a complete cutoff of its
Tehran's oil policy remains something of a wild
card. Iran has the capacity to raise oil exports by
up to 60 percent if Iraq does not destroy key oil
facilities. Tehran has so far been unwilling to risk
intensifying the current price war, in large part
because the clerical regime believes that low oil
prices only benefit the West. Nevertheless, Teh-
ran's willingness to abide by its OPEC quota may
fade if oil prices remain depressed over a long
period. At the recently concluded OPEC meeting,
Iran's Oil Minister threatened to greatly increase
exports if OPEC cannot reach agreement on cut-
ting production.
Unless Iran increases oil exports, we estimate $15 a
barrel oil and a weakened dollar would cause about
a 35- to 40-percent decline in real forei n exchange
earnings in 1986. Iran
expects to trim imports by at least 20 percent this
year following a 30-percent reduction last year.
oil exports
The war and slack oil market have caused Iran
increasing economic distress, especially over the
past year, and growing
resistance to calls for ever greater sacrifices. Food
and military imports are likely to be spared in the
next few months, leaving the full burden of cuts on
the long-suffering industrial and construction sec-
tors. Higher unemployment and inflation seem
inevitable. Severe shortages of important consumer
goods such as medicines and meat already exist,
and most people must turn to the high-priced black
market for their needs. On the plus side, domestic
agricultural production is up and food shortages are
unlikely. The government is also giving freer rein to
the still important private sector, which should
provide some cushion against necessary reductions
in imports.
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Recent military successes harden Tehran's will to
fight on and help temper popular reaction to great-
er economic hardships. Moreover, the Islamic Re-
public retains considerable popular support. Eco-
nomic problems are likely to produce some unrest,
although not enough to pose a serious threat to the
regime over the next 12 months unless combined
with a major setback in the war. The need for even
tougher austerity measures, however, may eventu-
ally convince Tehran that it must scale down its
war effort to preserve the Islamic Republic and
guarantee a tolerable level of long-run economic
development.
Impact on the War
Financial constraints will not prevent either side
from continuing the war in the short term. Iran's
war effort is "labor-intensive," and the high level of
Arab aid to Iraq almost guarantees that neither
nation will find itself critically short of military
supplies in the next several months. Over the longer
term, however, Iran will probably find it difficult to
maintain the scale of its military initiatives, and
Iraq will need to trim plans to modernize its forces.
Both combatants presumably are reviewing their
military options in light of current economic pres-
sures. Iraq may mount more aggressive attacks on
Iran's economic infrastructure. We believe Iraq has
the capability to bring much of Iran's economy to a
standstill by destroying its electrical system and oil
refineries. If Baghdad maintains pressure on eco-
nomic targets for a few months, Tehran might be
compelled to accept a de facto truce in the war.
Iran has warned Saudi Arabia and Kuwait to
bolster the price of oil by restraining production
and to discontinue their massive economic support
for Iraq. Iran already appears to have stepped up
attacks on tankers in the Gulf and will probably
take stronger action-including terrorist acts or
tanker seizures in the Gulf-if oil prices remain
depressed.
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Mexico: Charting the
Financial Gap
Even though Mexican officials reduced their esti-
mated financial gap from $9 billion in early Febru-
ary to $6 billion last week, we believe there still is a
substantial gulf between Mexico's needs and the
amount creditors are willing to offer. The de la
Madrid administration has announced it will seek
$2.5 billion in new commercial bank lending and
another $1.5 billion in funding from multilateral
lending institutions. Mexican negotiators
publicly claim the country will cover the remaining
$2 billion through Paris Club reschedulings and
bolstered nonoil exports,
foreign commercial banks plan to offer only $2.5
billion contingent on an agreement with the IMF
and structural adjustment legislation. Perhaps
more important, they have agreed to reject any
Mexican request for interest payment concessions
or capitalization. In addition to lost revenues, the
banks fear a spillover of such concessions to other
debtors. Moreover, banks do not want to appear to
be rewarding Mexico for the country's poor eco-
nomic policies in 1985.
1986 Financing Gap-How Big?
From the perspective of foreign creditors and
Washington, the first step in finding a solution to
Mexico's financial problem lies in determining the
true magnitude of the country's needs. To take a
closer look at these needs, we have charted financ-
ing gaps under three scenarios.
Sharing the Burden. In our view, the most probable
outcome will be one of moderate sacrifice on the
part of Mexico, with some sacrifice on the part of
creditors. In this case, we project that GDP would
decline about 3 percent and inflation would hit 80
to 85 percent. Under this scenario, Mexican oil
prices stabilize at $15 per barrel and oil exports
average 1.3 million b/d. In addition, LIBOR-the
rate to which most Mexicans' loans are pegged-
stays at about 8 percent.
The nearly 50-percent fall in petroleum revenues
projected for 1986 as a result of the price decline--
about $6.5 billion-will be partially offset by at
least a 20-percent increase in nonoil exports, made
possible by stagnant domestic demand and a favor-
able exchange rate policy. Significant increases in
maquiladora activity (assembly plants) fueled by
aggressive support from Mexico City, the growing 25X1
popularity of the program with US businessmen, 25X1
and the higher expected level of US economic
growth this year also could help rescue the current
account. In our view, the country alsd can increase
its tourism receipts 25 percent if it modestly deval-
ues the peso and takes measures to allay tourists'
safety concerns.
Even though Mexico City soon will begin negotia-
tions to join the GATT, import barriers probably
will be retained through 1986. These restrictions,
combined with a modest peso devaluation and
depressed domestic demand, will keep imports well
below 1985 levels. In addition, the country will save
about $400 million from interest overpayments
after last year's restructuring and perhaps that
much again from lower priced imports of petroleum
derivatives and petrochemicals. Therefore, we ex-
pect Mexico's import bill to decline by about $1.2
billion from the 1985 level. Even if de la Madrid is
able to rebuild some confidence in the Mexican
economy, the likelihood of depressed domestic in-
terest rates and ineffectiveness of government at-
tempts to repatriate capital will probably mean that
capital flight will be reduced to $2.0 billion at best.
Finally, we assume that the IMF will require as
part of any 1986 financial package that the country
raise foreign exchange reserves.
Secret
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28 March 1986
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Mexico: The Potential 1986 Financial Gap
Most No $10 per
Likely Adjust- Barrel
Case ment Oil Price
Current Account
5,324
3,969
-427
-2,497 -3,797 -3,370
Trade balance
13,762
12,800
8,235
4,318 3,168 3,445
22,312
24,054
21,835
16,718 _16,268 14,745
Oil and products
16,017
16,602
14,675
8,018 8,018 5,445
Maquila
818
1,115
1,300
1,5001,450 1,500
Other
5,477
6,297
5,860
7,200 6,800 7,800
8,551
11,254
13,600
12,400 13,100 11,300
4,307
4,790
4,950
4,750 4,950 4,500
Private sector
4,244
6,465
8,650
7,650 8,150 6,800
Services balance
-8,437
-8,831
-8,662
-6,815 -6,965 -6,815
Of which:
Interest payments
10,198
11,856
10,047
9,000 9,000 9,000
Tourism
1,183
1,307
1,200
1,500 1,350 1,500
Capital account
-1,106
-1,576
-1,931
4,998 6,798 5,870
Public sector
743
-207
519
7,178 8,978 8,050
Priva
te sector
-1,849
-1,369
-2,450
-2,180 -2,180 -2,180
Change i
n reserves
3,301
2,241
-3,019
500 500 0
Errors an
d omissions and capital flight
917
151
3,000
2,000 2,500 2,500
Estimated.
n Projected.
Including borrowing to finance the current account deficit, net
private-sector borrowing needs, capital flight, and reserve changes.
In our estimation, Mexico's financing needs would earthquakes and another $250 million due this
be about $7 billion under this scenario. As things year. We do not believe banks will grant Mexico
now stand, the best Mexico City can hope for from relief from interest payments or reduce their spread
commercial banks is a rescheduling of $1.2 billion over LIBOR. The de la Madrid administration
in principal payments: $950 million originally due probably can negotiate a rescheduling of $1 billion
in 1985 but deferred until now because of last fall's
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in official amortization payments through the Paris
Club. If new lending is limited to $4.1 billion-$2.5
billion from commercial banks and $1.6 from other
sources-the country would face a financing short-
fall of approximately $900 million, which could be
managed through some combination of reserve
drawdowns, additional import cuts, or appeals for
foreign financing.
