(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706870001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 42
• Document Creation Date: January 12, 2017
• Document Release Date: October 21, 2010
• Sequence Number: 1
• Publication Date: February 24, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
24 February 1984
DI JEEW 84-008
24 February 1984
Copy 686
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Secret
Internation
Economic
al
& Energy
Weekly
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24 February
1984
iii Synopsis
1 / Perspective
-The LDC Debt Service Burden
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Energy
International Finance
Global and Regional Developments
National Developments
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Internationa
l Financial Situation: Dropoff in Syndicate
d
Lending 25X1
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19 Internationa
l Financial Situation: Political Updat
e
This article wa
s prepared by analysts in ALA, OEA, and OGI
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21 Iraq: War-I
nduced Austerity Grips Economy
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27 West Germ
any: Focus on Economic Policy
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31 North-Sout
h Issues: Prospects in 1984
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oviet Education to Accent Vocational Training
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence, 25X1
Secret
24 February 1984
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Secret
International
Economic & Energy
Weekly
25X1
Synopsis
1 Perspective- The LDC Debt Service Burden
An increasing number of financial analysts over the past several months have
expressed concern that LDC debt servicing burdens are unmanageable under
current world economic conditions. Although most principal repayments now
are being rescheduled or rolled over by creditors, attention has shifted to the
terms on new and existing loans-particularly the interest cost-that borrow-
ers must shoulder.
15 International Financial Situation: Dropoff in Syndicated Lending
This article in our series on the economic and political aspects of the
international financial situation looks at the decline last year in syndicated
loans to LDCs and the stiffer terms attached.
This article is part of our series examining economic and political aspects of
the international financial situation. The political climate in the debt-troubled
countries does not appear to have changed much over the past month.
21 Iraq: War-Induced Austerity Grips Economy
Iraq is trapped in a costly war of attrition with Iran that is straining its
economy. If Iraq cannot somehow ease economic and military pressures, it
may escalate the war in the Gulf, threatening oil exports vital to the West.
27 West Germany: Focus on Economic Policy
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West German economic indicators are almost uniformly positive. The Kohl
government is being criticized, however, for its failure to bring about longer
term structural changes needed to sustain economic growth.
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DI IEEW 84-008
24 February 1984
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31 North-South Issues: Prospects in 1984
We believe the developing countries will continue to press their demands for a
New International Economic Order (NIEO) this year despite their inability to
make significant progress on it during the past decade
35 Soviet Education To Accent Vocational Training
A Politburo commission studying the Soviet educational system last month
issued comprehensive proposals that call for increased vocational training and
recommends a restructuring of the general education system so that children
start school one year earlier. Not only are the Soviets seeking to make a larger
proportion of youth available for employment at an earlier age but hope to in-
crease the number of skilled workers and improve the match between job
openings and suitably trained personnel.
Secret iv
24 February 1984
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Secret
Perspective
Weekly
International
Economic & Energy
24 February 1984
export earnings.
An increasing number of financial analysts over the past several months have
expressed concern that LDC debt servicing burdens are unmanageable under
current world economic conditions. Although most principal repayments now
are being rescheduled or rolled over by,creditors, attention has shifted to the
terms on new and existing loans-particularly the interest costs-that borrow-
ers must shoulder. According to our estimates, interest payments alone for
several major debtors-including Argentina, Brazil, Chile, Mexico, Morocco,
Peru, and the Philippines-account for at least 40 percent of projected 1984
international financial position
Debtor countries have increasingly focused on the large debt service burden
since the Latin American economic conference in Quito in early January. The
conference issued a declaration calling for a new approach to handling the debt
problem and for a sharing of responsibility between creditors and debtors for
solving problems and assuming losses. Subsequently, Presidents Betancur of
Colombia and Alfonsin of Argentina jointly emphasized the need for frank
dialogue with creditors in order to work out "affordable" terms. Alfonsin also
issued a joint statement with Venezuelan President Lusinchi calling for
common financial policies among Latin American countries to strengthen their
Although bankers have been narrowing interest spreads, lowering fees, and
granting longer maturities and grace periods, the underlying problem of
continued high LIBOR and other interest rates remains. Financial observers
and academics have suggested several alternatives to reduce the total interest
burden:
? One proposal involves the implementation of below-market interest rates on
new and existing loans. The interest differential between the new and market
rates would be converted to future principal repayments or subsidized by
creditor governments or commercial banks.
? Another scheme would link debt service payments to LDC export earnings.
For example, an individual country's debt service payments would be set at a
maximum of 25 percent of export earnings. This plan would limit debt
repayment to make available foreign exchange for imports in the hope of
spurring economic growth.
1 Secret
DI IEEW 84-008
24 February 1984
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? A third suggestion involves the conversion of outstanding debt of individual
LDC enterprises to equity capital-or in other words, convert loans to shares
in the firm-in order to reduce the overall debt burden. This would eliminate
mandatory repayments until economic recovery is under way and the firms
hopefully can pay dividends to the shareholders.
None of these alternative solutions has been formally endorsed by banks or
governments. Banks-which must operate within various regulatory environ-
ments and seek to maintain the quality and profitability of their assets-are
unlikely to agree to make loans below their cost of funds unless they are
subsidized. Creditor country governments, however, are unlikely to agree to
such subsidies with no strings attached. Banks are opposed to capping debt
repayments by tying them to exports because this would cut into profits on the
loans. Some banks might consider converting debt to equity as a means of
avoiding nonperforming status on the loans. On the other hand, banks would
have to forgo earnings under this proposal. In any event, we believe most
debtors would be unwilling to allow greater foreign control of individual firms.
Debtor countries will continue to push for easier loan terms in upcoming
meetings, such as the OAS special committee on Finance and Trade and the
Inter-American Development Bank meetings next month. We believe the
alternative proposals will remain in the talking stages unless a major debtor
such as Mexico or Brazil were to offer its support. Even with such major
debtor endorsement, countries probably would continue to negotiate with
creditors on an individual basis with specific relief tied to the debtor's
particular economic and political circumstances.
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24 February 1984
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Secret
Heating Oil
Consumption Rises
Sharply
Energy
Cold weather contributed to a 12-percent rise in heating oil demand in five
major developed countries in the fourth quarter of 1983 compared with the
same period a year earlier. Heating degree days-a measure of the impact of
weather on space heating requirements-were up 21 percent in the United
States, 28 percent in Japan, and 8 percent in Western Europe, over year-
earlier levels. As a result, heating oil consumption in the fourth quarter ranged
from 8 percent in Japan to 20 percent in Italy. The rise in heating oil
consumption-which accounts for about one-fifth of total oil consumption in
the five countries-boosted fourth-quarter overall oil use 3 percent. Prelimi-
nary data indicate January 1984 heatin oil demand in the United States was
35 percent above year-earlier levels
1983
January
1984
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Total
-7.7
-1.3
0.8
11.8
United States
-10.8
-3.7
-7.4
11.5
Japan
-1.6
-5.1
1.3
7.6
West Germany
-5.9
16.8
-16.3
14.7
France
-3.7
-6.2
-14.9
11.3
Italy
--8.6
2.2
-0.7
20.5
Kuwait Considers . Kuwait Petroleum Corporation (KPC) is considering purchases of "down-
Japanese Petroleum stream" petroleum assets in Japan, a move that is unsettling to the Japanese:
/ Acquisitions According to a knowledgeable US Embassy source, Tokyo is unsure how to
/// K t' h' h tl 1 d ' t f '1
t t
rt
t
issue.
o uwa
s in
en ions, w is apparen y me u e acquisi ion o of
reac
storage and marketing operations. In the past year, KPC has purchased the
European assets of a major US oil company and now has three refineries and
approximately 3,100 retail outlets on the continent. Kuwait views these
acquisitions as necessary to secure future markets for its oil, particularly
planned increases in exports of refined petroleum products. Now that it has
established itself in Europe, KPC intends to make 1984 the "year of Japan."
