INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707100001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2010
• Sequence Number: 1
• Publication Date: July 27, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
27 July 1984
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DI IEEW 84-030
27 July 1984
Copy 686
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Secret
Weekly
International
Economic & Energy
27 July 1984
iii Synopsis
1 Pers ective-West German : Implications of the Metalworkers Strike IT 25X1
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Energy
International Finance
Global and Regional Developments
National Developments
15 /'International Financial Situation: Latin American Debt Update ~ 25X1
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Comments and queries regarding this publication are welcome. They may be
Directorate of Intelligence,
Secret
27 July 1984
19 /El Salvador: Economic Challenges Facing the Duarte Government
25 The Caribbean Area: No Economic Recovery in Sight
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Secret
International
Economic & Energy
Weekly
Synopsis
1 Perspective- West Germany: Implications
of the Metalworkers Strike
The West German economy experienced a significant loss in output as a result
of the seven-week metalworkers strike-the country's largest postwar labor
dispute. Awareness of the worsening labor-management climate could sharpen
the image in investors' minds of a more hesitant, less dynamic West German
economy.
15 International Financial Situation: Latin American Debt Update
The results of the Cartagena Conference last month suggest limited support
for joint action against creditors and no movement toward a debtors' cartel. A
surge in interest rates or a perceived continued lack of progress toward easing
the debt burden during the summer could yet, however, forge closer links
among these disparate governments.
19 El Salvador: Economic Challenges Facing the Duarte Government
Despite the $240 million in US economic aid slated for El Salvador this year,
we believe that output will decline-albeit slightly-for the sixth consecutive
year. For now at least, President Duarte's focus on political and military 25X1
matters and his strong commitment to redistributing economic and social
power are delaying the tough actions needed to stimulate the economy.
25 The Caribbean Area: No Economic Recovery in Sight
The Caribbean area shows little indication of pulling out of its economic slump
any time soon. We expect the region to show little or no growth and
unemployment rates to range between 20 and 40 percent in most countries
over the near term. The result is likely to be increased requests for US
assistance, as well as stepped-up pleas for US intercession with the IMF and
other donors to ease aid requirements.
iii Secret
DI IEEW 84-030
27 July 1984
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Secret
International
Economic & Energy
Weekly
27 July 1984
% Perspective West Germany: Implications
of the Metalworkers Strike
The West German economy experienced a significant loss in output as a result
of the seven-week metalworkers strike-the country's largest postwar labor
dispute. The uncharacteristic militancy of both sides during the dispute,
moreover, signaled a step back from the cooperative spirit that has generally
characterized postwar labor-management relations in West Germany !and has
contributed significantly to the country's prosperity. The Kohl government's
open criticism of the union's demands, which was a break from the tradition of
government neutrality in labor negotiations, also helped to poison the atmo-
sphere.
On balance, the settlement appears to favor the interests of labor. Although
the original goal of a 35-hour week was not achieved, the 90-minute cut in
working hours is close to what the leadership of the metalworkers realistically
hoped to get. Furthermore, management's agreement to maintain current pay
levels after the shorter workweek takes effect was a significant achievement-
at least for those members who currently are at work. Additional pay increases
and a $90 lump-sum payment to cover the five-month period since the old
contract expired sweeten the pie. The pay hikes-3.3 percent effective 1 July
and 2.0 percent next April-are modest when measured against current and
projected West German inflation of about 3 percent.
The metalworkers union, with 2.5 million members, is West Germany's
largest, and its settlements have long served as a model for those in other in-
dustries. The union, for example, spearheaded several previous drives,for a
shorter workweek, with enough success to bring the national average for hours
worked down to 40 from the 1950 average of 49. The smaller printers; union-
which also was on strike-accepted terms close to those of the metalworkers,
and new contracts in other industries already are being worked out along
similar lines. We also expect unions in other West European countries-with
the metalworkers as an example-to achieve comparable settlements.
Management did not come away emptyhanded, although the utility of the
concessions it gained is more problematic. A major achievement was a clause
permitting individual companies to vary workers' schedules between 37 and 40
hours, provided that the average workweek over a two-month period is 38.5
hours. This flexibility at the shop level-a first in industry dealings with the
metalworkers-should boost productivity and enable manufacturers to offset
some of their increased costs. In addition, the delay in implementing the
1 Secret
DI IEEW 84-030
27 July 1984
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Secret
labor costs for the next two years.
reduction in working hours until next April will give individual manufacturers
time to consider how to handle the cut most efficiently. Since the new contract
will run until October 1986, manufacturers will also benefit from predictable
Publicly, the leadership of the metalworkers justified their push for a 35-hour
week in terms of job creation. Their demand for full compensation for the
shorter week suggests, however, that they are more concerned with protecting
existing jobs than with putting unemployed metalworkers back to work. In
light of the overcapacity in certain branches of the industry, such as steel
production, that clearly threatens jobs, this priority is understandable. Most
West German economists are skeptical that the shorter week will reduce
joblessness significantly, and even the arbitrator who worked out the compro-
mise settlement said it will not create jobs although it may stabilize existing
Awareness of the worsening labor-management climate could sharpen the
image in investors' minds of a more hesitant, less dynamic West German
economy. If investors' confidence is shaken, economic growth over the next few
years could be slower than the Kohl government expects.
the workweek.
Kohl is likely to be especially apprehensive about the
national election scheduled for 1987. The metalworkers' contract will expire in
late 1986, and the union will almost certainly press for further reductions in
Secret.
27 July 1984
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LSoviet Oil
Production Problems
Reviewed
Energy
According to press reports, Soviet officials have indicated that production at
several giant West Siberian fields has peaked and that the era of powerfully
flowing wells has passed. To raise production at Tyumen'-which provides
nearly two-thirds of all Soviet production-oil increasingly will have to be
extracted by pumping. Production problems at Tyumen' are not being
resolved, and no short-term solutions have been recommended. A recent press
article reported that 2,000 wells above the norm were idle and that their
number is growing. There are 350 well-repair crews working in Tyumen', but
200 more crews are needed. Reported shortages of oil well pumps and oil-well-
repair rigs appear to be greater than in the past. Over the long run, supply and
quality improvements are possible with more investment in the petroleum
machinery and equipment manufacturing industry. Costs will be high, how-
ever, and realization of these improvements would claim an even larger share
of investment funds. 25X1
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27 July 1984
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I aqi-Saudi Arabian
Pipeline
Contracts to build the oil pipeline spur linking Iraq to Saudi Arabia's Petroline
will be awarded by September and construction will begin in October,.
Riyadh plans to expand
crude is not likely to begin flowing through Petroline before 1986.
Petroline's 1.85-million-barrel-per-day capacity to accommodate the addition-
al 500,000 barrels per day Iraq wants to export by adding a line through some
existing pumping stations. Despite the priority it attaches to the project,
Baghdad is likely to engage in rigorous contract negotiations on both technical
and financial arrangements, and construction is likely to take longer than the
projected 10 to 11 months. Even if no other major obstacles develop, Iraqi
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Oil Development in Chevron's oil exploration in Sudan continues to be curtailed by insurgent
Sudan Curtailed activity. According to Embassy reporting, Chevron is confining its efforts to a
secondary area about 175 miles northwest of Sudan's main oilfield at Bentiu.
Chevron operations at Bentiu were suspended after the insurgents attacked
company facilities there in February. The Sudanese Government has been
prodding Chevron to resume operations
development of the Bentiu oilfields
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requires Western technology, and Khartoum and Chevron appear to have
reached an accommodation whereby the company will resume activity in the
south once it is safe.
Chevron also has delayed construction of the White Nile pipeline because of
uncertainty over development of Bentiu, which would be its main feeder
oilfield. Moreover, financing for the $1.1 billion pipeline is about $200 million
short. Khartoum appealed to Chevron and Saudi Arabia to fill the gap.
Chevron has declined
Secret 4
27 July 1984
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Philippine
Banking Crisis
Fund's monetary reserve targets.