Limited Mexican Sacrifice. A less likely scenario
could develop in which de la Madrid believes that,
because of political constraints, he is unable to
significantly improve the country's external bal-
ances through greater austerity. Lack of adjust-
ment measures would limit the fall in real GDP to
1 or 2 percent, but the deterioration of Mexico's
current account is substantial. In this case, we
assume oil still is selling at $15 per barrel and that
Mexico is exporting 1.3 million b/d. Once again,
we assume LIBOR is at 8 percent. Unlike the first
scenario, however, Mexico City does relatively little
to offset lower oil prices.
Even with a less ambitious exchange rate policy, we
assume the $6.5 billion loss in petroleum revenues
is partially offset by an increase in nonoil exports of
about 15 percent-about $1 billion, mainly the
result of depressed domestic demand-and a 12-
percent rise in tourism receipts. Growth of the
maquiladora industry would be constrained by a
lack of infrastructure investment and the politically
motivated desire to rein in northern Mexican busi-
nessmen.
Lack of an aggressive exchange rate policy allows
for only a modest saving in imports. Slow domestic
demand reduces private-sector imports by $500
million, but the government's import bill is un-
changed. Given the bleak economic future implied
in this scenario, we assume capital flight reaches
$2.5 billion. As before, we anticipate an IMF-
recommended increase in foreign exchange re-
Under this scenario, we estimate Mexico would
need $9 billion in external financing. Despite Mexi-
co's unwillingness to take tough adjustment mea-
sures, we believe the country still can count on
commercial banks to roll over both the $950 million
principal payment from last year and the $250
million payment this year. The banks probably
have already decided to reschedule these obliga-
tions to maintain the flow of interest payments.
Similarly, a $1 billion Paris Club rescheduling is
still likely. However, in light of the tough and
united stance bankers now appear to be taking, we
would expect little in the way of new lending or
concessions. At most, we believe foreign lending
from all sources would total $2.6 billion. Without
some relief from its creditors, the country almost
certainly would be forced to withhold interest
payments to cover the resulting $4 billion financing
gap.
$10 Oil Prices. In the third scenario, the average
price for Mexican oil falls to $10 per barrel and
export volume of 1.3 million b/d is maintained.
Again, LIBOR is at 8 percent. We believe the
dramatic fall in revenues would prompt Mexico to
adopt aggressive export promotion programs and 25X1
fairly strict import controls. At the same time, the
country's creditors probably would be under even
greater pressure to rethink their positions and
adopt a concessionary stance.
We estimate that the $8.5 billion loss in crude oil
revenues could be partially offset by a $2 billion
increase in nonoil exports if Mexico City imple-
mented a 20-percent devaluation and loosened
some foreign investment laws. In addition, tourism
receipts could be expected to climb 25 percent as
foreigners took advantage of the favorable
peso/dollar rate.
The devaluation, import control, and lack of Mexi-
can purchasing power also would save the country
some $2 billion. We believe that nearly all of the
savings would come from the private sector, which
also carried the weight of adjustment when imports
Action to bolster the country's external accounts
would not come without high domestic costs, how-
ever. We estimate GDP would plunge 4 to 6
percent in real terms and inflation almost certainly
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would approach triple digits if Mexico City imple-
mented these policies. These measures would be
politically costly as well, especially in the north
where trade is relatively more important and politi-
cal dissatisfaction is highest.
In this case, we estimate Mexico's borrowing needs
would be slightly over $8 billion. We believe that
Mexico's creditors, faced with the realities of $10
per barrel oil prices and encouraged by the de la
Madrid administration's willingness to adjust,
would be willing to grant some interest payment
relief, in addition to rescheduling $1.2 billion in
principal payments due this year. Thus, Mexico
City might receive up to $6 billion in new lending,
and an additional $1 billion in interest payment
concessions. Despite this relief, however, we believe
Mexico still would come up $1.75 billion short,
forcing a further drawdown in reserves and interest
payment arrearages.
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Summit Issues: The US
Initiative on Debt
Both debtors and creditors have publicly welcomed
the US initiative on global debt as a positive first
step, but all groups have expressed some reserva-
tions. Big Six leaders consider the US initiative a
good starting point for discussing debt and will
probably make it a prominent issue at the Tokyo
Summit. They might stress, however, that the
approach needs rethinking, particularly in light of
the impact of falling oil prices on oil-producing
countries. Major debtor countries, meanwhile, are
reluctant to undertake the substantial policy re-
forms that the approach entails, and some LDC
leaders feel full subscription to the US plan is
politically unpalatable at this time. Both debtor
countries and commercial banks have publicly ex-
pressed some concerns with the US approach and
responded with their own recommendations.
Debtors' Response
Summit participants will have an opportunity to
gauge debtor attitudes at the IMF/IBRD commit-
tee meetings in April. The 11 Latin American
nations of the Cartagena group' already have
issued a set of "emergency" measures for negotia-
tions on debt and growth that go beyond US
recommendations. Meeting in Montevideo, Uru-
guay, on 16-17 December 1985, the foreign and
finance ministers of the Cartagena group presented
counterproposals to the US approach and stated in
a joint declaration that structural problems in
industrial countries-particularly high real interest
rates-and falling terms of trade are the major
obstacles to solving their debt problem. The minis-
ters claim that living standards in Latin America
have slipped to levels of a decade ago, and they
argue that their countries cannot wait for improve-
ments in the world economy.
'The Cartagena group consists of Argentina, Bolivia, Brazil, Chile,
Colombia, Dominican Republic, Ecuador, Mexico, Peru, Uruguay,
US Treasury Secretary James Baker proposed a new
program for sustained growth in debtor countries on
8 October 1985 at the joint IMF/World Bank meeting
in Seoul, South Korea:
? Debtor countries are to adopt market-oriented poli-
cies to promote economic growth, hold down infla-
tion, and shore up their balance of payments. These
policies are aimed at improving the investment
climate in these countries by allowing a larger role
for private companies, asserting financial discipline
over public enterprises, and eliminating a variety of
economic controls.
? Lending by the World Bank and other multilateral
development banks to countries that adopt such
reforms would increase $9 billion over the next
three years. The IMF also would play a central role
in assisting and monitoring the adjustment process
in debtor countries. The initiative foresees in-
creased coordination between the World Bank and
IMF to ensure consistent policy advice.
? Debtor countries that undertook market-oriented
adjustment also would be eligible for $20 billion in
new lending by commercial banks during the next
three years. Secretary Baker has suggested that US
banks put up $7 billion, with West European and
Japanese banks providing the other $13 billion.
Meanwhile, the group of 24 2 (G-24) met on 4-6
March in Buenos Aires at the behest of Argentina
' The G-24, formed at the 1972 Lima meeting of the G-77 to
represent the interests of the Third World in international mone-
tary affairs, consists of eight finance ministers each from Africa,
Secret
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as the pro tempore chairman to try to reach a joint
position on debt and related issues for the 9-10
April meeting of the IMF's Interim Committee.
The G-24 report states that the US initiative
contains some positive elements, such as the recog-
nition that a lasting solution to the global debt
problem requires sustained economic growth. How-
ever, the finance ministers believe the US initiative
should be adapted to the needs of each country,
providing resources necessary to offset the fall in
the price of oil products and raw materials as well
as the capital inflows necessary to achieve sus-
tained economic growth. They declare that the
repayment capacity of the debtors will improve
only if the interest rates paid on their external
debts are reduced to levels below the present
market.
The declarations issued by the Cartagena group
and the G-24 are part of the effort of Latin debtors
to gain concessions from their international credi-
tors. Latin leaders must try to appease growing
domestic popular sentiment for a tougher stand
with creditors. Moreover, they want Washington to
view their debt problem as at least as important as
issues in Central America. Finally, these countries
are reluctant to undertake the substantial policy
reforms that the US approach on debt entails
because their leaders feel the reforms are politically
unacceptable.