According to the Embassy's source, Tokyo is unlikely to allow the type of
investments Kuwait desires but has yet to formulate a policy to deal with the
3 Secret
2.4 February 1984
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apanese-Soviet
Oil Deal
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British-Norwegian
atural Gas Sales
Agreements
B azilian Oil
,production Hits
Record Levels
The British Gas Corporation (BGC) and Statoil-the Norwegian Oil Compa-
ny-have signed a contract for the sale of natural gas from Norway's Sleipner
field to the United Kingdom. Although detailed information on the agreement
is unavailable, press reports indicate that contract terms include a sales price
of about $4.30 per million Btu and annual deliveries of 12 to 14 billion cubic
meters. Under the agreement-which still must be approved by both London
and Oslo-deliveries are expected to commence in 1990 via a new pipeline that
will have sufficient spare capacity to allow for the transport of gas from small
British fields nearby. This spare capacity may lessen the expected opposition of
some British officials to the purchase. We expect the Norwegian Government
will quickly approve the Sleipner deal because successful conclusion of these
negotiations will clear the way for Oslo to begin discussions with buyers on the
Brazilian oil output reached a new high last month of slightly over 440,000
b/d with the startup of a new production platform in the Campos Basin.
the national oil company Petrobras
is forecasting production to rise to 500,000 b/d by yearend and average about
460,000 b/d for all of 1984. This is approximately one-third more than last
investment expenditures substantially and to reduce drilling activity.
year's 338,000 b/d. If this year's goal is met, domestic oil production will cover
about half of Brazil's petroleum consumption needs, double the proportion just
two years ago. We remain skeptical, however, that Brazil will be able to
achieve its targets. Severe financial problems have forced Petrobras to cut its
Indonesian Production- Indonesia signed only three production-sharing contracts in 1983
down from
,
/Sharing Agreements 13 in 1982, reflecting its inability to promote exploration and development in
the current weak oil market. Jakarta met resistance from the country's largest
equity producers, particularly US firms that currently produce over 80 percent
of Indonesia's output. Jakarta was unable to sign a new production-sharing
accord with any US firm and, because the government demanded more than
the standard 85:15 production split, was successful in converting Caltex's
contract of work to a production-sharing agreement only after protracted and
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24 February 1984
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Secret
International Finance
Ar entine Debt Economy Minister Grinspun's survey of foreign debt in preparation for
ecalculated Upward rescheduling talks has turned up substantial additional obligations, which
grow beyond the $2.5 billion level of December 1983.
money needs this year from $3 billion to $5 billion. We expect new loans will
be a particularly tough issue in bank negotiations because of Argentina's
substantial payments arrears. Despite ongoing payments against trade arrears
and a recent $78 million payment to the World Bank, total arrears continue to
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New Syrian Foreign The.Syrian Government recently announced a series of decrees spelling out
difficult negotiations. Most other oil companies were reticent to enter agree-
ments to explore for and produce oil they felt they would be unable to sell. Oil
production this year is expected to outstrip additions to proved reserves for the
fourth consecutive year, and the failure to sign more contracts in 1983 is likely
to prolong this trend.
and $2 billion in civilian public-sector debt not previously reported.
Garcia-Vasquez, grew as a result of $3 billion in recalculated military debt
could necessitate greater borrowing this year. The latest estimate of
Argentina's external debt is up by $5 billion to nearly $44 billion, including $3
.billion in arrears. The new figure,, announced by Central Bank President
Buenos Aires increased its estimates o new
Exchange Measures
new foreign currency regulations designed to ease serious foreign exchange
shortages. The new laws primarily affect tourists, Syrians working abroad, and
private-sector importers:
? Non-Arab tourists are required to exchange the equivalent of $100 at the
tourist rate upon entering the country.
? Syrian Government employees working abroad are required to remit at least
35 percent of their foreign currency salaries through official banking
channels.
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24 February 1984
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? Private-sector importers are authorized to open foreign exchange accounts
with the Commercial Bank of Syria from funds currently held abroad. Once
the funds have been on account for three months, the importer can draw on
the money to pay for imports of raw materials and spare parts-up to an an-
nual maximum of $300,000-or sell the foreign exchange to the Commercial
Bank at the tourist rate.
through illegal capital transactions or smuggling.
The measures are unlikely to add substantially to Syria's pool of foreign
currency. Only the provision dealing with private-sector importers has much
potential. Syrian businessmen, however, probably will choose not to open the
local accounts, because of concern that Damascus will confiscate or exact
exorbitant taxes from the accounts. Moreover, it is unlikely that many of these
businessmen would be able to comply with regulations that require proof that
the foreign exchange was derived from activities outside of Syria rather than
ment of a committee to issue letters of credit for imports.
The decrees also mandate that foreigners working in Syria exchange their
foreign currency earnings through' official channels and call for the establish-
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24 February 1984
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s an y agreemen -necessary prior to a airs u resc e u rng-because
Madagascar's projected foreign financing gap for 1984 is still too large, and
Antananarivo has not taken promised agricultural price reforms. Recent.IMF
projections show Madagascar will be nearly $220 million short in meeting this
year's debt service payments, about $50 million above the original projection.
The Fund, plans to canvas Western donors for pledges and, if sufficient
commitments are obtained, will chair a donors', conference as early -as April.
According to the US Embassy, the Malagasy Government had planned to use
an IMF agreement to pressure the Soviets-who have a significant military
presence in Madagascar-to increase their economic aide
Global and Regional Developments
MITI Calls for . MITI officials are urging. Japans machine tool industry to limit exports to the
Restraint in Machine. United States in an effort to, avoid US trade restraints. In mid-January, the
Too
Exports Director General of MITI's Bureau of Machinery:.and Information Industries
cautioned machine tool builders to avoid excessive competition and price
cutting and to generally observe orderly marketing practices. Ih late'1983,
.MITI officials extended the export price floor on numerically controlled (NC)
lathes and machining centers through 1984 and expanded coverage to include
an additional class of machining centers. Although exports of NC lathes and
machining centers to North America were down 60 percent and 27 percent, re-
spectively, in the first half of 1983, a strong resurgence in the second half has
renewed fears in Tokyo of increased trade friction with the United States.
7 Secret
24 February 1984
'mania-IMF Talks Disagreement early this month between President Nyerere and the IMF over
Stalemated the removal of food subsidies and the amount and timing of a devaluation
continue to block a standby agreement. Despite a general consensus among
Nyerere's top advisers that Dar es Salaam must reach agreement with the
IMF, Nyerere still believes the inflationary impact of a large devaluation
could lead to unrest. According to the US Embassy, Nyerere has insisted that
$800 million in prior aid commitments from the IMF, World Bank, and
,bilateral donors-a figure that unrealistically includes $200 million in bilater-
al assistance above existing levels-are necessary to cushion the effects of a de-
valuation. Failure to reach an IMF agreement soon will result in an
accelerated deterioration of Tanzania's econorny.F__-]
Madagascar Debt Re- IMF dissatisfaction with the progress, of Madagascar's economic adjustment
heduling Postponed program has forced postponement of this month's-Paris Club meeting to
consider official debt rescheduling. The Fund has held up implementation of a
t db t P ' Cl b hd 1'
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Japanese Exports to Boosted by a sharp increase in steel exports, Japan's trade deficit with China
Record trade with China is forecast in 1984. The Japanese expect further
Chinese purchases of machinery and equipment. Japan's economic recovery
China Up in 1983
dropped to $200 million last year after a record $1.8 billion in 1982:
? Japanese exports reached $4.9 billion, a 40-percent increase over 1982's
depressed level. Steel exports-up from $1.3 billion in 1982 to $22 billion
last year-made up 45 percent of Japan's total exports. The Chinese bought
7.4 million metric tons, 23 percent of Japan's worldwide steel exports, and
surpassed the United States as Japan's number-one steel customer.
? Declining oil prices held Japanese imports from China to $5.1 billion, down
5 percent.
should boost its imports from China.
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24 February 1984
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Secret
National Developments
Developed Countries
nada Introduces The Canadian Government's budget, announced on 15 February, proposes to
E iElection Budget reduce the federal deficit by US $1.5 billion from this year's estimated $25.5
the private sector.
billion. The budget provides for only a modest increase in social spending.
With a federal election likely to occur this fall, the conservative cast of the
budget is designed to boost the private sector's confidence in the Liberals'
ability to manage Canada's recovery. The business community has expressed
its approval of the budget's noninterventionist tone, emphasis on fiscal
restraint, and new measures to simplify the small business tax system and
provide tax credits for companies setting up owner-employee profit-sharing
programs. Opposition party and labor leaders have strongly criticized the
government for not doing enough to ease unemployment; Finance Minister
Lalonde has responded by claiming that creating jobs is the responsibility of
French Restructuring The most recent plan proposed by the French Government to deal wiih the
easures structural problems of the economy calls for the establishment of "redevelop-
Wi
hi
b l
hi
h
"
d
ese zones:
osses.
t
n t
ment zones
in the areas har
est
t by jo
? Workers from the coal, steel, and shipbuilding industries will receive
70 percent of their previous pay while they undergo retraining.
? Tax and credit incentives will be provided to attract new small- and medium-
sized firms.
The government will provide a larger share of total government public works
spending to hard hit areas.
Both unions and employer groups have criticized the plan as inadequate and
because it discriminates between locations and industries. The plan is expected
to cost less than $1 billion over the next several years. It will not add
significantly to projected deficits because it merely rearranges previous
appropriations and uses off-budget financing-including unemployment insur-
ance funds.)
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24 February 1984
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exico Revamps
ublic-Sector
Contracting System
Less Developed Countries
We believe recently enacted changes in the method of awarding public-sector
contracts will drastically cut costs and represent a step toward institutionaliz-
ing President de la Madrid's anticorruption campaign. Contracts for all
public-sector firms, including the national oil company, Pemex, will now be
put up for bid, and all work must be performed by the contracting agent. In
the past, a percent of contracts were automatically awarded to industry unions,
which frequently sold them to third parties. Although this practice was not
illegal, it increased costs and encouraged union profiteering. The oil workers'
union, which previously received 40 percent of Pemex's onland contracts,
probably agreed to comply with the new regulations in exchange for an
implicit administration promise to stay out of internal union affairs and not
charge the union's leadership with corruption. Press reports speculate the
government will save $1 billion this year as a result of the rule change.