Growing evidence suggests that repercussions from the Philippines' foreign-
debt crisis threaten the country's domestic financial system. In recent, weeks,
the Central Bank has been forced to close six banks and organize financial
bailouts for several others. Banco Filipino, one of the country's largest savings
institutions with nearly 4 million depositors and 89 branches, was forced to
close last weekend after a mild run on deposits escalated to panic with
After providing Banco Filipino with over $40 million in emergency financing,
the Central Bank decided to seek new ownership for the troubled bank rather
than continue rescue operations. The move has left Central Bank Governor
Fernandez vulnerable to press criticism. Banco Filipino is apparently an early
casualty of Manila's efforts to comply with IMF austerity targets. The Central
Bank has moved to reduce the money supply by drawing reserves away from
private banks--driving short-term interest rates up to over 30 percent.' Its
ability to pump rescue funds into weaker financial institutions is limited by the
technocrats to deflect mounting criticism
The banking crisis has encouraged the opposition to challenge the govern-
ment's economic management record. In addition, President Marcos's,business
associates, whose economic privileges have been eroded by economic, reforms,
are launching new attacks on technocrats and the policies prescribed by the
IMF. With a Fund rescue package on hold and the economy steadily,,
worsening, Marcos will be increasingly tempted to divorce himself from the
New Mexican The Mexican Government is backing away from earlier statements that it
/ "oan Requests would not seek new credits from international banks for. 1985, partly because it
fears that world interest rates will rise further. Officials now plan to ask for a
new $1.6-2 billion credit line from commercial banks to handle financial
contingencies next year. To avoid almost certain rejection by a large number of
banks that are already upset by the breadth of its requests for debt
rescheduling, Mexico will call for voluntary participation and count on money-
center banks to cover any shortfall. Mexican officials now project their
requirements for new commercial borrowing to increase an average 4!, percent
each year through 1990.
Chile Ponders
Deva ation
million to the deficit.
Chile's deteriorating balance of payments may force Santiago to devalue the
peso before the end of August, despite probable adverse domestic conse-
quences. The Central Bank now projects a $1.8 billion current account deficit
for 1984, a 30-percent increase over earlier projections. Higher-than-anticipat-
ed import growth, coupled with the dampening effect of depressed copper
prices on export earnings, will reduce the expected trade surplus by some $300
million and the Central Bank estimates that higher interest rates will add $126
Secret
27 July 1984
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In response to the worsening payments position, the free market peso is trading
at a 30-percent premium above the official exchange rate, increasing the
prospect of capital flight-a factor that has precipitated devaluation in the
past.
will erode Chile's ability to comply with its IMF program.
IA devaluation would increase the '
burden of servicing dollar-denominated foreign loans and cause real wages to
drop by spurring inflation. Pinochet probably anticipates widespread public
criticism if he devalues, but he may be more concerned that delaying this move
Cuba s 1984 Debt Agreements for rescheduling about $365 million of Cuban debt payments
W~tth Bankers Continue
Secret
27 July 1984
having to pay 2.25 percentage points above LIBOR.
falling due this year were reached separately with Western creditor govern-
ments and commercial banks during the past week. Both provide for a four-
year repayment schedule following a five-year grace period. The interest
spread on commercial debt will be 1.875 percentage points above LIBOR.
Cuba last year obtained only a three-and-a-half-year grace period while
Lenders are indicating that Bogota will have difficulty securing a $700 million
loan this year for energy development projects. The press reports that former
Finance Minister Gutierrez told British bankers in London that Chase
Manhattan Bank is willing to lead the syndication
prescriptions.
Bankers are concerned about: Colombia's low level of official reserves,
Bogota's refusal to aid the ailing Banco de Colombia, the country's largest
private bank, and sluggish economic conditions. Moreover, we expect the
upcoming IMF consultative mission to render a negative evaluation on
Colombia's trade, fiscal, and monetary policies. The IMF will most likely
recommend that Colombia take a strong dose of austerity. Such a measure
would meet strong political resistance, but Bogota probably will have difficulty
securing credit support and rescheduling its debt unless it goes along with IMF
Haiti is at least $15 million over the budget deficit target of its IMF standby
program because of a surge of expenditures last month. According to the IMF,
about half of these expenditures were commercial purchases and emergency
relief. Haiti also recently contracted to purchase $12 million in armaments.
The food riots in May apparently have weakened Port au Prince's resolve to
abide by IMF guidelines. The Duvalier regime probably is trying to improve
its public image by financing some domestic growth through government
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spending. Over the short term, problems with the IMF and irresponsible
government spending will reduce business confidence and increase capital
flight. Without significant foreign aid-an unlikely prospect-Haiti will have
a difficult time getting its budget back on track before its next IMF review in
September.
ambian Zambia has arranged to reschedule nearly $200,million in foreign debts, thus
Debt Rescheduling paving the way for another $220 million in IMF loans, according to press
reports. Zambia had faced debt service payments of $609 million compared
with only $42 million in available funds. Payments to Western creditors will be
spread over five years preceded by a five-year grace period. The IMF loan,
tentatively approved last week pending the debt rescheduling, probably will be
granted. The Zambian economy has been hit hard by the low price of copper,
which provides as much as 90 percent of foreign-currency earnings. Recent
loans to Zambia have been targeted at strengthening agriculture and diversify-
ing exports to lessen dependence on copper.
Global and Regional Developments
Secret
27 July 1984
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Fokker's
New Passenger Jet
The Netherlands' Fokker aircraft company received its first order for the
Fokker 100, a twin-engine passenger jet now in development. Swissair, which
bought eight F100s for delivery starting in 1987, paid about $19.5 million for
the 85-passenger luxury configuration. We believe the price for the standard
100-to-105-seat version will be $16-17 million, comparable with Boeing's
737-200. Fokker won the Swissair sale against strong competition from British
Aerospace, Boeing, and McDonnell Douglas. Fokker is pushing for a quick
succession of orders for the F100 in Western Europe and the Third World and
is expected to mount a major marketing effort in North America
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Xokyo's Aid to Iran Japan will provide technical assistance to Tehran for the first time since the
Iranian revolution began in 1979. According to press reports the Japan
criticism of its recent reduction in oil imports from Iran.
Possible Airbus
/ Deal With Pan Am
Secret
27 July 1984
,
International Cooperation Agency and the Government of Iran signed an
agreement on 19 July to cooperate in an agricultural development project in
Mazanderan Province. Foreign Minister Abe promised assistance for this
project and for an urban transport project in Tehran during his visit to Iran
last year. Tokyo probably granted the aid at this time in an effort to deflect
Western Europe's Airbus Industrie is negotiating a leasing and sales agree-
ment with Pan American Airlines for up to 67 aircraft valued at $2 billion. A
sale of this size would allow Airbus to clean out its inventory of some 20 unsold
A-300 and A-310 wide-bodies; the deal would also mark the first sale of
A-310s to a major US carrier. According to key industry spokesmen in
Western Europe and the United States, Pan Am can expect favorable price or
leasing offers that would be likely to include an option to exchange some
A-300s or A-310s for the new 150-seat A-320 when it becomes available in
1988. We believe the sales would add prestige to the Airbus worldwide
marketing campaign, lead Airbus officials to put renewed emphasis on the
North American market, and enhance the long-range sales potential of the
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I.ghtened Israeli
Foreign-Currency
Restrictions
Japan's leading business federation, on the other hand, has publicly reiterated
support for budget cuts. Nakasone backs the Ministry of Finance targets but
has decided to use the word "standards" instead of "ceilings" for the spending
'i V limits to provide himself with more flexibility later in the year when revenues
Ano .her Tight Budget expenditures for most ministries and a 5-percent reduction in public works
d
Tokyo Setting
such controls, which had existed until October 1977.
National Developments
Developed Countries
The Israeli Government announced a series of foreign-currency restrictions
this week to stem the decline in foreign exchange reserves and reduce imports.
According to press reports, the new measures include:
u A ban on the transfer of foreign currency as a gift to relatives abroad unless
prior approval is granted by the Bank of Israel. Israelis had been allowed to
send $2,000 per person per year. `'
c Imposition of a 15-percent value-added tax on imported goods, foreign
purchases made with credit cards, and hotels, meals, and car rentals made
through Israeli travel agents.
o A ban on advance payments for imported goods.