Creditor Banks and Western Government Responses
Private bankers and government officials in West-
ern Europe and Japan remain skeptical about the
US initiative despite their public support. The
international banking community welcomed the
initiative as a new and promising approach, but
subsequently bankers have hedged their approval
with several conditions. Some bankers now believe
the amount of new lending envisioned in the initia-
tive will need to be raised in view of the deteriora-
tion in oil producers' export earnings. West Europe-
an bankers, in particular, want strong creditor
government action before they make any commit-
ments. British bankers, for instance, have said that
they will not move forward on the US initiative
The Cartagena Group Proposals
on Debt and Growth
The Cartagena group presented nine items for negoti-
ations on debt and growth at the Montevideo meeting
including:
? Western action to return real interest rates to
historic levels and examination of mechanisms to
ease the debt service burden.
? Increased capital flows to the region and a separa-
tion of old debt from new debt, with future credit
flows getting lower rates.
? Increases in commercial bank lending to at least
match world inflation.
? A limitation on debt payments, linked either to
economic growth or to export earnings.
? A 20 percent annual increase in multilateral devel-
opment lending for the next three years.
? Arrangement of multiyear restructuring and inter-
est capitalization through the Paris Club, without
creditors suspending new export credits or requiring
an IMF-supported adjustment program.
? Enlarging and broadening the coverage of the
IMF's compensatory financing facility to help offset
the impact of deteriorating terms of trade, natural
disasters, and increased interest rates.
? An easing of conditionality required by creditors
for new loans to allow for economic growth.
? Elimination of industrial country protectionist
measures.
In addition to these proposals, the Cartagena Steer-
ing Committee, which met on 27-28 February in
Punta del Este, Uruguay, to respond to the "emergen-
cy" situation created by the drop in oil prices, voiced
full support for Cartagena members' efforts to modify
existing debt agreements, especially by renegotiating
interest rates.
without a go-ahead from the Bank of England.
Senior managers of the 12 largest West German
commercial banks claim that the initiative places
too much of the burden on banks and have called
for greater tax write offs on bad loans and more
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Commercial Bank Exposure to
15 Troubled Debtorsa
? Italian officials see no alternative to increased
lending while the Canadians believe they have a
lot at stake because of Canadian exposure in
Latin America.
United States
35.0
EC Finance Ministers will try to formulate a
coordinated position on the US initiative when they
` Data are for December 1984. The 15 countries are
Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Ivory
Coast, Mexico, Morocco, Nigeria, Peru, Philippines,
Uruguay, Venezuela, and Yugoslavia.
n Venezuelan debt to Japanese banks not available.
export credit guarantees.
Governments' reaction has been generally
favorable:
? Japan's Finance Ministry already has called on
its banks to contribute $3 billion and advocates
implementing the initiative on a case-by-case
basis.
? French Finance Minister Beregovoy has praised
the US initiative as a "big step forward," and
French officials are especially pleased with its
proposals for a cooperative creditor strategy and
an enhanced role for the World Bank.
meet in the Netherlands on 4-6 April.
Even if bankers and government officials go along
with the US concept, they are likely to insist that
US banks take on a larger share of the lending.
many West Europe-
an banks are not willing to put up substantial new
funds for debtor countries such as Mexico. Despite
the exposure of their banks, the governments and
private banks in Western Europe and Japan believe
the burden of dealing with the problems falls on
Washington because they view Mexico primarily as
a US responsibility. Although they could suffer 25X1
financial losses, they are in much better shape than
most major US banks because of greater reserves
against their troubled loans and more favorable
writeoffs for bad debts.
Implementation of US Strategy
Some financial observers are concerned that if the
US approach is not soon translated into a workable
plan for major debtors such as Mexico, Argentina,
and the Philippines, the initiative may wither on
the vine. Thus far, however, most debtors have
displayed little commitment to economic policy
reforms. Creditor banks also want to see the US
concept turned into reality but will be hesitant to
become the sole source of additional funds. Bankers
? British officials agree with the objectives and
concept of the approach but believe that "sub-
stantial" changes are needed to get both lenders
and borrowers alike on board.
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believe that more leadership is required from West-
ern governments to implement the US approach.
Because of the serious global debt situation, Big Six
leaders undoubtedly will be eager to discuss the
international debt situation at the Tokyo Summit.
The United Kingdom, for example, regards it as a
"high stakes" issue because of London's status as a
key financial center. West German Finance Minis-
ter Stoltenberg has suggested making it the main
theme of the summit. The Big Six countries are
likely to declare publicly support for the US initia-
tive; they are unlikely, however, to agree to boost
export credits substantially or make the regulatory
changes that their bankers want.
Secret 14
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Summit Issues:
The New GATT Round
Big Six leaders will probably not make the launch-
ing of a new round of multilateral trade negotia-
tions a major issue at the Tokyo Summit. Disagree-
ment on some aspects of the trade talks could arise,
however, particularly regarding agriculture,
Japanese trade practices, investment, and textiles.
Non-US participants will probably seek a general
endorsement for the new round in order to keep
preparations on track and thus help avoid fueling
US protectionist pressures. Japan will probably try
to use statements of support for the new round to
help deflect attention from its contentious bilateral
trade issues
All summit partners have expressed general sup-
port for the launching of a new trade round at the
GATT Ministerial in September. The Big Six have
also endorsed the inclusion of trade in services in
the GATT negotiations, a key US initiative. None-
theless, many major issues for the new round's
agenda are still unresolved
A principal source of contention is the inclusion of
new trade issues. Several LDCs, led by India and
Brazil, have been arguing that the GATT is not the
proper forum for negotiating rules to promote
liberalized trade in services, enforcement of intel-
lectual property rights, and less restricted foreign
investment-key new round initiatives of the
United States. A longstanding demand by many
LDCs-including newly industrialized countries
(NICs)-is either that they be exempt from new
GATT agreements or that the agreements be ap-
plied to LDCs gradually, given their special need to
protect domestic markets. Many LDCs are also
insisting that industrial country reduction of trade
barriers against traditional LDC exports, such as
agricultural products and textiles, be accomplished
as "confidence building" measures before a new
round begins. The West Europeans, however, are
likely to balk at LDC proposals-particularly on
textiles-which threaten to increase European un-
employment. Moreover, disagreement also exists
among the industrialized countries on a number of
these issues.
Agriculture has the potential to be the most conten-
tious GATT-related issue at the summit. The EC
has repeatedly warned that proposals aimed at
attacking its Common Agricultural Policy (CAP) 25X1
are not negotiable. France, the most zealous de-
fender of the CAP, believes that any GATT discus-
sion of agriculture will degenerate into an attack on
EC policy. The conservative victory in last week's
French parliamentary elections, moreover, proba-
bly presages an even tougher stance by Paris.
French President Mitterrand cited this concern in
opposing the Bonn Summit's declaration of support
for the new round last year. Jacques Chirac, the
new prime minister, has expressed opposition to a
new trade round unless EC-US differences on
agriculture are resolved, according to Embassy
reporting. Among other summit countries:
? We believe that Italy would support French
opposition to agriculture's inclusion in the GATT.
? The United Kingdom, on the other hand, has
stated that agriculture is a priority issue for the
trade round.
? West Germany, while backing London, is unlikely
to press the issue in Tokyo, since its farmers are
heavily dependent on CAP subsidies and Chan-
cellor Kohl probably is unwilling to antagonize
the French over this issue.
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Secret
? Canada, although unlikely to initiate discussion of
agriculture issues, is strongly opposed to EC
agricultural subsidies and to recently enacted US
farm legislation
Japanese trade restrictions are likely to become the
target of a West European attack. The EC has long
viewed Japan as the most notorious unfair player
within the GATT, and last week proposed discuss-
ing that problem formally in the new round. Al-
though Japan will attempt to steer summit deliber-
ations away from the market access issue, the
Europeans will probably attempt to use Tokyo's
desire as summit host to avoid major blowups as a
means to gain Japanese concessions in this area.
Textiles has the potential to become a problem
issue. Although EC trade ministers recently agreed
that current negotiations to renew the Multifiber
Arrangement (MFA) should be followed by efforts
in the new round to liberalize trade in textiles and
apparel trade, individual EC members are probably
still divided on the question. France and Italy, in
fact, are seeking a more restrictive extension of the
MFA to protect their textile and apparel industries
from LDC exports. Bonn and London, in contrast,
believe the industrial countries can solidify LDC
support for the trade round by phasing out the
MFA and including textiles in the GATT negotia-
tions. Canada will probably oppose folding MFA
into the GATT.