,Mexico Announces New New foreign investment guidelines, issued last week, are an attempt to
Investment Guidelines selectively attract new investment without altering the 1973 Foreign Invest-
ment Code. According to press reporting, the new guidelines specify 34
I , priority areas-including communications, computer, oilfield, and petrochemi-
Secret
24 February 1984
cal equipment-where foreigners will be allowed to have majority control.
Mexico's foreign investment law generally restricts foreign participation to 49
percent. Special attention will be given to labor-intensive industries that
produce exports or replace imports. Mexican officials indicated foreigners
would be allowed to increase their participation in established Mexican firms if
new capital investment is essential to the firm's survival.
economic recovery gets under way.
Strong objection from the opposition left, labor,.and some businessmen will
preclude, in our judgment, any major shift in investment policy. Government
approval of new investments is likely to remain subject to lengthy case-by-case
negotiations. In a recent report on investment in Mexico, businessmen
indicated that they fear Mexico City's flexible response now will be reversed in
the future. According .to US Embassy reporting, net new foreign investment
fell 73 percent in 1983 and is likely to remain depressed until Mexico's
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Argentine. Labor Leaders of the confederation of major trade unions are pushing wage demands
/Demands Threaten that could upset President Alfonsin's plans to cut Argentina's 400-percent
/ To Spur Inflation inflation. The current labor demands follow real wage gains of nearly 22
f
i
d
i
percent
or
n
ustr
al workers last year and a further 12-percent nominal
increase in January, which was later augmented to offset unexpectedly high
inflation. We believe labor leaders probably calculate that attacking the
government's wage policies will help them build opposition to Alfonsin's union
reform legislation as well. The government is seeking new union elections,
greater minority representation on union governing councils, and tighter
controls over huge welfare funds to break the Peronists' longtime hold on
labor. A Peronist-Conservative alliance in the Senate has stalled legislation on
the reforms.
To bolster labor support, Alfonsin has countered by decreeing several wage
hikes and introducing other measures aimed at increasing working-class living
standards. Moreover, Economy Minister Grinspun has stated his intention to
raise real incomes by 6 to 8 percent this year. The danger in granting such
wage concessions is that union leaders wilf continuously demand more wage
hikes in an attempt to weaken Alfonsin's overall labor program, especially
proposed reforms. Wage hikes unsupported by increased productivity-will
trigger another round of inflation. At the end of the last Peron government in
1975 and. during the Bignone regime when inflation for September 1983
soared to an annual rate of 925 percent, high wage increases in response to
heavy union pressures brought Argentina to the brink of economic collapse. E
Cuba Seeks Increased Argentina and Venezuela are likel to expand credit lines to Havana this year,
Trade Credits From The new Argentine Government signed an
rgentina and agreement with Cuba in December that increases Havana's line of credit for
~-/ Venezuela food products to $104.5 million this year.from $67.5 million in 1983.
Argentina and Cuba soon will begin negotiating a new one-year economic
cooperation agreement that could include up to $300 million in additional
trade credits for capital goods and equipment The ex-
isting agreement, which expires in June, provided Havana with $114 million in
such credits.
a bilateral credit line of $30 million in 1984 to promote trade,
The central banks of Venezuela and Cuba have tentatively agreed to establish
Total trade turnover between the two countries in recent years
has averaged only $5 million and has been fairly balanced. The new agreement
manufactured goods.
probaby will not include sugar and petroleum-Venezuela is self-sufficient in
sugar, and Cuba receives all of its oil on Soviet account. Havana probably
hopes to export rum and tobacco and may import fertilizer, iron and steel, and
Secret
24 February 1984
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Soviets Experiment The Soviet leadership announced in early February-a few days before
Wi 1h Consumer Andropov died-that it would conduct an ""experiment" to improve the
ervices provision of repair and personal care services for consumers. The initiative,
limited to a few areas of the RSFSR with only 6 percent of the Soviet Union's
population, is part of the long-term consumer goods and services program
being developed for the 1986-90 Five-Year Plan. The experiment will include:
? A reduction in the number of targets that participating enterprises must
meet.
? Greater freedom for these enterprises to use their profits.
? Broader use by larger service enterprises of labor brigades-small groups of
workers. paid according to their performance.
? Intensified recruitment of pensioners, housewives, and students for part-time
work.
The initiative is similar to the much-publicized experiment in five industrial
ministries that began in January. Both experiments, although emphasizing
greater enterprise autonomy, are cautious and involve no radical innovations.
Furthermore, both are confined to a small portion of total activity in industry
and services. They hold little promise for substantial improvements in
East Germany's
mproved Financial
Outlook
Secret
24 February 1984
consumer services any time soon.
East Germany's financial prospects have been. improved by East Berlin's
success in running trade surpluses and by bankers' strengthened confidence
that Bonn will serve as a lender of last resort. Last month the regime
announced a "considerable" surplus in trade with nonsocialist countries in
1983, its third consecutive annual surplus after deficits throughout the 1970s.
Figures of the Bank for International Settlements show that in the first nine
months of 1983 East Germany's reserves rose nearly $1 billion, while its debt
to Western banks fell by more than $600 million. Banker confidence also has
been increased by Bonn's guarantee last year of a medium-term loan of DM 1
billion (about $400 million) and by the perception that it would provide help
again if East Berlin needs money. Bankers. remain wary about making long-
term commitments, however,.and they are providing only short-term loans.
overly dependent on West Germany.
This year East Berlin should be able to cover estimated debt repayments of
$3.6 billion, which is less than repayments in either of the last two years. The
regime seems committed to reducing its debt further. It probably will be able
to increase exports enough to accomplish .this, while still increasing imports of
key industrial products. East Berlin probably considers future economic deals
with Bonn a good source of additional funds, despite its fears of becoming
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C1tl ina-Offers Satellite China apparently intends to commercialize parts of its space program in the
25X1
L
Launch Services next several years the Chinese have offered to sell
launch services on their new CSL-X-3 space booster to the British.
25X1
the Chinese would be able to place between 1,000 and 1,200
i og~nto geostationary orbit at a cheaper cost than NASA could using
the space shuttle or than the European Space Agency could using the Ariane.
China has invested substantial sums in two new space launch facilities and in
the CSL-X-3, which uses a liquid-hydrogen/liquid-oxygen third stage. The
first launch of the CSL-X-3 late last month, however, failed to put its payload
into the proper orbit. The CSL-X-3 closely resembles the Ariane booster,
which had two failures in its first seven launches)
The Chinese evidently believe that they will solve their problems with the
CSL-X-3 and that they will be able to offer launch services at less. than
NASA's current price of $27 million for a satellite payload placed into
geostationary orbit. A similar service using the Ariane would cost about $23
million. The Chinese, however, are likely to fulfill their own satellite launch re-
quirements and establish a degree of reliability for the CSL-X-3 before they
enter the launch services market. This process could take several years
13 Secret
24 February 1984
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Dropoff in Syndicated Lending
This article is part of our series focusing on the
economic and political aspects of the international
The volume of medium- and long-term syndicated
loan commitments by commercial banks to LDCs
totaled $44 billion in 1983, down about 25 percent
from the previous year and the lowest level since
1980.' Banker concern about the world debt crisis
was the major reason behind the cutback in new
lending. The decline in bank lending, in turn,
prompted large import cuts, devaluations, and
accumulation of arrearages by debt-troubled
countries.
The total interest cost on medium-and long-term
syndicated loans was about 2.2 percentage points
lower-last year than in 1982. LIBOR fell from an
average of 12.2 percent in 1982 to 9.6 percent in
1983. This decrease was offset, however, by a
considerable widening of the average spread on
these loans in 1983, rising by nearly 0.4 percentage
point to 1.44 percentage points above LIBOR.
.Other-lending terms for LDCs as a group remained
about the same as the year before; the average
maturity stayed at about six years, and banker fees
ranged from 0.25 to 2.5 percent of the total amount
of the loan. F---]
Several, major patterns, in syndicated lending, were
evident:
? About 40 percent of new medium-. and long-term
syndicated loans were tied to debt rescheduling
These data cover only publicized loans and exclude repayments of
existing credits. Moreover, not all new commitments are drawn
down at the time they are signed. We estimate that medium- and
long-term syndicated loans in recent years have accounted for 35 to
40 percent of total lending to all LDCs, although the share varies
packages.-Nearly all of this "involuntary"
lending went to Latin American debtors. Most
other lending was provided to Asian and OPEC 25X1
borrowers.