We believe these restrictions will be counterproductive unless the government
cracks down on the black market. Israelis have become adept at getting' around
Japan's Ministry of Finance is pushing for a 10-percent cut in current
Agency, and Kiichi Miyazawa-criticized his economic policy.
spen
ing in the budget for fiscal year 1985. Spending on defense, foreign aid,
and personnel will increase, but the Ministry wants to keep total spending at
about the level of this year's budget-already the tightest in over 30 years.
Prime Minister Nakasone, who faces an election for the Liberal Democratic
Party (LDP) presidency in November, has encountered mounting pressure
from within the LDP for increased spending. Last weekend two of his potential
rivals-Toshio Komoto, a faction leader and chief of the Economic Planning
will be easier to forecast.
Mil' ant Union
B ks Australian
age Accord
Prime Minister Hawke's wage accord--the centerpiece of his government's
economic policy--received a boost last week as trade union leader Norm
Gallagher pledged to reduce the number of strikes in the construction industry.
Gallagher controls the 24,000-member Building Laborers' Federation,'a
leftwing union whose militancy in pursuit of wage increases had posed 'one of
the greatest threats to Hawke's wage policy. Gallagher reportedly gave his
pledge in order to preempt a move by employers to have the union deregistered
by the federal court--a move which would have denied the federation the
benefits of Australia's industrial arbitration system.
9 Secret
27 July 1984
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Philippine Rice
Imports Up
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27 July 1984
Less Developed Countries
affordable prices until late fall.
The Philippines-a rice exporter in recent years-is importing 150,000 tons of
Asian rice to quiet public protests over inflation and rumors of impending rice
shortages. Although the Philippines has enough rice to meet domestic needs,
traders and farmers are withholding supplies from the market in anticipation
of an increase in the government-controlled price. Manila's decision to import
rice rather than raise the price-despite a severe foreign exchange shortage-
stems from a fear of aggravating the 40-percent annual rate of inflation.
Imports probably will stabilize the domestic price of rice and assure adequate
supplies for the capital. Recent Philippine rice purchases are likely to tighten
available export supplies of non-US rice and probably exert upward pressure
on international rice prices. Other developing countries that import rice and
have not already lined up their supplies may find little rice available at
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Ar ntine Sugar
arnings To
marketing year.
Argentina's sugar export earnings are expected to fall by one-third to about
$88 million in the current marketing year--June 1984 to May 1985. A smaller
sugar crop, a reduced US import quota, and depressed world sugar prices are
the major contributing factors. Argentine sugar export volume is forecast by
the US Department of Agriculture at 580,000 metric tons, down sharply from
the record exports of 760,000 tons registered in the last marketing year.
Argentine shipments to the United States under the sugar import quota system
will amount to about $35 million, a 5-percent drop from marketing year
1983/84. Argentine earnings from shipments to non-US markets are expected
to total only $53 million compared with about $100 million in the 1983/84
Soviet Grain Recently available meteorological data show that about half of the grain crop
Prospects Deteriorate in Kazakhstan was hit with hot, dry winds from 9 to 12 July. Soviet weather
stations reported temperatures as high as 107 degrees Fahrenheit and winds of
15 knots. 25X1
El~~Prolonged, excessive rainfall in the western Ukraine and Belorussia has 25X1
cut potential yields there as well. The affected areas account for about 10
percent of the annual harvest. Because the winds occurred during the; critical
flowering period-when maximum potential yields are determined-as much 25X1
as 3 million tons of grain may have been lost in Kazakhstan. Although; damage
in the Ukraine and Belorussia so far has been minimal, sizable losses are in
prospect if the fields do not dry out in the next few weeks. Even with normal
weather for the remainder of the year, total Soviet grain production is; likely to
be only about 190 million tons, 5 million less than the estimated output last
year.
Stepp d-Up
So 'et Grain
ports
Moscow has bought more than 700,000 metric tons of new crop corn from the
United States in the past two weeks, bringing total corn purchases to2.1
million tons so far this marketing year. The Soviets have also continued their
purchases of US wheat, buying some 2 million tons since the middle of last
month. Since then.Moscow has also purchased at least 2 million tons of grain
from the EC and possibly 750,000 tons from Australia. This brings total
purchases from all sources to at least 12 million tons and perhaps as much as
million tons-4 million tons above the required minimum.
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15 million tons this marketing year.) Moscow is 25X1
buying, in part, to stockpile grain this year. The Soviet purchases of US corn
are scheduled for delivery after September and will be counted in the new year
of the current US-Soviet Long-Term Agreement (LTA), which begins on 1
October 1984. The 2 million tons of wheat will be exported under. the current
LTA year. This raises total Soviet purchases in the current LTA year to 12.3
11 Secret
27 July 1984
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Moscow appears to be stepping up grain imports for a number of reasons.
Adverse weather has reduced the crop, and a slow start in harvesting the
forage crop will mean. lower supplies this year. On the other hand, domestic
grain demand is higher because of an increase in livestock herds to record
levels. If reports of. grain stockpiling are correct, the Soviets probably will have
to import more than 40 million tons. Some of the increase in US grain
purchases probably is due to delays in Argentine shipments to the USSR.
Although the USSR has been buying grain from Canada this marketing year,
the Canadians could not fill the latest grain orders because of limitations on
their ability to transport large quantities of grain on short notice.
U
Yugoslav Falling living standards are prompting new concern in Croatia about potential
Economic Problems unrest. The US Consul General in Zagreb reports that Croatian workers'
income is not keeping up with inflation. Consulate sources worry that new
government-imposed austerity measures-including pay cuts. in the most
troubled enterprises-will accelerate the decline in living standards, increase
the number of strikes, and pose a threat of mass protests. Yugoslav workers
continue to show restraint in the face of economic decline, but their patience
probably is wearing thin. Significant unrest in Croatia almost certainly would
spill over into other parts of the country where ethnic tensions and similar
economic privations exist. Croatian leaders might use this threat to press
Belgrade to ask the IMF for more relaxed performance conditions on the
current standby agreement. The Yugoslav leadership, however, is increasingly
divided over economic policy and probably would not unite behind a request to
the IMF that would call into question its economic stabilization program. .
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27 July 1984
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Soviet omputer
Ini ' tives
An unconfirmed report in a Western computer industry publication says the
Academy of Sciences of the USSR will include a fifth-generation computing
research program in its next five-year plan. Western computer scientists!, expect
to develop a generation of computers capable of a high level of deductive
reasoning, which could, for example, make medical diagnoses.
advances.
As recently as November, leading Soviet computer
scientists showed little interest in logic programing, a topic that is central to
fifth-generation computer efforts. The Soviets presumably want to keep from
falling further behind the highly publicized Western fifth-generation initia-
tives and, in particular, to acquire enough knowledge to exploit any Western
Soviets Buying Open source reports indicate that the USSR-in an effort to become less
B, `technology To dependent on imported grain-is using biotechnology to produce protein
educe Grain Imports supplements for use in livestock feeds. The Soviets have acquired chemical-
processing plants and are negotiating with several West European nations to
buy operational protein-supplement-production facilities. The Soviets probably
will secure the protein-supplement facilities and succeed in using the Western
biotechnology to make significant gains toward agricultural self-sufficiency.
By 1990 the Soviets should have the capability to produce enough protein
supplements to reduce their annual grain imports by 6 million to 11 million
metric tons-a substantial decrease from the 33 million tons of grain Moscow
imported in 1982.
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27 July 1984
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International Financial Situation:
Latin American Debt Update
The results of the Cartagena Conference last
month suggest limited support for joint action
against creditors and no movement toward a debt-
ors' cartel. Nevertheless, the participants cited
unanimous concern over rising interest rates, repay-
ment terms, and IMF conditionality, and they
formed a secretariat to coordinate positions on
these issues. It appears that the debtors believe the
conference advanced their efforts to obtain easier
repayment terms, even though our review of devel-
opments indicates that the situation remains essen-
tially unchanged. We expect the gap between debt-
ors' expectations and market realities to come into
clearer focus at the Cartagena working group
meeting scheduled for 2 August in Buenos Aires.
The result is likely to be increased criticism of
creditors and redoubled efforts to forge common
positions.
Cartagena in Perspective
The Cartagena Conference established a perma-
nent political forum to voice Latin concerns, but it
did not change the current approach of negotiating
with creditors on a bilateral basis. The delegates
reached no consensus on radical proposals, such as
a unilateral moratorium on interest payments. The
conference, by limiting itself to the lowest common
denominator, helped to reinforce the moderate
position taken by Brazil, Mexico, and Venezuela.