Trade-related investment could also generate dis-
agreement at the summit. London, Bonn, and
Rome believe that the current US position on
including investment in the new round is too broad
and is being pressed too hard. In their view,
according to US Embassy reporting, the United
States risks provoking strong LDC resistance not
only to including investment but also to other
GATT priorities, such as services. The three coun-
tries believe the LDCs will particularly oppose
investment if topics such as expropriation are in-
cluded. They prefer to restrict GATT negotiations
to areas the LDCs will probably find less sensitive,
such as investment incentives, export performance
requirements, and local content. Japanese officials
similarly are hesitant about making the discussion
of investment too broad, according to Embassy
reporting.
Intellectual property rights may receive only luke-
warm response from several non-US participants.
According to US Embassy reporting, the United
Kingdom, West Germany, and Italy view the issue
with little enthusiasm. Bonn, for example, believes
that pushing too hard on copyright violations and
counterfeit goods, in which LDCs are major of-
fenders, could reduce LDC support for the new
round.
Services will probably not prompt serious disagree-
ment at the summit. Once the new round begins,
considerable disagreement will probably emerge
regarding specific service sectors to be included and
the means for negotiating service trade rules.
Beyond the Summit
Although the summit almost certainly will support
the launching of the new round, substantial dis-
agreement on key topics has the potential for
slowing the progress of the new round. Open dis-
cord among the summit participants-such as an
EC attack on Japanese trade restrictions-would
diminish developed country unity on the new round
and could cause problems for US efforts to include
some items on the new round's agenda.
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US Sanctions Against Libya:
Opportunities for Eastern Europe
US sanctions against Libya may provide an oppor-
tunity for Eastern Europe to earn badly needed
hard currency as well as to diversify its sources of
oil. Several East European countries-particularly
Bulgaria, Romania, and Hungary-may seek to
supply Libya with technology and petroleum drill-
ing equipment previously supplied by US firms.
Bloc countries almost certainly must weigh careful-
ly Tripoli's past unreliability in paying many of its
East European suppliers. Moreover, Eastern Euro-
pe's potential to capitalize on the sanctions depends
on West European competition because Libya, for
both economic and political reasons, is likely to
view the Bloc as a second choice.
Turning Oil Into Hard Currency
A substantial portion of the Libyan crude oil
obtained in barter deals is refined and reexported to
the West for hard currency.' From 1980 to 1985
the region earned $4-7 billion in hard currency
annually from reexports of oil. Over the past
decade Libya has provided 13 to 15 percent of
Eastern Europe's non-Soviet oil imports. In 1983
Bulgaria and Hungary relied the most on Libyan
oil, importing over 75 percent of their non-Soviet
oil from Libya. Poland (60 percent of non-Soviet oil
imports), Yugoslavia (30 percent), and Romania (10
percent) also counted on Libyan oil. According to
the US Embassy in Prague, Czechoslovakia has
received substantial amounts of Libyan oil, which it
has resold on the spot market, although neither
country reports these deals. East Germany imports
little, if any, oil from Libya.
Opportunities for Expanded Ties
East European firms potentially could fill some of
the gaps left as US firms comply with the sanc-
'The USSR supplies about 70 percent of Eastern Europe's oil
imports and Libya, along with Iran and Iraq, supplies the rest.
Although Libya has played a relatively small role
in Eastern Europe's foreign trade, the growth in
Eastern Europe's exports to Libya since 1980-
almost 2 percent annually-exceeds the growth of
the region's exports to developing countries as a
whole. In 1984 Libya purchased 10 percent of the
region's hard currency exports to developing coun-
tries. Hungary and Bulgaria have seen the most
rapid growth of exports to Libya; East Germany
has experienced a decline in sales.
Libya provides an outlet for East European arms
and manufactured goods, many of which are not
competitive in Western markets. Czechoslovakia,
Yugoslavia, and Bulgaria have been Libya's major
East European arms suppliers. In 1983 and 1984
East European arms deliveries to Libya totaled
$480 million and $350 million, respectively. East-
ern Europe also supplies services and equipment
for oil drilling and refining and constructs large-
scale projects such as refineries, factories, power
plants, irrigation systems, agricultural facilities,
housing, roads, and some military-related projects.
Because of the scarcity of skilled professionals and
need for construction crews, Tripoli employs a
sizable number of East European guest workers
and pays their salaries in hard currency. An
estimated 50,000 East Europeans-including 800
military advisers-currently work in Libya.
tions. Bulgaria and Romania already have an es-
tablished presence in Libya as suppliers of petro-
leum drilling and exploration equipment and tech-
nicians. These countries probably could provide
additional equipment and services of sufficient
Secret
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quality and quantity to maintain Libyan oil produc-
tion and exports. Tripoli is already hiring Bulgarian
crews to replace US crews in conducting seismic
studies and is likely to bring in more Bulgarian
Incentives for East European countries to replace
US firms in Libya include:
? Hard currency earnings. Increased sales of equip-
ment and services to Libya, specifically in the
petroleum sector, could generate hard currency-
either by direct payment or via reexport of more
Libyan oil. Goods and services previously sup-
plied by US firms totaled about $600-700 million
annually. Because of the soft oil market, Eastern
Europe may have good bargaining leverage in
striking barter deals with Libya. These same
market conditions, however, limit prospects for
reexporting more of this oil without putting addi-
tional pressure on prices. Still, even if Eastern
Europe marketed just one-fourth of the Libyan
oil formerly sold by US companies and prices
plunged to $10 per barrel, the region could earn
annually nearly $200 million in hard currency.
? Diversification of Oil Sources. By diversifying its
energy sources, Eastern Europe lowers the risk of
domestic energy shortfalls-a particular concern
if the Soviets decrease their oil exports to the
region. The USSR might choose to redirect some
oil exports to the West to generate hard currency
in the wake of falling energy prices or retain more
oil at home to balance supplies with growing
domestic demand. In addition, Eastern Europe
may look increasingly to Third World oil produc-
ers such as Libya because the price for Soviet
oil-while payable in East European goods-is
now almost twice the world price.
Eastern Europe is probably approaching increased
Libyan commercial ties with caution. In recent
Eastern Europe: Trade With Libya,
1984
Estimated.
According to official East European trade statistics,
Czechoslovakian and Polish imports of Libyan goods are
negligible.
c Including some oil imports on Soviet accounts.
years several Bloc countries have encountered diffi-
culty in receiving payment for exports-including
military hardware-and construction services. Fall-
ing oil prices and revenues have worsened Tripoli's
cash flow problems. Uncertainty about Libya's
creditworthiness has probably limited trade be-
tween Tripoli and the Bloc.
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Libya's cash shortage has forced some of its East
European creditors to accept payment in oil, and
even then Tripoli has been less than reliable in
making deliveries.
some East European firms have had considerable
difficulty getting Libya to deliver oil to settle debts.
Recently, Romania blamed its inability to meet
payments due to Western banks on Libya's failure
to meet its commitment to deliver oil for resale.
Even if this accusation is exaggerated, such bad
experiences may induce Romania and other Bloc
countries to go slowly on expanding trade ties.
Despite the risks, East European countries are
likely to try to supply Libya with goods and services
previously furnished by US firms. However, the
region's ability to do so is limited. Soviet demands
for oil and gas equipment, coupled with its hard
currency shortages, could persuade the USSR to
look to its East European allies to replace Western
equipment purchases. The need to supply the Soviet
economy could leave little slack capacity to produce
goods for the Libyans.
Furthermore, competition from West European
and Asian firms also seeking to benefit from US
sanctions will limit the Bloc's gains.
Libyan authorities are likely to continue to favor
these firms over the East Europeans. By employing
Western firms, Qadhafi would not only receive
better quality goods and services but also isolate
the United States from its West European allies.