? Asian countries in general continued to attract
the most favorable loan terms during 1983; India,
Malaysia, and Thailand obtained spreads of less
than 0.5 percentage point above LIBOR with
eight- to nine-year maturities. Some large debtors
in the region still considered fairly good credit
risks-such as Indonesia and South Korea-were
forced to accept higher spreads largely because of
creditor nervousness about the Philippine and
Latin American debt problems.
? LDCs drew down existing credits that had been
committed in previous years to help make up for
the shortfall in new loans. This trend began in
late 1982 but probably has tailed off because the
stock of undisbursed credits for many countries-
particularly in Latin America-is not being
replenished.
Borrowing by Key Countries
Latin American borrowers were the hardest hit in 25X1
1983. New syndicated lending by banks fell by
about $6 billion overall,, and nearly: all countries
had to pay loan spreads in excess:of 2 percentage
points. Argentina, Brazil, Chile, Mexico, and Peru
had most of their new loans tied to IMF_mandated
financial rescue.packages: during 1983. In addition,
these five. countries received the worst.terms among
all LDCs. Venezuela experienced the' largest
decline in loan volume' last year; the $7.7 billion
drop, reflected banker reluctance to-lend to
Venezuela until debt renegotiations. are completed
and an economic stabilization program is in place.
Colombia increased its borrowing last year but felt
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Average Spreads
(percentage points above LIBOR)
Average Maturities
(years)
1982
1983
Total
1.08
1.44
Non-OPEC
1.15
1.64
Of which:
7 7
Colombia
0.64
1.40
9 6
Hong Kong
1.46
1.13
4 7
India
0.45
0.47
9 8
Malaysia
0.39
0.49
10 9
Mexico
1.06
2.25
4
1.00
2.25
6 8
Philippines
0.85
1.05
10 8
South Korea
0.57
0.74
6 7
Thailand
0.50
0.38
10 8
0.81
0.86
5 7
Saudi Arabia.
1.21'
1.04
Venezuela
0.83
1.85
a Spreads are weighted by the amount and maturity of the loan.
Maturities are weighted by the amount of the loan.
the impact of the region's problems as its average
spread more than doubled.
Most Asian debtors cut back the volume of new.
loans, as they attempted to avoid the Latin Ameri-
can mistake of overborrowing. South Korea was the
largest borrower in the region in 1983, but its total
was $1.0 billion off that of 1982. Along with
Malaysia and Thailand, South Korea was also able
to increase its issues of foreign and international
bonds at rates more favorable than on syndicated
Secret
24 February 1984
loans-an option no longer available to major Latin
American borrowers. Indonesia was' the only major
Asian debtor to increase its syndicated borrowing,
although it borrowed less than originally planned:
The Philippines, which incurred major debt' prob-
lems in mid-1983, received stiffer terms and few
new loans in the second half.
Among other major LDC borrowers, Algeria
sharply increased its syndicated loan total last year
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LDC Syndicated Credits a
Billion US S
Argentina
2.5
1.8
Brazil
6.9
9.2
Chile
1.3
1.4
Colombia
0.2
0.5
Hong Kong
1.7
1.2
Philippines
1.4
0.9
South Korea
4.9
3.9
Thailand
0.4
0.4
OPEC
16.3
7.9
Of which:
Algeria
0.5
1.9
Indonesia
1.7
2.1
Nigeria
1.5
0.8
Saudi Arabia
2.4
0.9
Venezuela
7.9
0.2
a Includes publicized medium- and long-term loans from commer-
cial banks.
We expect the market for medium- and long-term
syndicated loans to remain depressed this year.
Much of the new lending-perhaps even more than
last year-will continue to be linked with debt
rescheduling packages and effectively will be invol-
untary. Because of their large loan exposures to
commercial banks, we expect that the financing
needs of the major debtors will be met. Smaller
debtors whose external payments problems do not
threaten the international financial system will
have a harder time obtaining new syndicated loans.
Average spreads may ease somewhat-as
evidenced by the softer terms on the $3.8 billion
loan for Mexico currently being syndicated-but
probably not enough to be of great help to the
debtors.
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to-$1.9 billion after intentionally limiting its
borrowing since 1979: Nigeria's short-term debt
problems reduced its access to medium- and long-
term loans.
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Political Update
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
The political climate in the debt-troubled countries
does not appear to have deteriorated over the past
month, but neither has it improved. The situation
remains particularly volatile in the Philippines-
where President Marcos is resisting pressure to
make political concessions to the opposition-and
in Nigeria-where General Buhari is trying to
avoid provoking a countercoup. In South America,
political activity revolved around both economic
policies and presidential elections.
President Marcos is presumably encouraged by the
continuing splits among Philippine opposition
groups on whether or not to boycott the May
National Assembly elections, hoping that there will
be sufficient opposition participation to make them
look credible. Nigeria's General Buhari continues
to purge corrupt military and police officials, in
part to appease younger officers. The handling of
the impending trials of former top civilian officials
and the punishments given them entail considerable
risk for Buhari, especially if junior officers con-
clude that the officials have been let off too lightly.
25X1
Peronists and the Conservatives have thus far
blocked Argentine President Alfonsin's proposals in
Congress for labor union reforms such as new union
elections and tighter controls over huge welfare
funds. In addition, two rival factions of the Peron-
ist-dominated union movement have agreed to work
together, according to press reports, and are orga-
nizing opposition sentiment among workers. Sever-
al unions have called strikes, and on 11 and 12
February about 10,000 workers demonstrated in
Buenos Aires. Alfonsin has countered by decreeing
several wage increases and taking a tough stand
against strikers, including threats to arrest union
leaders. We believe Alfonsin will continue to nego-
tiate with the Peronists, but new union elections are
essential to his plans to curb the unions' opposition 25X1
to future reforms. Workers will be returning from
summer vacations later this month, and Peronists
will no doubt increase their calls for protests if
Alfonsin cannot further reduce inflation or grant
additional wage hikes.
In Bolivia, President Siles continues to lurch from
crisis to crisis. The US Embassy reports that his
recent capitulation to demands by labor for higher
wages and price controls led to a shutdown by
almost all private businesses on 6 and 7 February. 25X1
On 15 February, according to press reports, civil
servants went on a 48-hour strike, and miners
blocked roads demanding additional wage
increases. In addition, Siles's failure to change any
of the important portfolios in a cabinet reorganiza-
tion in January led the Congress-for the second
time in two months-to censure him for his auto-
cratic rule and his mismanagement of the economy.
Siles recently relieved some pressure on his govern-
ment by assigning armed forces
Political unrest in Brazil has centered on demands
for the next president to be elected by popular vote
rather than a government-controlled electoral col-
lege. Last week after President Figueiredo reaf-
firmed his commitment to the indirect method in
the election scheduled for January 1985, demon-
strators marched through downtown Rio de Janei-
ro. According to press reports, more than 200,000
demonstrated in Sao Paulo in late January to
demand the return of direct elections.)
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In Ecuador, a May runoff in the race for president
will pit a center-leftist against a Conservative with
strong support from the military. Rodrigo Borja,
the center-leftist, has advocated more government
intervention and social spending, while Conserva-
tive Leon Febres Cordero, who finished a close
second in the first vote, has supported a free market
approach and austerity measures
We believe the clear-cut ideologi-
cal choice between the two men will polarize the
voters, making it more difficult to develop a non-
partisan approach to Ecuador's economic problems.
One of the first items on the new president's agenda
will be.negotiations for an IMF accord.
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Iraq: War-Induced Austerity
Grips Economy
Iraq is trapped in a costly war of attrition with Iran
that is straining its economy. On the threshold of
an oil-driven economic takeoff before the war,
Baghdad has seen its oil earnings and foreign
exchange reserves plummet. The regime has
slashed imports, virtually abandoned its develop-
ment program, and even terminated combat pay. It
now depends on foreign aid and credits to stay
financially afloat. Despite Iraq's desire to end the
war because of economic problems and growing
casualties, a relentless enemy is pressing President
Saddam Husayn to escalate fighting. F__1
Iraq's economic situation may stabilize in 1984, but
its financial problems are far from solved. We
believe the Gulf states and Western creditors will
provide help for Iraq to meet basic import needs in
1984. If, however, they are not as generous as in
1983, imports will have to be reduced further,
thereby increasing consumer dissatisfaction. Iraq's
prospects for increasing revenues by opening new
oil outlets through Saudi Arabia or Jordan this
year are remote. The only positive development will
be an increase in the capacity of the Turkish
pipeline expected in April. The populace seems
resigned to the economic situation for now but the
austerity program has the potential to create politi-
cal problems for Saddam.
The war is affecting all aspects of economic life.
The government has all but abandoned its econom-
ic development program. This is a sharp reversal
from the guns-and-butter approach maintained
during the first year of the war. Baghdad has
canceled nearly all new contracts not related to the
military effort or the petroleum sector and post-
poned several nonessential projects already under
way, according to the US Interests Section. As a
result, many projects stand idle; including housing,
hospitals, and irrigation work. Among the few
projects where work is continuing are two $1 billion
power plants at Al Yusufiyah and the $3.5 billion
Baghdad-Umm Qasr railroad. In our view, the
slowdown or cancellation of most infrastructure
development will set back by several years Iraq's
plans for rapid industrialization and import substi-
tution.