The results of the conference suggest that Latin
debtors would support joint action only if it does
not threaten their ability to negotiate individually
with commercial banks and creditor governments.
While many of the participants at Cartagena ap-
parently believe there are at least political benefits
in coordinated positions, the final communique
indicates an unwillingness to reject the current
case-by-case approach to debt renegotiations.
Whether this attitude persists probably will depend
on a number of developments:
o The Cartagena participants are waiting for a
response from creditors to the concerns they
expressed in the communique. They are asking
for more concessions from commercial banks and
a dialogue with industrialized countries aimed at
changing trade-related policies of the IMF and
multilateral development banks.
o A significant increase in the US prime rate and
LIBOR would have a highly charged emotional
effect on Latin governments and encourage them
to seek a joint solution to the interest burden.
o Argentina's debt situation and Mexico'snegotia-
tions with creditor banks will be closely watched
this summer by the Cartagena participants. In-
sufficient progress could make the next Latin
debtor meeting in Buenos Aires-tentatively
scheduled for September-much less moderate.
Despite the conciliatory tone of the Cartagena
consensus, the creation of the consultative! ,secretar-
iat is the first concrete step toward a unified stand
on debt issues. It will enable the Latin debtors to
coordinate their actions more effectively by sharing
information on IMF and debt negotiations. More-
over, it indicates a heightened political willingness
to press for financial reforms, which is confirmed
by the selection of Argentina as the first coordinat-
ing secretary of the consultative mechanism.
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Secret
IMF Developments
ed to restrict wage increases and bring the official
exchange rate closer to that of the black market.
Despite the lack of an accord with the IMF,
Argentina and its bank advisory committee worked
out an arrangement that allowed Buenos Aires to
slip past the 30 June deadline for settling interest
arrearages. We see signs, however, that Buenos
Aires is adjusting its economic policies in the
direction sought by the IMF. Buoyed by several
political successes, President Alfonsin seems more
willing to confront labor and demand sacrifices,
promising only to shelter the lower wage earners.
He put a 12-percent cap on wage increases for July
despite an 18-percent rise in prices in June, and he
has raised gasoline prices and transport fees to
reduce the need for subsidies. Economy Minister
Grinspun told the press again recently that an IMF
agreement will be reached within weeks. An Ar-
gentine press article, claiming to quote informed
sources, says that an IMF agreement will be
reached by 15 August and that the government is
prepared to put into place tough economic meas-
ures to bring inflation down to 200 percent by June
1985. The article said that the government intend-
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27 July 1984 -
Venezuela's bank advisory committee agreed to
begin debt rescheduling after IMF representatives
commented favorably on Venezuela's self-imposed
economic adjustment efforts.
that Venezuela is likely to propose rescheduling
$22 billion in debt over a 15-year period and
adopting an interest rate ceiling, with interest
charges above it added to unpaid principal. Al-
though Caracas probably will accept other IMF
terms, progress in rescheduling will be slow until
the government settles past-due debt payments.
The US Embassy reports
Bank Negotiations
Mexican rescheduling talks began this week in
New York and apparently are raising questions
rather than defining areas of consensus. In our
judgment, substantial concessions from both Mexi-
co and commercial banks will be needed for any
tentative settlement, and convincing US regional
and West European bankers to accept the agree-
ment will be even harder.
bankers are reluctant to give Mexico fa-
vorable terms because they realize other LDC
debtors will be watching these negotiations closely
and will seek similar deals. The thorniest questions
revolve around coverage of rescheduled debt, finan-
cial concessions, and continued monitoring of the
deal, The
amount of debt restructured will range from $20
billion to $60 billion. Mexico wants to reschedule
obligations falling due through 1990 at an interest
spread of less than 1 percentage point above
LIBOR, but most banks prefer a shorter restruc-
turing period covering repayments due through
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1988 at a spread of at least 1.5 percentage points.
Bankers are demanding some continuing role for
the IMF through the period of the rescheduling.
They particularly want some assurances for policy
continuity in the administration that begins in
1988. Mexico City, however, will find it hard to
accept conditionality past the current three-year
IMF agreement, which expires next year
Chile's worsening payments position is heightening
the need for additional money this year.
Chile will need $1.5 billion in new money next
year, according to US Embassy reports. Given the
difficulties in lining up the recent credit, we believe
banks will be unreceptive to such a request for
more money this year and reluctant to lend even
one-third of what is needed next year. Meanwhile,
the Finance Minister will seek $75 million in
compensatory financing from the IMF and draw
down foreign reserves by $200 million to cover the
expected shortfall in copper revenues, according to
press reports. We believe Chile will need to draw
down at least $450 million in foreign reserves or
delay some interest payments if Santiago fails to
obtain another loan this year.
Peru's failure to meet a $26 million interest pay-
ment to foreign banks on 5 July is_ jeopardizing the
remaining $100 million tranche from the jumbo
loan negotiated in 1983. Peruvian financial officials
argued that the Central Bank could not finance the
interest payment without violating IMF targets for
net government indebtedness and net domestic
assets. According to US Embassy reporting, Peru
had requested a $90 million bridge loan from its
creditor banks to cover this overdue debt payment,
but the loan was rejected.
difficulty meeting commercial debt payments and
maintaining compliance with IMF performance
criteria in coming months.
Bolivia met with its private creditors recently to
discuss its unilateral payment suspension. The US
Embassy reports bankers granted La Paz a 90-day
truce-not a moratorium-to work out a final
debt-rescheduling agreement. Finance Minister
Bonifaz claimed La Paz needs the 90 days to try to
obtain labor support for the negotiations, but as-
sured bankers that Bolivia intends to pay its debt
with or without labor backing. Bankers indicated to
Finance Minister Bonifaz that failure to make
progress during the 90-day period would terminate
debt-refinancing talks and leave bankers free to
take le al action a ainst Bolivia.
Bolivia's failure to reach a debt-rescheduling
agreement this time probably will block for the
foreseeable future new credits to finance develop-
ment projects that are needed to resuscitate the
ailing economy.
With little external financing now
available and strong domestic political pressure to
relax austerity, President Belaunde will have great
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27 July 1984
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Lenders also are indicating that Colombia will
have difficulty securing a $700 million loan this
year for energy development projects.
~We expect that Bo-
gota probably will encounter problems securing
new credit and rescheduling its debt unless it
agrees to an IMF-supported adjustment program.
Implications
As part of the collaborative effort established at
Cartagena,'a working group of the Latin debtors
will meet on 2 August in Buenos Aires. The group
probably will review financial developments since
Cartagena and share technical information con-
cerning their debt talks. As a result, we expect that
the gap between debtors' expectations and market
realities will come into clearer focus, prompting
criticism from the participants about the lack of
progress toward a solution to their repayment
problems. Although we still expect no movement
toward a debtors' cartel, a surge in interest rates or
a perceived continued lack of progress toward
easing the debt burden during the summer could
yet forge closer links among these disparate govern-
ments. This would encourage concerted action on
debt at the ministerial meetings slated for Buenos
Aires in late September.
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El Salvador: Economic Challenges
Facing the Duarte Government
Despite substantial US aid, we believe that eco-
nomic activity in El Salvador will decline-albeit
slightly-for the sixth consecutive year and that
little recovery will occur before early 1985. For now
at least, President Duarte's focus on political and
military matters and his strong commitment to
redistributing economic and social power are delay-
ing the tough actions needed to stimulate the
economy. Duarte's economic maneuvering room is
narrowing, however, as the country faces a rising
number of guerrilla strikes at economic targets,
increasing leftist-inspired labor unrest, and rightist
opposition to present economic policies. In these
circumstances, we believe Duarte will continue to
avoid a currency devaluation and other measures
requested by the IMF as long as possible. Instead,
El Salvador: Economic Indicators, 1979-84
he probably will go on pressing Washington to
relax the conditions of its economic assistance and
to increase El Salvador's US sugar quota.