As long as Eastern Europe faces such competition,
its gains from increased commercial ties to Libya
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The USSR and China:
Boosting Industrial Use
of Computers
The Soviet Union and China have each embarked
on ambitious programs to bolster labor productivi-
ty, raise product quality, and improve management
practices by introducing more low- and intermedi-
ate-level computer technology throughout their
economies. In our judgment, because it has easier
access to Western equipment and technical support
and less resistance to computer use, China will
achieve more rapid short-term progress in the
widespread introduction of computers in industrial
facilities, but both countries will remain behind the
West. Potentially, the efforts to introduce computer
technology into Soviet and Chinese industry will
create new market opportunities in Western firms,
but will heighten tensions among COCOM mem-
bers. As China's own computer production capabil-
ity and imports rise, moreover, China could become
a new target for Soviet computer-related acquisi-
tions.
Lagging Behind the West
Soviet and Chinese enterprises lag behind Western
enterprises in exploiting electronic technology to
boost productivity and raise product quality. One
knowledgeable American academic has estimated
that less than 8 percent of Soviet industrial enter-
prises had mainframes in 1984. China has far fewer
mainframes than the Soviet Union-probably less
than 1 percent of China's factories had either
minicomputers or mainframes by the end of 1984.
Moreover, the Soviets and Chinese both have diffi-
culty applying existing computer technology. The
Chinese admit to having 70,000 microcomputers
idle in warehouses, and to using 50 to 80 percent of
their computers ineffectively. Soviet officials have
also openly complained that computers are not used
efficiently. Nationwide statistics on computer utili-
zation are not available, but a recent Soviet press
report acknowledged that in Leningrad, on average,
only 60 to 70 percent of the capacity of automation
facilities and computers is being used.
tion and planning
Both the Soviets and the Chinese have ambitious
goals for the widespread application of computers
at factories and research institutes. In January
1985, the Soviet Politburo approved a program for
the development, production, and effective use of
computer technology and automated systems up to
the year 2000. An important part of this effort is a
plan to put as many as 1 million personal comput-
ers in secondary and vocational-technical schools
over the next 15 years. China is also embarking on
an ambitious program to broaden the use of com-
puters throughout the economy. A number of min-
istries and central agencies, spurred on both by the
economic modernization strategy and by the US
and COCOM adoption of more liberal export
control policies toward China, have undertaken
programs to apply computer technology to produc-
... But Different Approaches
The Soviets, confronted with stronger Western
export controls, are being forced to rely more on
domestic and CEMA resources to increase the
availability of computers. Soviet efforts to obtain
Western turnkey facilities and process technology
for the manufacture of computer equipment have
been consistently rebuffed. The draft 12th Five-
Year Plan (1986-90) calls for an increase in overall
computer production of 100 to 130 percent and the
start of mass production of PCs. Although the
Soviets currently have a much more developed
computer industry than the Chinese-at least for
the larger minicomputer and mainframe systems-
production problems, especially in the microelec-
tronics and magnetic disk drive areas, have consis-
tently frustrated Soviet efforts to increase comput-
er output.
Secret
D/ 1EEW 86-013
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China has used its advantage of a more liberal
Western export control policy to import large
amounts of computers and computer equipment.
We estimate that China in 1985 imported 65,000
microcomputers from the West compared with less
than 10,000 for the Soviets. The Chinese also have
a headstart on the Soviets in the application of
personal computers, acknowledged in both coun-
tries as one of the key components in raising
industrial efficiency and spurring innovation. Since
the beginning of 1983, when the government an-
nounced a decision to focus on minicomputers,
China has purchased over 125,000 PCs from the
West. Although China has recently cut back on
purchases of Western PCs, this has been partially
offset by increased domestic production, primarily
through the assembly of imported computer kits.
Odds Favor Greater Chinese Progress ...
Domestic Opposition. The Soviets have to deal
with opposition from party and police officials, who
view the widespread use of computers as a threat to
the state monopoly of information. The prospect of
millions of personal computers-each a potential
printing press when coupled with a printer and
wordprocessing software-alarms the leadership.
In contrast, the
Chinese seem to have fewer ideological inhibitions
against broad dissemination of information.
Chinese managers generally need less persuasion
than their Soviet counterparts to adopt computer
technology. Incentives to improve profitability by
cutting waste, reducing production costs, and in-
creasing output are built into China's economic
reform program-and many managers have sought
computers to improve industrial performance. In
contrast, Soviet managers often are reluctant to
incorporate new technologies that could temporar-
ily lower output. Moreover, bonuses are often tied
to the number of computer tasks performed and to
the number of subsystems in place. So, instead of
developing integrated systems, users create many
separate-cumulatively inefficient-systems.
Computers in China and the USSR, Number of units
1985- (except where noted)
Minicomputers/
mainframes
10,000
60,000
Minicomputers/
mainframes
2,000
4,000 to 6,500
a Estimated. Reliable statistics on the Soviet and Chinese computer
sectors are scarce. Our estimates are drawn from Chinese and
Soviet statements and analysis of trade data.
Yet another barrier for Moscow is resistance from
Soviet industrialists and scientists to the use of
imported equipment or production lines to meet
demand while the domestic computer industry
gears up. Our statistics on Soviet computer imports
are incomplete, but we believe that the vast major-
ity of the computers in the Soviet Union were
manufactured domestically. The fear is that mas-
sive imports will undermine commitment to domes-
tic development of computer technology. Beijing
has also grown protective of its infant computer
industry in the last few months. Even so, Beijing
acknowledges the need for imports-of microcom-
puter kits, or finished minicomputers and main-
frames, if not of completed micros. We estimate
that since the start of 1983 imports have accounted
for roughly two-thirds of China's microcomputer
inventory.
Greater Access to Foreign Technology and Train-
ing. China enjoys greater access to Western com-
puters, production technology, training, and after
sales support than the Soviet Union. COCOM
relaxed restrictions on sales of eight-bit comput-
ers-the type sought for school use-to the Soviet
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Secret
Union in January 1985, but controls on sales of
more sophisticated 16-bit computers required for
Soviet industrial, scientific, and higher education
applications remain stringent. For China, US ex-
port licenses for most 16-bit microcomputers have
routinely been approved since November 1983; US
firms have been able to get bulk distribution li-
censes for them for more than a year. Although the
licensing process is lengthier for minicomputers and
mainframes, most are also approved by the United
States and COCOM for sale to China. Beijing also
faces fewer obstacles to the transfer of computer
production know-how. China is currently pursuing
more than 100 cooperative projects for computer or
peripheral production with foreign firms-mostly
US-and last year signed its first joint venture
agreement to coproduce mainframes. US and CO-
COM guidelines strictly embargo transfers of com-
puter production technology to the Soviet Union.
China also benefits from the overseas training
available to students, engineers, and technicians.
Our records are spotty, but nonetheless show a
clear trend: between 1979 and 1985, the United
States hosted thousands of Chinese students and
trainees in computer-related fields, according to
information supplied on visa applications. The
Soviets have, by and large, sent students and
engineers to East European countries, where the
level of technology and quality of instruction is
generally inferior.
... But Both Will Remain Behind the West
Nonetheless, we believe both the Soviet Union and
China will for many years remain far behind the
West in effectively assimilating computer technol-
ogy into their economies. One obstacle both coun-
tries face is the poor internal coordination of plans
for the computer industry. In the Soviet Union,
four ministries are producing computer hardware
and nearly 30 ministries are involved in the devel-
opment of software. To overcome this problem, the
Soviet Politburo in March 1986 adopted a decision
calling for an all-union state committee for com-
puter technology and information science, which
would be responsible for coordinating all projects
involved in the development, manufacture, use, and
servicing of computers. Beijing formed just such an
oversight agency in 1982, but dozens of agencies
that import or use computers are still not represent-
ed on the body. In both countries, the absence of
strong central coordination will impede progress in
adopting national standards for computer equip-
ment and software.
computer networking.
Although US and COCOM controls over sales of
Western computer equipment will have a greater
impact on the Soviet computerization effort, export
controls will also frustrate China's attempts to
broaden computer use. Controls on sales of main-
frame computers, advanced software, networking
equipment, and telecommunications gear will re-
strict China's use of computers in some areas,
including robotics, microcircuit design, seismic 25X1
data processing, weather forecasting, and intercity
Inadequate support also will continue to impair
both countries' efforts to use their computers effec-
tively. In China, as in the USSR, shortages of key
technical personnel will not be quickly remedied.