Although most basic needs are still met, the Iraqi
consumer increasingly has been squeezed. As a
result of Baghdad's sharp clampdown on imports-
some $11-12 billion last year compared with $19
billion in 1982-imported staples are more fre-
quently scarce or exorbitantly priced. The list of
scarce commodities in government shops often in-
cludes dairy products, eggs, sugar, cooking oil, and
potatoes. Shortages also exist for automobile spare
parts, cigarettes, and beer, as well as most luxury
goods. Gasoline queues have cropped up because
military fuel demands take priority; according to
press reports, gas stations at times have been
guarded by armed soldiers.
The shortages have fostered a thriving black mar-
ket and are fueling inflation that we estimate could
be as high as 50 percent annually. Eggs, for
example, now cost about $19 a dozen, and mutton,
an important meat in the Iraqi diet, brings about $7
per pound, according to the Interests Section.
Many scarce items are available only to those with
connections with the Army, the Ba'th Party, or the
local shopkeeper. Hoarding has worsened immedi-
ate shortages as consumers respond to an uncertain
future and growing rumors of government ration-
ing. private
retailers are holding back goods in anticipation of
future shortages, higher prices, or to save them for
favored customers.
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Iraq: Civilian Import Trends, f.o.b., 1976-83
? USSR
? Other-
US
? Other OECD
aEstimated; based on partial third-quarter trade data.
to an unconfirmed report to the Interests Section.
So far, however, the decline in the standard of
living has not resulted in sufficient public resent-
ment to threaten the regime.
To stem discontent, the regime is struggling to
improve the economic situation. The regime so far
has rejected comprehensive rationing. Administer-
ing a national rationing scheme efficiently and
equitably would overextend a bureaucracy already
strained by manpower requirements for the war.
Baghdad, however, has had to restrict the sale of
certain commodities. The government began issu-
ing coupons for oil and gas products last October,
according to the local press. The government re-
portedly is limiting electricity use in Baghdad.
Moreover, the regime'is introducing "specialized
agencies" to distribute milk products produced by
public-sector dairies.
The government is relying on local citizens' organi-
zations to discourage hoarding and at the same
time deflect criticism from the regime. Baghdad is
using People's Councils-government-created citi-
zens' groups in various urban areas-to monitor
private'shop deliveries and sales. Local observers
report that People's Councils in Baghdad have
given away to local neighborhoods goods confiscat-
ed from shopkeepers accused of hoarding. Some
councils are using identity cards to restrict sales to
customers living in their areas.
in some rural villages, the local manag-
er of the government store distributes food based on
his personal interpretation of the requirements of
the local inhabitants.
Pent-up frustrations with the war and its impact on
the economy occasionally have surfaced. Sources of
the Interests Section claim that members of the
National Assembly, Saddam's rubberstamp parlia-
ment, have criticized exorbitant prices in the pri-
vate sector. Late last year, buyers at a dairy outlet
shouted antigovernment chants when the Army
took the day's supply of dairy products, according
Secret
24 February 1984?
The regime has adopted other measures that we,
believe are testing popular resolve. Baghdad appar-
ently has increased income taxes for wage earners
to help finance the war and has launched a cam-
paign to collect "voluntary" gold contributions
from a reluctant citizenry. According to the Inter-
ests Section, the government has resorted to using
teams of Ba'th Party militia for unannounced
nighttime gold collections.
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Secret
Other steps Baghdad has taken highlight the sever-
ity of its foreign exchange dilemma. Baghdad has
restricted the amounts of foreign exchange that the
large community of foreign workers can repatriate
as well as jobs they may hold. These controls are
hastening-the-flight of foreign labor and compound-
ing-a rh onic shortage of skilled manpower. Wom-
en 'increasingly are used to fill the labor gap. The
government has reduced salaries and benefits of its
diplomats and closed several smaller embassies,
with a commensurate decline in morale-among
Foreign Ministry employees. Perhaps even a more
significant move was Saddam's decision last Octo-
ber to terminate combat pay for all military person-
nel, a particularly risky move considering Iranian
attacks along the border.
The Oil Question
Iraq is searching for alternative export routes, but
has had only limited success. Heading the list is a
program to expand the capacity of the Iraq-Turkey
pipeline. According to Iraqi officials, the line now
can carry 900,000 b/d of crude oil and will reach
its planned maximum capacity of 1 million b/d by
this summer. Although isolated incidents of sabo-
tage since 1980 have caused only brief closures, the
980-km-long line is still extremely vulnerable to
terrorists or commando-type attack.
Other options-all longer term-include oil pipe-
lines through Saudi Arabia, Jordan, and Turkey.
Negotiations are under way with Riyadh to build a
spur capable of moving up to 500,000 b/d of oil to
Petroline, the Saudi pipeline to the Red Sea. The
spur would take advantage of unused capacity in
Petroline-currently above 1 million b/d-and
could-also be the first part of a project involving a
separate Iraqi line with a volume of 1.5-2 million
b/d parallel to Petroline.
The Saudis, however, fear a separate pipeline will
ultimately cause friction between themselves and
Baghdad and become a target for Iranian military 25X1
action. While senior Saudi officials have given
public support to the project,
project.
We believe the Saudis will delay the
The proposed pipeline across Jordan to the Red Sea
port of Al Aqabah is only at the feasibility study
stage. According to Embassy reporting, estimates
of construction time run from 16 months to three
years, with a cost of at least $1 billion and a
capacity we believe would be up to 1.5 million b/d.
As for a new Turkish line, Embassy reports indi-
cate that Baghdad and Ankara signed a prelimi-
nary protocol late last year to study the construc-
tion of a liquefied petroleum gas pipeline that
would parallel the existing crude oil line to the
Mediterranean.
Despite the prospect for only a marginal increase in
oil sales, Baghdad will probably get enough foreign
help to meet its basic import needs in 1984. These
will include grain imports necessary to meet about
half of domestic grain consumption. The Gulf
states' oil sales are not likely to recover enough to
prompt substantial increases in their direct finan-
cial aid to Iraq over last year's level of around $1.5
billion unless they perceive real danger to Iraqi
political stability. The Gulf states, however, will
continue to sell oil on Iraq's .behalf. Commercial
banks probably will-refrain from giving major long-
term loans-to Iraq while the war continues. 0
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Iraq: Oil Exports and Revenues, 1980-838
Net Exports, f.o.b.
Thousand b/d
0 1980
a Quarterly data.
1981
1982
Revenue
Billion US $
1980 1981 1982 1983 b
301954 2.83
Iraq probably will be able to obtain enough trade
credits to match last year's level. Baghdad has
lined up at least $500 million in credits from
several countries including Austria; the United
Kingdom, West Germany, and Australia, accord-
ing to the US Interests Section and the press. Iraq
will continue to negotiate with other countries,
especially France and West Germany, for more
deferred payments, but it is likely to encounter
resistance. Moreover, should Baghdad renege on
1983 payments due in 1984, this will probably
cause many creditors to shy away from new loans.
Iraq's economic problems probably will not be
enough to loosen Saddam's tenacious hold on pow-
er. Instead, we believe growing war weariness
among the populace and declining morale in the,
military will pose a more serious threat in the
months ahead. If his ability to attract popular.
support significantly wanes, he will resort to repres-
sive measures to maintain control)
Improving relations with the United States is an
important part of Iraq's diplomatic strategy to
alleviate its economic difficulties and end the war.
Iraq believes US leadership is needed to elicit
increased support for Baghdad, particularly addi-
tional financial assistance from the Gulf states and
Western creditors. Baghdad probably will even
seek economic help from Washington.
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Closer ties with Washington will not translate into
a cooling off of the Iraqi-Soviet relationship. Bagh-
dad and Moscow signed a comprehensive trade
agreement last November that gives the Soviets an
expanded role in Iraq's petroleum and development
projects. Iraq's sizable arms deals also ensure
Baghdad's dependence on the Soviets. Moscow
probably will try to use closer military cooperation
with Baghdad as an entree for expanding its politi-
cal influence in Iraq-especially. now that Soviet
relations with Iran have-soured.
Baghdad, for its part, will remain distrustful of
Soviet intentions and will prevent any spread of
Soviet interference in Iraqi internal politics-espe-
cially attempts to strengthen Communist Party
influence in Iraq. Baghdad has warned the Soviets
not to attempt to parlay its dependence on arms
into a strategic alliance. Moreover, Baghdad has
not forgotten Moscow's refusal to ship arms to Iraq
during the first six months of the war.