Compared with the dramatic decline in the previ-
ous four years, the economy was calm in 1983. The
torrent of private capital flowing out of the country
slowed substantially. Buoyed by US funds and the
reallocation to El Salvador of a large share 'of
Nicaragua's sugar quota in the US market,.export
earnings rose 5 percent, after dropping 12 percent
in 1982. Improved security in San Salvador and
Gross Fixed Investment as a
Share of GDP
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other major cities helped deter guerrilla attacks on
factories and commerce.
El Salvador: Million US $
Balance of Payments
Although we cannot measure El Salvador's eco-
nomic performance with certainty, we believe a
variety of factors depressed real GDP slightly in
1983-perhaps 1 percent-leaving domestic output
more than 25 percent below the 1978 peak. USAID
estimates indicate that the manufacturing sector
declined 3.2 percent; this probably reflects continu-
ing shortages of domestic and foreign credit, re-
duced trade within the Central American Common
Market, and the lack of new investment to replace
wornout plant and equipment. Improved agricul-
tural performance partly compensated for this de-
cline as the production of basic grains and sugar
increased in 1983. Unfortunately, much of this
improvement was offset by inadequate mainte-
nance of plantations, the spread of coffee rust,
sluggish world demand, and guerrilla damage to
agriculture-estimated by the US Embassy at $90
million last year.'
Duarte's Initial Approach
Duarte's relatively narrow election victory in May
1984-he received 54 percent of the vote-has
prompted him to move cautiously. Duarte has
assuaged military fears that he might accept a
power-sharing arrangement with the insurgents by
challenging the guerrillas to lay down their arms
and participate in the democratic process before
beginning talks. He has yet to convince the business
community, however, that it stands to gain from his
economic policies.
Duarte and his key economic advisers have stressed
publicly that their vision of social justice will take
priority over government efforts to promote eco-
nomic recovery and to assist large businesses.
Duarte already has met on several occasions with
private-sector representatives, an indication that he
' The US Embassy calculates that total direct economic damage
and production losses reached $230 million in 1983, bringing the
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27 July 1984
Trade balance
-263
-219
-297 to -414
Exports, f.o.b.
700
737
730
Manufactures to
CACM
174
170
165
43
55
65
Imports, c.i.f.
963
956
1,027 to 1,144
Military goods
80
87
127 to 244
Net services and transfers
106
89
173 to 290
US grant aid d
187
160
250 to 367
Current account balance
-157
-130
-124
Capital account
53
172
120
Of which:
US loans d
92
122
115
Changes in net reserves
-104
42
-4
a Projected.
b Includes $50 million worth of prior years' production that El
Salvador intends to sell this year.
c Assumes US quota remains at current levels.
d Estimates for 1983 include one-fourth of the FY 1984 appropria-
tion. Projections for 1984 are based on the presentation to
Congress.
is not insensitive to their concerns. Nonetheless, his
deeply held commitment to restructuring El Salva-
dor's social, political, and economic institutions
has led him to strongly resist proposals to devalue
the currency or to raise guaranteed coffee prices to
realistic levels, because these measures would raise
the profits of large coffee growers at the expense of
the urban poor and small nonagricultural business-
es. In his initial public speeches, newly appointed
Minister of the Economy Ricardo Gonzalez Cama-
cho has indicated that the government may impose
additional price controls, that the nationalized
banks may divert scarce credit to smaller business-
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El Salvador: Agricultural Exports, 1981-84
Export Prices
US cents per pound
0 1981 82 83 84b
Including export of about 20,000 tons stored from prior year's production.
b Projected.
es, and that "consumer protection" will be a major
government concern.
Disappointing External Factors
We judge that only one of the major external forces
affecting El Salvador's economy-the strength of
US demand-is likely to improve much in the near
term. Robust US economic growth and the tariff
benefits afforded by the Caribbean Basin Initiative
offer Salvadoran exporters an excellent opportunity
to expand manufactured exports to the US market.
The US recovery, however, probably will provide
only small immediate benefits. Even assuming Sal-
vadoran sales of manufactured goods to the United
States increase 20 percent this year, export earn-
ings would rise only $10 million or 1 percent.
World prices for the agricultural exports-coffee,
cotton, and sugar-that account for the bulk of El
Salvador's exports and one-fourth of its GDP are
projected to rise little, if at all, over the next year.
Meanwhile, rising US interest rates and a strong
Exports
Thousand metric tons
175
150
i
0 1981 82 83 84
US dollar are likely to encourage illegal capital
flight and to raise the costs of servicing El Salva-
dor's foreign debt. Other CACM economies that
have traditionally bought nearly all of El Salva-
dor's manufactured exports will continue to be
hobbled by severe foreign exchange difficulties and
curtailed domestic demand.
Since the expiration of El Salvador's $85 million
IMF standby agreement last year, the United
States has shouldered the bulk of foreign financial
support for the Salvadoran economy. For 1984,
some $240 million in US economic aid (and as
much as $244 million in military aid) is tentatively
slated for El Salvador. About half of the economic
assistance is earmarked for the private sector in
direct support of production and exports.
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27 July 1984
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El Salvador: Projected f Million US $
US Assistance for FY 1984 a
Total
371.4 to 488.4
Economic support fund
120.0
Development assistance
43.1
51.3
30.0
a State Department estimates of the amount that will be obligated
by end of FY 1984.
Other donors will provide much smaller amounts:
c West Germany and Japan have agreed to provide
economic aid, but the amounts will be relatively
small.
c Under the provisions of the San Jose Accord,
Mexico and Venezuela together are offering pe-
troleum price discounts that probably will be
worth about $30 million.
c The Inter-American Development Bank is ex-
pected to disburse $40 million in development
assistance.
International commercial banks continue to scale
down their exposure in El Salvador. According to a
preliminary government estimate, El Salvador ex-
pects to receive no more than $26 million in net
nonguaranteed commercial bank credit this year.
Guerrilla Activity. The guerrillas recently stepped
up their campaign to destroy the economy after a
series of government successes since last summer
put them on the defensive. Shortly after Duarte's
election, for example, guerrilla leaders publicly
declared the start of a new effort to disrupt cotton
farming. In June, the insurgent Radio Venceremos
announced a campaign to halt traffic on the na-
tion's main transport routes. Increased insurgent
attacks on communications and power installations
periodically have choked commerce in several east-
ern provinces, and even small commercial facilities
in the capital are again being sabotaged, according
to the US Embassy.
In addition to hitting these lightly defended, low-
value targets, the guerrillas retain the ability to
attack major economic installations. In late June,
FMLN forces launched a raid against the largest
hydroelectric dam in the country, damaging a
substation near the dam and holding a large part of
the complex for several hours before it was retaken
by the Army. Although government counterinsur-
gency operations have improved over the past year,
we believe the Army will not be able to prevent the
guerrillas from attacking more such targets during
the insurgents' planned late-summer or early-fall
offensive.
Labor Unrest. The guerrillas also are trying to
foment labor unrest to undermine the government.
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Domestic Challenges
Although the availability of foreign exchange is a
critical problem, we believe that internal develop-
ments will be the most important factors influenc-
ing the Salvadoran economy over the next year.
Some indicators suggest that the rise in guerrilla
attacks aimed at the economy, coupled with leftist-
inspired labor unrest and the Duarte government's
approach to socioeconomic reform, could well
heighten capital flight and undermine recovery in
since Duarte's election, two
1984.
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27 July 1984
leftist-dominated government unions have already
gone on strike and several more are reportedly
planning to do so. A six-week-long strike by postal
workers temporarily disrupted the flow of remit-
tances into El Salvador from workers in the United
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Faced with continuing double-digit inflation and a
budget deficit projected to exceed 10 percent of
GDP this year, the government can ill afford a
general round of wage hikes. In addition, Duarte
almost certainly would improve his standing with
rightist elements by taking a hard line with strik-
ers. Nonetheless, if intransigence on both sides
results in widespread, prolonged strikes, it would
deal a substantial blow to internal commerce and
export earnings.
Business Uncertainty. The highly conservative
"traditional" private sector in El Salvador-the
wealthy businessmen and plantation owners who
had a lock on El Salvador's economic life before
1979-are deeply opposed to much of Duarte's
economic agenda. Still rankled by the 1980 nation-
alization of banks and the establishment of govern-
ment monopolies for marketing coffee and sugar,
the business sector worries that Duarte's strongly
held views on social justice will lead him toward
additional nationalizations and expropriations.