Both countries have only a fraction of the number
of programers, repairmen, educators, and other
technical support personnel available in the United
States.' We expect Beijing will be slow to imple-
ment its ambitious plans for a tenfold increase in
the number of software writers by 1990 and a
similar jump in the number of service personnel.
Moscow's plans, far less well defined, will probably
take even longer before yielding significant results.
In addition unreliable electric power systems cause
frequent computer crashes and damage to equip-
ment, and erratic telecommunications links prevent
local or wide area computer networking.
Finally, Soviet and Chinese users both have to find
ways to communicate with their computers in
Russian or Chinese-languages for which little
computer software and hardware have been devel-
oped. Neither country can hope to make computer
use widespread if users must know English or
' Estimates place the US figure near 500,000, the Chinese number
at roughly 18,000. Comparable statistics for the Soviets are not
available, but shortages of software and service personnel have been
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 We believe a Chinese decision to sell the Soviets
computer equipment is unlikely as long as Beijing
views Moscow as a strategic threat and believes
such sales would contribute to Soviet military
strength. But because individual Chinese factories
are encouraged to boost profits and foreign ex-
change earnings-and are periodically granted au-
tonomy to conduct their own foreign trade-such
sales could occur outside of Beijing's control. For
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Secret
Japanese as a prerequisite. Off-the-shelf software
packages to handle routine tasks, readily available
in the West, must also be adapted to Russian or
Chinese-and often completely rewritten to accom-
modate unique Soviet or Chinese inventory or
accounting practices as well.
The United States Will Face
New Export Control Issues
We expect the demand for computers generated by
the Soviet and Chinese industrial modernization
efforts to generate new frictions among COCOM
allies over export control issues. European CO-
COM members may be more eager than the Unit-
ed States to permit the sale of computer equipment
and production lines to the Soviet Union-where
their firms have established commercial ties-and
less so to China, where US firms have taken the
lead. Although turnkey computer factory transfers
to the USSR are currently prohibited by US and
COCOM regulations, West European vendors are
particularly interested in such sales. Moreover, as
China grows increasingly interested in acquiring
networking equipment, advanced software, super-
computers, and production technology for mini-
computers and mainframes, COCOM differences
will crop up with greater frequency in these areas
as well. Washington will be the primary target of
COCOM frustrations, in our view, because US
sales will generate the vast majority of the contro-
versial cases; US firms not only are China's major
source of supply for large computers, they also are
likely to be more willing than their competitors to
transfer production technology.
The development of China's computer industry
could also create additional export control issues
for the United States and COCOM in the future.
China's industry is advancing most rapidly in an
area where the Soviets are particularly weak-
personal computer technology. As a result, China
could become a target for Soviet attempts to
acquire microcomputer and peripheral equipment.
example
during a period of decen-
tralized trade control last year, the Soviets pur-
chased 1,000 16-bit PCs-IBM PC/XTs or
PC/XT copies. In the future, Chinese exports to
nonaligned developing countries-an attractive
market for a new entrant to the electronics trade-
could also find their way to the Soviet Union
without Beijing's complicity and without COCOM
approval.
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Secret
Shakeup Pending
in Indonesia's
Oil Industry
Energy
relationship.
Rumors are circulating in Jakarta of a wholesale shakeup at Pertamina-the
state oil monopoly-when the five-year term of the board of directors expires
at the end of March, according to the US Embassy. President Director Ramly,
who replaced the discredited Joedo Sumbono in 1984, is among those rumored
to be getting the ax. There are also hints of a reorganization at the Department
of Mines and Energy, including the creation of two junior ministerial
positions-one for oil and one for oil marketing-Ramly will reportedly be the
junior Minister for Oil. The rumor that Ramly may be on his way out is partic-
ularly disquieting since he has the confidence of foreign oil companies.
Replacing him with an unknown when oil prices have collapsed and Indonesia
is experiencing difficulty marketing its crude oil abroad could create some
friction until the new director and the companies establish a working
Indonesia Rescinds According to a US Embassy report, the government in late February
Official Crude Oil abandoned the use of the official price for crude oil as a reference for assessing
Selling Price foreign oil companies' tax liability and cost reimbursements. This decision
effectively reestablished the 85/15-percent split between the government and
production sharing contractors and clears the way for them to maximize oil
production as requested by Jakarta. The government has been anxious to boost
output to offset declining prices. Jakarta's adherence to an unrealistically high
official price, however, had effectively reduced the split to an estimated 90 to
95 percent for Jakarta and 10 to 5 percent for the oil companies. As a result,
foreign oil companies were reluctant to increase output.
Financing Venezuela's Press reports indicate that PDVSA, the state oil monopoly, continues to seek
Joint Oil Ventures joint ventures abroad to secure a captive export market for 800,000 b/d of
crude and refined products-more than half PDVSA's planned exports. The
strategy is to acquire up to 50-percent equity in existing refining and 25X1
distribution facilities, while leaving operating authority with the foreign
partner. Last month Caracas announced deals that will soon bring exports to
such captive clients abroad to about 440,000 b/d. Negotiations with British
Petroleum, Exxon, and Champlin Petroleum-and reported interest in at least
three additional facilities-would push the total over the 800,000 b/d mark.
Such acquisitions
venture partners accepted payment in petroleum.
were to have been financed out of PDVSA's investment reserve, but this fund
may be used instead by the central government to cover a looming budgetary
deficit. In that case, acquisitions would be difficult to finance unless joint
Secret
D/ /EEW 86-013
28 March 1986
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Secret
Jordanian Oil
Exploration Agreement
Signed
Yugoslavia Seeks
Lower Oil
Import Prices
Egypt's Nuclear
Power Option
Secret
28 March 1986
According to press reports, Jordan signed a profit-sharing agreement with the
US firm Amoco last week. Under terms of the agreement, Amoco will search
for oil in the Jordan Valley and Al-Azraq regions. The agreement extends for
seven and a half years, with the company obligated to conduct extensive field
studies of the exploration areas. Amoco will drill at least five exploratory wells.
exports to Western markets.
Yugoslavia has negotiated lower oil import prices with its Middle Eastern
suppliers and with the Soviet Union, which normally supplies about 50 percent
of the country's oil imports. According to the US Embassy in Belgrade, import
prices for March delivery have reportedly been reduced on average by 26
percent, and new prices are to be negotiated following this week's OPEC
meetings. If the lower prices remain in force and Yugoslavia imports the
planned 217,000 b/d in 1986, Belgrade's oil import bill would be cut by at
least $500 million. While falling oil prices are good news, the benefits will not
be as large as the price reductions suggest. Hard currency savings will be much
less because the bulk of Yugoslavia's oil imports are barter trade or clearing
account deals. Although energy-dependent industries will benefit, enterprises
that depend heavily on exports of goods and services to the Middle East or the
Soviet Union may lose sales, and may be unable to redirect their low-quality
outcome of the government study.
The Egyptian Government appears determined to keep alive its plans for civil
nuclear power, despite continuing economic difficulties. President Mubarak
led cabinet reviews in January that reaffirmed the importance of nuclear
power for future electricity generation, according to the US Embassy. Nuclear
power had been questioned in light of the deteriorating economy, a World
Bank recommendation that coal would be a more cost-effective energy source,
and concerns about the safety of nuclear energy. The Egyptians are having
difficulty financing the ambitious El Dabaa nuclear power project-the
centerpiece of their immediate nuclear plans, and austerity measures cloud the
short-term prospects for nuclear power in Egypt. The Embassy reports that
Mubarak will postpone any decision on the El Dabaa contract pending the
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South African
Rescheduling
Moves Forward
South Africa and its commercial bank creditors have agreed to modify the
compromise debt accord suggested last month by Swiss debt mediator Fritz
Leutwiler, extending the deferral of principal repayments from 12 to 15
months. The agreement-negotiated by 12 key creditor banks-still requires 25X1
the cooperation of some 200 smaller creditors. Under the new plan, Pretoria's
unilateral freeze of $14 billion of its $24 billion in foreign debts would be re-
placed on 1 April by a tacit agreement by banks to roll over 95 percent of the
currently frozen loans through June 1987. Pretoria is to repay the other
5 percent on the original maturity dates during this extension. In addition, a
5-percent downpayment on the arrearages accumulated during Pretoria's
unilateral freeze would be paid on 15 April. Creditor banks plan to review the
South African situation in April 1987. 25X1
many banks hope to replace the current arrangement with a 5-to-7- 25X1
New Moroccan
Rescheduling Talks
Tunisia Borrows
Again
year rescheduling agreement at that time. If black unrest persists during the
coming year, however-which we consider likely-creditors may again resort
to a short debt deferral to maintain the appearance of pressuring Pretoria.