If Iraq cannot somehow ease economic and military
pressures, it may escalate the war in the Gulf,
threatening oil exports vital to the West. Baghdad's
attacks on oil tankers servicing Iran and the recent
attack on a petrochemical plant at Bandar-e Kho-
meyni represent major attempts to break the eco-
nomic stranglehold. The Iraqis, we believe, are
prepared to make good on their threat to cut off
Iranian oil exports in the hope that this will force
Iran into negotiations to end the war. Baghdad's
threats also may be used as leverage to obtain
substantial increases in subsidies from the Saudis
and other moderate Gulf states. More realistically,
however, the Iraqis probably would count on major
Western powers to intervene to stop an escalation
of the war and enable Iraq to resume exporting oil
from its Gulf ports.
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West Germany:
Focus on Economic Policy
On the eve of Economic Minister Lambsdorff's
visit to the United States, West German economic
indicators are almost uniformly positive. The Kohl
government is being criticized, however, for failure
to bring about, longer term structural changes
needed to sustain economic growth. Business and
union leaders complain of a rudderless economic
policy, and respected economic research institutes
accuse.the government of lacking the political will
to tackle the economy's fundamental problems.
Even elements within Kohl's own center-right co-
alition question the government's ability to deal
with the country's economic ills.
After 1.3-percent real GNP growth in 1983, fore-
casts for 1984 cluster in the 2.5- to 3.0-percent
range-a much rosier outlook than, expected even
as recently as last fall. Inflation should remain near
the 3-percent level of 1983, while last year's com-
fortable $3.3 billion current account surplus will
benefit from a resurgence in exports, and we
project the surplus will probably reach $5 billion in
1984. Even West Germany's most intractable eco-
nomic problem-unemployment--could ease
From INF to GNP
With the initial INF basing debate in West Germa-
ny now over, attention in and out of government is
focusing on the economy. The government of Chan-
cellor Helmut Kohl had acted quickly after taking
office in. October 1982, enacting sizable tax in-
creases and social benefit cuts that.dramatically
reduced budget deficits., Over the past year, each
new economic- forecast has been cheerier than the
one before. Nevertheless, the government's much-
proclaimed economic revival has not fully material-
ized. Kohl campaigned on a pledge to restore
confidence, and incentives to an economy burdened
by too much government, an unaffordable social
welfare system, and increasingly viewed as unable
to adapt to economic and technological change.
Since Kohl's initial round of tax hikes and social
benefit cuts, the government has taken few steps to
boost the economy:
? A committee has been formed to look into reduc-
ing bureaucratic and regulatory burdens. Regula-
tions governing the construction industry, occupa-
tional health and safety, and dismissal of 25X1
employees are likely targets for eventual change.
? Another committee is to recommend badly need-
ed improvements in West Germany's financial
markets. Legislation reportedly will be intro-
duced soon to promote venture capital, and some
taxes on new stock issues have been eliminated.
? Legislation promoting retirement at age 59 in-
stead of 60 helped take the wind out of labor's
campaign for the 35-hour workweek.
? A small-scale denationalization program began
last month with the reduction of the government
stake in the oil firm Veba AG from 44 to 25
percent. More sales are promised but probably
will not occur this year.
We believe West German business perceives a
sense of drift in economic policy as the government
fails to follow up on its initial round of tax hikes
and spending cuts. Business unease has been fos-
tered by:
? Kohl's acknowledged lack of economic expertise.
? His inability to project an image of strong
leadership.
? Government vacillation over issues such as tax
reform and overhaul of the ponderous social
welfare system.
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? Intracoalition bickering reminiscent of the last
days of the Schmidt government.
? The uncertain fate of Economics Minister
Lambsdorff.
Lambsdorff was indicted in November for allegedly
granting tax breaks to the Flick concern, West
Germany's largest private holding company, in
exchange for campaign contributions to his Free
Democratic Party (FDP). He almost certainly will
resign once formal court proceedings begin in the
next few months. The first Bonn Cabinet minister
ever indicted, Lambsdorff is a longtime champion
of free enterprise and has been a key architect.of
economic policy under both the Kohl and Schmidt
governments.
In addition to the Lambsdorff affair, Kohl has been
buffeted by a succession of setbacks to his econom-
ic policy:
? A merger of West German steel giants Thyssen
and Krupp collapsed in November when the
government's final offer of $185 million in aid
was rejected as insufficient. The rebuff was a
sharp blow to Kohl and the slumping steel indus-
try. Kohl had intervened personally to thrash out
the plan, which was the crux of government
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24 February 1984
efforts to restructure a sector hurt by weak
demand and cheap imports.
? At the same time, a major corporate and banking
crisis occured when IBH Holding, one of the
world's largest construction companies, filed for
bankruptcy. This sparked anxiety about the West
German economy and contributed to the weak-
ness of the deutsche mark.
change its strategy.
? West German labor may be shifting away from
the. moderation in wage demands and strikes that
has been a major factor in West German econom-
ic strength. Last October the Metalworkers
Union, West'Germany's largest union with 2.6
million members and a pacesetter for the rest of
organized labor, announced that it was mobiliz-
ing to achieve the 35-hour workweek. In acrimo-
nious debate with management since then, labor
has demonstrated a new militancy in the face of
firm employer resistance. Government and busi-
ness leaders alike fear that serious industrial
disputes this spring could threaten the nation's
nascent economic recovery. A recent poll, how-
ever, shows a sharp drop in worker support for the
shorter workweek, w, hick may cause the union to
Criticism From Without and Within
West Germany's five major economic research
institutes acknowledged in last fall's joint report
that the economy has picked up more rapidly than
they thought possible. Still, they expect the recov-
ery to be short lived because of unresolved structur-
al problems. Indeed, even the institutes' projections
of 2.5-percent real GNP growth in 1984 show the
expansion decelerating over the course of the year.
The institutes believe business generally lacks con-
fidence because Bonn has not made the changes it
led business to' expect. Subsidies to ailing indus-
tries, taxation, and bureaucracy actually have in-
creased, according to the institutes, discouraging
Private consumption led the recovery in first-half
1983. Consumers more than offset a decline in real
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Secret
West Germany: Economic Outlook Percent change,
except where noted
Council of
Economic
Experts
CIA Model
Government
consumption
-0.6.
0.5
-0.1
Investment
2.9
6.5
5.8
Equipment
5.0
5.5
6.7
Construction
1.6
7.0
5.2
Exports of goods and
services
1.0
4.0
5.6
Imports of goods and
services
0.4
4.5
Consumer prices
3.0
3.0
2.7
Current account surplus
(billion US S)
3.3
NA
5.0
disposable income by turning to savings and credit
to fund autos and consumer-durable purchases
postponed during the recession. The miniboom in
consumption now has fizzled but has been replaced
by strong investment, which averaged 2.9-percent
real growth in 1983 and should grow about 6
percent this year. The crucial question in the near
term for investment and the recovery, according to
the institutes, is how much of the increase in
investment results from one-time government stim-
uli-monetary expansion, an investment tax credit,
and housing programs-and how much stems from
more sustainable factors such as lower interest
rates, higher profits, and expectations of increased
sales.
A number of government coalition leaders and
party rank-and-file elements lack confidence in
Bonn's economic policy. They worry that, should
the recovery founder and unemployment resume its
climb, the government could be unseated by the
Social Democrats (SPD) in 1987. Lambsdorff has
said the election will hang on the economy's per-
formance. Government support among workers is
particularly vulnerable because they have been hit
in the pocketbook by austere budget measures.
Criticism from within Kohl's own party began last
August when Lower Saxony's Minister President
Ernst Albrecht, a highly respected CDU moderate,
published a paper critical of government economic
policy. Albrecht wrote that neither self-sustaining
economic growth nor a reduction in unemployment
would be achieved by the measures taken by the
government. He cited overtaxation, bureaucracy
and regulation, inadequate corporate profits, and
excessive labor costs-particularly employers' so-
cial welfare contributions-among the problems
that-needed urgent attention.
On the Brighter Side
The most upbeat analysis of near-term economic
prospects thus far came close on the heels of the
.e.
-
. i
ns
ti
tut
e
ort w
he
n t
he C
ount
l
cono
..
f E
o
is Experts presented its annual submission to the
government in late November. Although the five-
member Council-composed largely of prominent
university economics professors and known as the
Five Wise Men-officially projected growth of 2.5
percent, it asserted that 3-percent real growth is
attainable this year with exports and investment
playing leading roles. In general, the Council seems
determined to counteract a prevailing pessimism in
West Germany, which it believes has hurt invest-
ment. Even the Council, however, states that not
enough has been done to dismantle obstacles to
economic growth.
The most welcome and surprising aspect of the
economic rebound for the Kohl government is the
recent leveling off in unemployment. Although the
seasonally adjusted level of joblessness-2.2 million
or 9 percent of the labor force-remains near a
record, it has been inching downward since August,
ending a 42-month unbroken climb. Government
and labor union analysts have long believed that
real growth on the order of 6 percent a year would
be necessary to substantially reduce unemployment
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in the 1980s because of rapid labor force. expansion.