Duarte and his ministers, meanwhile, have rejected
policies that could most immediately bolster busi-
ness profits and have called for sacrifice and social
solidarity by the traditional sector.
As the US Embassy has noted, most members of
the traditional sector reject any suggestion that El
Salvador's political and economic troubles are at-
tributable to the middle or upper income business
classes. Appeals for them to take the brunt of any
additional hardships will encounter stiff resistance.
As long as these classes perceive that Duarte is a
believe they are likely to exploit available opportu-
nities-including abusing the access to foreign
exchange afforded by US aid to the private sec-
tor-to transfer additional funds out of the country
into such safehavens as Miami and to shun the
.industrial and agricultural investment at home
needed to revitalize the economy. Despite stepped-
up government efforts to curb capital flight, we
believe that current controls could be evaded with
relatively little difficulty. Efforts to get capital out
of the country will be intensified by the recently
enacted land reform program that requires all
individual land holdings above 245 hectares to be
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sold.
We believe the cumulative effects of these factors
will cause economic activity to dip slightly, again
this year. Even if the armed forces can keep the
guerrillas on the defensive and Duarte can mollify
leftist unions and rightist business elements, the
poor outlook for world commodity prices and neigh-
boring economies would preclude much economic
expansion at least until the next harvest season
ends in early 1985. Coffee production probably will
decline significantly in the next harvest as the
failure to replant coffee lands during the early
years of land reform begins to take its toll' We
doubt that the nationalized banks and land reform
agencies will become much more efficient in proc-
essing loans and giving technical assistance to
farmers. Moreover, government borrowing to fi-
nance rising war expenses and higher salaries prob-
ably will preclude much expansion in domestic
credit to the private sector.
We expect that over the next few months Duarte
will move slowly, if at all, on such issues as higher
prices for coffee growers and devaluation-the
colon has remained at the same fixed rate to the
US dollar for 50 years. Devaluation of the colon is
a central element of conditionality for both US aid
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The Status of Land Reform
The Salvadoran land reform program, which is far
more ambitious than that implemented to date by
the Sandinista regime in Nicaragua, is regarded by
many observers as the key to successful redistribu-
tion of income in El Salvador. Begun in early 1980,
the program has achieved greater results in redis-
tributing legal titles than in providing the manage-
ment assistance, credit, and technical support to
make it an economic success. About one-fifth of El
Salvador's land under cultivation has been redis-
tributed.
Phase I, the expropriation of farms over 500
hectares, is complete. Some 439 estates, account-
ing for 15 percent of El Salvador's cultivated land,
have been converted into cooperatives. Slightly
more than half the former owners of these estates
have been compensated so far, mostly by 30-year,
6-percent bonds-which many former owners fear
will never be redeemed. About 190,000 Salvador-
ans (including family members) are beneficiaries of
Phase I. The Salvadoran Institute of Agrarian
Reform (ISTA), the government agency designed to
funnel credit and other assistance to the coopera-
tives, has been plagued with poor administrators
and a lack of funds. Many heavily indebted coop-
eratives are finding it difficult or impossible to
repay their loans. Moreover, from 1982 until
Duarte's election, ISTA was run by a partisan of
the rightwing ARENA party and was used to
undermine reforms and to recruit votes for
ARENA.
constitution in late 1983. Originally designed to
break up the remaining holdings between 100 and
500 hectares, the Assembly compromised on an
upper limit of 245 hectares per owner. Landowners
holding more than 245 hectares now have until the
end of 1986 to sell the excess. Several apparent
loopholes in the law, however, suggest that current
owners will be able to evade Phase II by putting
excess land in the name of a corporation. Few of
the roughly 20,000 hectares affected have been
sold.
Phase III gave tenant farmers the right to claim 7
hectares of the land that they were tilling when the
reform was initiated. About 40,000 hectares, or 6
percent, of all farmed. land had been redistributed
under this phase by the time the filing period
expired in June 1984. Of some 117,000 potential
claimants, only about half filed claims; just 9,000
of those have received permanent titles to the plots.
National Financiers of Agricultural Lands
(FINA TA), the agency created to process tenant
claims, has a huge backlog of cases and, like
ISTA, has suffered from incompetent employees.
Landlords have evicted about 7,000 of the Phase
III claimants since 1980, but most of them eventu-
ally regained access to their land with assistance
from the military. Duarte recently pledged that the
government would buy additional land to distrib-
ute to those tenant farmers who had not filed
claims by the time the Phase Ill filing period
expired.
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After a prolonged political struggle, Phase II of the
land reform program was written into the new
and any future IMF relief package. We expect
that, as a result, Duarte will drag his feet on a new
IMF accord and will continue efforts to persuade
the United States to ease its conditionality require-
ments. He will also try to persuade Washington to
increase the amount of sugar El Salvador is permit-
ted to sell to the United States at preferential
prices. In these circumstances, foreign investors
and lenders will remain chary of El Salvador.
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The Caribbean Area:
No Economic Recovery in Sight
The Caribbean area shows little sign of pulling out
of its economic slump any time soon. Although the
output of the major Caribbean countries fell only
slightly in both 1982 and 1983, many of the
ministates performed substantially worse. High oil
prices, low world commodity prices, rising foreign
competition for tourists, and government misman-
agement were largely responsible. Some Caribbean
governments are adopting a more rational approach
to economic decision making than previously. How-
ever, growing popular resistance to austerity, a
tentative world recovery, and the general cut in
commercial lending to Latin America will make it
difficult to secure or retain IMF programs designed
to restructure the region's economies over the
longer run. Consequently, we expect the region to
show little or no growth and unemployment rates to
range between 20 and 40 percent in most countries
over the near term. The result is likely to be
increased requests for US assistance as well as
stepped-up pleas for US intercession with the IMF
and other donors to ease aid requirements.
Prolonged Economic
The 1973 oil price hikes were particularly disas-
trous for most Caribbean countries because they
came at a time of sluggish world demand for the
region's primary exports. The world recession in the
mid-1970s further curtailed demand for tropical
and mineral products and battered tourist earnings.
Most of those hardest hit resorted initially to bor-
rowing on commercial markets, seeking economic
aid, accumulating payments arrears, and drawing
down international reserves to make ends meet. A
few-Trinidad and Tobago, the Netherlands Antil-
les, and The Bahamas-experienced oil-based eco-
nomic booms. Nonetheless, weighted average
growth in the Caribbean region's output-barely
comparable in size' to that of Colombia-slowed to
little more than 2 percent annually during 1974-79,
less than half the Latin American average.
The Caribbean: GDP by Major
Contributor, 1981
Dominican Republic-30
Haiti-8
The Bahamas-6
Others-8-
Jamaica-17
The second round of oil price hikes, the world
recession, and subsequent belt tightening in'many
countries reduced real GDP growth to roughly 1
percent annually during 1980-82. To qualify for
IMF funding, Haiti, Barbados, and Dominica im-
posed strict import controls and public-spending
cuts. Jamaica, struggling to overcome seven consec-
utive years of economic. decline, experienced a spurt
in growth largely owing to massive, but short-lived,
injections of foreign aid following President Seaga's
election in October 1980. Despite a surge inn inves-
tor interest, few projects got off the drawing boards
because of bureaucratic redtape and a shortage of
skilled labor. Squeezed by. the 1982 drop in;oil
'prices-and in the case of Trinidad, falling produc-
tion-even the oil-based economies experienced
economic slowdowns. Meanwhile, the smallest is-
lands continued to face intractable development
problems. Moreover, a series of hurricanes slashed
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DI IEEW 84-030
27 July 1984
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The Caribbean: Economic Indicators,
1974-84
Real GDP Growth a
Percent
2.5
3.0
-
2.0
1.5
-
-
-
1.0
-
0.5
-
-
-0.5 1974-79 80 81 82 83 84
average
annual
Consumer Price Growth a
Percent
1974-79 80 81 82 83 84b
average
annual
Major Export Prices
Index: 1974-79 average= 100
banana production-which contributes 40 percent
of their export earnings-causing real GDP in
1982 to fall well below the 1979 level.