The initial meeting at mid-month on rescheduling Morocco's 1985-86 com-
mercial debt payments produced few results. Stumblingblocks were financing
short-term debt, provision of new loans, and medium-term debt rescheduling
terms. Rabat is pressing to convert about half of its $400 million in short-term
debt into medium-term debt to be included in the rescheduling. Morocco is
also asking for $200 million in new money. The banks are pushing for
relatively tough rescheduling terms: a repayment period of 10 years with five
years' grace at an interest rate 1.125 percentage points above LIBOR. Talks
are slated to resume on 10 April, but could be contentious. Morocco's 1983-84
rescheduling was nearly derailed earlier this year by Rabat's failure to live up
tears, according to the US Embassy.
Tunisia's growing foreign exchange gap has pushed the government to secure a
$175 million Eurodollar loan, the first borrowing in 18 months. Nonetheless,
the loan terms-0.5 to 0.63 percentage point over LIBOR-do not show lender
apprehension over Tunisia's creditworthiness. The new loan probably will be
insufficient to cover the projected financial gap caused by low oil prices and
drought this year. With a foreign debt of nearly $6 billion and a debt service
ratio exceeding 25 percent, Tunis will have to cover new financial needs by
making hard choices between development priorities, taxation, and lower
domestic consumption. Moreover, Tunisia's financial troubles may be aggra-
vated by Prime Minister Mzali's move to replace the governor of the Central
Bank because his pessimistic economic reports reduced President Bourguiba to
27 Secret
28 March 1986
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Foreign Views on According to US Embassy reporting, many nations support the principle of
Including Investment including investment issues in the GATT, but differ over which matters should
Issues in the GATT be addressed. To date, the most positive support has come from the govern-
ments of France, Japan, Spain, Switzerland, and Togo. Of the OECD
countries expressing reservations, most fear strong LDC resistance and
overloading the GATT agenda. A member of the West German Government
said that most EC members believe the US proposals go too far, too quickly,
and cannot win acceptance by the LDCs. Most governments believe the LDCs
will be particularly opposed to inclusion of investment if topics such as right of
establishment and expropriation are included. Moreover, Bonn and London are
concerned that hostile LDC reaction toward including investment will adverse-
ly affect new round negotiations covering services issues. LDC reaction has
been mixed. The traditional hardliners-Argentina, Brazil, India, Yugoslavia,
and Egypt-opposed the US position at last week's GATT preparatory
meetings. Most of the developing countries, however, are studying the issue
and waiting for other LDC reaction before taking firm positions.
Foreign Views on US Initiative To
Include Investment Issues in the GATT
Secret
28 March 1986
Supports/Agrees
Agrees in
No Objection/
With US Position
Principle
Possible Support
France
European Community
Canada
Japan
Italy
Finland
Spain
New Zealand
Indonesia
Switzerland
West Germany
Thailand
Togo
Norway
South Korea
Sweden
Tunisia
Ghana
Uruguay
Noncommittal
Opposes US Position
Australia
Argentina
Denmark
Brazil
Iceland
India
United Kingdom
Egypt
Malaysia
Yugoslavia
Pakistan
Cuba
Singapore
Colombia
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More Libyan Aid
for Sudan
Global and Regional Developments
Libya is providing new military materiel and support to Sudan and may
provide additional amounts of economic assistance. The US Embassy in
Khartoum says, on the basis of a variety of sources, that Libya has moved as
many as 300 trucks filled with food and military supplies to western Sudan to
aid government efforts to dislodge rebel forces. In addition, the US Embassy
says Tripoli probably will supply up to 100,000 metric tons of crude oil this
year, although the terms of the agreement have yet to be settled. Unlike the
300,000 tons of free oil Libya supplied last year, the new oil may be in barter
for Sudanese goods and services. In return for this largesse Qadhafi probably
will demand that Khartoum distance itself further from the United States and
Egypt to keep aid deliveries on track, and may ask for Sudanese support for
Ottawa's Banking
Proposal Criticized 7
Probable Japanese
Pump-Priming
Measures
Libya's position in Chad.
National Developments
Developed Countries
dominance of Canada's financial activity.
Ottawa is planning to designate Montreal and Vancouver as international
banking centers. The proposal, as it currently stands, would exempt banks in
these cities from a number of taxes, including provincial capital taxes and
those on international transactions, as a means of attracting more international
banking activity and hence more jobs. The plan has been criticized by financial
analysts and the banks, however, as providing little incentive for the banks to
repatriate their overseas operations because it neglects to reduce Canada's
relatively high withholding tax. Ottawa continues to reject the tax concessions
sought by the financial community because such action would reduce tax
revenue when the government is trying to reduce the budget deficit. As a
result, critics claim the proposal is a crude attempt by Ottawa to boost its do-
mestic support in Quebec and British Columbia by lessening Toronto's
The economic stimulus package Tokyo plans to announce before Prime
Minister Nakasone's US visit in mid-April will do little to boost an economy
hard hit by the yen's recent upsurge. Large tax cuts and a sharp rise in
government spending are not seriously being considered because most econom- 25X1
is policymakers, including Nakasone, remain committed to budget austerity.
Instead, Tokyo is likely to announce a package that includes accelerated public
works expenditures, reduction in utility rates, a further discount rate cut, and
additional relief for small exporters hurt by the strong yen. Plans to disburse
80 percent of fiscal 1986 public works spending in the first half of the year will
add little stimulus-70 percent is the normal practice. Expected reductions in
utility rates-less than $2 a month per household-will do little to spur
consumer spending. Previously discussed modest cuts in income tax rates have
been shelved, according to the US Embassy, but may come up again before
this summer's elections. F___1 25X1
29 Secret
28 March 1986
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London Moving
To Ease Monetary
Policy
New French
Economic Team
Secret
28 March 1986
States, West Germany, and Japan lowered their discount rates.
Chancellor of the Exchequer Lawson, in his budget speech last week,
reaffirmed London's committment to a "sound" monetary policy, but there are
signs that there will be some easing in the coming months. Lawson reinstated
sterling M3 as a monetary tool and said that the 1986-87 higher target range
of 11 to 15 percent is still consistent with an anti-inflation policy. London had
dropped the sterling M3 measure last year after it exceeded the 5- to 9-percent
growth target and as a result of complaints in financial markets that M3 was
an unreliable indicator of monetary conditions. As another sign of easier
credit, the Bank of England lowered its money market intervention rate the
day after the budget speech. This permitted commercial banks to lower base
lending rates by I percentage point to 11.5 percent. We believe London will be
able to ease its monetary policy further over the next several months because
inflation is expected to fall from 5.5 percent to 4 percent this year, and sterling
has strengthened against the dollar and the deutschemark since the United
al trade war with the United States to protect its export markets.
pected to fight vigorously to protect French and EC farmers. In his first public
statements he warned that the Community must be prepared for an agricultur-
Prime Minister Chirac has pledged to press for swift economic reform-
especially denationalization--during his first months in office, and Chirac's
cabinet underscores the importance he attaches to economic issues. While
President Mitterrand pressed hard to influence ministerial appointments in
foreign affairs and defense, Chirac managed to handpick his economic team.
Chirac named Edouard Balladur, his longtime confidant and top political aide,
Minister of State for Economy, Finance, and Privatization. As head of what
the press has termed France's "superministry," Balladur is likely to emerge as
the most important cabinet member after Chirac. Although his experience in
economic affairs has been limited, US diplomats consider Balladur an
extremely competent moderate who is committed to a free market approach.
Alain Juppe, junior minister in charge of the budget, is perhaps Chirac's most
trusted economic adviser, and has repeatedly called for simultaneous tax and
budget cuts. Chirac installed another member of his neo-Gaullist party,
Michel Noir, as junior minister for trade. Minister of Agriculture Francois
Guillaume is head of the most powerful French farmers' union and can be ex-
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Secret
Stronger-Than-tit
Expected
West German GNP
Italy Lowers
Discount Rate
Turkish
Response to Foreign
Exchange Difficulties
400,000 new jobs.