Now most forecasters-including the Five Wise
Men-see unemployment holding or declining
slightly this year.
Outlook
Kohl is not now in trouble. His government has
garnered the credit for reversing the trend toward
ballooning federal deficits, and polls show that, if
an election were held today, the Christian, Demo-
crats would do almost as well as in the election last
March. Kohl, however, can no longer blame the
former government for the country's economic ills
and is vulnerable to criticism over the absence of a
comprehensive and convincing economic game
plan.
The government is well aware of the need for
structural change in the economy, and we believe
Kohl realizes his political future in large part rides
on his perceived handling of the economy. The
strengthening recovery offers an opportunity to
begin implementing a medium- and long-term eco-
nomic strategy. Kohl would like to introduce such a
strategy at the CDU congress this May, according
to a press report. Decisive action on the economy
will not come easily, however, given the sidelining
of key player Lambsdorff, coalition strife over the
timing of tax reform and other issues, and Kohl's
reluctance to involve himself in disputes
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Secret
Prospects in 1984
We believe the developing countries will continue
to press their demands for a New International
Economic Order.(NIEO) this year. despite their
inability to make significant progress on it during
the past decade. In our judgment, they will cling to
the NIEO because it represents their vision of an
egalitarian world order, unites them by consolidat-
ing their economic demands into one proposal, and
places principal blame for their economic difficul-
ties on external rather than internal factors-The
developing-countries particularly will focus on four
North-South. issues in 1984: ratification of the
Common Fund, the convocation of an international
monetary conference, the launching of Global Ne-
gotiations, and the enactment of 39 "immediate
measures" for reform of the specialized agencies in
the United Nations, particularly the IMF
The Common Fund obliges participating nations to
make prorated financial contributions to a central
body that would intervene in commodity markets in
an effort to increase the revenue of developing
countries. The Common Fund would embrace as
many as 18 nonfuel commodities, five of which are
already covered by price-stabilizing international
commodity organizations. For the Common Fund
to become operative, 90 ratifications and direct .
capital contributions of $313 million are needed. As
of late 1983, 110 countries, including the United
States, had signed the agreement, but only 64
nations accounting -for $195 million in contribu-
tions had ratified it. The countries that have rati-
fied probably will meet this spring to set a deadline
by which the agreement must enter into force or be
scrapped. It appears likely that enough new ratifi-
cations will, be forthcoming this year to make the
agreement's fate contingent .on the United States,
which is slated to-make the largest capital contribu-
tion, $74 million
We expect the other major industrial countries will
press the United States at the June 1984 London
Economic Summit to ratify the Common Fund. In
our judgment, the setting of a deadline in conjunc-
tion with the expected new ratifications will make
the Common Fund a high-profile issue around the
time of the summit. Four summit participants-
Japan, Great Britain, France, and Canada-have
ratified the agreement while two others, West
Germany and Italy, have begun ratification proce-
dures. We believe our summit partners will see the
Common Fund as an opportunity to enhance their
image with the Third World. It has great symbolic
value because it would be the first part of the
NIEO to become operative and entails only a small
direct expense for the other summit countries rang-
ing from $11 million in direct capital contributions
for Canada to $34 million for Japan. We expect
Japan to take the lead in lobbying for the Common
Fund at the summit. It played a similar role at
UNCTAD VI in June 1983. According to US
Embassy reporting; Tokyo sees its stand on the
Common Fund as an important element in its
relationship with Malaysia, the Philippines, and
Indonesia-all supporters of the agreement.
An International Monetary Conference
At the March 1983 Nonaligned Summit in New
Delhi, the developing countries called for an inter-
national monetary conference to negotiate the fi-
nancial issues contained in the NIEO. The pro-
posed conference would have universal
participation and focus on "reforming" the IMF.
The conference, however, would not be held under
the auspices of the IMF where the industrial
countries have effective: control. At the May 1983
Williamsburg Economic Summit, the seven major
industrial countries, prompted by France, said that
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The New International Economic Order
The NIEO presumes that sustained economic
growth in the developing countries can occur only
through a massive North to South transfer of
wealth and dramatically increased Third World
power in international economic institutions. It
focuses on changes in five areas: money, trade,
commodities, aid, and energy.
Money:
? The IMF's system of tying a member's voting
strength to its financial contribution should be
altered so that the LDCs can have voting power
commensurate with their numbers.
? The IMF should create large new quantities of
Special Drawing Rights, mostly to be allocated
to the developing countries.
? The IMF should relax the conditionality it atta-
ches to its loans so as not to conflict with a
member's national economic program.
? The IMF should use its loans to encourage
expansion in domestic production rather than
correcting foreign payments problems.
? Stable exchange rates should be created through
the use of target zones. and guidelines supervised
by the IMF.
? The IMF should expand its resources by borrow
ingfrom capital markets and linking increases in
its quotas. to growth in world trade and pay-
Trade:
? Industrial countries should increase nonrecipro-
cal trade preferences for the LDCs.
they would invite finance ministers from unspeci-
fied countries and the head of the IMF to consider
the possibility of a high-level monetary conference.
Subsequently, India, the chairman of the Non-
aligned Movement, publicly implored the industrial
nations to enter into a dialogue with the developing
countries on .the organization of a monetary confer-
ence. The developing countries tried unsuccessfully
at UNCTAD VI and the fall 1983 UN General
Assembly session to gain the industrial nations'
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24 February 1984
? The industrial countries should dismantle pro-
tectionist barriers to Third World exports.
? The industrial nations should phase out their
aging industries so that LDCs can expand their
market shares.
? GATT and UNCTAD should engage in more
joint activities and eventually merge.)
Commodities:
? Enactment of the Common Fund.
? Industrial nations should assist the LDCs to
increase their participation in the processing,
marketing, and distribution'of their
commodities.
? Prices of commodities the LDCs export to the
industrialized countries should be linked to the
prices of manufactured goods the LDCs import
from the industrialized countries.
Energy:
? The World Bank should establish an energy
affiliate to finance Third World energy projects.
? The industrial nations should transfer energy-
related technology to the LDCs.
Aid:
? Industrial nations should donate 0.7 percent of
their GNP to the LDCs in foreign aid; the aid
should be assured, continuous, and automatic.
approval for resolutions that incorporated language
on a monetary conference from both the New Delhi
and Williamsburg communiques.
We believe the developing countries will make 'a
major effort in 1984 to initiate preparations for a
monetary conference. We expect they will try to
formulate a UN resolution that would commit the
industrial nations to the convocation of a confer-
ence. Press reports indicate that they'have estab-
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lished a group of experts to work out the details of
their proposal. The developing countries hope to
keep alive the idea of a conference and to be
prepared with their own proposals should the indus-
trial countries decide to hold high-level discussions
We doubt that a Third World proposal for a
monetary conference will win significant support
from the EC and Japan. The major industrial
nations have made clear that discussion of a mone-
tary conference must start in the IMF's Group of
10, which they dominate. Most industrial nations
have little interest in a conference addressing their
own monetary problems much less one focusing on
Global Negotiations
We believe the so-called Global Negotiations,
which the developing countries first proposed in
1979, will be a secondary issue in 1984. Global
Negotiations would involve recommendations by
the Third World-dominated UN General Assem-
bly on trade, aid, energy, commodities, and finance
to the UN's specialized agencies, such as the IMF,
the World Bank, and GATT. The industrial and
developing countries have been unable to agree on a
General Assembly resolution that would launch
Global Negotiations. In an attempt to break the
impasse, the developing countries proposed at the
fall 1983 session of the General Assembly that
Global Negotiations be separated into two stages.
This approach would postpone discussion of the two
thorniest issues, energy and finance, so that negoti-
ation of the less controversial issues could begin.
The developing countries, however, have not yet
offered details on how the two-stage approach
would work.
developing countries concluded at the March 1983
Nonaligned Summit that Global Negotiations were
unlikely to bring progress on the NIEO in the near
The Soviet Union and the
North-South Dialogue
The Soviet Union has used North-South forums to
try to win Third World sympathy for its positions
on East-West issues. At UNCTAD VI, for exam-
ple, the Soviets claimed that the United States was
diverting aid into arms expenditures and that US
sanctions on East-West trade were limiting Soviet
access to hard currency and thus curtailing Mos-
cow's ability to aid the developing countries. De-
spite such claims, the US delegation to the confer-
ence reported that the Soviet Union did not
enhance its image with the developing countries by
emphasizing East-West issues.
The Soviet Union is committed to bilateralism in
its relations with developing countries and stead- 25X1
fastly refuses to enter into the types of multilateral
agreements called for in Third World demands. For
example, Moscow has-
? Not signed the Common Fund.
? Not established a generalized system of trade 25X1
preferences for developing countries.
? Declined to join any of the multilateral aid
institutions.
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24 February 1984
future. Consequently, they formulated 39 "immedi-
ate measures" that they want to pursue in the IMF,
the World Bank, GATT, and other UN specialized
agencies. The measures are virtually identical to
the NIEO demands and call for the IMF and
World Bank to transfer funds quickly to the devel-
oping countries. The developing nations say that
the immediate measures are meant to supplement,
not replace, Global Negotiations.