Only steady emigration kept unemployment within
the 20-to-40-percent range in most countries. How-
ever, the continuing exodus also drained much of
the manpower needed to promote economic devel-
opment. Making matters worse, the wealthier econ-
omies-which had become magnets for many Ca-
ribbean nationals seeking jobs surreptitiously-
began to crack down on illegal immigrants.
Despite deep import cuts that reduced the region's
current account deficit below $1.5 billion in 1983-
the first improvement in six years-serious foreign
payments problems persist in most countries. The
pace of OECD recovery has not been robust enough
to boost demand for Caribbean exports. In addi-
tion, bauxite/alumina earnings have been hurt by
continuing depletion of richer ores and high indus-
try wages that prompted several US companies to
close their operations. Tourist earnings have picked
up only slightly because of the strong US dollar and
intensified competition from Western Europe and
other areas. Although the region's $7 billion exter-
nal debt is dwarfed by that of the largest Latin
American economies, debt servicing has become a
major burden for many Caribbean countries. Al-
though a number of Caribbean countries increas-
ingly are involved in narcotics trafficking as mon-
ey-laundering centers or transshipment points,
individual economies appear to benefit little from
drug income except in Jamaica, where the rural
sector depends heavily on marijuana earnings.
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a Excluding the smallest islands, for which data are
incomplete.
b Projected.
Tighter austerity has yielded some longer term
benefits but has further depressed economic activi-
ty. Those countries with IMF relief packages have
improved tax collection, trimmed and redirected
the bloated public sector away from make-work
projects toward more productive investments,
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raised interest rates to encourage domestic savings,
and stimulated the search for foreign investment.
Nevertheless, potential lenders have failed to re-
spond adequately to the IMF lead. Moreover,
popular protests against deepening austerity-par-
ticularly against currency devaluations and subsidy
cuts that trigger immediate hardships-are compli-
cating economic management. As a result, overall
economic activity fell slightly in 1983.
In Jamaica, weak world demand for aluminum,
prolonged drought, and low world sugar and ba-
nana prices kept 1983 export earnings nearly 25
percent below the 1981 peak. To cover import
needs and debt-servicing costs, Kingston borrowed
heavily-the external debt reached $2.2 billion by
yearend 1983-and almost depleted the country's
foreign exchange holdings. These actions took Ja-
maica out of compliance with IMF targets under
the 1981 Extended Fund Facility (EFF), causing
the program to be suspended in late 1983. New
foreign credit dried up, rescheduling discussions
with foreign creditors halted, and economic activity
fell 1 percent last year. Despite popular resentment
of austerity, Jamaica has instituted measures since
then-including hefty devaluations-to win a new
$140 million standby program in June. Meanwhile,
the decision of Reynolds Metals to terminate its
Jamaican bauxite operations has added 200 people
to the unemployment rolls-Jamaica's unemploy-
ment rate already approximates 30 percent-and
will cost Kingston $25 million in bauxite revenues
in 1984.
To obtain a three-year, $408 million Extended
Fund Facility in early 1983, the Jorge Blanco
government in the Dominican Republic increased
income taxes, slashed government expenditures,
banned luxury imports, and transferred others to
the costlier parallel exchange market. Jorge also
rescheduled $600 million in overdue commercial
debt. Under the Fund's tutelage, real GDP grew 1
percent in 1983 despite sluggish world demand for
sugar and minerals-the country's major exports-
and inflation and unemployment also moderated.
In April 1984, widespread riots erupted in response
to the government's imposition of food price in-
creases and other budget-tightening measures
needed to qualify for the second year of the EFF.
Fearing that the IMF-required removal of petro-
leum subsidies would spark more violence, Jorge
suspended talks in May. Meanwhile, the Domini-
can Republic is accumulating arrears, cutting im-
'ports, and courting emergency assistance from the
United States and other Western donors to make
ends meet.
By contrast, Haiti in late 1983 negotiated a two-
year, $63 million standby program with the IMF,
following the successful completion of a 13-month
standby accord last summer. We believe Haiti's
relations with the Fund have been smoother than
most because the programs have emphasized the,
need to make Haiti's byzantine finances less
opaque than drastic belt tightening. Except for
some food rioting in May, the government has not
been buffeted strongly by the uproar over auster-
ity-partly because the Haitian population gener-
ally is more quiescent and labor is not permitted to
organize.
Nevertheless, major problems persist. Economic
activity has stagnated over the past 18 months,
resulting in a 3-percent decline in per capita in-
come. Export earnings remain flat largely because
of low prices for coffee-Haiti's main export. De-
spite Haiti's low wages, the country's underdevel-
oped infrastructure has limited foreign investment.
Living conditions in the countryside and Port-au-
Prince continue to deteriorate gradually as unem-
ployment spreads in response to cuts in develop-
ment programs and food becomes increasingly
unaffordable for many.
The sharp drop in oil output-nearly 8 percent
below the 1982 level in Trinidad and Tobago-has
tightened austerity in the oil-based economies.
These countries also are hurt by the continued
slump in tourism-their second-largest foreign ex-
change earner-and depressed island-based ship-
ping. As a result, combined real GDP in Trinidad
and Tobago, Netherlands Antilles, and The Baha-
mas fell 1 percent last year, a far cry from the 8-to-
9-percent growth rates achieved during 1978-80.
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Moreover, in early 1984 some oil refiners-Texaco
in Trinidad and Exxon and Shell in Netherlands
Antilles-moved to curtail or shut their operations.
Suriname has faced severe foreign-payments prob-
lems since the Bouterse regime's execution of 15
opposition leaders in December 1982 prompted the
Netherlands and other Western donors to suspend
assistance. Paramaribo turned to Cuba in early
1983 for help but received little, if any, financial
support, and it later pulled back from economic and
technical accords signed with Havana-throwing
out all Cuban personnel last October-partly in the
unrealistic hope of attracting sizable Western aid.
Real GDP fell 3 percent last year despite govern-
ment efforts to prop up, the economy by borrowing
domestically and depleting foreign reserves. A
bauxite strike in January 1984 cost Suriname some
$75 million in foreign exchange earnings, and
occasional food and raw materials shortages have
appeared in recent months. Nonetheless, according
to the US Embassy, Suriname has abandoned
efforts to negotiate with the IMF for fear that
tighter austerity would prompt violence.
Despite Guyana's wealth of resources, its economy
is in a shambles. Output of the main exports-
bauxite, alumina, sugar, and rice-is declining
steadily as a result of pervasive corruption, mis-
management, and costly labor disputes. The result-
ant decline in foreign exchange earnings, coupled
with a chronic inability to maintain support from
multilateral institutions, forced Guyana to impose
stringent import restrictions last year. As a result,
real GDP plummeted 13 percent in 1983, to barely
65 percent of the 1976 peak. To sustain even this
level of activity, the Burnham government primed
the money pump to cover a budget deficit exceed-
ing 50 percent of GDP. President Burnham none-
theless steadfastly refuses to take the steps needed
to regain IMF financing. In fact, Guyana has
become the first country declared ineligible for
IMF funding, due to Burnham's refusal to repay
the Fund and to initiate a restructuring of the
economy. Endemic shortages of food, drugs, trans-
portation, electricity, water, and jobs have wors-
ened.
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27 July 1984
In the eastern Caribbean, economic performance
generally remains weak. The rise in tourist receipts
has been too little to offset sluggish export earn-
ings. Moreover, intra-CARICOM trade disputes
have limited local markets in the fledgling light-
manufacturing industries that dot the ministates.
Only Barbados and, to a limited extent, Grenada
are exceptions to this otherwise gloomy picture.
Barbados' generally sound economic management
and aggressive lures to investors have helped to
keep that economy on relatively solid footing. In
Grenada, sizable aid infusions after the US-led
intervention last October offset some lost tourist
earnings and IMF monies-after the Fund sus-
pended its program in late 1983-and prompted a
slight recovery during the first six months of 1984.
Nevertheless, financial shortfalls continue-gov-
ernment salary payments in June apparently were
missed-and many domestic problems remain;
electricity, for example, is available only three
hours daily.