Stronger-than-expected gains in private consumption should propel real GNP
growth into the 4-percent range this year-a big bonus for the Bonn coalition's
reelection prospects. Real disposable income will be boosted by nominal wage
gains between 3.5 and 4.5 percent, combined with inflation of about 1 percent.
Already low West German inflation is improving because of the weak dollar
and falling oil prices. Also adding to purchasing power will be this year's
DM 11 billion tax cut, new family income supplements, and as many as
bank loan growth in the near future.
On 21 March, Treasury Minister Goria lowered Italy's official discount rate
by 1 percentage point to 14 percent, but this is not likely to have much impact
on real interest rates, currently 7 to 9 percent. Goria announced that the move,
which follows similar reductions in other industrialized nations, was made
possible by declining domestic inflation, a recent increase in the Bank of Italy's
reserves, and the favorable impact of falling oil prices. The market, however,
probably will not respond quickly to Treasury's signal. Difficulty in marketing
treasury securities, which forced Rome to raise rates on three- and six-month
treasury bills in January, persists and will keep those interest rates high.
According to the Italian Bankers Association, commercial banks are reluctant
to decrease their rates because of credit and foreign exchange restrictions
imposed in conjunction with January's treasury rate hikes. Moreover, neither
the Treasury nor the Bank of Italy appears willing to remove the ceiling on
Speculation in Turkey's foreign exchange markets and a shortage of foreign
exchange prompted Ankara to devalue the lira by 5.2 percent against the
dollar on 14 March and retreat from plans for further liberalization of foreign
currency regulations. The Central Bank has set the band within which
commercial banks trade foreign exchange at plus or minus 1 percent of its offi-
cial exchange rate, putting an end to the unrestricted trading permitted since
last July. The bank said free market operations would resume as soon as
possible. Ankara also asked the United States in February to disburse the
remaining $19.6 million in fiscal year 1986 ESF aid early because of a serious
foreign exchange shortage. Following expiration of grace periods on previously
31 Secret
28 March 1986
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ing the situation.
rescheduled debt, debt service jumped by one-fourth to an estimated $3.7
billion in 1985, equal to approximately 28 percent of foreign exchange
earnings. In addition, Turkey's foreign exchange position has been strained by
Ankara's decision to buy oil on the spot market while it tries to renegotiate ex-
pensive barter contracts with Iran and Libya. Moreover, Iraqi arrearages on
$800 million in Turkish export credits extended since 1983 may be aggravat-
Less Developed Countries
Guatemalan Economic resident Cerezo's economic program contains several positive steps to
Program Announced revitalize the economy but, on balance, is unlikely to reduce the budget deficit,
decrease inflation, or restore business confidence. Without formally changing
the official exchange rate, the program shifts most commodity imports and
exports to a new "regulated" exchange at a rate close to the former parallel
market and includes a more flexible rate for most services. Debt service
payments will continue at the official rate. The package calls for a 5-percent
cut in public spending and higher luxury and export taxes. Nevertheless, it also
grants a public-sector wage increase and promises creation of 40,000 tempo-
rary public jobs. Price controls were retained on 25 consumer good categories.
Subsidies for public transportation and imported medicines also will continue.
The measures are unlikely to satisfy
Algerian
Belt-Tightening
new lending he is counting on.
international creditors and will make it difficult for Cerezo to negotiate the
dealing decisively with local disturbances.
Algeria, facing up to a 50-percent drop in its hydrocarbons earnings this year,
has begun implementing austerity measures. So far, the Bendjedid government
has cut tourist overseas travel allocations in half and reduced allowances for
the annual pilgrimage to Mecca. Efforts are also under way to cut nonessential
imports and postpone development projects. In addition, Algiers is making
plans to borrow heavily on the international market. Embassy reporting
indicates Algeria is seeking a $500 million loan, but Algiers' insistence on easy
terms could thwart the effort. Any political backlash from harsh adjustment
measures will probably be limited largely because the government has been
preparing the populace for some time for economic hard times ahead.
Moreover, Algiers has shown the will to use its extensive security forces in
Saudis Delay Budget King Fahd recently surprised most government ministers and the Saudi
business community by postponing for at least 5 months a new budget for the
fiscal year that began 11 March. The delay puts off tough decisions on further
spending cuts and allows monthly spending to continue at last year's level. Last
year, spending was reduced 8 percent and started to have a direct impact on
Secret 32
28 March 1986
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Secret
Omani Spending Cuts
Saudi citizens, but this failed to balance the budget because oil earnings-
about two-thirds of government revenue-fell rapidly
The Omani Government has cut spending in its 1986 budget because of
sharply lower oil earnings. An early casualty is the purchase of 8 Tornado
fighter aircraft from the United Kingdom-delaying the purchase until 1992
effectively cancels the deal. Defense spending overall has been cut 25 percent
from 1985 levels. In addition, most new development projects have been
halted.
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More Indonesian
Budget Woes
time when the Indonesian economy is in a tailspin.
According to US Embassy reporting, the continued fall in oil prices may soon
force an additional $1.8 billion in budget cuts-including $1.3 billion in
project reductions-over those proposed last January. The new cuts occur at a
the economy is expected to contract by 4 to 5 percent in
33 Secret
28 March 1986
1986, and there is growing sentiment for government deficit spending to spur
economic activity. So far Jakarta has resisted such moves for fear of touching
off a new round of inflation. In addition, the government is afraid that any rise
in interest rates would "crowd out" the private sector in Indonesia's thin
capital markets. Jakarta continues to pin its near-term economic hopes on an
expansion of the nonoil sector, but is moving slowly on basic economic reforms
to encourage exports. For example, at the same time the Finance Ministry was
denying rumors earlier this month that foreign exchange controls were being
contemplated, the Trade Ministry was imposing more import restrictions.
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Philippines Lifts In our judgment, the Aquino government's lifting this week of a ban on the ex-
Copra Export Ban port of copra-the oil-bearing meat of a coconut-should improve the
economic situation in the countryside, where one-third of the population relies
on coconuts as its primary source of income. The export ban, imposed in 1982,
resulted in low domestic copra prices because farmers were forced to sell to a
small number of domestic coconut oil mills controlled by a close Marcos
associate. We estimate that copra prices will increase by at least 50 percent
over the next several months as oil mills and exporters will now compete for
domestic copra. The chairman of the government's Coconut Authority has
warned, however, that the ban could be reimposed if domestic mills encounter
a shortage of copra.
Malaysia Planning Details of the Fifth Malaysia Plan-covering 1986-90-which was released
for Slower Growth this week, projects slower growth than during the past five years, rising
unemployment, and increasing reliance on the private sector for investment
funding. The new plan envisions average annual real GDP growth of 5 percent
through 1990 and unemployment rising to 10.1 percent. With projected
growth now at 3 percent for 1986 and little improvement likely in the next two
years, growth over the final two years of this period would have to exceed 7
percent annually for the plan to succeed. We believe that the plan implies
further backpedaling on improving economic opportunity for ethnic Malays
under the New Economic Policy, which will have an adverse effect on the
government's prospects in elections widely expected within the next few
months.
China Unveils New
Five-Year Plan
China Considers
National Pension
Plan
Secret
28 March 1986
exceeded.
Premier Zhao Ziyang presented a draft of China's Seventh Five-Year Plan
(1986-90) for discussion during the annual National People's Congress. The
document calls for further reform of the Chinese economy, including limiting
the number of products under state control and making more enterprises
economically independent entities. The plan also is aimed at slowing and
consolidating economic growth during the period, but Zhao acknowledged that
the target of 7.5-percent average annual growth in GNP is likely to be
drafted.
The Ministry of Labor has announced that it is considering a national pension
plan for retired workers. The proposed plan would require each enterprise to
contribute a specific percentage of its payroll to a national fund, rather than
being solely responsible for its own retirees as is currently the case. The
ministry cites the new plan, implemented in trial areas early last year, as being
more equitable and particularly helpful for older enterprises with a large
number of retirees. We believe the system is also being considered as part of
plans to allow individual firms more economic independence, including the
possibility of failure and dissolution under the bankruptcy laws currently being
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