We doubt the EC and Japan will urge the United
States to consider the immediate measures. These
proposals require substantial short-term resource
transfers, and we have no evidence that any major
industrial country is prepared to make them. The
developing countries pressed for the immediate 25X1
measures at UNCTAD VI and the September
1983 IMF/World Bank meetings, but the industri-
al nations refused to make substantive concessions.
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The Soviet Union endorses the Third World's call
for the NIEO but avoids participation in North-
South negotiations that involve the transfer of
wealth. Moscow uses forums such as UNCTAD
and the UN Economic and Social Council to back
the NIEO's assertion that Third World poverty is
largely a result of colonialism and Western exploi-
tation. It claims that as a noncolonial, socialist
state, it bears no responsibility for the Third
World's plight. F___]
In our opinion, the developing countries have dis-
counted the Soviet Union as a factor in the North-
South dialogue. We believe they have done so
partly because the Soviet Union is not a member of
the three international economic institutions they
want to change most-the IMF, the World Bank,
and GATT. Furthermore, the Soviet refusal to
engage in multilateral trade and aid negotiations is
so firm that we believe the developing countries
doubt they can ever change Soviet policy. In our
judgment, the developing countries occasionally
will criticize the Soviet Union for not helping them
more, as they did at UNCTAD VI, but will
continue to fix virtually all of their attention on the
wealthy industrialized countries.
An International Financial Crisis:
The Potential Wildcard
While we believe continued stalemate will mark
North-South discussions this year, a dramatically
different alternative scenario cannot be ruled out.
The whole tenor of North-South relations could
shift markedly in the event of a financial crisis
induced either by the default of a major debtor or
by a major shock to the world economy such as an
oil price runup caused by interruption of Persian
Gulf oil supplies. We believe that some LDCs
might think the Third World as a group has
sufficient bargaining power to coerce the industri-
alized countries into making real concessions on the
NIEO.
Following the 1973/74 oil price hikes, the LDCs
believed that they could use OPEC's leverage and
the West's concern about oil supply and price
Secret
24 February 1984
stability to secure the economic and political con
cessions included in the NIEO. The tactic failed
principally because OPEC was neither willing nor
able to use what leverage it had to help poorer
Third World countries at the North-South bargain-
ing table. We believe that, in the event of interna-
tional financial crisis precipitated by a debt default
or world oil shortage, some LDCs could try again
to link the NIEO with their cooperation in manag-
ing the crisis.
Should a global financial crisis occur, some LDCs
would try to convince the industrial countries that
they need the cooperation of Third World debtors
to contain the serious economic and political dislo-
cations an international financial crisis would
cause. Nicaragua and Ecuador, which have already
proposed unified action on debt, could again raise
that possibility in an attempt to link Third World
debt directly to economic and political concessions.
Although the major Third World debtors have
repeatedly blocked proposals to create a debtors'
cartel, the more radical Third World states may
believe that the industrial powers would be willing
to grant concessions in a crisis rather than risk even
more uncertainty. We believe, however, the major
debtors such as Mexico, Brazil, and Argentina,
with a greater stake in the financial system, are
unlikely to risk their national financial interests by
supporting confrontational Third World tactics in
the midst of a crisis.
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Vocational Training
A Politburo commission studying the Soviet educa-
tional system last month issued comprehensive
proposals that call for increased vocational training
and recommends a restructuring of the general
education system so that children start school one
year earlier. Not only are the Soviets seeking to
make a larger proportion of youth available for
employment at an earlier age, but they hope to
increase the number of skilled workers and improve
the match between job openings and suitably
trained personnel. The proposed changes are in-
tended primarily to help offset the decrease in the
number of young people who will enter the labor
force during the 1980s and are in line with the
traditional Soviet educational policy of giving pri-
ority to meeting short-term manpower needs. The
price for the immediate gains, however, could be a
long-run reduction in the supply of highly trained
manpower.
Past and Present Emphasis on Vocational
Education
The current proposals to expand. vocational educa-
tion are a continuation of an earlier policy that has
had little success. In December 1977 the Council of
Ministers, in anticipation of declining increments
to the labor force, adopted a resolution calling for
an increase in vocational training in secondary
schools. Such training was to increase from two to
four hours weekly, curricula and textbooks were to
have a more practical orientation, and material
deemed to be "of secondary importance" was to be
eliminated. The resolution was designed to make
secondary school graduates better suited to the
economy's immediate needs without abandoning
the government's commitment to universal second-
ary education. The draft proposals reiterate the
provisions of this resolution, calling for further
streamlining of the academic curriculum, "stepping
up the polytechnical thrust of the content of educa-
tion," and increasing the time spent on labor
training.
The emphasis on vocational education since 1977
has not worked out as planned. Between 1975 and
1980 there was little increase in the proportion of
eighth-grade graduates entering specialized sec-
ondary or vocational-technical schools. The regime
wanted to reduce the number of youths choosing
the academic track, not only to increase the num-
ber being trained in specific skills and for specific
trades, but because, as Soviet surveys have indicat-
ed, 15-year-olds are more willing to take blue-collar
jobs than 17- or 18-year-olds.
Since 1977, Soviet educators have staged a massive
public relations campaign to raise' the prestige of
wageworker occupations and to steer students away 25X1
from a college-bound track, the traditional path of
upward mobility in Soviet society. The State Com-
mittee for Labor and Social Problems has been
tasked with directing an ambitious program of
career counseling for students about to enter a
secondary school program.
Reform Likely To Have Limited Impact
Many of the commission's proposals have been
made before, but issuing a comprehensive reform
program suggests a willingness heretofore lacking
in allocating the resources required to reform the
educational system. Among the commissions rec-
ommendations are:
? A one-year course in secondary vocational-tech-
nical schools or a two- to three-year course in
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Distribution of Eighth-Grade Graduates
1965
1975
1980
42.5
2.3
0.5
Vocational-Technical
General Secondary
Specialized Secondary
12.3
40.0
5.2
31.6
60.9
5.2
33.1
60.2
6.2 -
specialized secondary schools for secondary
school graduates who want more advanced tech-
nical training.
? Gradually integrating six-year-olds into general
education schools beginning in 1986 as teachers
and programs become available. The purposes are
to lighten the academic load for children in the
primary grades, allow for an emphasis on basic
skills, and permit some mothers to enter the labor
force a year earlier than might otherwise be
possible.
? Expanding vocational training in all school pro-
.grams and attaching each school to an enterprise
that would act as a sponsor or patron. Vocational
training in general secondary schools will be
upgraded, primarily through increased use of
interschool production combines. These combines
consist of facilities set up by local governments
and industrial and agricultural enterprises. Stu-
dents work at the combines one'day- a week
during the school year and three weeks during the
summer. Currently, there are about 2,500 inter-
school production combines, which train one-
third of general secondary school students. Plans
are being formulated to increase the number of
such facilities to 3,200 to train over .half of the
students by 1985.
? Training more teachers by increasing admissions
to teachers' colleges and upgrading their educa-
tion by extending the present four-year course by
one year. Measures designed to make teaching
more attractive will include wage increases, pref-
Secret
24 February 1984
erential housing, and improved living and work-
ing conditions.0
At least in the short run, even with massive invest-
ment, the program's objectives face formidable
obstacles. For example, reducing enrollment in
general secondary schools and correspondingly in-
creasing it in vocational-technical schools may be
frustrated by shortages of the latter schools, partic-
ularly in Central Asia, the Caucasus, and some
sections of the RSFSR.
Though the current reform proposals are less ex-
treme than similar reforms under Khrushchev, the
Soviets face the same problems in revamping the
schools now that 'they did 25 years ago-a shortage
of vocational schools, training materials, and quali-
fied production instructors, unwillingness by enter-
prises to provide training, and the negative percep-
tion of wageworker positions held by students and
their families. In fact, the resistance may be stron-
ger now because of the gains made in educational
attainment since the 1960s
The objectives of the current reform are open to
question. Gearing the-educational system to deem-
phasize the academic curriculum at an early stage
in life and to promote more rapid placement of
young people with finely tuned vocational skills into
the labor force could help ease the short-term
manpower squeeze. But Soviet education is already
vocationally oriented-in' the RSFSR, for instance,
one-third of the hours in general secondary schools
are devoted to labor training-and pushing it fur-
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ther in this direction could jeopardize long-term
Soviet interests. Lowering the quality of general
education and placing greater stress on training
that leads to excessively narrow specialization
could leave the USSR ill equipped to deal with the
demands of an increasingly complex economy in an
era of rapid technological change.
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24 February 1984
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Sanitized Copy Approved for Release 2011/06/04: CIA-RDP97-00771 R000706870001-4
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Sanitized Copy Approved for Release 2011/06/04: CIA-RDP97-00771 R000706870001-4