The traditionally strong link between OECD and
Caribbean growth appears to be weakening. Shift-
ing tourist patterns and growing competition from
other LDC producers of tropical products, light
manufactures, and bauxite/alumina are largely
responsible. Consequently, even if near-term
OECD economic growth exceeds expectations, it is
unlikely that Caribbean growth would rise .in tan-
dem. As matters stand, we expect OECD recovery
over the next year or two to be moderate and
Caribbean growth to be slight, at best.
In these circumstances, Caribbean countries must
try even harder to revamp and streamline their
economies with an eye toward raising productivity
and trimming consumption. In addition to these
difficult domestic adjustments, aggressive market-
ing strategies and new labor-intensive products
aimed at markets outside the region are needed to
offset poor prospects for traditional exports. We
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The Unraveling of ARICOM
CARICOM,, the 1:3-member: Caribbean Economic
Community, was formed,in.1973--to promote:eco-
nomic-integration:through a: common market.:In.,
recent. years; however,,.,individual!attempts;tb.- solve
common economic problems have -heightened intra-
CARICOM.;trade-squabbles and-brought -the orga-
nization near collapse: -For, -example: : .
? Jamaica last -year irked member states by impos-
ing a: two-tiered exchange-rate system. In retalia-
tion, Barbados floated its currency while Trini-
dad and Tobago.slapped'a licensing requirement
on all Jamaican goods.: Jamaica's trading part-
ners have. balked at, its recent devaluations, _
which have reduced the competitiveness of their
exports.
? Other community members are angered by Trini-
dad and Tobago's recent cut in imports-espe-
cially since Trinidad is CARICOM's wealthiest
member-and its decision to require import. li-
censes across the board.
Disagreements-over the CARICOM Multilateral
Clearing Facility=a clearinghouse for settling
trade-accounts and financing-transactions through
short-term credits --have been most debilitating.,
The failure of Guyana, which holds, the lion's.
believe:agricultural:diversification geared to high-
value: products such ~ as flowers, spices, and winter.
vegetables- could provide 'the quickest results. Other
efforts require -large cash.injections that are unlike-
ly to materialize from donors and commercial
bankers.- Still;., the adoption of growth-generating
policies would go-a long way toward -enticing what
financing and technical expertise is -available -
especially under the: Caribbean Basin' Initiative..
Steps ' to- eliminate :growing -intraregional. protec-
tionism should also be taken.
Over the near term, countries already in various
stages of IMF adjustment programs are likely to
continue reform efforts wherever possible, hoping
share of this debt; to: repay Barbados; :which - ;
underwrote the $I00-, million facility,' led' Barbadi
an.-Prime Minister Adams to unilaterally, end it.,.;
last'year: All--intro-CARICOM-trade now is-con-,
ducted--on -a bilateral basis because even Trinidad-
and Tobago-which since 1974 has?provided-$400
million'-in aid to, the-community-can no longer }
afford to finance,trade: venturesH
Political infighting has only exacerbated trade
problems. The organization over the years often
split along ideological lines, especially when Mau-
rice Bishop still represented. Grenada, :but the-
schism between-the more-moderate countries and.
the left-leaning states became even more dramatic
following the intervention in Grenada.' The incur-
sion was, not supported by Trinidad and Tobago,
Guyana, Belize,- and :The-Bahamas.
Members put aside-political: and economic differ-
ences at least temporarily. at-their-summit meeting
this month an Nassau. The'participants tentatively
agreed to -eliminate sometrade%barriers and to
grant observer status. to the Dominican Republic,
Haiti, and Suriname. Nevertheless, no substantial
progress was' made -in dealing with .the region's - '
basic economic '"troubles.-
to revive economic growth. The next steps:-will not
be easy, however; ?because-long-term adjustment
measures will, compound: consumer hardships over
the short run. Moreover, -with educational; levels
high and labor`: unions strong,-.rnost Caribbean,,,.',.
constituencies closely scrutinize economic -issues-so
that `political. leaders are--likelyto procrastinate in
setting toughpolicies.-In=Jamaica,ythe'newIM-F:.:
program could still fall apart-should riots or dem-
onstrations onstrations by opposition parties or organized. labor
seriously -threaten-the Seaga government.-In, the..
Dominican Republic, the issue of electricity price
increases threatens to upset an agreement even
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The Caribbean Basin Initiative, in:place since
January 1984,. is a US program. of trade.and tax
measures designed to help 27'.Caribbean and Cen-
tral American countries expand employment and
raise living standards: The program's centerpiece.
consists of 12-year, duty-free access to US markets
for a wide range of agricultural and manufactured
goods. To foster tourism, the CBI. also allows US
tax deductions for the cost of attending business
conventions in the Caribbean Basin.
To date, the combination of tariff and tax advan-
tages, relatively low wages, proximity to the US
market,. and the expected hardening of terms for
LDCs under the Generalized System of Preference
(GSP) after December 1984.appears to be attract-
ing the attention of many investors.. The most
interest has come from businessmen in the Far
East-Taiwan, Hong Kong, South Korea, and
Singapore-where wage rates are rapidly rising
and transport costs to the United States,are high.
Hong Kong's scheduled takeover by China in 1997
also has sparked consideration of the Caribbean as
an alternative business base.
It is too early to tell how much the Caribbean
economies will bent from the CBI. US trade .
officials estimate that the initiative eventually will
boost exportsto.$9.5 billion annually-still below
the $10.3 billion peak in 1980. About 80 percent of
Caribbean produced goods already enter the Unit-
ed States duty free under the GSP. Inffrastructural
development is so weak in the smallest economies
that the bigger ones., are likely to continue to
attract the largest chunk of any new investment. In
addition; many of the products the Caribbean
countries could produce most easily because of
underutilized capacity-textiles, apparel, foot-
wear,, leather goods, canned tuna, and petroleum
products-are exempt from the CBI in order to
protect US industries. fl
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27 July 1984
before it is formally signed. Growing: problems in
maintaining austerity in Haiti already show `signs
of threatening the current standby. Regardless of
their efforts, these countries are likely to experience
little or no recovery over the next year or so as new
austerity measures take hold and demand for their
traditional exports remains weak. Nevertheless,.
these countries stand to profit most from the CBI
over.. the longer term because of their relatively
large economies and labor pools.
The oil-based economies also face continued tough
times. Over the near term, we believe they will
postpone such needed adjustment measures as
slashing government subsidies and. payrolls because
they are unaccustomed to the seriousness of the
problems that have beset their economies recently.
Instead, they appear to be hoping-unrealistically,
in our view-to ride out the world oil slump: We do
not expect oil prices to rise much until the late
1980s, a factor that will encourage foreign refiners
to further curtail their operations.
Other countries face intractable problems. Under
their present regimes, Suriname and Guyana will
continue to resist any moves to revamp their econo-
mies, especially under IMF aegis.-According to the
US Embassy, Suriname instead will 'try to lure
Western aid, but is unlikely to succeed without an
IMF accord. In these circumstances, Army Com-
mander Bouterse is. likely to warm up to the left at
home and abroad. In Guyana, President Burnham
probably will continue to seek Communist assis-
tance, but any agreements are likely to be too
insubstantial to ease the country's pressing finan-
cial needs. Many,of the smallest economies. are not
viable without infusions of aid, so that any restruc-
turing will have limited results, at best.
Although the region is troubled, it probably will not
attract, significant Cuban- meddling unless the Cas-
tro regime-embarrassed by the Grenada and Su-
riname' debacles-stumbles onto a clear opportuni-
ty for influence.. Cuba, in the face of.tough US
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policies, has largely withdrawn its destabilizing
tactics, concentrating instead on strengthening ties
with leftists in the region, who are currently in
disarray. Left-leaning trade unionists, opposition
political figures, journalists, and youth leaders-
those.most likely to spearhead any protests to
austerity-are being targeted. To supplement these
activities, Havana is also expanding contacts in the
region through diplomatic approaches, commercial
dealings, and social and cultural activities. Pros-
pects for increased trade appear to be the bait that
Havana is using to lure Trinidad and Tobago into a
closer relationship. In some of the smallest islands,
Havana is offering special scholarships at Cuban
universities to promote a better image and expand
contacts. Guyana seems destined to replace Grena-
da as Cuba's base of operation in the Caribbean,
although mutual distrust between Castro and
Burnham probably will inhibit close bilateral ties.
Cuba is not abandoning Grenada, however
31 Secret
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